CRMT 10-Q
Americas Carmart Inc (CRMT)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
Or
For the transition period from ________ to ________
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (zip code)
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | |||
| Non-accelerated filer ☐ | Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Title of Each Class | Outstanding at March 8, 2024 |
| Common stock, par value $.01 per share |
AMERICA’S CAR-MART, INC.
TABLE OF CONTENTS
| Item 1. Financial Statements | America’s Car-Mart, Inc. |
Condensed Consolidated Balance Sheets (Unaudited)
January 31, 2024 and April 30, 2023
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(Dollars in thousands except share and per share amounts) |
January 31, 2024 |
April 30, 2023 |
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Assets: |
(Unaudited) |
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Cash and cash equivalents |
$ | $ | ||||||
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Restricted cash |
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Accrued interest on finance receivables |
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Finance receivables, net |
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Inventory |
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Income tax receivable, net |
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Prepaid expenses and other assets |
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Right-of-use asset |
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Goodwill |
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Property and equipment, net |
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Total Assets |
$ | $ | ||||||
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Liabilities, mezzanine equity and equity: |
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Liabilities: |
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Accounts payable |
$ | $ | ||||||
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Deferred accident protection plan revenue |
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Deferred service contract revenue |
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Accrued liabilities |
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Deferred income tax liabilities, net |
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Lease liability |
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Non-recourse notes payable, net |
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Revolving line of credit, net |
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Total liabilities |
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Commitments and contingencies (Note J) |
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Mezzanine equity: |
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Mandatorily redeemable preferred stock |
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Equity: |
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Preferred stock, par value $ per share, |
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| Common stock, par value $ per share, |
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Additional paid-in capital |
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Retained earnings |
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Less: Treasury stock, at cost, |
( |
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Total stockholders' equity |
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Non-controlling interest |
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Total equity |
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Total Liabilities, Mezzanine Equity and Equity |
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| Condensed Consolidated Statements of Operations (Unaudited) | America’s Car-Mart, Inc. |
Three and Nine Months Ended January 31, 2024 and 2023
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Three Months Ended |
Nine Months Ended |
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(Dollars in thousands except share and per share amounts) |
2024 |
2023 |
2024 |
2023 |
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Revenues: |
(Unaudited) | (Unaudited) | ||||||||||||||
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Sales |
$ | $ | $ | $ | ||||||||||||
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Interest and other income |
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Total revenues |
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Costs and expenses: |
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Cost of sales |
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Selling, general and administrative |
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Provision for credit losses |
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Interest expense |
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Depreciation and amortization |
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Loss on disposal of property and equipment |
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Total costs and expenses |
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(Loss) Income before taxes |
( |
) | ( |
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Provision for income taxes |
( |
) | ( |
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Net (loss) income |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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Less: Dividends on mandatorily redeemable preferred stock |
( |
) | ( |
) | ( |
) | ( |
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Net (loss) income attributable to common stockholders |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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Earnings per share: |
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Basic |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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Diluted |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
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Weighted average number of shares used in calculation: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| Condensed Consolidated Statements of Cash Flows (Unaudited) | America’s Car-Mart, Inc. |
Nine Months Ended January 31, 2024 and 2023
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Nine Months Ended |
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(In thousands) |
2024 |
2023 |
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| (Unaudited) | ||||||||
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Operating Activities: |
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Net (loss) income |
$ | ( |
) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
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Provision for credit losses |
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Losses on claims for accident protection plan |
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Depreciation and amortization |
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Amortization of debt issuance costs |
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Loss on disposal of property and equipment |
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Impairment of goodwill |
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Stock based compensation |
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Deferred income taxes |
( |
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Excess tax benefit from share based compensation |
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Change in operating assets and liabilities: |
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Finance receivable originations |
( |
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Loan origination costs |
( |
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Finance receivable collections |
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Accrued interest on finance receivables |
( |
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Inventory |
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Prepaid expenses and other assets |
( |
) | ( |
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Accounts payable and accrued liabilities |
( |
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Deferred accident protection plan revenue |
( |
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Deferred service contract revenue |
( |
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Income taxes, net |
( |
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Net cash used in operating activities |
( |
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Investing Activities: |
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Purchase of investments |
( |
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Purchase of property and equipment |
( |
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Proceeds from sale of property and equipment |
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Net cash used in investing activities |
( |
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Financing Activities: |
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Exercise of stock options |
( |
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Issuance of common stock |
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Purchase of common stock |
( |
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Dividend payments |
( |
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Change in cash overdrafts |
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Debt issuance costs |
( |
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Issuances of non-recourse notes payable |
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Payments on non-recourse notes payable |
( |
) | ( |
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Proceeds from revolving line of credit |
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Payments on revolving line of credit |
( |
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Net cash provided by financing activities |
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Increase in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash beginning of period |
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Cash, cash equivalents, and restricted cash end of period |
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| Condensed Consolidated Statements of Equity (Unaudited) | America’s Car-Mart, Inc. |
Three and Nine Months Ended January 31, 2024
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Additional |
Non- |
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Common Stock |
Paid-In |
Retained |
Treasury |
Controlling |
Total |
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(In thousands, except share data) |
Shares |
Amount |
Capital |
Earnings |
Stock |
Interest |
Equity |
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Balance at April 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
