B – Summary of Significant Accounting Policies
General
The accompanying condensed consolidated balance
sheet as of April 30, 2018, which has been derived from audited financial statements, and the unaudited interim condensed financial
statements as of July 31, 2018 and 2017, have been prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the three months ended July 31, 2018 are
not necessarily indicative of the results that may be expected for the year ending April 30, 2019. For further information, refer
to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the
year ended April 30, 2018.
Principles of Consolidation
The condensed consolidated financial statements
include the accounts of America’s Car-Mart, Inc. and its subsidiaries. All intercompany accounts and transactions have been
eliminated.
Segment Information
Each dealership is an operating segment with
its results regularly reviewed by the Company’s chief operating decision maker in an effort to make decisions about resources
to be allocated to the segment and to assess its performance. Individual dealerships meet the aggregation criteria for reporting
purposes under the current accounting guidance. The Company operates in the Integrated Auto Sales and Finance segment of the used
car market, also referred to as the Integrated Auto Sales and Finance industry. In this industry, the nature of the sale and the
financing of the transaction, financing processes, the type of customer and the methods used to distribute the Company’s
products and services, including the actual servicing of the contracts as well as the regulatory environment in which the Company
operates, all have similar characteristics. Each of our individual dealerships are similar in nature and only engages in the selling
and financing of used vehicles. All individual dealerships have similar operating characteristics. As such, individual dealerships
have been aggregated into one reportable segment.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during the period. Actual results could differ from those
estimates. Significant estimates include, but are not limited to, the Company’s allowance for credit losses.
Concentration of Risk
The Company provides financing in connection
with the sale of substantially all of its vehicles. These sales are made primarily to customers residing in Alabama, Arkansas,
Georgia, Kentucky, Mississippi, Missouri, Oklahoma, Tennessee, and Texas, with approximately 29% of current period revenues resulting
from sales to Arkansas customers.
Periodically, the Company maintains cash in
financial institutions in excess of the amounts insured by the federal government. The Company’s revolving credit facilities
mature in December 2019.
Restrictions on Distributions/Dividends
The Company’s revolving credit facilities
generally restrict distributions by the Company to its shareholders. The distribution limitations under the credit facilities allow
the Company to repurchase shares of its common stock up to certain limits. Under the current limits, the aggregate amount of repurchases
after October 25, 2017 cannot exceed the greater of: (a) $50 million, net of proceeds received from the exercise of stock options
(plus any repurchases made during the first six months after October 25, 2017, in an aggregate amount up to the remaining availability
under the $40 million repurchase limit in effect immediately prior to October 25, 2017, net of proceeds received from the exercise
of stock options), provided that the sum of the borrowing bases combined minus the principal balances of all revolver loans after
giving effect to such repurchases is equal to or greater than 20% of the sum of the borrowing bases; or (b) 75% of the consolidated
net income of the Company measured on a trailing twelve month basis. In addition, immediately before and after giving effect to
the Company’s stock repurchases, at least 12.5% of the aggregate funds committed under the credit facilities must remain
available. Thus, the Company is limited in its ability to pay dividends or make other distributions to its shareholders without
the consent of the Company’s lenders.
Cash Equivalents
The Company considers all highly liquid debt instruments
purchased with original maturities of three months or less to be cash equivalents.
Finance Receivables, Repossessions and Charge-offs
and Allowance for Credit Losses
The Company originates installment sale contracts
from the sale of used vehicles at its dealerships. These installment sale contracts carry an average interest rate of approximately
16.3% using the simple effective interest method including any deferred fees. In May 2016, the Company increased its retail installment
sales contract interest rate from 15.0% to 16.5% in response to continued high levels of credit losses. Contract origination costs
are not significant. The installment sale contracts are not pre-computed contracts whereby borrowers are obligated to pay back
principal plus the full amount of interest that will accrue over the entire term of the contract. Finance receivables are collateralized
by vehicles sold and consist of contractually scheduled payments from installment contracts net of unearned finance charges and
an allowance for credit losses. Unearned finance charges represent the balance of interest receivable to be earned over the entire
term of the related installment contract, less the earned amount ($2.3 million at July 31, 2018 and $2.2 million at April 30, 2018
on the Condensed Consolidated Balance Sheets), and as such, have been reflected as a reduction to the gross contract amount in
arriving at the principal balance in finance receivables
.
