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 October
31, 2017, 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 decreased 0.2% for the first six months of fiscal 2018 compared to the same period of fiscal
2017 due primarily to a 1.5% decrease in the number of retail units sold, partially offset by an 11.0% increase in interest income.
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
six months of fiscal 2018, credit losses as a percentage of sales were 28.2%, compared to 27.7% for the first six months of fiscal
2017. This increase is primarily due to an increase in the severity of the losses, partially offset with a lower frequency of losses
compared to the same period in the prior year. A lower percentage of collections to finance receivables, due to the longer contract
terms, and the effect of closed dealerships also contributed to the increase in the credit loss provision as a percentage of sales
for the first six months of fiscal 2018.
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 six months of fiscal 2018 the gross margin was 41.7% of sales
compared to 41.6% for the first six 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
October 31,
|
|
2017
vs.
|
|
Three Months Ended
October 31,
|
|
|
2017
|
|
2016
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
130,427
|
|
|
$
|
133,170
|
|
|
|
(2.1
|
)%
|
|
|
100.0
|
|
|
|
100.0
|
|
Interest income
|
|
|
18,691
|
|
|
|
17,040
|
|
|
|
9.7
|
|
|
|
14.3
|
|
|
|
12.8
|
|
Total
|
|
|
149,118
|
|
|
|
150,210
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation shown below
|
|
|
75,623
|
|
|
|
77,997
|
|
|
|
(3.0
|
)
|
|
|
58.0
|
|
|
|
58.6
|
|
Selling, general and administrative
|
|
|
23,727
|
|
|
|
22,654
|
|
|
|
4.7
|
|
|
|
18.2
|
|
|
|
17.0
|
|
Provision for credit losses
|
|
|
38,746
|
|
|
|
39,441
|
|
|
|
(1.8
|
)
|
|
|
29.7
|
|
|
|
29.6
|
|
Interest expense
|
|
|
1,324
|
|
|
|
1,036
|
|
|
|
27.8
|
|
|
|
1.0
|
|
|
|
0.8
|
|
Depreciation and amortization
|
|
|
1,108
|
|
|
|
1,080
|
|
|
|
2.6
|
|
|
|
0.8
|
|
|
|
0.8
|
|
(Gain) loss on disposal of property and equipment
|
|
|
57
|
|
|
|
(1
|
)
|
|
|
(5800.0
|
)
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
140,585
|
|
|
|
142,207
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
8,533
|
|
|
$
|
8,003
|
|
|
|
|
|
|
|
6.5
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail units sold
|
|
|
11,932
|
|
|
|
12,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stores in operation
|
|
|
140
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units sold per store per month
|
|
|
28.4
|
|
|
|
28.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average retail sales price
|
|
$
|
10,418
|
|
|
$
|
10,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store revenue change
|
|
|
0.6
|
%
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open
|
|
|
140
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts over 30 days past due
|
|
|
4.1
|
%
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended October 31, 2017 vs. Three months
ended October 31, 2016
Revenues decreased by approximately $1.1 million,
or 0.7%, for the three months ended October 31, 2017 as compared to the same period in the prior fiscal year. The decrease resulted
from the loss of revenues from dealerships closed after October 31, 2016 ($2.6 million), partially offset by revenue growth at
dealerships that operated a full three months in both current and prior year second quarter ($872,000) and revenue growth from
dealerships opened after the prior year quarter ($650,000). Interest income increased approximately $1.7 million for the three
months ended October 31, 2017, as compared to the same period in the prior fiscal year due to the $21.0 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 58.0% for the three months ended October 31, 2017 compared to 58.6% for the same period of the prior fiscal year, resulting
in a gross margin as a percentage of sales of 42.0% for the current year period compared to 41.4% 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 second quarter of fiscal 2018 was $10,418, a $73 decrease over the prior
year quarter. While the average retail sales price was down slightly compared to 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 18.2% for the three months ended October 31, 2017, 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 $1.1 in the second
quarter of fiscal 2018 compared to the same period of the prior fiscal year. The increase was primarily a result of 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 29.7% for the three months ended October 31, 2017 compared to 29.6% for the three months ended October 31, 2016. Net
charge-offs as a percentage of average finance receivables were 7.5% for the three months ended October 31, 2017 compared to 7.7%
for the prior year quarter. The increase in the provision for credit losses as a percentage of sales is primarily due to a lower
percentage of collections of finance receivables, due to longer contract terms and the increase in our contract interest rate.
The effect of closed dealerships also contributed to the increase in the provision as a percentage of sales compared to the same
period of the prior fiscal year. 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 1.0% for the three months ended October 31, 2017 compared to 0.8% for the same period of the prior fiscal year. The increase
is attributable to higher average borrowings during the three months ended October 31, 2017 at $134.2 million, compared to $123.7
million for the prior year quarter, along with increased interest rates.
