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, 2016, the Company operated 143 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 7.4% for the first six months of fiscal 2017 compared to the same
period of fiscal 2016 due primarily to a 4.3% increase in units sold, a 3.4% increase in the average selling price to $10,442,
and a 9.1% 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 annual credit losses as a percentage of sales have ranged from approximately 21.1% in fiscal
2012 to 28.5% in fiscal 2016 (27.6% excluding the effect of the increase in the allowance for credit losses in the second quarter
of fiscal 2016) (average of 25.1%). The higher credit losses as a percentage of sales for fiscal 2016 of 28.5% were primarily a
result of competitive pressures remaining elevated and the increased number of newer dealerships weighing on credit loss results.
For the first six months of fiscal 2017, credit losses as a percentage of sales decreased to 27.7%, resulting from a decrease in
the frequency of losses as a result of the low delinquencies greater than 30 days at April 30, 2016 of 3.0%, significantly lower
than at April 30, 2015 at 5.8%.
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
has recently 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 global positioning system (“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 Support 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. Also, turnover at the dealership level for
collections positions is down compared to historical levels, which management believes can have a positive effect on collection
results. 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 margins
as a percentage of sales have been fairly consistent from year to year. Over the period from fiscal 2011 through fiscal 2016, the
Company’s gross margins as a percentage of sales ranged between approximately 40% and 43%. Gross margin as a percentage of
sales for fiscal 2016 was 39.8%. The Company’s gross margins are based upon the cost of the vehicle purchased, with lower-priced
vehicles typically having higher gross margin percentages. Gross margins in recent years have 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. Additionally, the percentage of wholesale sales to retail sales, which relate for the
most part to repossessed vehicles sold at or near cost, can have a significant effect on overall gross margins. For the first six
months of fiscal 2017, gross margin increased to 41.6% of sales primarily due to a decrease in the level of wholesales due to lower
repossession activity, as well as a Company-wide effort to reduce vehicle repair expenses which had also negatively impacted gross
margins in fiscal 2016. 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 rate at which the Company adds new dealerships and is able to 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,
|
|
2016
vs.
|
|
Three Months Ended
October 31,
|
|
|
2016
|
|
2015
|
|
2015
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
133,170
|
|
|
$
|
117,670
|
|
|
|
13.2
|
%
|
|
|
100.0
|
|
|
|
100.0
|
|
Interest income
|
|
|
17,040
|
|
|
|
15,334
|
|
|
|
11.1
|
|
|
|
12.8
|
|
|
|
13.0
|
|
Total
|
|
|
150,210
|
|
|
|
133,004
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation shown below
|
|
|
77,997
|
|
|
|
71,596
|
|
|
|
8.9
|
|
|
|
58.6
|
|
|
|
60.8
|
|
Selling, general and administrative
|
|
|
22,654
|
|
|
|
22,239
|
|
|
|
1.9
|
|
|
|
17.0
|
|
|
|
18.9
|
|
Provision for credit losses
|
|
|
39,441
|
|
|
|
38,094
|
|
|
|
3.5
|
|
|
|
29.6
|
|
|
|
32.4
|
|
Interest expense
|
|
|
1,036
|
|
|
|
792
|
|
|
|
30.8
|
|
|
|
0.8
|
|
|
|
0.7
|
|
Depreciation and amortization
|
|
|
1,080
|
|
|
|
1,038
|
|
|
|
4.0
|
|
|
|
0.8
|
|
|
|
0.9
|
|
Loss on disposal of property and equipment
|
|
|
(1
|
)
|
|
|
19
|
|
|
|
100.0
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
142,207
|
|
|
|
133,778
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income (loss)
|
|
$
|
8,003
|
|
|
$
|
(774
|
)
|
|
|
|
|
|
|
6.0
|
%
|
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail units sold
|
|
|
12,167
|
|
|
|
10,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stores in operation
|
|
|
143
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units sold per store per month
|
|
|
28.4
|
|
|
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average retail sales price
|
|
$
|
10,491
|
|
|
$
|