An account is considered delinquent when the
customer is one day or more behind on their contractual payments. While the Company does not formally place contracts on nonaccrual
status, the immaterial amount of interest that may accrue after an account becomes delinquent up until the point of resolution
via repossession or write-off is reserved for against the accrued interest on the Condensed Consolidated Balance Sheets. Delinquent
contracts are addressed and either made current by the customer, which is the case in most situations, or the vehicle is repossessed
or written off if the collateral cannot be recovered quickly. Customer payments are set to match their payday with approximately
75% of payments due on either a weekly or bi-weekly basis. The frequency of the payment due dates combined with the declining value
of collateral lead to prompt resolutions on problem accounts. At July 31, 2018, 3.5% of the Company’s finance receivable
balances were 30 days or more past due, compared to 4.6% at July 31, 2017.
Substantially all of the Company’s automobile
contracts involve contracts made to individuals with impaired or limited credit histories or higher debt-to-income ratios than
permitted by traditional lenders. Contracts made with buyers who are restricted in their ability to obtain financing from traditional
lenders generally entail a higher risk of delinquency, default and repossession, and higher losses than contracts made with buyers
with better credit.
The Company strives to keep its delinquency
percentages low, and not to repossess vehicles. Accounts three days late are contacted by telephone. Notes from each telephone
contact are electronically maintained in the Company’s computer system. In May 2017, the Company began implementing text
messaging notifications in a controlled rollout which allows customers to elect to receive a reminder on their due date and late
notifications further into the delinquency. The Company attempts to resolve payment delinquencies amicably prior to repossessing
a vehicle. If a customer becomes severely delinquent in his or her payments, and management determines that timely collection of
future payments is not probable, the Company will take steps to repossess the vehicle.
Periodically, the Company enters into contract
modifications with its customers to extend or modify the payment terms. The Company only enters into a contract modification or
extension if it believes such action will increase the amount of monies the Company will ultimately realize on the customer’s
account and will increase the likelihood of the customer being able to pay off the vehicle contract. At the time of modification,
the Company expects to collect amounts due including accrued interest at the contractual interest rate for the period of delay.
No other concessions are granted to customers, beyond the extension of additional time, at the time of modifications. Modifications
are minor and are made for payday changes, minor vehicle repairs and other reasons. For those vehicles that are repossessed, the
majority are returned or surrendered by the customer on a voluntary basis. Other repossessions are performed by Company personnel
or third-party repossession agents. Depending on the condition of a repossessed vehicle, it is either resold on a retail basis
through a Company dealership, or sold for cash on a wholesale basis primarily through physical or online auctions.
Accounts are charged-off after the expiration
of a statutory notice period for repossessed accounts, or when management determines that the timely collection of future payments
is not probable for accounts where the Company has been unable to repossess the vehicle. For accounts with respect to which the
vehicle was repossessed, the fair value of the repossessed vehicle is charged as a reduction of the gross finance receivables balance
charged-off. For the quarter ended July 31, 2018, on average, accounts were approximately 62 days past due at the time of charge-off.
For previously charged-off accounts that are subsequently recovered, the amount of such recovery is credited to the allowance for
credit losses.
The Company maintains an allowance for credit
losses on an aggregate basis at a level it considers sufficient to cover estimated losses inherent in the portfolio at the balance
sheet date in the collection of its finance receivables currently outstanding. At July 31, 2018, the weighted average
total contract term was 32.4 months with 23.5 months remaining. The reserve amount in the allowance for credit losses at July 31,
2018, $122.4 million, was 25% of the principal balance in finance receivables of $520.8 million, less unearned payment protection
plan revenue of $20.4 million and unearned service contract revenue of $10.6 million.
The estimated reserve amount is the Company’s
anticipated future net charge-offs for losses incurred through the balance sheet date. The allowance takes into account historical
credit loss experience (both timing and severity of losses), with consideration given to recent credit loss trends and changes
in contract characteristics (i.e., average amount financed, months outstanding at loss date, term and age of portfolio), delinquency
levels, collateral values, economic conditions and underwriting and collection practices. The allowance for credit losses is reviewed
at least quarterly by management with any changes reflected in current operations. The calculation of the allowance for credit
losses uses the following primary factors:
·
|
|
The number of units repossessed or charged-off as a percentage of total units financed
over specific historical periods of time from one year to five years.
