Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion
should be read in conjunction with the Company's Condensed Consolidated Financial Statements and notes thereto appearing elsewhere
in this report.
Forward-Looking
Information
This Quarterly Report
on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements address the Company’s future objectives, plans and goals, as well as the Company’s
intent, beliefs and current expectations regarding future operating performance, and can generally be identified by words such
as “may”, “will”, “should”, “could”, “believe”, “expect”,
“anticipate”, “intend”, “plan”, “foresee”, and other similar words or phrases.
Specific events addressed by these forward-looking statements include, but are not limited to:
|
·
|
new dealership openings;
|
|
·
|
performance of new dealerships;
|
|
·
|
same dealership revenue growth;
|
|
·
|
receivables growth as related to revenue growth;
|
|
·
|
gross margin percentages;
|
|
·
|
the Company’s collection results, including, but not limited to, collections during income tax refund periods;
|
|
·
|
security breaches, cyber-attacks, or fraudulent activity;
|
|
·
|
compliance with tax regulations;
|
|
·
|
the Company’s business and growth strategies;
|
|
·
|
financing the majority of growth from profits; and
|
|
·
|
having adequate liquidity to satisfy its capital needs.
|
These forward-looking
statements are based on the Company’s current estimates and assumptions and involve various risks and uncertainties. As a
result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results
could differ materially from those projected in these forward-looking statements. Factors that may cause actual results to differ
materially from the Company’s projections include those risks described elsewhere in this report, as well as:
|
·
|
the availability of credit facilities to support the Company’s business;
|
|
·
|
the Company’s ability to underwrite and collect its contracts effectively;
|
|
·
|
dependence on existing management;
|
|
·
|
availability of quality vehicles at prices that will be affordable to customers;
|
|
·
|
changes in consumer finance laws or regulations, including, but not limited to, rules and regulations that have recently been
enacted or could be enacted by federal and state governments; and
|
|
·
|
general economic conditions in the markets in which the Company operates, including, but not limited to, fluctuations in gas
prices, grocery prices and employment levels.
|
The Company undertakes
no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they
are made.
Overview
America’s Car-Mart,
Inc., a Texas corporation initially formed in 1981 (the “Company”), is one of the largest publicly held automotive
retailers in the United States focused exclusively on the “Integrated Auto Sales and Finance” segment of the used car
market. The Company’s operations are principally conducted through its two operating subsidiaries, America’s Car Mart,
Inc., an Arkansas corporation (“Car-Mart of Arkansas”), and Colonial Auto Finance, Inc., an Arkansas corporation (“Colonial”).
References to the Company include the Company’s consolidated subsidiaries. The Company primarily sells older model used vehicles
and provides financing for substantially all of its customers. Many of the Company’s customers have limited financial resources
and would not qualify for conventional financing as a result of limited credit histories or past credit problems. As of January
31, 2018, the Company operated 140 dealerships located primarily in small cities throughout the South-Central United States.
The Company has grown
its revenues between 3% and 14% per year over the last ten fiscal years (9% on average). Growth results from same dealership revenue
growth and the addition of new dealerships. Revenue increased 1.8% for the first nine months of fiscal 2018 compared to the same
period of fiscal 2017 due to a 10.2% increase in interest income and a 0.6% increase in the number of retail units sold.
The Company’s
primary focus is on collections. Each dealership is responsible for its own collections with supervisory involvement of the corporate
office. Over the last five fiscal years, the Company’s credit losses as a percentage of sales have ranged from approximately
23.1% in fiscal 2013 to 28.7% in fiscal 2017 (average of 26.6%). The increase in credit losses as a percentage of sales in recent
years has been primarily due to increased contract term lengths and lower down payments resulting from increased competitive pressures
as well as higher charge-offs caused, to an extent, by negative macro-economic factors affecting the Company’s customer
base. For the first nine months of fiscal 2018, credit losses as a percentage of sales were 28.6%, compared to 28.8% for the first
nine months of fiscal 2017. The decrease in the provision for credit losses as a percentage of sales is primarily due to lower
delinquencies and fewer contract modifications. The decrease in the provision for credit losses as a percentage of sales was partially
offset by a lower percentage of collection of finance receivables due to longer contract terms, and the increase in our contract
interest rate.