10,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store revenue change
|
|
|
11.6
|
%
|
|
|
(3.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open
|
|
|
143
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts over 30 days past due
|
|
|
4.8
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31,
2016 vs. Three Months Ended October 31, 2015
Revenues increased by approximately $17.2 million,
or 12.9%, for the three months ended October 31, 2016 as compared to the same period in the prior fiscal year. This increase resulted
from revenue growth at dealerships opened after October 31, 2015 ($1.5 million), dealerships that operated a full three months
in both current and prior year second quarter ($15.2 million), and dealerships opened during or closed after the three months ended
October 31, 2015 ($504,000). Interest income increased approximately $1.7 million for the three months ended October 31, 2016,
as compared to the same period in the prior fiscal year primarily due to the $41.2 million increase in average finance receivables,
and to a lesser extent to 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 58.6% for the three months ended October 31, 2016 compared to 60.8% for the same period of the prior fiscal year, resulting
in a gross margin as a percentage of sales of 41.4% for the current year period compared to 39.2% for the prior year period. The
higher gross margin percentage relates to lower wholesale volumes and losses and lower repair expenses, partially offset by the
effect of a higher average selling price. The average retail sales price for the second quarter of fiscal 2017 was $10,491, a $244
increase over the prior year quarter. Increases in the volume of wholesales sales, resulting from higher credit losses, negatively
affected our gross margin percentages in the second quarter of fiscal 2016.
The increase in average retail sales price
during the second quarter of fiscal 2017 largely relates to an increase in the Company’s purchase costs. As 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. The increased purchase costs are the result of a combination of consumer
demand for the types of vehicles the Company purchases for resale, which remains high relative to supply, and a strategic management
decision to purchase higher quality vehicles for our customers. The high demand and tight supply of the vehicles we purchase for
resale are largely related to excess funding to the used vehicle financing market and the depressed levels of new car sales during
and after the recession, although more robust new car sales in recent years have begun to bolster the supply of used vehicles.
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 17.0% for the three months ended October 31, 2016, a decrease of 1.9% 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 $415,000 in the second quarter of fiscal 2017 compared
to the same period of the prior fiscal year, related primarily to higher payroll costs.
Provision for credit losses as a percentage
of sales was 29.6% for the three months ended October 31, 2016 compared to 32.4% (28.3% excluding a $3 million non-cash after tax
charge resulting from an increase to the allowance for credit losses) for the three months ended October 31, 2015. Net charge-offs
as a percentage of average finance receivables were 7.7% for the three months ended October 31, 2016 compared to 7.8% for the prior
year quarter. Frequency and severity of losses were basically flat for the quarter. The Company has implemented several operational
initiatives (including credit reporting and installing GPS technology on vehicles) for the collections area and continues to push
for improvements and better execution of its collection practices. However, the extended challenging macro-economic, competitive
conditions and wholesale values are expected to continue to put pressure on our customers and the resulting collections of our
finance receivables. 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 0.8% for the three months ended October 31, 2016 compared to 0.7% for the same period of the prior fiscal year. Average borrowings
during the three months ended October 31, 2016 were $123.7 million, compared to $106.1 million for the prior year quarter.
Consolidated Operations
(Operating Statement Dollars in Thousands)
|
|
|
|
|
|
% Change
|
|
As a % of Sales
|
|
|
Six Months Ended
October 31,
|
|
2016
vs.