|
·
|
|
The average net repossession and charge-off loss per
unit during the last eighteen months segregated by the number of months since the contract origination date and adjusted for the
expected future average net charge-off loss per unit. About 50% of the charge-offs that will ultimately occur in the
portfolio are expected to occur within 10-11 months following the balance sheet date. The average age of an account
at charge-off date for the eighteen-month period ended July 31, 2018 was 12 months.
|
·
|
|
The timing of repossession and charge-off losses relative
to the date of sale (i.e., how long it takes for a repossession or charge-off to occur) for repossessions and charge-offs occurring
during the last eighteen months.
|
A point estimate is produced by this analysis
which is then supplemented by any positive or negative subjective factors to arrive at an overall reserve amount that management
considers to be a reasonable estimate of losses inherent in the portfolio at the balance sheet date that will be realized via actual
charge-offs in the future. Although it is at least reasonably possible that events or circumstances could occur in the future that
are not presently foreseen which could cause actual credit losses to be materially different from the recorded allowance for credit
losses, the Company believes that it has given appropriate consideration to all relevant factors and has made reasonable assumptions
in determining the allowance for credit losses. While challenging economic conditions can negatively impact credit losses, effective
execution of internal policies and procedures within the collections area and the competitive environment on the funding side have
historically had a more significant effect on collection results than macro-economic issues.
In most states, the Company offers retail customers
who finance their vehicle the option of purchasing a payment protection plan product as an add-on to the installment sale contract.
This product contractually obligates the Company to cancel the remaining principal outstanding for any contract where the retail
customer has totaled the vehicle, as defined by the contract, or the vehicle has been stolen. The Company periodically evaluates
anticipated losses to ensure that if anticipated losses exceed deferred payment protection plan revenues, an additional liability
is recorded for such difference. No such liability was required at July 31, 2018 or April 30, 2018.
Inventory
Inventory consists of used vehicles and is
valued at the lower of cost or net realizable value on a specific identification basis. Vehicle reconditioning costs are capitalized
as a component of inventory. Repossessed vehicles and trade-in vehicles are recorded at fair value, which approximates wholesale
value. The cost of used vehicles sold is determined using the specific identification method.
Goodwill
Goodwill reflects the excess of purchase price
over the fair value of specifically identified net assets purchased. Goodwill and intangible assets deemed to have indefinite lives
are not amortized but are subject to annual impairment tests at the Company’s year-end. The impairment tests are based on
the comparison of the fair value of the reporting unit to the carrying value of such unit. There was no impairment of goodwill
during fiscal 2018, and to date, there has been no impairment during fiscal 2019.
Property and Equipment
Property and equipment are stated at cost.
Expenditures for additions, remodels, and improvements are capitalized. Costs of repairs and maintenance are expensed as incurred.
Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the lease period. The lease period
includes the primary lease term plus any extensions that are reasonably assured. Depreciation is computed using the straight-line
method, generally over the following estimated useful lives:
Furniture, fixtures and
equipment (years)
|
3
|
to
|
7
|
Leasehold improvements (years)
|
5
|
to
|
15
|
Buildings and improvements (years)
|
18
|
to
|
39
|
Property and equipment are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying values of the impaired assets exceed the fair value of such assets. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less costs to sell.
Cash Overdraft
As checks are presented for payment from the
Company’s primary disbursement bank account, monies are automatically drawn against cash collections for the day and, if
necessary, are drawn against one of the revolving credit facilities. Any cash overdraft balance principally represents outstanding
checks that as of the balance sheet date had not yet been presented for payment, net of any deposits in transit. Any cash overdraft
balance is reflected in accrued liabilities on the Company’s Condensed Consolidated Balance Sheets.
Deferred Sales Tax
Deferred sales tax represents a sales tax liability
of the Company for vehicles sold on an installment basis in the states of Alabama and Texas. Under Alabama and Texas law for vehicles
sold on an installment basis, the related sales tax is due as the payments are collected from the customer, rather than at the
time of sale. Deferred sales tax liabilities are reflected in accrued liabilities on the Company’s Condensed Consolidated
Balance Sheets.
Income Taxes
Income taxes are accounted for under the liability
method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities, and are measured using the enacted tax rates expected to apply in the years in which these
differences are expected to be recovered or settled. The quarterly provision for income taxes is determined using an estimated
annual effective tax rate, which is based on expected annual taxable income, statutory tax rates and the Company’s best estimate
of nontaxable and nondeductible items of income and expense. The effective income tax rates were 17.1% and 35.8% for the three
months ended July 31, 2018 and July 31, 2017, respectively. Total income tax expense for the three months ended July 31, 2018 differed
from amounts computed by applying the United States federal statutory tax rates to pre-tax income primarily due to state income
taxes and the impact of permanent differences between book and taxable income. The Company recorded a discrete income tax benefit
of approximately $943,000 and $172,000 for the three months ended July 31, 2018 and July 31, 2017, respectively, related to excess
tax benefits on share based compensation, which is recorded in the income tax provision pursuant to ASU 2016-09, which was adopted
on May 1, 2017.