Historically, credit
losses, on a percentage basis, tend to be higher at new and developing dealerships than at mature dealerships. Generally, this
is the case because the management at new and developing dealerships tends to be less experienced in making credit decisions and
collecting customer accounts and the customer base is less seasoned. Normally more mature dealerships have more repeat customers
and, on average, repeat customers are a better credit risk than non-repeat customers. Negative macro-economic issues do not always
lead to higher credit loss results for the Company because the Company provides basic affordable transportation which in many cases
is not a discretionary expenditure for customers. The Company does believe, however, that general inflation, particularly within
staple items such as groceries and gasoline, as well as overall unemployment levels and potentially lower or stagnant personal
income levels affecting customers can have, and have had in recent years, a negative impact on collections. Additionally, increased
competition for used vehicle financing in recent years has had a negative effect on collections and charge-offs.
In an effort to offset
the elevated credit losses and lower collection levels and to operate more efficiently, the Company continues to look for improvements
to its business practices, including better underwriting and better collection procedures. The Company has a proprietary credit
scoring system which enables the Company to monitor the quality of contracts. Corporate office personnel monitor proprietary credit
scores and work with dealerships when the distribution of scores falls outside of prescribed thresholds. The Company has implemented
credit reporting and the use of GPS units on vehicles. Additionally, the Company has placed significant focus on the collection
area; the Company’s training department continues to spend significant time and effort on collections improvements. The Field
Operations Officer oversees the collections department and provides timely oversight and additional accountability on a consistent
basis. In addition, the Company has a Director of Collection Services who assists with managing the Company’s servicing and
collections practices and provides additional monitoring and training. The Company believes that the proper execution of its business
practices is the single most important determinant of its long term credit loss experience.
Historically, the Company’s gross
margin as a percentage of sales has been fairly consistent from year to year. Over the previous five fiscal years , the Company’s
gross margins as a percentage of sales ranged between approximately 40% and 43%. The Company’s gross margin is based upon
the cost of the vehicle purchased, with lower-priced vehicles typically having higher gross margin percentages, and is also affected
by the percentage of wholesale sales to retail sales, which relates for the most part to repossessed vehicles sold at or near
cost. Gross margin in recent years has been negatively affected by the increase in the average retail sales price (a function
of a higher purchase price) and higher operating costs, mostly related to increased vehicle repair costs and higher fuel costs.
After decreasing to a five-year low of 39.8% of sales during fiscal 2016, gross margin for fiscal 2017 improved to 41.4% primarily
as a result of lower repair expenses and a decrease in losses on wholesales. For the first nine months of fiscal 2018 the gross
margin was 41.6% of sales compared to 41.3% for the first nine months of fiscal 2017, resulting primarily from better inventory
management and repair practices. The Company expects that its gross margin percentage will continue to remain under pressure over
the near term.
Hiring, training and
retaining qualified associates is critical to the Company’s success. The extent to which the Company is able to add new dealerships
and implement operating initiatives is limited by the number of trained managers and support personnel the Company has at its disposal.
Excessive turnover, particularly at the dealership manager level, could impact the Company’s ability to add new dealerships
and to meet operational initiatives. The Company has added resources to recruit, train, and develop personnel, especially personnel
targeted for dealership manager positions. The Company expects to continue to invest in the development of its workforce.
Consolidated Operations
(Operating Statement Dollars in Thousands)
|
|
|
|
|
|
% Change
|
|
As a % of Sales
|
|
|
Three Months Ended
|
|
2018
|
|
Three Months Ended
|
|
|
January 31,
|
|
vs.