|
|
Six Months Ended
October 31,
|
|
|
2016
|
|
2015
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
262,854
|
|
|
$
|
245,265
|
|
|
|
7.2
|
%
|
|
|
100.0
|
|
|
|
100.0
|
|
Interest income
|
|
|
33,196
|
|
|
|
30,428
|
|
|
|
9.1
|
|
|
|
12.6
|
|
|
|
12.4
|
|
Total
|
|
|
296,050
|
|
|
|
275,693
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation shown below
|
|
|
153,510
|
|
|
|
146,682
|
|
|
|
4.7
|
|
|
|
58.4
|
|
|
|
59.8
|
|
Selling, general and administrative
|
|
|
45,822
|
|
|
|
45,363
|
|
|
|
1.0
|
|
|
|
17.4
|
|
|
|
18.5
|
|
Provision for credit losses
|
|
|
72,822
|
|
|
|
73,439
|
|
|
|
(0.8
|
)
|
|
|
27.7
|
|
|
|
29.9
|
|
Interest expense
|
|
|
1,980
|
|
|
|
1,552
|
|
|
|
27.6
|
|
|
|
0.8
|
|
|
|
0.6
|
|
Depreciation and amortization
|
|
|
2,176
|
|
|
|
2,048
|
|
|
|
6.3
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Loss on Disposal of Property and Equipment
|
|
|
399
|
|
|
|
19
|
|
|
|
2000.0
|
|
|
|
0.2
|
|
|
|
0.0
|
|
Total
|
|
|
276,709
|
|
|
|
269,103
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
19,341
|
|
|
$
|
6,590
|
|
|
|
|
|
|
|
7.4
|
%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail units sold
|
|
|
24,124
|
|
|
|
23,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stores in operation
|
|
|
143
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units sold per store per month
|
|
|
28.1
|
|
|
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average retail sales price
|
|
$
|
10,442
|
|
|
$
|
10,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store revenue change
|
|
|
5.8
|
%
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open
|
|
|
143
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts over 30 days past due
|
|
|
4.8
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended October 31, 2016
vs. Six Months Ended October 31, 2015
Revenues increased by approximately $20.4 million,
or 7.4%, for the six months ended October 31, 2016 as compared to the same period in the prior fiscal year. This increase resulted
from revenue growth at dealerships opened after October 31, 2015 ($3.0 million), dealerships that operated a full six months in
both current and prior year period ($15.7 million), and dealerships opened during or closed after the six months ended October
31, 2015 ($1.7 million). Interest income increased approximately $2.8 million for the six months ended October 31, 2016, as compared
to the same period in the prior fiscal year primarily due to the $33.7 million increase in average finance receivables, and to
a lesser extent to 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 six months ended October 31, 2016 compared to 59.8% 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 40.2% for the prior year period. The higher
gross margin percentage relates to lower wholesale volumes and losses and lower repair expenses, partially offset by the effect
of a higher average selling price. The average retail sales price for the period ended October 31, 2016 was $10,442, a $344 increase
over the prior year period. Increases in the volume of wholesales sales, resulting from higher credit losses, negatively affected
our gross margin percentages in the first six months of fiscal 2016.
Selling, general and administrative expenses,
as a percentage of sales, were 17.4% for the six months ended October 31, 2016, a decrease of 1.1% 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 $459,000 in the first six months of fiscal 2017 compared
to the same period of the prior fiscal year, related primarily to higher payroll costs.
Provision for credit losses as a percentage
of sales was 27.7% for the period ended October 31, 2016 compared to 29.9% (28% excluding a $3 million non-cash after-tax charge
resulting from an increase to the allowance for credit losses) for the period ended October 31, 2015. Net charge-offs as a percentage
of average finance receivables were 14.0% for the six months ended October 31, 2016 compared to 15.6% for the prior year period.
The decrease in the provision and net charge-offs primarily related to a decrease in the frequency of losses. 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 0.8% for the six months ended October 31, 2016 compared to 0.6% for the same period of the prior fiscal year. The overall dollar
increase in interest expense was attributable to higher average borrowings during the six months ended October 31, 2016 as compared
to the same period in the prior fiscal year ($118.8 million compared to $105.2 million).
Financial Condition
The following table sets forth the major balance
sheet accounts of the Company as of the dates specified (in thousands):
|
|
October 31, 2016
|
|
April 30, 2016
|
Assets:
|
|
|
|
|
|
|
|
|
Finance receivables, net
|
|
$
|
362,955
|
|
|
$
|
334,793
|
|
Inventory
|
|
|
32,446
|
|
|
|
29,879
|
|
Property and equipment, net
|
|
|
33,451
|
|
|
|
34,755
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
25,809
|
|
|
|
23,558
|
|
Deferred revenue
|
|
|
28,945
|
|
|
|
27,339
|
|
Income taxes payable (receivable), net
|
|
|
664
|
|
|
|
(894
|
)
|
Deferred tax liabilities, net
|
|
|
19,859
|
|
|
|
18,280
|
|
Debt facilities and notes payable
|
|
|
124,696
|
|
|
|
107,902
|
|
Historically, finance receivables tended to
grow slightly faster than revenue; for fiscal year 2016, however, revenue growth exceeded growth in net finance receivables.