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Issuance of common stock |
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Stock options exercised |
( |
) | ( |
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Purchase of treasury shares |
- | ( |
) | ( |
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Stock based compensation |
- | |||||||||||||||||||||||||||
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Dividends on subsidiary preferred stock |
- | ( |
) | ( |
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Net income |
- | |||||||||||||||||||||||||||
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Balance at July 31, 2023 (Unaudited) |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
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Issuance of common stock |
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Stock based compensation |
- | ( |
) | ( |
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Dividends on subsidiary preferred stock |
- | ( |
) | ( |
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Net (loss) |
- | ( |
) | ( |
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Balance at October 31, 2023 (Unaudited) |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
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Issuance of common stock |
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Purchase of treasury shares |
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Stock based compensation |
- | |||||||||||||||||||||||||||
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Dividends on subsidiary preferred stock |
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Net (loss) |
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Balance at January 31, 2024 (Unaudited) |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| Condensed Consolidated Statements of Equity (Unaudited) | America’s Car-Mart, Inc. |
Three and Nine Months Ended January 31, 2023
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Additional |
Non- |
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Common Stock |
Paid-In |
Retained |
Treasury |
Controlling |
Total |
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(In thousands, except share data) |
Shares |
Amount |
Capital |
Earnings |
Stock |
Interest |
Equity |
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Balance at April 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
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Issuance of common stock |
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Stock options exercised |
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Purchase of |
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Stock based compensation |
- | |||||||||||||||||||||||||||
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Dividends on subsidiary preferred stock |
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Net income |
- | |||||||||||||||||||||||||||
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Balance at July 31, 2022 (Unaudited) |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
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Issuance of common stock |
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Stock based compensation |
- | |||||||||||||||||||||||||||
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Dividends on subsidiary preferred stock |
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Net income |
- | |||||||||||||||||||||||||||
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Balance at October 31, 2022 (Unaudited) |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
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Issuance of common stock |
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Stock based compensation |
- | |||||||||||||||||||||||||||
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Dividends on subsidiary preferred stock |
- | ( |
) | ( |
) | |||||||||||||||||||||||
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Net income |
- | |||||||||||||||||||||||||||
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Balance at January 31, 2023 (Unaudited) |
$ | $ | $ | $ | ( |
) | $ | $ | ||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| Notes to Consolidated Financial Statements (Unaudited) | America’s Car-Mart, Inc. |
A – Organization and Business
America’s Car-Mart, Inc., a Texas corporation (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. References to the Company typically include the Company’s consolidated subsidiaries. The Company’s operations are principally conducted through its operating subsidiaries, America’s Car Mart, Inc., an Arkansas corporation (“Car-Mart of Arkansas”), and Colonial Auto Finance, Inc., an Arkansas corporation (“Colonial”). 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 difficulties. As of January 31, 2024, the Company operated
B – Summary of Significant Accounting Policies
General
The accompanying condensed consolidated balance sheet as of April 30, 2023, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of January 31, 2024 and 2023, have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended January 31, 2024 are not necessarily indicative of the results that may be expected for the year ending April 30, 2024. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended April 30, 2023.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of America’s Car-Mart, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated.
Segment Information
Each dealership is an operating segment with its results regularly reviewed by the Company’s chief operating decision maker in an effort to make decisions about resources to be allocated to the segment and to assess its performance. Individual dealerships meet the aggregation criteria for reporting purposes under the current accounting guidance. The Company operates in the Integrated Auto Sales and Finance segment of the used car market, also referred to as the Integrated Auto Sales and Finance industry. In this industry, the nature of the sale and the financing of the transaction, financing processes, the type of customer and the methods used to distribute the Company’s products and services, including the actual servicing of the contracts as well as the regulatory environment in which the Company operates, all have similar characteristics. Each individual dealership is similar in nature and only engages in the selling and financing of used vehicles. All individual dealerships have similar operating characteristics. As such, individual dealerships have been aggregated into reportable segment.
Reclassifications
Accident protection plan (“APP”) reserves in the amount of approximately $
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant estimates include the Company’s allowance for credit losses.
Concentration of Risk
The Company provides financing in connection with the sale of substantially all of its vehicles. These sales are made primarily to customers residing in Alabama, Arkansas, Georgia, Illinois, Kentucky, Mississippi, Missouri, Oklahoma, Tennessee, and Texas, with approximately
As of January 31, 2024, and periodically throughout the period, the Company maintained cash in financial institutions in excess of the amounts insured by the federal government. The cash is held in several highly rated banking institutions. The Company regularly monitors its counterparty credit risk and mitigates exposure by limiting the amount it invests in one institution.
Restrictions on Distributions / Dividends
The Company’s revolving credit facilities generally restrict distributions by the Company to its shareholders. The distribution limitations under the credit facilities allow the Company to repurchase the Company’s stock so long as either: (a) the aggregate amount of such repurchases after September 30, 2021 does not exceed $
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.
Restricted Cash
Restricted cash is related to the financing and securitization transaction discussed below and is held by the securitization trust.
Restricted cash from collections on auto finance receivables includes collections of principal, interest, and late fee payments on auto finance receivables that are restricted for payment to holders of non-recourse notes payable pursuant to the applicable agreements.
The restricted cash on deposit in reserve accounts is for the benefit of holders of non-recourse notes payable, and these funds are not expected to be available to the Company or its creditors. If the cash generated by the related receivables in a given period was insufficient to pay the interest, principal, and other required payments, the balances on deposit in the reserve accounts would be used to pay those amounts.
Restricted cash consisted of the following at January 31, 2024 and April 30, 2023:
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(In thousands) |
January 31, 2024 |
April 30, 2023 |
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Restricted cash from collections on auto finance receivables |
$ | $ | ||||||
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Restricted cash on deposit in reserve accounts |
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Restricted Cash |
$ | $ | ||||||
Financing and Securitization Transactions
The Company utilizes term securitizations to provide long-term funding for a portion of the auto finance receivables initially funded through the debt facilities. In these transactions, a pool of auto finance receivables is sold to a special purpose entity that, in turn, transfers the receivables to a special purpose securitization trust. The securitization trust issues asset-backed securities, secured or otherwise supported by the transferred receivables, and the proceeds from the sale of the asset-backed securities are used to finance the securitized receivables.
The Company is required to evaluate term securitization trusts for consolidation. In the Company’s role as servicer for each securitization, it possesses non-substantive voting rights and has the power to direct the activities of the trust that most significantly impact the economic performance of the trust. In addition, the obligation to absorb losses (subject to limitations) and the rights to receive any returns of the trust, remain with the Company. Accordingly, the Company is the primary beneficiary of the trust and is required to consolidate it.
The Company recognizes transfers of auto finance receivables into the term securitization as secured borrowings, which results in recording the auto finance receivables and the related non-recourse notes payable on our consolidated balance sheet. These auto finance receivables can only be used as collateral to settle obligations of the related non-recourse notes payable. The term securitization investors have no recourse to the Company’s assets beyond the related auto finance receivables, the amounts on deposit in the reserve account, and the restricted cash from collections on auto finance receivables. See Notes C and F for additional information on auto finance receivables and non-recourse notes payable.