|
|
January 31,
|
|
|
2018
|
|
2017
|
|
2017
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
128,166
|
|
|
$
|
121,263
|
|
|
|
5.7
|
%
|
|
|
100.0
|
|
|
|
100.0
|
|
Interest income
|
|
|
19,048
|
|
|
|
17,521
|
|
|
|
8.7
|
|
|
|
14.9
|
|
|
|
14.4
|
|
Total
|
|
|
147,214
|
|
|
|
138,784
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation shown below
|
|
|
74,951
|
|
|
|
71,836
|
|
|
|
4.3
|
|
|
|
58.5
|
|
|
|
59.2
|
|
Selling, general and administrative
|
|
|
25,945
|
|
|
|
22,654
|
|
|
|
14.5
|
|
|
|
20.2
|
|
|
|
18.7
|
|
Provision for credit losses
|
|
|
37,872
|
|
|
|
37,645
|
|
|
|
0.6
|
|
|
|
29.5
|
|
|
|
31.0
|
|
Interest expense
|
|
|
1,482
|
|
|
|
1,060
|
|
|
|
39.8
|
|
|
|
1.2
|
|
|
|
0.9
|
|
Depreciation and amortization
|
|
|
1,057
|
|
|
|
1,059
|
|
|
|
(0.2
|
)
|
|
|
0.8
|
|
|
|
0.9
|
|
Loss on disposal of property and equipment
|
|
|
84
|
|
|
|
7
|
|
|
|
1100.0
|
|
|
|
0.1
|
|
|
|
-
|
|
Total
|
|
|
141,391
|
|
|
|
134,261
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
5,823
|
|
|
$
|
4,523
|
|
|
|
|
|
|
|
4.5
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail units sold
|
|
|
11,420
|
|
|
|
10,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stores in operation
|
|
|
140
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units sold per store per month
|
|
|
27.2
|
|
|
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average retail sales price
|
|
$
|
10,662
|
|
|
$
|
10,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store revenue change
|
|
|
7.1
|
%
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open
|
|
|
140
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts over 30 days past due
|
|
|
4.1
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended January
31, 2018 vs. Three months ended January 31, 2017
Revenues increased by
approximately $8.4 million, or 6.1%, for the three months ended January 31, 2018 as compared to the same period in the prior fiscal
year. The increase resulted from revenue growth at dealerships that operated a full three months in both current and prior year
third quarter ($9.7 million) and revenue growth from dealerships opened after the prior year quarter ($1.1 million), partially
offset by the loss of revenues from dealerships closed after January 31, 2017 ($2.4 million). Interest income increased approximately
$1.5 million for the three months ended January 31, 2018, as compared to the same period in the prior fiscal year due to the $20.6
million increase in average finance receivables and the increase in the contract interest rate from 15.0% to 16.5% at the end of
May 2016.
Cost
of sales, as a percentage of sales, decreased to 58.5% for the three months ended January 31, 2018 compared to 59.2% for the same
period of the prior fiscal year, resulting in a gross margin as a percentage of sales of 41.5% for the current year period compared
to 40.8% for the prior year period. The higher gross margin percentage primarily relates to
better inventory management
and repair practices
.
Gross margin as a
percentage of sales is significantly impacted by the average retail sales price of the vehicles the Company sells, which is largely
a function of the Company’s purchase cost. The average retail sales price for the third quarter of fiscal 2018 was $10,662
a $33 increase over the prior year quarter. The Company’s purchase costs remain relatively high as a result of increases
in prior periods from a combination of consumer demand for the types of vehicles the Company purchases for resale and a strategic
management decision to purchase higher quality vehicles for our customers. When purchase costs increase, the margin between the
purchase cost and the sales price of the vehicles we sell narrows as a percentage because the Company must offer affordable prices
to our customers. Therefore, we continue to focus efforts on minimizing the average retail sales price of our vehicles in order
to help keep contract terms shorter, which helps customers to maintain appropriate equity in their vehicles and reduces credit
losses and resulting wholesale volumes.
Selling,
general and administrative expenses, as a percentage of sales, were 20.2% for the three months ended January 31, 2018, an increase
of 1.5% from the same period of the prior fiscal year. Selling, general and administrative expenses are, for the most part, more
fixed in nature. In dollar terms, overall selling, general and administrative expenses increased approximately $3.3 million in
the third quarter of fiscal 2018 compared to the same period of the prior fiscal year. The increase was primarily a result of
a $1.1 million one-time retirement bonus paid to our former Chief Executive Officer and additional investments in general manager
recruitment, training and advancement, collections support and marketing. The Company continues to focus on controlling costs,
while at the same time ensuring a solid infrastructure to ensure a high level of support for our customers.
Provision for credit
losses as a percentage of sales was 29.5% for the three months ended January 31, 2018 compared to 31.0% for the three months ended
January 31, 2017. Net charge-offs as a percentage of average finance receivables were 7.4% for the three months ended January 31,
2018 compared to 7.8% for the prior year quarter. The decrease in the provision for credit losses as a percentage of sales is primarily
due to a higher percentage of collections of finance receivables, due to the lower delinquencies, the higher average age of receivables
and a lower level of modifications, partially offset by longer average term and the increase in our contract interest rate. The
decrease in charge-offs as a percentage of average finance receivables was due to a decrease in the frequency of the losses compared
to the same period in the prior year, with the severity of the losses remaining flat compared to the same period of the prior fiscal
year. The Company believes that the proper execution of its business practices remains the single most important determinant of
its long-term credit loss experience.
Interest expense as a
percentage of sales increased to 1.2% for the three months ended January 31, 2018 compared to 0.9% for the same period of the prior
fiscal year. The increase is attributable to higher average borrowings during the three months ended January 31, 2018 at $143.9
million, compared to $120.1 million for the prior year quarter, along with increased interest rates.