During the first six months of fiscal 2017, finance receivables grew slightly faster than revenue, consistent with the historical
trends. The Company currently anticipates going forward that the growth in finance receivables will generally 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 2017,
inventory increased by $2.6 million compared to inventory at April 30, 2016. This increase in inventory was attributable to an
increase in purchasing levels to meet demand and provide an adequate supply of affordable vehicles. The Company strives to offer
a broad mix and sufficient quantities of vehicles to adequately serve its expanding customer base. The Company will continue to
manage inventory levels in the future to ensure adequate supply, in volume and mix, and to meet anticipated sales demand.
Property and equipment, net, decreased by $1.3
million at October 31, 2016 as compared to property and equipment, net, at April 30, 2016. The Company incurred $875,000 in expenditures
to refurbish and expand existing locations, offset by depreciation expense.
Accounts payable and accrued liabilities increased
by $2.3 million during the first six months of fiscal 2017 as compared to accounts payable and accrued liabilities at April 30,
2016 related primarily to increases in inventory, cash overdrafts and accrued employee compensation.
Deferred revenue increased $1.6 million at October
31, 2016 as compared to April 30, 2016 primarily resulting from increased sales of the payment protection plan product and service
contracts.
Income taxes payable (receivable), net, increased
by $1.6 million at October 31, 2016 as compared to April 30, 2016 primarily due to the timing of quarterly tax payments and refunds.
Deferred income tax liabilities, net, increased
approximately $1.6 million at October 31, 2016 as compared to April 30, 2016 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 continuing 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 2017, the Company funded finance receivables growth of
$37 million, inventory growth of $2.6 million, capital expenditures of $875,000 and common stock repurchases of $8.1 million with
income from operations and a $16.8 million increase in total debt.
Liquidity and Capital Resources
The following table sets forth certain summarized
historical information with respect to the Company’s Statements of Cash Flows (in thousands):
|
|
Six Months Ended
October 31,
|
|
|
2016
|
|
2015
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,127
|
|
|
$
|
4,132
|
|
Provision for credit losses
|
|
|
72,822
|
|
|
|
73,439
|
|
Losses on claims for payment protection plan
|
|
|
6,919
|
|
|
|
6,095
|
|
Depreciation and amortization
|
|
|
2,176
|
|
|
|
2,048
|
|
Stock based compensation
|
|
|
783
|
|
|
|
949
|
|
Finance receivable originations
|
|
|
(244,680
|
)
|
|
|
(223,266
|
)
|
Finance receivable collections
|
|
|
117,126
|
|
|
|
117,593
|
|
Inventory
|
|
|
17,084
|
|
|
|
23,068
|
|
Accounts payable and accrued liabilities
|
|
|
1,262
|
|
|
|
775
|
|
Deferred payment protection plan revenue
|
|
|
1,171
|
|
|
|
409
|
|
Deferred service contract revenue
|
|
|
436
|
|
|
|
281
|
|
Income taxes, net
|
|
|
1,841
|
|
|
|
586
|
|
Deferred income taxes
|
|
|
1,579
|
|
|
|
(1,119
|
)
|
Accrued interest on finance receivables
|
|
|
(552
|
)
|
|
|
303
|
|
Other
|
|
|
(36
|
)
|
|
|
350
|
|
Total
|
|
|
(9,942
|
)
|
|
|
5,643
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(875
|
)
|
|
|
(2,922
|
)
|
Proceeds from sale of property and equipment
|
|
|
4
|
|
|
|
-
|
|
Total
|
|
|
(871
|
)
|
|
|
(2,922
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Revolving credit facilities, net
|
|
|
16,705
|
|
|
|
1,739
|
|
Payments on note payable
|
|
|
(51
|
)
|
|
|
-
|
|
Change in cash overdrafts
|
|
|
589
|
|
|
|
(360
|
)
|
Purchase of common stock
|
|
|
(8,059
|
)
|
|
|
(3,989
|
)
|
Dividend payments
|
|
|
(20
|
)
|
|
|
(20
|
)
|
Exercise of stock options,
including tax benefits and issuance of common stock
|
|
|
1,217
|
|
|
|
505
|
|
Total
|
|
|
10,381
|
|
|
|
(2,125
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
$
|
(432
|
)
|
|
$
|
596
|
|
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 used in operations for the six months
ended October 31, 2016 compared to the same period in the prior fiscal year were positively impacted by (i) higher net income and
(ii) higher accounts payable and accrued liabilities, offset by (iii) an increase in finance receivables originations, (iv) an
increase in inventory, and (v) a lower non-cash charge for credit losses. Finance receivables, net, increased by $28.2 million
from April 30, 2016 to October 31, 2016.