On December 22, 2017, President Trump signed
into law the "Tax Cuts and Jobs Act" (the "Tax Act"). The Tax Act includes significant changes to the U.S.
tax code that affected our fiscal year ending April 30, 2018, and future periods. Changes in the tax laws from the Tax Act had
a material impact on our financial statements in fiscal 2018. Under generally accepted accounting principles, ("U.S. GAAP")
specifically ASC Topic 740, Income Taxes, the tax effects of changes in tax laws must be recognized in the period in which the
law is enacted, or December 22, 2017, for the Tax Act. ASC 740 also requires deferred tax assets and liabilities to be measured
at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment,
the Company’s deferred taxes were re-measured based upon the new tax rates. The change in deferred taxes was recorded as
an adjustment to our deferred tax provision. The Tax Act reduced the corporate tax rate from 35% to 21%, effective January 1, 2018.
This resulted in a blended federal corporate tax rate of approximately 30.4% in fiscal year 2018 and will result in a federal corporate
tax rate of 21% thereafter. In the third quarter of fiscal 2018, we recorded a discrete net deferred income tax benefit of $8.1
million with a corresponding provisional reduction to our net deferred income tax liability.
Occasionally, the Company is audited by taxing
authorities. These audits could result in proposed assessments of additional taxes. The Company believes that its tax positions
comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations by
taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes.
The Company recognizes the financial statement
benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position
following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements
is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant
tax authority. The Company applies this methodology to all tax positions for which the statute of limitations remains open.
The Company is subject to income taxes in the
U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation
of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer
subject to U.S. federal, state and local income tax examinations by tax authorities for the years before fiscal 2015.
The Company’s policy is to recognize
accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had
no accrued penalties or interest as of July 31, 2018 or April 30, 2018.
Revenue Recognition
Revenues are generated principally from the
sale of used vehicles, which in most cases includes a service contract and a payment protection plan product, interest income and
late fees earned on finance receivables. Revenues are net of taxes collected from customers and remitted to government agencies.
Cost of vehicle sales include costs incurred by the Company to prepare the vehicle for sale including license and title costs,
gasoline, transport services, and repairs.
Revenues from the sale of used vehicles are
recognized when the sales contract is signed, the customer has taken possession of the vehicle and, if applicable, financing has
been approved. Revenues from the sale of vehicles sold at wholesale are recognized at the time the proceeds are received. Revenues
from the sale of service contracts are recognized ratably over the expected duration of the product. Service contract revenues
are included in sales and the related expenses are included in cost of sales. Payment protection plan revenues are initially deferred
and then recognized to income using the “Rule of 78’s” interest method over the life of the contract so that
revenues are recognized in proportion to the amount of cancellation protection provided. Payment protection plan revenues are included
in sales and related losses are included in cost of sales as incurred. Interest income is recognized on all active finance receivables
accounts using the simple effective interest method. Active accounts include all accounts except those that have been paid-off
or charged-off.
Sales consist of the following:
|
|
Three Months Ended
July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
|
|
|
|
|
Sales – used autos
|
|
$
|
125,224
|
|
|
$
|
111,113
|
|
Wholesales – third party
|
|
|
6,052
|
|
|
|
5,337
|
|
Service contract sales
|
|
|
7,328
|
|
|
|
6,904
|
|
Payment protection plan revenue
|
|
|
5,497
|
|
|
|
4,920
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
144,101
|
|
|
$
|
128,274
|
|
At July 31, 2018 and 2017, finance receivables
more than 90 days past due were approximately $1.6 million and $2.0 million, respectively. Late fee revenues totaled approximately
$446,000 and $449,000 for the three months ended July 31, 2018 and 2017, respectively. Late fees are recognized when collected
and are reflected in interest and other income on the Condensed Consolidated Statements of Operations.