Finance Receivables, Repossessions and Charge-offs and Allowance for Credit Losses
The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts carry a weighted average interest rate of approximately
An account is considered delinquent when the customer is three days or more behind on their contractual payments. While the Company does not formally place contracts on nonaccrual status, the immaterial amount of interest that may accrue after an account becomes delinquent up until the point of resolution via repossession or write-off is reserved for against the accrued interest on the Condensed Consolidated Balance Sheets. Delinquent contracts are addressed and either made current by the customer, which is the case in most situations, or the vehicle is repossessed or written off if the collateral cannot be recovered after 90 days. Customer payments are set to match their payday with approximately
Substantially all of the Company’s installment sale contracts involve contracts made to individuals with impaired or limited credit histories, or higher debt-to-income ratios than permitted by traditional lenders. Contracts made with buyers who are restricted in their ability to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher losses than contracts made with buyers with better credit. At the time of originating an installment sale contract, the Company requires customers to meet certain criteria that demonstrate their intent and ability to pay for the financed principal and interest on the vehicle they are purchasing. However, the Company recognizes that their customer base is at a higher risk of default given their impaired or limited credit histories.
The Company strives to keep its delinquency percentages low, and not to repossess vehicles. Accounts one to three days late are contacted by telephone or text messaging notifications. Notes from each contact are electronically maintained in the Company’s computer system. The Company also utilizes text messaging notifications that allow customers the option to receive due date reminders and late notifications, if applicable. The Company attempts to resolve payment delinquencies amicably prior to repossessing a vehicle. If a customer becomes severely delinquent in his or her payments, and management determines that timely collection of future payments is not probable, the Company will take steps to repossess the vehicle.
Periodically, the Company enters into contract modifications with its customers to extend or modify the payment terms. The Company only enters into a contract modification or extension if it believes such action will increase the amount of money the Company will ultimately realize on the customer’s account and will increase the likelihood of the customer being able to pay off the installment sale contract. At the time of modification, the Company expects to collect amounts due including accrued interest at the contractual interest rate for the period of delay. No other concessions are granted to customers, beyond the extension of additional time, at the time of modifications. Modifications are minor and are made for payday changes, minor vehicle repairs and other reasons. For those vehicles that are repossessed, the majority are returned or surrendered by the customer on a voluntary basis. Other repossessions are performed by Company personnel or third-party repossession agents. Depending on the condition of a repossessed vehicle, it is either resold on a retail basis through a Company dealership or sold for cash on a wholesale basis, primarily through physical or online auctions.
The Company takes steps to repossess a vehicle when the customer becomes delinquent in his or her payments and management determines that timely collection of future payments is not probable. Accounts are charged-off after the expiration of a statutory notice period for repossessed accounts, or when management determines that the timely collection of future payments is not probable for accounts where the Company has been unable to repossess the vehicle. For accounts with respect to which the vehicle was repossessed, the fair value of the repossessed vehicle is charged as a reduction of the gross finance receivables balance charged-off. On average, accounts are approximately
During the second quarter of the 2024 fiscal year, the Company implemented third-party software to assist in calculating the Company’s allowance for credit losses. After implementation, the Company’s quantitative portion of the allowance for credit losses was measured using an undiscounted cash flow (“CF”) model. Whereby the undiscounted cash flows are adjusted by a prepayment rate and then the loss rate is applied and compared to the amortized cost basis of finance receivables to reflect management’s estimate of expected credit losses. The CF model is based on installment sale contract level characteristics of the Company’s finance receivables, such as the contractual payment structure, maturity date, payment frequency for recurring payments, and interest rates, as well as the following assumptions:
|
● |
a historical loss period, which represents a full economic credit cycle utilizing loss experience, to calculate the historical loss rate; and |
|
● |
static annualized historical rate based on average time of charge-off; and |
|
● |
expected prepayment rates based on our historical experience, which also incorporates non-standard contractual payments such as down payments made during the first ninety-days or annual seasonal payments. |
The Company’s allowance for credit losses also considers qualitative factors not captured within the CF modeled results such as changes in underwriting and collection practices, economic trends, changes in volume and terms of installment sales contracts, credit quality trends, installment sale contract review results, collateral trends, and concentrations of credit. The Company’s qualitative factors incorporate a macroeconomic variable forecast of inflation over a reasonable and supportable forecast period of one year that affects its customers’ non-discretionary income and ability to repay. The reasonable and supportable forecast period of one year is based on management’s current review of the reliability of extended forecasts and is applied as an adjustment to the historical loss rate.
As a result of this update to our methodology and the performance of our loan portfolio, the Company increased the provision for credit losses by $
The Company maintains an allowance for credit losses on an aggregate basis at an amount it considers sufficient to cover net credit losses expected over the remaining life of the installment sales contracts in the portfolio at the measurement date. At January 31, 2024, the weighted average total contract term was
In most states, the Company offers retail customers who finance their vehicle the option of purchasing an accident protection plan product as an add-on to the installment sale contract. This product contractually obligates the Company to cancel the remaining principal outstanding for any contract where the retail customer has totaled the vehicle, as defined by the product, or the vehicle has been stolen. The Company periodically evaluates anticipated losses to ensure that if anticipated losses exceed deferred accident protection plan revenues, an additional liability is recorded for such difference. At January 31, 2024, anticipated losses did not exceed deferred accident protection plan revenues. No such liability was required at January 31, 2024 or April 30, 2023.
Inventory
Inventory consists of used vehicles and is valued at the lower of cost or net realizable value on a specific identification basis. Vehicle reconditioning costs are capitalized as a component of inventory. Repossessed vehicles and trade-in vehicles are recorded at fair value, which approximates wholesale value. The cost of used vehicles sold is determined using the specific identification method.
Goodwill
Goodwill reflects the excess of purchase price over the fair value of specifically identified net assets purchased. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to qualitative annual impairment tests at the Company’s year-end. The impairment tests are based on the comparison of the fair value of the reporting unit to the carrying value of such unit. The implied goodwill is compared to the carrying value of the goodwill to determine the impairment, if any. There was impairment of goodwill during the 2023 fiscal year. During the nine months ended January 31, 2024, the Company evaluated goodwill and recorded an immaterial impairment of $212,000 due to a dealership that closed during the first quarter of 2024.
Goodwill totaled $
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, remodels and improvements are capitalized. Costs of repairs and maintenance are expensed as incurred. Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the lease period. The lease period includes the primary lease term plus any extensions that are reasonably assured. Depreciation is computed principally using the straight-line method generally over the following estimated useful lives:
|
Furniture, fixtures and equipment |
|
|
Leasehold improvements |
|
|
Buildings and improvements |
|
Long-Lived Assets
Long-lived assets, such as property and equipment, capitalized internal-use software and operating lease right-of-use assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares the undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, such assets are considered to be impaired, and the impairment is recognized to the extent that the carrying value exceeds its fair value. There were no impairment charges recognized during any of the periods presented.