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. Management expects the recent tight supply of vehicles and resulting
increases in vehicle purchase costs to continue, although some relief is expected as a result of steady increases in new car sales
levels in recent periods.
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 can have an effect on credit
losses and resulting liquidity. General inflation, particularly within staple items such as groceries, as well as overall unemployment
levels can have a significant effect on collection results and ultimately credit losses. The Company anticipates that credit losses
in the near term will be higher than historical ranges due to significant continued macro-economic challenges for the Company’s
customer base as well as increased competitive pressures. Management continues to focus on improved execution at the dealership
level, specifically as related to working individually with customers concerning collection issues.
The Company has generally leased the majority
of the properties where its dealerships are located. As of October 31, 2016, the Company leased approximately 85% 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 the Company’s stock so long as: either (a) the aggregate amount of such repurchases does not exceed
$40 million beginning October 8, 2014 and the sum of borrowing bases combined minus the principal balances of all revolver loans
after giving effect to such repurchases is equal to or greater than 30% of the sum of the borrowing bases, or (b) the aggregate
amount of such repurchases does not exceed 75% of the consolidated net income of the Company measured on a trailing twelve month
basis; provided that immediately before and after giving effect to the stock repurchases, at least 12.5% of the aggregate funds
committed under the credit facilities 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, 2016, the Company had
approximately $170,000 of cash on hand and an additional $45 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
October 2017. Subsequent to October 31, 2016, the Company entered into an agreement which amended and restated the credit
facilities; see further explanation in Note F. 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, 2016 in
the Company’s Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
The Company has entered into operating leases for approximately
85% 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, 2016.
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 300 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, 2016.
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, 2016, the weighted average
total contract term was 31.7 months with 23.2 months remaining. The reserve amount in the allowance for credit losses at October
31, 2016, $111.3 million, was 25% of the principal balance in finance receivables of $474.3 million, less unearned payment protection
plan revenue of $18.5 million and unearned service contract revenue of $10.5 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, 2016 was 11.9 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
$4.5 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 is currently evaluating the potential effects of the adoption of this update
on the consolidated financial statements.
Leases
. In February 2016, the FASB
issued ASU 2016-02,
Leases
. The new guidance requires that lessees recognize all leases, including operating leases,
with a term greater than 12 months on-balance sheet and also requires disclosure of key information about leasing
transactions. The guidance in ASU 2016-02 is effective for annual reporting periods beginning after December 15,
2018, and interim reporting periods within those years. The Company is currently evaluating the potential effects of the adoption of this guidance on the consolidated
financial statements.
Stock Compensation
. In March 2016, the
FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which aims to simplify aspects of accounting
for share-based payment transactions, including: presenting the excess tax benefit or deficit from the exercise or vesting of share-based
payments in the income statement, a revision to the criteria for classifying an award as equity or liability, an option to recognize
gross stock compensation expense with actual forfeitures recognized as they occur, and certain classifications on the statement
of cash flows. In addition, the new guidance eliminates the excess tax benefit from the assumed proceeds calculation under the
treasury stock method for purposes of calculating diluted shares. ASU 2016-09 is effective for annual reporting periods beginning
after December 15, 2016 and interim reporting periods within those years. Certain provisions of ASU 2016-09 are required to be
adopted prospectively, notably the requirement to recognize the excess tax benefit or deficit in the income statement, while other
provisions require modified retrospective application or in some cases full retrospective application. 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.
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.