Consolidated Operations
(Operating Statement Dollars in Thousands)
|
|
|
|
|
|
% Change
|
|
As a % of Sales
|
|
|
Nine Months Ended
|
|
2018
|
|
Nine Months Ended
|
|
|
January 31,
|
|
vs.
|
|
January 31,
|
|
|
2018
|
|
2017
|
|
2017
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
386,867
|
|
|
$
|
384,117
|
|
|
|
0.7
|
%
|
|
|
100.0
|
|
|
|
100.0
|
|
Interest income
|
|
|
55,883
|
|
|
|
50,717
|
|
|
|
10.2
|
|
|
|
14.4
|
|
|
|
13.2
|
|
Total
|
|
|
442,750
|
|
|
|
434,834
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation shown below
|
|
|
225,780
|
|
|
|
225,346
|
|
|
|
0.2
|
|
|
|
58.4
|
|
|
|
58.7
|
|
Selling, general and administrative
|
|
|
73,537
|
|
|
|
68,476
|
|
|
|
7.4
|
|
|
|
19.0
|
|
|
|
17.8
|
|
Provision for credit losses
|
|
|
110,778
|
|
|
|
110,467
|
|
|
|
0.3
|
|
|
|
28.6
|
|
|
|
28.8
|
|
Interest expense
|
|
|
3,978
|
|
|
|
3,040
|
|
|
|
30.9
|
|
|
|
1.0
|
|
|
|
0.8
|
|
Depreciation and amortization
|
|
|
3,244
|
|
|
|
3,235
|
|
|
|
0.3
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Loss on Disposal of Property and Equipment
|
|
|
188
|
|
|
|
406
|
|
|
|
(53.7
|
)
|
|
|
-
|
|
|
|
0.1
|
|
Total
|
|
|
417,505
|
|
|
|
410,970
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
25,245
|
|
|
$
|
23,864
|
|
|
|
|
|
|
|
6.5
|
%
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail units sold
|
|
|
35,189
|
|
|
|
34,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stores in operation
|
|
|
140
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units sold per store per month
|
|
|
27.9
|
|
|
|
27.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average retail sales price
|
|
$
|
10,487
|
|
|
$
|
10,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store revenue change
|
|
|
3.3
|
%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open
|
|
|
140
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts over 30 days past due
|
|
|
4.1
|
%
|
|
|
4.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended January
31, 2018 vs. Nine Months Ended January 31, 2017
Revenues increased by
approximately $7.9 million, or 1.8%, for the nine months ended January 31, 2018 as compared to the same period in the prior fiscal
year. The increase resulted from revenue growth at dealerships that operated a full nine months in both current and prior year
periods ($14.2 million) and revenue growth from dealerships opened after the prior year third quarter ($2.1 million), partially
offset by the loss of revenues from dealerships closed after January 31, 2017 ($8.4 million). Interest income increased approximately
$5.2 million for the nine months ended January 31, 2018, as compared to the same period in the prior fiscal year due to the $24.4
million increase in average finance receivables and the increase in the contract interest rate from 15.0% to 16.5% at the end of
May 2016.
Cost of sales, as a percentage of sales, decreased
to 58.4% for the nine months ended January 31, 2018 compared to 58.7% for the same period of the prior fiscal year, resulting in
a gross margin as a percentage of sales of 41.6% for the current year period compared to 41.3% for the prior year period. The slightly
higher gross margin percentage primarily relates to better inventory management and repair practices.
Gross margin as a percentage of sales is significantly
impacted by the average retail sales price of the vehicles the Company sells, which is largely a function of the Company’s
purchase cost. The average retail sales price for the nine months ended January 31, 2018 was $10,487, a $13 decrease over the same
period in the prior fiscal year. While the average retail sales price was down slightly compared to the same period in the prior
fiscal year, the Company’s purchase costs remain relatively high as a result of increases in prior periods from a combination
of consumer demand for the types of vehicles the Company purchases for resale and a strategic management decision to purchase higher
quality vehicles for our customers. When purchase costs increase, the margin between the purchase cost and the sales price of the
vehicles we sell narrows as a percentage because the Company must offer affordable prices to our customers. Therefore, we continue
to focus efforts on minimizing the average retail sales price of our vehicles in order to help keep contract terms shorter, which
helps customers to maintain appropriate equity in their vehicles and reduces credit losses and resulting wholesale volumes.