Cloud Computing Implementation Costs
The Company enters into cloud computing service contracts to support its sales, inventory management, and administrative activities. The Company capitalizes certain implementation costs for cloud computing arrangements that meet the definition of a service contract. The Company includes these capitalized implementation costs within prepaid expenses and other assets on the Condensed Consolidated Balance Sheets. Once placed in service, the Company amortizes these costs over the remaining subscription term to the same caption on the Condensed Consolidated Statement of Operations as the related cloud subscription.
Cash Overdraft
As checks are presented for payment from the Company’s primary disbursement bank account, monies are automatically drawn against cash collections for the day and, if necessary, are drawn against one of the revolving credit facilities. Any cash overdraft balance principally represents outstanding checks that as of the balance sheet date had not yet been presented for payment, net of any deposits in transit. Any cash overdraft balance is reflected in accrued liabilities on the Company’s Condensed Consolidated Balance Sheets.
Deferred Sales Tax
Deferred sales tax represents a sales tax liability of the Company for vehicles sold on an installment basis in the states of Alabama and Texas. Under Alabama and Texas law for vehicles sold on an installment basis, the related sales tax is due as the payments are collected from the customer, rather than at the time of sale. Deferred sales tax liabilities are reflected in accrued liabilities on the Company’s Condensed Consolidated Balance Sheets.
Income Taxes
Income taxes are accounted for under the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates expected to apply in the years in which these differences are expected to be recovered or settled. The quarterly provision for income taxes is determined using an estimated annual effective tax rate, which is based on expected annual taxable income, statutory tax rates and the Company’s best estimate of nontaxable and nondeductible items of income and expense. The effective income tax rates were
Occasionally, the Company is audited by taxing authorities. These audits could result in proposed assessments of additional taxes. The Company believes that its tax positions comply in all material respects with applicable tax law. However, tax law is subject to interpretation, and interpretations by taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applies this methodology to all tax positions for which the statute of limitations remains open.
The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the years before fiscal
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 accrued penalties or interest as of January 31, 2024 or April 30, 2023.
Revenue Recognition
Revenues are generated principally from the sale of used vehicles, which in most cases includes a service contract and an accident protection plan product, as well as interest income and late fees earned on finance receivables. Revenues are net of taxes collected from customers and remitted to government agencies. Cost of vehicle sales include costs incurred by the Company to prepare the vehicle for sale including license and title costs, gasoline, transport services, and repairs.
Revenues from the sale of used vehicles are recognized when the sales contract is signed, the customer has taken possession of the vehicle and, if applicable, financing has been approved. Revenues from the sale of vehicles sold at wholesale are recognized at the time the proceeds are received. Revenues from the sale of service contracts are recognized ratably over the expected duration of the product. Service contract revenues are included in sales and the related expenses are included in cost of sales. Accident protection plan revenues are initially deferred and then recognized to income using the “Rule of 78’s” interest method over the life of the contract so that revenues are recognized in proportion to the amount of cancellation protection provided. Accident protection plan revenues are included in sales and related losses are included in cost of sales as incurred. Any unearned revenue from ancillary products is charged-off at the time of repossession. Interest income is recognized on all active finance receivables accounts using the simple effective interest method. Active accounts include all accounts except those that have been paid-off or charged-off.
Sales for the three and nine months ended January 31, 2024 and 2023 consisted of the following:
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
(In thousands) |
2024 |
2023 |
2024 |
2023 |
||||||||||||
|
Sales – used autos |
$ | $ | $ | $ | ||||||||||||
|
Wholesales – third party |
||||||||||||||||
|
Service contract revenue |
||||||||||||||||
|
Accident protection plan revenue |
||||||||||||||||
|
Total |
$ | $ | $ | $ | ||||||||||||
At January 31, 2024 and 2023, finance receivables more than 90 days past due were approximately $
Earnings per Share
Basic earnings per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding during the period plus dilutive common stock equivalents. The calculation of diluted earnings per share takes into consideration the potentially dilutive effect of common stock equivalents, such as outstanding stock options and non-vested restricted stock, which if exercised or converted into common stock would then share in the earnings of the Company. In computing diluted earnings per share, the Company utilizes the treasury stock method and anti-dilutive securities are excluded.
Stock-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant over the requisite service period. The Company uses the Black-Scholes option pricing model to determine the fair value of stock option awards. The Company may issue either new shares or treasury shares upon exercise of these awards. Stock-based compensation plans, related expenses, and assumptions used in the Black-Scholes option pricing model are more fully described in Note I. If an award contains a performance condition, expense is recognized only for those shares for which it is considered reasonably probable as of the current period end that the performance condition will be met. The Company accounts for forfeitures as they occur and records any excess tax benefits or deficiencies from its equity awards in its Consolidated Statements of Operations in the reporting period in which the exercise occurs. The Company recorded a discrete income tax benefit of approximately $
Treasury Stock
Treasury stock may be used for issuances under the Company’s stock-based compensation plans or for other general corporate purposes. The Company has a reserve account of
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.
Adopted in the Current Period
In March 2022, the FASB issued an accounting pronouncement (ASU 2022-02) related to troubled debt restructurings (“TDRs”) and vintage disclosures for financing receivables. The amendments in this update eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted this standard on May 1, 2023 under a prospective basis. In regard to installment sale contract modifications, management notes that the Company primarily modifies a customer’s installment sale contract to allow for insignificant payment delays. This type of modification is generally done to account for payday changes for the customer and minor vehicle repairs.