Earnings per Share
Basic earnings per share are computed by dividing
net income attributable to common stockholders by the average number of common shares outstanding during the period. Diluted earnings
per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding
during the period plus dilutive common stock equivalents. The calculation of diluted earnings per share takes into consideration
the potentially dilutive effect of common stock equivalents, such as outstanding stock options and non-vested restricted stock,
which if exercised or converted into common stock would then share in the earnings of the Company. In computing diluted earnings
per share, the Company utilizes the treasury stock method and anti-dilutive securities are excluded.
Stock-Based Compensation
The Company recognizes the cost of employee
services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value
of those awards at the date of grant over the requisite service period. The Company uses the Black-Scholes option pricing model
to determine the fair value of stock option awards. The Company may issue either new shares or treasury shares upon exercise of
these awards. Stock-based compensation plans, related expenses, and assumptions used in the Black-Scholes option pricing model
are more fully described in Note I. If an award contains a performance condition, expense is recognized only for those shares for
which it is considered reasonably probable as of the current period end that the performance condition will be met. In March 2016,
the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, to simplify the accounting for share-based
payment transactions. The Company adopted the guidance prospectively on May 1, 2017. The Company recorded a discrete income tax
benefit of approximately $943,000 and $172,000 for the three months ended July 31, 2018 and July 31, 2017, respectively. In connection
with the adoption, we elected to account for forfeitures as they occur; previously, we were required to record stock compensation
expense based on awards that were expected to vest, which had required us to apply an estimated forfeiture rate. The differential
between the amount of compensation previously recorded and the amount that would have been recorded, if we did not assume a forfeiture
rate, was not material to our consolidated financial statements. Also, in connection with the adoption, the Company now records
any excess tax benefits or deficiencies from its equity awards in its Consolidated Statements of Operations in the reporting period
in which the exercise occurs. As a result, going forward, the Company’s income tax expenses and associated effective tax
rate will be impacted by fluctuations in stock price between the grant dates and exercise dates of equity awards.
Treasury Stock
The Company purchased 115,999 shares of its
common stock to be held as treasury stock for a total cost of $7.4 million during the first three months of fiscal 2019 and 102,843
shares for a total cost of $3.7 million during the first three months of fiscal 2018. Treasury stock may be used for issuances
under the Company’s stock-based compensation plans or for other general corporate purposes. The Company has established two
separate reserve accounts of 10,000 shares of treasury stock each to: i) secure outstanding service contracts issued in Iowa in
accordance with the regulatory requirements of that state, and ii) for its subsidiary, ACM Insurance Company, in accordance with
the requirements of the Arkansas Department of Insurance.
Recent Accounting Pronouncements
Occasionally, new accounting pronouncements
are issued by the FASB or other standard setting bodies which the Company will adopt as of the specified effective date. Unless
otherwise discussed, the Company believes the implementation of recently issued standards which are not yet effective will not
have a material impact on its consolidated financial statements upon adoption.
Revenue Recognition
. In May 2014, the
FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(Topic 606), which supersedes existing revenue recognition
guidance. The new guidance in ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue
and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized
from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with
Customers (Topic 606): Deferral of the Effective Date
, to provide entities with an additional year to implement ASU 2014-09.
As a result, the guidance in ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, and interim
reporting periods within those years, using one of two retrospective application methods. The Company adopted this standard for
its fiscal year beginning May 1, 2018 and applied the modified retrospective transition method. Adoption of this standard did not
result in an adjustment to our revenue recognition. The Company’s evaluation process included, but was not limited to, identifying
contracts within the scope of the guidance and reviewing and documenting its accounting for these contracts. The Company primarily
sells products and recognizes revenue at the point of sale or delivery to customers, at which point the earnings process is deemed
to be complete. The Company’s performance obligations are clearly identifiable, and management’s evaluation of the
standard did not result in significant changes to the assessment of such performance obligations or the timing of the Company’s
revenue recognition upon adoption of the new standard. The Company’s primary business processes are consistent with the principles
contained in the ASU, and the Company’s evaluation of the standard did not result in significant changes to those processes
or its internal controls or systems.
Statement of Cash Flows.
In August 2016,
the FASB issued ASU 2016-15 —
Statement of Cash Flows
(Topic 230). ASU 2016-15
aims to
eliminate diversity in the practice of how certain cash receipts and cash payments are presented and classified in the statement
of cash flows.
The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods
within those years
.
The Company adopted this standard for its fiscal year beginning May 1,
2018, and it did not have a material effect on our consolidated financial statements.
Income Taxes.