Selling,
general and administrative expenses, as a percentage of sales, were 19.0% for the nine months ended January 31, 2018, an increase
of 1.2% from the same period of the prior fiscal year. Selling, general and administrative expenses are, for the most part, more
fixed in nature. In dollar terms, overall selling, general and administrative expenses increased approximately $5.1 in the first
nine months of fiscal 2018 compared to the same period of the prior fiscal year. The increase was primarily a result of a $1.1
million one-time retirement bonus paid to our former Chief Executive Officer and additional investments in general manager recruitment,
training and advancement, collections support and marketing. The Company continues to focus on controlling costs, while at the
same time ensuring a solid infrastructure to ensure a high level of support for our customers.
Provision for credit losses as a percentage
of sales was 28.6% for the nine months ended January 31, 2018 compared to 28.8% for the nine months ended January 31, 2017. Net
charge-offs as a percentage of average finance receivables were 21.2% for the nine months ended January 31, 2018 compared to 21.8%
for the prior year quarter. The decrease in the provision for credit losses as a percentage of sales is primarily due to lower
delinquencies and fewer contract modifications. The decrease in the provision for credit losses as a percentage of sales was partially
offset by a lower percentage of collection of finance receivables due to longer contract terms, and the increase in our contract
interest rate. The decrease in charge-offs as a percentage of average finance receivables was due to a decrease in the frequency
of the losses compared to the same period in the prior year, partially offset by a slight increase in the severity of the losses
compared to the same period of the prior fiscal year. The Company believes that the proper execution of its business practices
remains the single most important determinant of its long-term credit loss experience.
Interest expense as
a percentage of sales increased to 1.0% for the nine months ended January 31, 2018 compared to 0.8% for the same period of the
prior fiscal year. The increase is attributable to higher average borrowings during the nine months ended January 31, 2018 at $132.2
million, compared to $119.2 million for the same period in the prior fiscal year, along with increased interest rates.
Financial
Condition
The following table sets
forth the major balance sheet accounts of the Company as of the dates specified (in thousands):
|
|
January 31, 2018
|
|
April 30, 2017
|
Assets:
|
|
|
|
|
|
|
|
|
Finance receivables, net
|
|
$
|
380,384
|
|
|
$
|
357,161
|
|
Inventory
|
|
|
38,094
|
|
|
|
30,129
|
|
Income taxes receivable, net
|
|
|
489
|
|
|
|
-
|
|
Property and equipment, net
|
|
|
29,201
|
|
|
|
30,139
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
32,665
|
|
|
|
25,020
|
|
Deferred revenue
|
|
|
28,580
|
|
|
|
28,083
|
|
Income taxes payable, net
|
|
|
-
|
|
|
|
885
|
|
Deferred tax liabilities, net
|
|
|
11,664
|
|
|
|
18,918
|
|
Debt facilities and notes payable
|
|
|
148,172
|
|
|
|
117,944
|
|
Historically, finance
receivables have tended to grow slightly faster than revenue. During fiscal year 2017, finance receivables grew 7.0% compared to
revenue growth of 3.5%. During the first nine months of fiscal 2018, finance receivables grew 6.9% while revenue increased by 1.8%.
The Company currently anticipates going forward that the growth in finance receivables will generally continue to be slightly higher
than overall revenue growth on an annual basis due to overall term length increases partially offset by improvements in underwriting
and collection procedures in an effort to reduce credit losses.
During
the first nine months of fiscal 2018, inventory increased by $8.0 million compared to inventory at April 30, 2017.
The Company
strives to improve the quality of the inventory and improve turns while maintaining inventory levels to ensure adequate supply
of vehicles, in volume and mix, and to meet sales demand.
Property and equipment, net, decreased by $938,000 at January 31, 2018 as compared to property and equipment,
net, at April 30, 2017. The Company incurred $3.2 million of depreciation expense, partially offset by $1.6 million in expenditures
to refurbish and expand existing locations and equipment of $1.2 million acquired via a capital lease.
Accounts payable and
accrued liabilities increased by $7.6 million during the first nine months of fiscal 2018 as compared to accounts payable and accrued
liabilities at April 30, 2017, related primarily to increases in inventory and cash overdrafts.
Deferred revenue increased
$497,000 at January 31, 2018 as compared to April 30, 2017, primarily resulting from increased sales of the payment protection
plan product and service contracts.
Income taxes receivable,
net, was $489,000 at January 31, 2018 as compared to income taxes payable, net of $885,000 at April 30, 2017, primarily due to
the timing of quarterly tax payments.