C – Finance Receivables, Net
The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts, which carry a fixed interest rate of
The components of finance receivables are as follows:
|
(In thousands) |
January 31, 2024 |
April 30, 2023 |
||||||
|
Gross contract amount |
$ | $ | ||||||
|
Less: unearned finance charges |
( |
) | ( |
) | ||||
|
Principal balance |
||||||||
|
Less: estimated insurance receivables for APP claims |
( |
) | ( |
) | ||||
|
Less: allowance for APP claims |
( |
) | ( |
) | ||||
|
Less: allowance for credit losses |
( |
) | ( |
) | ||||
|
Finance receivables, net |
||||||||
|
Loan origination costs |
||||||||
|
Finance receivables, net, including loan origination costs |
||||||||
Changes in the finance receivables, net are as follows:
|
Nine Months Ended |
||||||||
|
(In thousands) |
2024 |
2023 |
||||||
|
Balance at beginning of period |
$ | $ | ||||||
|
Finance receivable originations |
||||||||
|
Finance receivable collections |
( |
) | ( |
) | ||||
|
Provision for credit losses |
( |
) | ( |
) | ||||
|
Losses on claims for accident protection plan |
( |
) | ( |
) | ||||
|
Inventory acquired in repossession and accident protection plan claims |
( |
) | ( |
) | ||||
|
Balance at end of period |
$ | $ | ||||||
Changes in the finance receivables allowance for credit losses are as follows:
|
Nine Months Ended |
||||||||
|
(In thousands) |
2024 |
2023 |
||||||
|
Balance at beginning of period |
$ | $ | ||||||
|
Provision for credit losses |
||||||||
|
Charge-offs |
( |
) | ( |
) | ||||
|
Recovered collateral |
||||||||
|
Balance at end of period |
$ | $ | ||||||
Amounts recovered from previously written-off accounts were approximately $
Our allowance for credit losses increased during the first nine months of fiscal year 2024 by $35.4 million or 12%, the majority of the increase relates to the $28.0 million increase in second quarter, which resulted from an increase in the allowance for credit loss from 23.91 % to 26.04%. The Company reduced the allowance for credit loss in the third quarter to 25.74%, resulting in a benefit of $3.9 million to the provision. Structural changes to our portfolio, primarily related to the longer contract terms, continue to drive an increase in the provision for credit losses. The charge-offs, net of recovered collateral, were impacted by a higher frequency of losses compared to the prior year as well as a higher severity of losses driven by lower recovery values and longer contract terms.
Credit quality information for finance receivables is as follows:
|
(Dollars in thousands) |
January 31, 2024 |
April 30, 2023 |
January 31, 2023 |
|||||||||||||||||||||
|
Principal |
Percent of |
Principal |
Percent of |
Principal |
Percent of |
|||||||||||||||||||
|
Balance |
Portfolio |
Balance |
Portfolio |
Balance |
Portfolio |
|||||||||||||||||||
|
Current |
$ | % | $ | % | $ | % | ||||||||||||||||||
|
3 - 29 days past due |
% | % | % | |||||||||||||||||||||
|
30 - 60 days past due |
% | % | % | |||||||||||||||||||||
|
61 - 90 days past due |
% | % | % | |||||||||||||||||||||
|
> 90 days past due |
% | % | % | |||||||||||||||||||||
|
Total |
$ | % | $ | % | $ | % | ||||||||||||||||||
Accounts one and two days past due are considered current for this analysis, due to the varying payment dates and variation in the day of the week at each period end. Delinquencies may vary from period to period based on the average age of the portfolio, seasonality within the calendar year, the day of the week and overall economic factors. The above categories are consistent with internal operational measures used by the Company to monitor credit results.
Substantially all of the Company’s installment sale contracts involve contracts made to individuals with impaired or limited credit histories, or higher debt-to-income ratios than permitted by traditional lenders. Contracts made with buyers who are restricted in their ability to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher losses than contracts made with buyers with better credit. The Company monitors customer scores, contract term length, payment to income, down payment percentages, and collections for credit quality indicators.
|
Nine Months Ended |
||||||||
|
2024 |
2023 |
|||||||
|
Average total collected per active customer per month |
$ | $ | ||||||
|
Principal collected as a percent of average finance receivables |
% | % | ||||||
|
Average down-payment percentage |
% | % | ||||||
|
Average originating contract term (in months) |
||||||||
| As of | ||||||||
|
January 31, 2024 |
January 31, 2023 |
|||||||
|
Portfolio weighted average contract term, including modifications (in months) |
||||||||
Although total dollars collected per active customer for the nine months increased
When customers apply for financing, the Company’s proprietary scoring model relies on the customers’ credit histories and certain application information to evaluate and rank their risk. The Company obtains credit histories and other credit data that includes information such as number of different addresses, age of oldest record, high risk credit activity, job time, time at residence and other factors. The application information that is used includes income, collateral value and down payment. The scoring models yield credit grades that represent the relative likelihood of repayment. Customers with the highest probability of repayment are 6 rated customers. Customers assigned a lower grade are determined to have a lower probability of repayment. For installment sales contracts that are approved, the credit grade influences the terms of the agreement, such as the maximum amount financed, term length and minimum down payment. After origination, credit grades are generally not updated.
The Company uses a combination of the initial credit grades and historical performance to monitor the credit quality of the finance receivables on an ongoing basis, and the accuracy of the scoring model is validated periodically. Installment sale contract performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.
The following table presents a summary of finance receivables by credit quality indicator, as of January 31, 2024, segregated by customer score.
As of January 31, 2024
|
(Dollars in thousands) |
Fiscal Year of Origination |
Prior to |
|||||||||||||||||||||||||||||||
|
Customer Rating |
2024 |
2023 |
2022 |
2021 |
2020 |
2020 |
Total |
% |
|||||||||||||||||||||||||
| 1-2 | $ | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||||
| 3-4 | $ | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||||
| 5-6 | $ | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||||
|
Gross charge-offs |
$ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
The following table presents a summary of finance receivables by credit quality indicator, as of January 31, 2023, segregated by customer score.