Consolidated Operations
(Operating Statement Dollars in Thousands)
|
|
|
|
|
|
% Change
|
|
As a % of Sales
|
|
|
Six Months Ended
October 31,
|
|
2017
vs.
|
|
Six Months Ended
October 31,
|
|
|
2017
|
|
2016
|
|
2016
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
258,701
|
|
|
$
|
262,854
|
|
|
|
(1.6
|
)%
|
|
|
100.0
|
|
|
|
100.0
|
|
Interest income
|
|
|
36,835
|
|
|
|
33,196
|
|
|
|
11.0
|
|
|
|
14.2
|
|
|
|
12.6
|
|
Total
|
|
|
295,536
|
|
|
|
296,050
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation shown below
|
|
|
150,829
|
|
|
|
153,510
|
|
|
|
(1.7
|
)
|
|
|
58.3
|
|
|
|
58.4
|
|
Selling, general and administrative
|
|
|
47,592
|
|
|
|
45,822
|
|
|
|
3.9
|
|
|
|
18.4
|
|
|
|
17.4
|
|
Provision for credit losses
|
|
|
72,906
|
|
|
|
72,822
|
|
|
|
0.1
|
|
|
|
28.2
|
|
|
|
27.7
|
|
Interest expense
|
|
|
2,496
|
|
|
|
1,980
|
|
|
|
26.1
|
|
|
|
1.0
|
|
|
|
0.8
|
|
Depreciation and amortization
|
|
|
2,187
|
|
|
|
2,176
|
|
|
|
0.5
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Loss on Disposal of Property and Equipment
|
|
|
104
|
|
|
|
399
|
|
|
|
(73.9
|
)
|
|
|
-
|
|
|
|
0.2
|
|
Total
|
|
|
276,114
|
|
|
|
276,709
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
19,422
|
|
|
$
|
19,341
|
|
|
|
|
|
|
|
7.5
|
%
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail units sold
|
|
|
23,769
|
|
|
|
24,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stores in operation
|
|
|
140
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units sold per store per month
|
|
|
28.3
|
|
|
|
28.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average retail sales price
|
|
$
|
10,402
|
|
|
$
|
10,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store revenue change
|
|
|
1.3
|
%
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open
|
|
|
140
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts over 30 days past due
|
|
|
4.1
|
%
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended October 31, 2017 vs. Six Months Ended
October 31, 2016
Revenues decreased by approximately $0.5 million,
or 0.2%, for the six months ended October 31, 2017 as compared to the same period in the prior fiscal year. The decrease resulted
from the loss of revenues from dealerships closed after October 31, 2016 ($5.4 million), partially offset by revenue growth at
dealerships that operated a full six months in both current and prior year periods ($3.9 million) and revenue growth from dealerships
opened after the prior year second quarter ($1.0 million). Interest income increased approximately $3.6 million for the six months
ended October 31, 2017, as compared to the same period in the prior fiscal year due to the $24.2 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
slightly to 58.3% for the six months ended October 31, 2017 compared to 58.4% for the same period of the prior fiscal year, resulting
in a gross margin as a percentage of sales of 41.7% for the current year period compared to 41.6% 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 six months ended was $10,402, a $40 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 18.4% for the six months ended October 31, 2017, an increase
of 1.0% 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 $1.8 in the first
six months of fiscal 2018 compared to the same period of the prior fiscal year. The increase was primarily a result of 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 28.2% for the six months ended October 31, 2017 compared to 27.7% for the six months ended October 31, 2016. Net charge-offs
as a percentage of average finance receivables were 13.8% for the six months ended October 31, 2017 compared to 14.0% for the prior
year quarter. The increase in the provision for credit losses as a percentage of sales is primarily due to a lower percentage of
collections of finance receivables, due to longer contract terms, and the increase in our contract interest rate. The effect of
closed dealerships also contributed to the increase in the provision as a percentage of sales compared to the same period of the
prior fiscal year. 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 an 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 six months ended October 31, 2017 compared to 0.8% for the same period of the prior fiscal year. The increase is
attributable to higher average borrowings during the six months ended October 31, 2017 at $126.3 million, compared to $118.8 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):
|
|
October 31, 2017
|
|
April 30, 2017
|
Assets:
|
|
|
|
|
|
|
|
|
Finance receivables, net
|
|
$
|
376,577
|
|
|
$
|
357,161
|
|
Inventory
|
|
|
31,315
|
|
|
|
30,129
|
|
Property and equipment, net
|
|
|
28,783
|
|
|
|
30,139
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
29,739
|
|
|
|
25,020
|
|
Deferred revenue
|
|
|
28,824
|
|
|
|
28,083
|
|
Income taxes payable, net
|
|
|
296
|
|
|
|
885
|
|
Deferred tax liabilities, net
|
|
|
19,888
|
|
|
|
18,918
|
|
Debt facilities and notes payable
|
|
|
137,950
|
|
|
|
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 six months of fiscal 2018, finance receivables grew 5.7% while revenue declined by 0.2%. 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 six months of fiscal 2018,
inventory increased by $1.2 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 $1.4
million at October 31, 2017 as compared to property and equipment, net, at April 30, 2017. The Company incurred $958,000 in expenditures
to refurbish and expand existing locations, offset by depreciation expense.