Deferred income tax
liabilities, net, decreased approximately $7.3 million at January 31, 2018 as compared to April 30, 2017, due primarily to the
impact of the Tax Act.
Borrowings on the
Company’s revolving credit facilities fluctuate primarily based upon a number of factors including (i) net income, (ii) finance
receivables changes, (iii) income taxes, (iv) capital expenditures, and (v) common stock repurchases. Historically,
income from operations, as well as borrowings on the revolving credit facilities, have funded the Company’s finance receivables
growth, capital asset purchases and common stock repurchases. In the first nine months of fiscal 2018, the Company funded finance
receivables growth of $30.8 million, inventory growth of $8.0 million, capital expenditures of $1.6 million, and common stock repurchases
of $26.3 million with income from operations and a $30.2 million increase in total debt.
Liquidity
and Capital Resources
The following table sets
forth certain summarized historical information with respect to the Company’s Condensed Consolidated Statements of Cash Flows
(in thousands):
|
|
Nine Months Ended
January 31,
|
|
|
2018
|
|
2017
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
26,340
|
|
|
$
|
14,963
|
|
Provision for credit losses
|
|
|
110,778
|
|
|
|
110,467
|
|
Losses on claims for payment protection plan
|
|
|
12,039
|
|
|
|
11,260
|
|
Depreciation and amortization
|
|
|
3,244
|
|
|
|
3,235
|
|
Stock based compensation
|
|
|
1,258
|
|
|
|
1,020
|
|
Finance receivable originations
|
|
|
(356,489
|
)
|
|
|
(356,776
|
)
|
Finance receivable collections
|
|
|
180,137
|
|
|
|
175,696
|
|
Inventory
|
|
|
22,347
|
|
|
|
28,186
|
|
Accounts payable and accrued liabilities
|
|
|
4,199
|
|
|
|
603
|
|
Deferred payment protection plan revenue
|
|
|
436
|
|
|
|
854
|
|
Deferred service contract revenue
|
|
|
61
|
|
|
|
(110
|
)
|
Income taxes, net
|
|
|
(2,151
|
)
|
|
|
3,015
|
|
Deferred income taxes
|
|
|
(7,254
|
)
|
|
|
1,160
|
|
Accrued interest on finance receivables
|
|
|
(251
|
)
|
|
|
(602
|
)
|
Other
|
|
|
175
|
|
|
|
(1,610
|
)
|
Total
|
|
|
(5,131
|
)
|
|
|
(8,639
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,586
|
)
|
|
|
(1,424
|
)
|
Proceeds from sale of property and equipment
|
|
|
288
|
|
|
|
924
|
|
Total
|
|
|
(1,298
|
)
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Revolving credit facilities, net
|
|
|
29,067
|
|
|
|
11,141
|
|
Debt issuance costs
|
|
|
(153
|
)
|
|
|
(378
|
)
|
Payments on note payable
|
|
|
(81
|
)
|
|
|
(77
|
)
|
Change in cash overdrafts
|
|
|
3,446
|
|
|
|
3,587
|
|
Purchase of common stock
|
|
|
(26,295
|
)
|
|
|
(8,175
|
)
|
Dividend payments
|
|
|
(30
|
)
|
|
|
(30
|
)
|
Excess tax benefit from share based compensation
|
|
|
-
|
|
|
|
942
|
|
Exercise of stock options and issuance of common stock
|
|
|
575
|
|
|
|
1,781
|
|
Total
|
|
|
6,529
|
|
|
|
8,791
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
$
|
100
|
|
|
$
|
(348
|
)
|
The primary drivers of operating profits and cash flows include (i) top line sales (ii) interest income
on finance receivables, (iii) gross margin percentages on vehicle sales, and (iv) credit losses, a significant portion of which
relates to the collection of principal on finance receivables
. The Company generates cash flow from
operations. Historically, most or all of this cash is used to fund finance receivables growth, capital expenditures,
and common stock repurchases. To the extent finance receivables growth, capital expenditures and common stock repurchases
exceed income from operations, generally the Company increases its borrowings under its revolving credit facilities. The
majority of the Company’s growth has been self-funded.
Cash flows from operations
for the nine months ended January 31, 2018 compared to the same period in the prior fiscal year were positively impacted by (i)
higher net income, (ii) higher finance receivable collections, (iii) higher accounts payable and accrued liabilities, and (iv)
increased losses on the payment protection plan, partially offset by (i) a decrease in income taxes payable for the nine months
ended January 31, 2018 compared to an increase in income taxes payable in the prior fiscal year, (ii) a decrease in deferred income
taxes for the nine months ended January 31, 2018 compared to an increase in deferred income taxes in the prior fiscal year, and
(iii) a larger increase in inventory. Finance receivables, net, increased by $23.2 million from April 30, 2017 to January 31, 2018.