As of January 31, 2023
|
(Dollars in thousands) |
Fiscal Year of Origination |
Prior to |
|||||||||||||||||||||||||||||||
|
Customer Rating |
2023 |
2022 |
2021 |
2020 |
2019 |
2019 |
Total |
% |
|||||||||||||||||||||||||
| 1-2 | $ | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||||
| 3-4 | $ | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||||
| 5-6 | $ | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||||
|
Total |
$ | $ | $ | $ | $ | $ | $ | % | |||||||||||||||||||||||||
D – Property and Equipment, Net
A summary of property and equipment is as follows:
|
(In thousands) |
January 31, 2024 |
April 30, 2023 |
||||||
|
Land |
$ | $ | ||||||
|
Buildings and improvements |
||||||||
|
Furniture, fixtures and equipment |
||||||||
|
Leasehold improvements |
||||||||
|
Construction in progress |
||||||||
|
Less: accumulated depreciation and amortization |
( |
) | ( |
) | ||||
|
Total |
$ | $ | ||||||
E – Accrued Liabilities
A summary of accrued liabilities is as follows:
|
(In thousands) |
January 31, 2024 |
April 30, 2023 |
||||||
|
Employee compensation |
$ | $ | ||||||
|
Deferred sales tax (see Note B) |
||||||||
|
Fair value of contingent consideration |
||||||||
|
Other |
||||||||
|
Total |
$ | $ | ||||||
F – Debt Facilities
A summary of debt facilities is as follows:
|
(In thousands) |
January 31, 2024 |
April 30, 2023 |
||||||
|
Revolving line of credit |
$ | $ | ||||||
|
Debt issuance costs |
( |
) | ( |
) | ||||
|
Revolving line of credit, net |
$ | $ | ||||||
|
Non-recourse notes payable - 2022-1 Issuance |
$ | $ | ||||||
|
Non-recourse notes payable - 2023-1 Issuance |
$ | |||||||
|
Non-recourse notes payable - 2023-2 Issuance |
- | |||||||
|
Non-recourse notes payable - 2024-1 Issuance |
||||||||
|
Debt issuance costs |
( |
) | ( |
) | ||||
|
Non-recourse notes payable, net |
$ | $ | ||||||
|
Total debt |
$ | $ | ||||||
Revolving Line of Credit
At January 31, 2024, the Company and its subsidiaries had $600.0 million of permitted borrowings under a revolving line of credit. The revolving credit facilities are collateralized primarily by finance receivables and inventory, are cross collateralized and contain a guarantee by the Company. Interest is payable monthly under the revolving credit facilities with a scheduled maturity date of September 29, 2024. The credit facilities provide for four pricing tiers for determining the applicable interest rate, based on the Company’s consolidated leverage ratio for the preceding fiscal quarter. The applicable interest rate under the credit facilities at January 31, 2024 was generally SOFR plus 2.75%, with a minimum of 2.25% or for non-SOFR amounts the base rate of 8.50% at January 31, 2024 and 8.25% at April 30, 2023. The credit facilities contain various reporting and performance covenants including (i) maintenance of certain financial ratios and tests, (ii) limitations on borrowings from other sources, (iii) restrictions on certain operating activities and (iv) restrictions on the payment of dividends or distributions (see note B).
The Company was in compliance with the covenants at January 31, 2024. The amount available to be drawn under the credit facilities is a function of eligible finance receivables and inventory; based upon eligible finance receivables and inventory at January 31, 2024, the Company had additional availability of approximately $125.6 million under the revolving credit facilities. The total permitted borrowings and certain terms of the Company’s revolving credit facilities were amended on February 28, 2024. This amendment is described in Note M, Subsequent Events.
Non-Recourse Notes Payable
The Company has issued four separate series of asset-backed non-recourse notes (known as the “2022 Issuance”, “2023-1 Issuance”, "2023-2 Issuance" and "2024-1 Issuance"). All four issuances are collateralized by installment sale contracts directly originated by the Company. Credit enhancement for the non-recourse notes payable consists of overcollateralization, a reserve account funded with an initial amount of not less than
|
Original Principal Balance |
Weighted Average Fixed Coupon Rate |
||||||||
| 2023-1 | $ | % | |||||||
| 2023-2 | % | ||||||||
| 2024-1 | % | ||||||||
G – Fair Value Measurements
Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Topic 820 describes three levels of inputs that may be used to measure fair value:
|
● |
Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities. |
|
● |
Level 2 Inputs – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
● |
Level 3 Inputs – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Because no market exists for certain of the Company’s financial instruments, fair value estimates are based on judgments and estimates regarding yield expectations of investors, credit risk and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
The methodology and assumptions utilized to estimate the fair value of the Company’s financial instruments and other assets are as follows:
|
Financial Instrument and Other Assets |
Valuation Methodology |
|
|
Cash, cash equivalents, and restricted cash |
The carrying amount is considered to be a reasonable estimate of fair value due to the short-term nature of the financial instruments (Level 1). |
|
| Repossessed inventory | The fair value approximates wholesale value (Level 1). | |
|
Finance receivables, net |
The Company estimated the fair value of its receivables at what a third-party purchaser might be willing to pay. The Company has had discussions with third parties and has bought and sold portfolios and has had a third-party appraisal in October 2022 that indicates a range of |
|
|
Accounts payable |
The carrying amount is considered to be a reasonable estimate of fair value due to the short-term nature of the financial instrument (Level 2). |
|
| Contingent Consideration | The fair value was based upon inputs from the earn-out projection (Level 2). | |
|
Revolving line of credit |
The fair value approximates carrying value due to the variable interest rates charged on the borrowings, which reprice frequently (Level 2). |
|
|
Non-recourse notes payable |
The fair value was based upon inputs derived from prices for similar instruments at period end (Level 2). |
The estimated fair values, and related carrying amounts, of the financial instruments included in the Company’s financial statements at January 31, 2024 and April 30, 2023 are as follows:
|
January 31, 2024 |
April 30, 2023 |
|||||||||||||||
|
Carrying |
Fair |
Carrying |
Fair |
|||||||||||||
|
(In thousands) |
||||||||||||||||
|
Cash and cash equivalents |
$ | $ | $ | $ | ||||||||||||
|
Restricted cash |
||||||||||||||||
| Inventory | 18,663 | 18,663 | 16,451 | 16,451 | ||||||||||||
|
Finance receivables, net |
||||||||||||||||
|
Accounts payable |
||||||||||||||||
| Contingent Consideration | 3,193 | 3,193 | 1,943 | 1,943 | ||||||||||||
|
Revolving line of credit, net |
||||||||||||||||
|
Non-recourse notes payable |
||||||||||||||||
H – Weighted Average Shares Outstanding
Weighted average shares of common stock outstanding used in the calculation of basic and diluted earnings per share were as follows:
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
2024 |
2023 |
2024 |
2023 |
|||||||||||||
|
Weighted average shares outstanding-basic |
||||||||||||||||
|
Dilutive options and restricted stock |
- | - | ||||||||||||||
|
Weighted average shares outstanding-diluted |
||||||||||||||||
|
Antidilutive securities not included: |
||||||||||||||||
|
Options |
||||||||||||||||
|
Restricted stock |
||||||||||||||||
I – Stock-Based Compensation
The Company has stock-based compensation plans available to grant non-qualified stock options, incentive stock options and restricted stock to employees, directors and certain advisors of the Company. The stock-based compensation plans being utilized at January 31, 2024 are the Amended and Restated Stock Option Plan and the Amended and Restated Stock Incentive Plan. The Company recorded total stock-based compensation expense for all plans of approximately $
Stock Option Plan
The Company has options outstanding under a stock option plan approved by the shareholders, the Amended and Restated Stock Option Plan. The shareholders of the Company approved the Amended and Restated Stock Option Plan (the “Restated Option Plan”) on August 5, 2015, which extended the term of the Stock Option Plan to June 10, 2025 and increased the number of shares of common stock reserved for issuance under the plan by an additional
|
Restated Option Plan |
||||
|
Minimum exercise price as a percentage of fair market value at date of grant |
||||
|
Last expiration date for outstanding options |
|
|||
|
Shares available for grant at January 31, 2024 |
||||
The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions in the table below.