Accounts payable and accrued liabilities increased
by $4.7 million during the first six months of fiscal 2018 as compared to accounts payable and accrued liabilities at April 30,
2017, related primarily to increases in inventory, cash overdrafts and accrued employee compensation.
Deferred revenue increased $741,000 at October
31, 2017 as compared to April 30, 2017, primarily resulting from increased sales of the payment protection plan product and service
contracts.
Income taxes payable, net, decreased by $589,000
at October 31, 2017 as compared to April 30, 2017, primarily due to the timing of quarterly tax payments.
Deferred income tax liabilities, net, increased
approximately $1.0 at October 31, 2017 as compared to April 30, 2017, due primarily to the change in finance receivables.
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 six months of fiscal 2018, the Company funded finance
receivables growth of $25.6 million, inventory growth of $1.2 million, capital expenditures of $958,000, and common stock repurchases
of $20.1 million with income from operations and a $20.0 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):
|
|
Six Months Ended
October 31,
|
|
|
2017
|
|
2016
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,961
|
|
|
$
|
12,127
|
|
Provision for credit losses
|
|
|
72,906
|
|
|
|
72,822
|
|
Losses on claims for payment protection plan
|
|
|
7,980
|
|
|
|
6,919
|
|
Depreciation and amortization
|
|
|
2,187
|
|
|
|
2,176
|
|
Stock based compensation
|
|
|
988
|
|
|
|
783
|
|
Finance receivable originations
|
|
|
(239,007
|
)
|
|
|
(244,680
|
)
|
Finance receivable collections
|
|
|
118,609
|
|
|
|
117,126
|
|
Inventory
|
|
|
18,910
|
|
|
|
17,084
|
|
Accounts payable and accrued liabilities
|
|
|
2,540
|
|
|
|
1,262
|
|
Deferred payment protection plan revenue
|
|
|
484
|
|
|
|
1,171
|
|
Deferred service contract revenue
|
|
|
257
|
|
|
|
436
|
|
Income taxes, net
|
|
|
(1,373
|
)
|
|
|
1,841
|
|
Deferred income taxes
|
|
|
970
|
|
|
|
1,579
|
|
Accrued interest on finance receivables
|
|
|
(236
|
)
|
|
|
(552
|
)
|
Other
|
|
|
670
|
|
|
|
(36
|
)
|
Total
|
|
|
(1,154
|
)
|
|
|
(9,942
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(958
|
)
|
|
|
(875
|
)
|
Proceeds from sale of property and equipment
|
|
|
23
|
|
|
|
4
|
|
Total
|
|
|
(935
|
)
|
|
|
(871
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Revolving credit facilities, net
|
|
|
20,088
|
|
|
|
16,705
|
|
Debt issuance costs
|
|
|
(153
|
)
|
|
|
-
|
|
Payments on note payable
|
|
|
(54
|
)
|
|
|
(51
|
)
|
Change in cash overdrafts
|
|
|
2,179
|
|
|
|
589
|
|
Purchase of common stock
|
|
|
(20,088
|
)
|
|
|
(8,059
|
)
|
Dividend payments
|
|
|
(20
|
)
|
|
|
(20
|
)
|
Excess tax benefit from share based compensation
|
|
|
-
|
|
|
|
283
|
|
Exercise of stock options and issuance of common stock
|
|
|
61
|
|
|
|
934
|
|
Total
|
|
|
2,013
|
|
|
|
10,381
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash
|
|
$
|
(76
|
)
|
|
$
|
(432
|
)
|
The primary drivers of operating profits and
cash flows include (i) top line sales (ii) interest rates 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 six months
ended October 31, 2017 compared to the same period in the prior fiscal year were positively impacted by (i) higher net income,
(ii) lower finance receivable originations, (iii) higher accounts payable and accrued liabilities, (iv) a smaller increase in inventory,
and (v) increased losses on the payment protection plan, partially offset by a decrease in income taxes payable for the six months
ended October 31, 2017 compared to an increase in income taxes payable in the prior fiscal year. Finance receivables, net, increased
by $19.4 million from April 30, 2017 to October 31, 2017.
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 six 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 October 31, 2017, the Company leased approximately 86% 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 October 31, 2017, the Company had approximately
$358,000 of cash on hand and approximately an additional $60 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
86% 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 October 31, 2017.
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 October 31, 2017.
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 October 31, 2017, the weighted average
total contract term was 32.5 months with 23.3 months remaining. The reserve amount in the allowance for credit losses at October
31, 2017, $115.9 million, was 25% of the principal balance in finance receivables of $492.5 million, less unearned payment protection
plan revenue of $19.0 million and unearned service contract revenue of $9.9 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 October 31, 2017 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
$4.6 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. The Company is still evaluating the
impact of the new standard on its financial statement disclosures.
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.