The purchase price the
Company pays for a vehicle has a significant effect on liquidity and capital resources. Because the Company bases its selling price
on the purchase cost for the vehicle, increases in purchase costs result in increased selling prices. As the selling price increases,
it becomes more difficult to keep the gross margin percentage and contract term in line with historical results because the Company’s
customers have limited incomes and their car payments must remain affordable within their individual budgets. Several external
factors can negatively affect the purchase cost of vehicles. Decreases in the overall volume of new car sales, particularly domestic
brands, lead to decreased supply in the used car market. Also, constrictions in consumer credit, as well as general economic conditions,
can increase overall demand for the types of vehicles the Company purchases for resale as used vehicles become more attractive
than new vehicles in times of economic instability. A negative shift in used vehicle supply, combined with strong demand, results
in increased used vehicle prices and thus higher purchase costs for the Company. While these factors have caused purchase costs
to increase generally over the last five years, during the first nine months of fiscal 2018, the average sales price decreased
slightly with a slight improvement to the average age of the vehicle. Management expects the supply of vehicles to remain tight
during the near term and to result in further modest increases in vehicle purchase costs, with strong new car sales levels in recent
years helping to provide additional supply and mitigate expected cost increases.
The Company believes
that the amount of credit available for the sub-prime auto industry has increased in recent years, and management expects the availability
of consumer credit within the automotive industry to be higher over the near term when compared to historical levels. This is expected
to contribute to continued strong overall demand for most, if not all, of the vehicles the Company purchases for resale. Increased
competition resulting from availability of funding to the sub-prime auto industry has also contributed to lower down payments and
longer terms, which have had a negative effect on collection percentages, liquidity and credit losses when compared to prior periods.
Macro-economic factors
such as inflation within groceries and other staple items, as well as overall unemployment levels, can also affect the Company’s
collection results, credit losses and resulting liquidity. The Company anticipates that, despite generally positive overall economic
trends, the continued economic challenges facing the Company’s customer base, coupled with sustained competitive pressures,
will contribute to credit losses remaining elevated in the near term compared to historical ranges. Management continues to focus
on improved execution at the dealership level, specifically as related to working individually with customers to address collection
issues.
The Company has generally
leased the majority of the properties where its dealerships are located. As of January 31, 2018, the Company leased approximately
87% of its dealership properties. The Company expects to continue to lease the majority of the properties where its dealerships
are located.
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, although the Company currently does routinely repurchase stock, 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.
At January 31, 2018,
the Company had approximately $534,000 of cash on hand and approximately an additional $52 million of availability under its revolving
credit facilities (see Note F to the Condensed Consolidated Financial Statements). On a short-term basis, the Company’s
principal sources of liquidity include income from operations and borrowings under its revolving credit facilities. On a longer-term
basis, the Company expects its principal sources of liquidity to consist of income from operations and borrowings under revolving
credit facilities or fixed interest term loans. The Company’s revolving credit facilities mature in December 2019. Furthermore,
while the Company has no specific plans to issue debt or equity securities, the Company believes, if necessary, it could raise
additional capital through the issuance of such securities.
The Company expects
to use cash from operations and borrowings to (i) grow its finance receivables portfolio, (ii) purchase property and equipment
of approximately $3.2 million in the next 12 months in connection with refurbishing existing dealerships and adding new dealerships,
(iii) repurchase shares of common stock when favorable conditions exist, and (iv) reduce debt to the extent excess cash is available.
The Company believes
it will have adequate liquidity to continue to grow its revenues and to satisfy its capital needs for the foreseeable future.
Contractual Payment Obligations
There have been no material
changes outside of the ordinary course of business in the Company’s contractual payment obligations from those reported at
April 30, 2017 in the Company’s Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
The Company has entered into operating
leases for approximately 87% of its dealerships and office facilities. Generally, these leases are for periods of three to five
years and usually contain multiple renewal options. The Company uses leasing arrangements to maintain flexibility in its dealership
locations and to preserve capital. The Company expects to continue to lease the majority of its dealerships and office facilities
under arrangements substantially consistent with the past.
The Company has a
standby letter of credit relating to an insurance policy totaling $1 million at January 31, 2018.