In October 2016, the FASB
issued ASU 2016-16,
Income Taxes
(Topic 740). ASU 2016-16 requires companies to recognize the income tax effects of intercompany
sales and transfers of assets, other than inventory, in the period in which the transfer occurs. The guidance is effective for
annual reporting periods beginning after December 15, 2017 and interim periods within those years. The Company adopted this standard
for its fiscal year beginning May 1, 2018, and it did not have a material effect on our consolidated financial statements.
Leases
. In February 2016, the FASB issued
ASU 2016-02,
Leases
. The new guidance requires that lessees recognize all leases, including operating leases, with a term
greater than 12 months on-balance sheet and also requires disclosure of key information about leasing transactions. The guidance
in ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within
those years. The Company is currently evaluating the potential effects of the adoption of this guidance on the consolidated financial
statements.
Credit Losses
. In June 2016, the FASB
issued ASU 2016-13,
Financial Instruments
—
Credit Losses
(Topic 326). ASU 2016-13 requires financial assets
such as loans to be presented net of an allowance for credit losses that reduces the cost basis to the amount expected to be collected
over the estimated life. Expected credit losses will be measured based on historical experience and current conditions, as well
as forecasts of future conditions that affect the collectability of the reported amount. ASU 2016-13 is effective for annual reporting
periods beginning after December 15, 2019, and interim reporting periods within those years using a modified retrospective approach.
The Company is currently evaluating the potential effects of the adoption of this guidance on the consolidated financial statements,
but does not expect such impact to be material.
F – Debt Facilities
A summary of debt facilities is as follows:
(In thousands)
|
|
July 31, 2018
|
|
April 30, 2018
|
|
|
|
|
|
Revolving lines of credit
|
|
$
|
154,173
|
|
|
$
|
151,380
|
|
Notes payable
|
|
|
278
|
|
|
|
305
|
|
Capital lease
|
|
|
1,050
|
|
|
|
1,117
|
|
Debt issuance costs
|
|
|
(366
|
)
|
|
|
(435
|
)
|
|
|
|
|
|
|
|
|
|
Debt facilities
|
|
$
|
155,135
|
|
|
$
|
152,367
|
|
On December 12, 2016, the Company entered into
a Second Amended and Restated Loan and Security Agreement (the “Agreement”) which amended and restated the Company’s
credit facilities. The Agreement extended the terms of the Credit Facilities to December 12, 2019, reduced the pricing tiers for
determining the applicable interest rate from four to three, and reset the aggregate limit on the repurchase of Company stock to
$40 million beginning December 12, 2016. The Agreement also increased the total revolving credit facilities from $172.5 million
to $200 million, provided the option to request revolver commitment increases for up to an additional $50 million and increased
the advance rate on accounts receivable with 37-42 month terms from 50% to 55%, and the advance rate on accounts receivable with
43-60 month terms from 45% to 50%.
On October 25, 2017, the Company entered into
Amendment No. 1 (the “Amendment”) to the Agreement. The Amendment, among other things, (i) increased the aggregate
limit on repurchases beginning with the effective date of the Amendment to $50 million, net of proceeds received from the exercise
of stock options, plus for a period of six months after October 25, 2017, the amount of repurchases available to the Company immediately
prior to the effective date of the Amendment (net of proceeds received from exercise of stock options), and (ii) reduced the upper
threshold to 20% from 25% for minimum net availability of the borrowing base for financial covenant testing and limitations on
distributions. The Amendment also provides for a 0.025% decrease in the second pricing tier and a 0.125% decrease in the third
pricing tier for determining the applicable interest rate. The Amendment also added a fourth pricing tier at LIBOR plus 2.875%,
based on the Company’s consolidated leverage ratio if greater than 1.75:1.00 for the preceding fiscal quarter. The Amendment
did not change the first pricing tier. Pricing tiers are based on the Company’s consolidated leverage ratio for the preceding
fiscal quarter.
The revolving credit facilities are collateralized
primarily by finance receivables and inventory, are cross collateralized and contain a guarantee by the Company. Interest is payable
monthly under the revolving credit facilities. The credit facilities provide for four pricing tiers for determining the applicable
interest rate, based on the Company’s consolidated leverage ratio for the preceding fiscal quarter. The current applicable
interest rate under the Credit Facilities is generally LIBOR plus 2.35%, or 4.43% at July 31, 2018 and 4.25% at April 30, 2018.