|
Nine Months Ended |
||||||||
|
2024 |
2023 |
|||||||
|
Expected terms (years) |
||||||||
|
Risk-free interest rate |
% | % | ||||||
|
Volatility |
% | % | ||||||
|
Dividend yield |
- | - | ||||||
The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of the Company’s common stock. The Company has not historically issued any dividends and does not expect to do so in the foreseeable future.
There were
Stock option compensation expense was $
The Company had the following options exercised for the periods indicated. The impact of these cash receipts is included in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows.
|
Nine Months Ended |
||||||||
|
(Dollars in thousands) |
2024 |
2023 |
||||||
|
Options exercised |
||||||||
|
Cash received from option exercises |
$ | $ | ||||||
|
Intrinsic value of options exercised |
$ | $ | ||||||
During the nine months ended January 31, 2024, there were
The aggregate intrinsic value of outstanding options at January 31, 2024 and 2023 was $
Stock Incentive Plan
On August 5, 2015, the shareholders of the Company approved the Amended and Restated Stock Incentive Plan (the “Restated Incentive Plan”), which extended the term of the Company’s Stock Incentive Plan to June 10, 2025. On August 29, 2018, the shareholders of the Company approved an amendment to the Restated Stock Incentive Plan that increased the number of shares of common stock that may be issued under the Restated Incentive Plan by
There were
As of January 31, 2024, the Company had approximately $
There were no modifications to any of the Company’s outstanding share-based payment awards during fiscal 2023 or during the first nine months of fiscal 2024.
J – Commitments and Contingencies
The Company has entered into operating leases for approximately
Scheduled amounts and timing of cash flows arising from operating lease payments as of January 31, 2024, discounted at the weighted average interest rate in effect as of January 31, 2024 of approximately
|
Maturity of lease liabilities |
||||
|
2024 (remaining) |
$ | |||
|
2025 |
||||
|
2026 |
||||
|
2027 |
||||
|
2028 |
||||
|
Thereafter |
||||
|
Total undiscounted operating lease payments |
||||
|
Less: imputed interest |
( |
) | ||
|
Present value of operating lease liabilities |
$ |
The Company has two standby letters of credit relating to insurance policies totaling $
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. 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.
K - Supplemental Cash Flow Information
Supplemental cash flow disclosures are as follows:
|
Nine Months Ended |
||||||||
|
(In thousands) |
2024 |
2023 |
||||||
|
Supplemental disclosures: |
||||||||
|
Interest paid |
$ | $ | ||||||
|
Income taxes paid, net |
||||||||
|
Non-cash transactions: |
||||||||
|
Inventory acquired in repossession and accident protection plan claims |
||||||||
|
Reduction in net receivables for deferred ancillary product revenue at time of charge-off |
||||||||
|
Net settlement option exercises |
||||||||
|
Right-of-use assets obtained in exchange for operating lease liabilities |
||||||||
|
Right-of-use assets obtained in exchange for operating lease liabilities through acquisitions |
||||||||
M – Subsequent Events
On February 28, 2024, the Company entered into Amendment No. 6 to the Third Amended and Restated Loan and Security Agreement (the “Agreement”) with certain financial institutions and BMO Harris Bank, N.A., as lead arranger and book manager. Amendment No. 6 to the Agreement (the “Amendment”) extends the term of the Company’s revolving credit facilities to September 30, 2025 and reduces the total permitted borrowings from $
The reduction in the total permitted borrowings will reduce the Company’s expense for unused line fees for the unused availability under the credit facilities based on the Company’s recent borrowings. However, the Amendment increases the unused line fee rate from
The Amendment removes the existing pricing tiers for determining the applicable interest rate, which were based on the Company’s consolidated leverage ratio for the preceding fiscal quarter and establishes the applicable margin for determining the interest rate at
Finally, the Amendment updates the definition of “permitted acquisitions” to allow the Company to make strategic business acquisitions so long as the aggregate cash consideration paid for all acquired businesses in any one fiscal year does not exceed $
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:
|
• |
operational infrastructure investments; |
|
• |
same dealership sales and revenue growth; |
|
• |
customer growth and engagement; |
|
• |
gross profit margin percentages; |
|
• |
gross profit per retail unit sold; |
|
• |
business acquisitions; |
| • | inventory acquisition, reconditioning, transportation and remarketing; |
|
• |
technological investments and initiatives; |
|
• |
future revenue growth; |
|
• |
receivables growth as related to revenue growth; |
|
• |
new dealership openings; |
|
• |
performance of new dealerships; |
|
• |
interest rates; |
|
• |
future credit losses; |
|
• |
the Company’s collection results, including but not limited to collections during income tax refund periods; |
|
• |
future supply, demand and affordability of used vehicles; |
|
• |
availability of used vehicle financing; |
|
• |
seasonality; and |
|
• |
the Company’s business, operating and growth strategies and expectations. |
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 and in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2023, as well as:
|
• |
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 and inflationary pressure on operating costs; |
|
• |
the availability of quality used vehicles at prices that will be affordable to our customers, including the impacts of changes in new vehicle production and sales; |
|
• |
the availability of credit facilities and access to capital through securitization financings or other sources on terms acceptable to us to support the Company’s business; |
| • | the ability to leverage the Cox Automotive services agreement to perform reconditioning and improve vehicle quality to reduce the average vehicle cost, improve gross margins, reduce credit loss and enhance cash flow; |
|
• |
the Company’s ability to underwrite and collect its contracts effectively; |
|
• |
competition; |
|
• |
dependence on existing management; |
|
• |
ability to attract, develop, and retain qualified general managers; |
|
• |
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; |
|
• |
the ability to keep pace with technological advances and changes in consumer behavior affecting our business; |
|
• |
security breaches, cyber-attacks, or fraudulent activity; |
|
• |
the ability to identify and obtain favorable locations for new or relocated dealerships at reasonable cost; |
|
• |
the ability to successfully identify, complete and integrate new acquisitions; and |
|
• |
potential business and economic disruptions and uncertainty that may result from any future public health crises and any efforts to mitigate the financial impact and health risks associated with such developments. |
The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers and investors 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 difficulties. As of January 31, 2024, the Company operated 154 dealerships located primarily in small cities throughout the South-Central United States.