Other than its operating leases and the
letter of credit, the Company is not a party to any off-balance sheet arrangement that management believes is reasonably likely
to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
Related Finance Company Contingency
Car-Mart of Arkansas
and Colonial do not meet the affiliation standard for filing consolidated income tax returns, and as such they file separate federal
and state income tax returns. Car-Mart of Arkansas routinely sells its finance receivables to Colonial at what the Company believes
to be fair market value and is able to take a tax deduction at the time of sale for the difference between the tax basis of the
receivables sold and the sales price. These types of transactions, based upon facts and circumstances, have been permissible under
the provisions of the Internal Revenue Code as described in the Treasury Regulations. For financial accounting purposes, these
transactions are eliminated in consolidation and a deferred income tax liability has been recorded for this timing difference.
The sale of finance receivables from Car-Mart of Arkansas to Colonial provides certain legal protection for the Company’s
finance receivables and, principally because of certain state apportionment characteristics of Colonial, also has the effect of
reducing the Company’s overall effective state income tax rate by approximately 250 basis points. The actual interpretation
of the Regulations is in part a facts and circumstances matter. The Company believes it satisfies the material provisions of the
Regulations. Failure to satisfy those provisions could result in the loss of a tax deduction at the time the receivables are sold
and have the effect of increasing the Company’s overall effective income tax rate as well as the timing of required tax payments.
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 January 31, 2018.
Critical Accounting Policies
The preparation of financial
statements in conformity with generally accepted accounting principles in the United States of America requires the Company to
make estimates and assumptions in determining 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 reporting
period. Actual results could differ from the Company’s estimates. The Company believes the most significant estimate made
in the preparation of the accompanying Condensed Consolidated Financial Statements relates to the determination of its allowance
for credit losses, which is discussed below. The Company’s accounting policies are discussed in Note B to the Condensed Consolidated
Financial Statements.
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 January 31,
2018, the weighted average total contract term was 32.4 months with 23.1 months remaining. The reserve amount in the allowance
for credit losses at January 31, 2018, $117.3 million, was 25% of the principal balance in finance receivables of $497.7 million,
less unearned payment protection plan revenue of $18.9 million and unearned service contract revenue of $9.7 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 January 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, the effectiveness of the 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. A 1% change, as a percentage of finance receivables, in the allowance for credit losses would equate to an approximate
pre-tax adjustment of $4.7 million.
Recent
Accounting Pronouncements
Occasionally, new
accounting pronouncements are issued by the Financial Accounting Standards Board (“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 will adopt this standard
for its fiscal year beginning May 1, 2018 and plans to apply the modified retrospective transition method with a cumulative effect
adjustment, if any, recognized at the date of adoption. While the Company continues to evaluate all potential impacts of this standard,
management generally does not expect adoption of the standard to have a material impact on the Company’s consolidated financial
statements. The Company’s evaluation process includes, but is 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 does not anticipate 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 does not expect significant
changes to those processes or its internal controls or systems. We continue to evaluate the impact of the adoption of this guidance,
but currently, we do not expect the new guidance to materially impact our consolidated financial statements other than additional
disclosure requirements.
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.
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
. Early adoption is permitted and the retrospective transition method should be
applied.
The Company is currently evaluating the potential effects of the adoption of this guidance on the 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.
Early adoption is permitted and the modified retrospective transition method should be applied. The Company is currently evaluating
the impact this guidance will have on our consolidated financial statements.
Stock-Based Compensation.
In May 2017, the FASB issued ASU 2017-09,
Compensation — Stock Compensation (Topic 718)
. ASU 2017-09 clarifies which
changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.
The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years.
Early adoption is permitted and the prospective transition method should be applied to awards modified on or after the adoption
date. The Company is currently evaluating the potential effects of the adoption of this guidance on the consolidated financial
statements.
Seasonality
Historically, the Company’s
third fiscal quarter (November through January) has been the slowest period for vehicle sales. Conversely, the Company’s
first and fourth fiscal quarters (May through July and February through April) have historically been the busiest times for vehicle
sales. Therefore, the Company generally realizes a higher proportion of its revenue and operating profit during the first and fourth
fiscal quarters. Tax refund anticipation sales efforts during the Company’s third fiscal quarter have increased sales levels
during the third fiscal quarter in some past years; however, due to the timing of actual tax refund dollars in the Company’s
markets, these sales and collections have primarily occurred in the fourth quarter in each of the last four fiscal years. The Company
expects this pattern to continue in future years.
If conditions arise
that impair vehicle sales during the first, third or fourth fiscal quarters, the adverse effect on the Company’s revenues
and operating results for the year could be disproportionately large.