The credit facilities contain various reporting and performance covenants including (i) maintenance of certain financial ratios
and tests, (ii) limitations on borrowings from other sources, (iii) restrictions on certain operating activities and (iv) restrictions
on the payment of dividends or distributions.
The distribution limitations under the credit
facilities allow the Company to repurchase shares of its common stock up to certain limits. Under the current limits, the aggregate
amount of repurchases after October 25, 2017 cannot exceed the greater of: (a) $50 million, net of proceeds received from the exercise
of stock options (plus any repurchases made during the first six months after October 25, 2017, in an aggregate amount up to the
remaining availability under the $40 million repurchase limit in effect immediately prior to October 25, 2017, net of proceeds
received from the exercise of stock options), provided that the sum of the borrowing bases combined minus the principal balances
of all revolver loans after giving effect to such repurchases is equal to or greater than 20% of the sum of the borrowing bases;
or (b) 75% of the consolidated net income of the Company measured on a trailing twelve month basis. In addition, immediately before
and after giving effect to the Company’s stock repurchases, at least 12.5% of the aggregate funds committed under the credit
facilities must remain available.
The Company was in compliance with the covenants
at July 31, 2018. The amount available to be drawn under the credit facilities is a function of eligible finance receivables and
inventory; based upon eligible finance receivables and inventory at July 31, 2018, the Company had additional availability of approximately
$44 million under the revolving credit facilities.
The Company recognized approximately $69,000
and $59,000 of amortization for the three months ended July 31, 2018 and 2017, respectively, related to debt issuance costs. The
amortization is reflected as interest expense in the Company’s Condensed Consolidated Statements of Operations.
During the first three months of fiscal 2019,
the Company did not incur any debt issuance costs related to the Agreement. During fiscal 2018, the Company incurred approximately
$103,000 in debt issuance costs related to the Agreement. Debt issuance costs of approximately $366,000 and $435,000 as of July
31, 2018 and April 30, 2018, respectively, are shown as a deduction from the debt facilities in the Condensed Consolidated Balance
Sheets.
On December 15, 2015, the Company entered into
an agreement to purchase the property on which one of its dealerships is located for a purchase price of $550,000. Under the agreement,
the purchase price is being paid in monthly principal and interest installments of $10,005. The debt matures in December 2020,
bears interest at a rate of 3.50% and is secured by the property. The balance on this note payable was approximately $278,000 and
$305,000 as of July 31, 2018 and April 30, 2018, respectively.
On March 29, 2018, the Company entered into
a lease classified as a capital lease. The present value of the minimum lease payments was approximately $1.1 million as of July
31, 2018 and April 30, 2018, which is included in Debt facilities in the Consolidated Balance Sheet. The leased equipment is amortized
on a straight-line basis over three years. As of July 31, 2018 and April 30, 2018, there was approximately $54,000 and $14,000,
respectively, in accumulated depreciation related to the leased equipment.
I – Stock-Based Compensation
The Company has stock-based compensation plans
available to grant non-qualified stock options, incentive stock options and restricted stock to employees, directors and certain
advisors of the Company. The stock-based compensation plans being utilized at July 31, 2018 are the Amended and Restated Stock
Option Plan and the Amended and Restated Stock Incentive Plan. The Company recorded total stock-based compensation expense for
all plans of approximately $1,094,000 ($831,000 after tax effects) and $626,000 ($393,000 after tax effects) for the three months
ended July 31, 2018 and 2017, respectively. Tax benefits were recognized for these costs at the Company’s overall effective
tax rate, excluding discrete income tax benefits related to excess benefits on share-based compensation.
Stock Options
The Company has options outstanding under a
stock option plan approved by the shareholders, the Amended and Restated Stock Option Plan. The shareholders of the Company approved
the Amended and Restated Stock Option Plan (the “Restated Option Plan”) on August 5, 2015, which extended the term
of the Restated Option Plan to June 10, 2025 and increased the number of shares of common stock reserved for issuance under the
plan to 1,800,000 shares. On August 29, 2018, the shareholders of the Company approved an amendment to the Restated Option Plan
increasing the number of share of common stock reserved for issuance under the plan by an additional 200,000 shares to 2,000,000
shares. The Restated Option Plan provides for the grant of options to purchase shares of the Company’s common stock to employees,
directors and certain advisors of the Company at a price not less than the fair market value of the stock on the date of grant
and for periods not to exceed ten years. Options granted under the Company’s stock option plans expire in the calendar years
2018 through 2028.
|
|
Restated
Option Plan
|
|
|
|
Minimum exercise price as a percentage of fair market value at date of grant
|
|
100%
|
Last expiration date for outstanding options
|
|
May 8, 2028
|
Shares available for grant at July 31, 2018
|
|
98,500
|
The fair value of options granted is estimated
on the date of grant using the Black-Scholes option pricing model based on the assumptions in the table below.
|
|
Three Months Ended
July 31,
|
|
|
2018
|
|
2017
|
Expected term (years)
|
|
|
5.5
|
|
|
|
5.5
|
|
Risk-free interest rate
|
|
|
2.78
|
%
|
|
|
1.81
|
%
|
Volatility
|
|
|
36
|
%
|
|
|
36
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
The expected term of the options is based on evaluations
of historical actual and future expected employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury
rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based
on historical volatility of the Company’s common stock. The Company has not historically issued any dividends and does not
expect to do so in the foreseeable future.
There were 145,000 options granted during the
three months ended July 31, 2018 and 25,000 options granted during the three months ended July 31, 2017. The grant-date fair value
of options granted during the three months ended July 31, 2018 and 2017 was $3 million and $336,000, respectively. The options
were granted at fair market value on the date of grant.
Stock option compensation expense was $841,000
($639,000 after tax effects) and $551,000 ($345,000 after tax effects) for the three months ended July 31, 2018 and 2017, respectively.
As of July 31, 2018, the Company had approximately $3.8 million of total unrecognized compensation cost related to unvested options
that are expected to vest. These unvested outstanding options have a weighted-average remaining vesting period of 2.7 years.
In May 2015, key employees of the Company were
granted 91,125 performance-based stock options with a five-year performance period ending April 30, 2020. An additional 40,000
such options were granted to key employees of the Company in August 2015. Tiered vesting of these units is based solely on comparing
the Company’s net income over the specified performance period to net income at April 30, 2015. As of July 31, 2018, the
Company had $1 million in unrecognized compensation expense related to 61,000 of these options that are not currently expected
to vest.
The Company had the following options exercised
for the periods indicated. The impact of these cash receipts is included in financing activities in the accompanying Condensed
Consolidated Statements of Cash Flows.
|
|
Three Months Ended
July 31,
|
(Dollars in thousands)
|
|
2018
|
|
2017
|
|
|
|
|
|
Options exercised
|
|
|
162,250
|
|
|
|
35,250
|
|
Cash received from option exercises
|
|
$
|
3,259
|
|
|
$
|
543
|
|
Intrinsic value of options exercised
|
|
$
|
5,508
|
|
|
$
|
784
|
|
The aggregate intrinsic value of outstanding options
at July 31, 2018 and 2017 was $13.5 million and $9.5 million, respectively. As of July 31, 2018, there were 240,750 vested and
exercisable stock options outstanding with an aggregate intrinsic value of $7 million, a weighted average remaining contractual
life of 3.89 years, and a weighted average exercise price of $34.98.
Stock Incentive Plan
On August 5, 2015, the shareholders of the
Company approved the Amended and Restated Stock Incentive Plan (the “Restated Incentive Plan”), which extended the
term of the Company’s Stock Incentive Plan to June 10, 2025. On August 29, 2018, the shareholders of the Company approved
an amendment to the Restated Stock Incentive Plan that increased the number of shares of common stock that may be issued under
the Restated Incentive Plan by 100,000 shares to 450,000. For shares issued under the Stock Incentive Plan, the associated compensation
expense is generally recognized equally over the vesting periods established at the award date and is subject to the employee’s
continued employment by the Company.
There were 3,000 restricted shares granted
during the three months ended July 31, 2018 and 34,500 restricted shares were granted during the three months ended July 31, 2017.
A total of 6,027 shares remained available for award at July 31, 2018. There were 181,000 unvested restricted shares outstanding
as of July 31, 2018 with a weighted average grant date fair value of $46.13.
As of July 31, 2018, the Company had approximately
$7.5 million of total unrecognized compensation cost related to unvested awards granted under the Stock Incentive Plan, which the
Company expects to recognize over a weighted-average remaining period of 7.9 years. The Company recorded compensation cost of approximately
$247,000 ($188,000 after tax effects) and $71,000 ($45,000 after tax effects) related to the Restated Incentive Plan during the
three months ended July 31, 2018 and 2017, respectively.
There were no modifications to any of the Company’s
outstanding share-based payment awards during fiscal 2018 or during the first three months of fiscal 2019.