The Company has grown its revenues between approximately 4% and 32% per year over the last ten fiscal years (average 12%). Growth results from same dealership revenue growth and the addition of new dealerships. Revenue increased 1.6% for the first nine months of fiscal 2024 compared to the same period of fiscal 2023, due to a 21.8% increase in interest income and a 5.6% increase in the average retail sales price, partially offset by a 6.9% decrease in retail units sold. Our dealership volume productivity averaged 30.8 sales per month for the first nine months of fiscal 2024, down from 33.1 during the same period last year.
The Company has been focused on improving vehicle quality by bringing lower mileage and on average newer model-year vehicles to our consumers, while balancing this with affordability. The Company believes this will aid in driving down our customers’ vehicle repair costs, reduce our service contract repair expenses, and lead to better recovery values in the event of repossession. When combined with inventory procurement efficiencies, these changes are expected to drive improved customer experience and contribute to better gross margins.
In February, the Company entered into a strategic partnership with a leading automotive services and technology provider, to improve the efficiencies within the Company’s inventory supply chain process. This partnership will allow the Company to utilize reconditioning and auction facilities, which the Company expects will improve the Company’s vehicle quality.
Over the last five fiscal years, the Company’s provision for credit losses as a percentage of sales averaged 23.74%, with a pre-pandemic rate of 23.71% in fiscal 2019. During fiscal 2023, credit losses exceeded pre-pandemic levels, partially due to the inflationary pressure on customers and increasing interest rates from federal monetary policy. For the first nine months of fiscal 2024, the provision for credit losses as a percentage of sales increased to 37.6%, primarily due to the $28 million increase in provision for credit losses during the three months ended October 31, 2023, primarily resulting from increased net charge-offs as well as an increase to the allowance percentage used to reserve for future losses. The allowance for credit losses as a percentage of finance receivables, net of deferred revenue and pending accident protection plan (“APP”) claims, increased from 23.91% at April 30, 2023 to 26.04% at October 31, 2023. Based on the Company’s current analysis of credit losses, the allowance for credit losses at January 31, 2024 was 25.74% of finance receivables, net of deferred revenue and pending APP claims.
The Company’s credit losses and charge-offs are impacted by market and economic factors, including macro-economic conditions such as inflation in the price of gasoline, groceries and other staple items, cost of car insurance, and overall unemployment levels, as well as the personal income levels of the Company’s customers. Historically, credit losses, on a percentage basis, also tend to be higher at new and developing dealerships than at longer tenure locations with experienced management. Generally, this is 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.
The Company continuously looks for ways to operate more efficiently, improve its business practices and adjust underwriting and 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. Additionally, the Company has placed significant focus on the collection area. The Company’s head of operations oversees the collections area and provides timely oversight and additional accountability on a consistent basis. The Company believes that the proper execution of its business practices is the single most important determinant of its long-term credit loss experience.
The Company’s gross profit dollars per retail unit sold increased by $526, or 8.3%, during the first nine months of fiscal 2024 compared to the first nine months of fiscal 2023, and gross margin as a percentage of sales for the first nine months of fiscal 2024 increased to 34.4% of sales from 33.5% in the prior year period. The increase in gross profit dollars per retail unit sold was primarily related to an increase in the average retail sales price of the vehicles sold during the respective periods. The Company’s initiatives around inventory life cycle efficiencies and a decrease in wholesale losses also contributed to the increase in gross profit dollars. The Company’s gross margin is based upon the cost of the vehicle purchased, with higher-priced vehicles typically having higher gross margin dollars but lower gross margin percentages. Gross margin 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. The Company plans to continue to focus on managing gross margin dollars in the near term, as demonstrated by the increases during fiscal 2024 as well as continuing to focus on improving wholesale results, cost controls, and operational improvement around the acquisition and disposal of vehicles.
The Company consistently focuses on collections. Each dealership is responsible for its own collections with supervisory involvement and oversight from the corporate office. Total collections of principal, interest, and late fees for the first nine months of fiscal 2024 increased by $49.3 million, or 10.9%, over the prior year period. Principal collections, as a percentage of average finance receivables, however, decreased to 22.7%, compared to 25.4% for the same period in prior year, reflecting an increase in the weighted average contract term compared to the prior year period.
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 landscape for hiring remains very competitive. The Company has continued to add resources to recruit, train, and develop personnel, especially personnel targeted to fill dealership manager positions. The Company expects to continue to invest in the development of its workforce.
The Company continues to prioritize investments to improve its products and services and operate more efficiently over time. One of the Company’s largest recent investments has been improving its processes and technology for credit applications and decision-making through a new loan origination system (“LOS”). This online loan application system allows the consumer to apply for credit faster in anticipation of their vehicle purchase, authorize a soft credit pull during the application process, and receive a response via text message on the status of their application, as well as have access to centralized appointment-setting. At the end of the third quarter, the Company had implemented the LOS in over 70% of its 154 dealerships and in nearly all of its dealerships at the end of February 2024, with centralized decision-making on approvals of applications submitted via the online platform. Through the LOS, the Company has tightened its credit approval standards, primarily by requiring a higher down payment and shorter terms from certain customers. The Company expects the full implementation of this system to improve the customer experience across the Company’s dealerships, provide enhanced data and visibility into credit decisions, and help reduce credit losses and repossessions.
Three months ended January 31, 2024 vs. Three months ended January 31, 2023
Consolidated Operations
(Operating Statement Dollars in Thousands)
|
% Change |
As a % of Sales |
|||||||||||||||||||
|
Three Months Ended |
2024 |
Three Months Ended |
||||||||||||||||||
|
2024 |
2023 |
2023 |
2024 |
2023 |
||||||||||||||||
|
Revenues: |
||||||||||||||||||||
|
Sales |
$ | 240,401 | $ | 274,276 | (12.4 | )% | 100.0 | % | 100.0 | % | ||||||||||
|
Interest income |
59,213 | 51,063 | 16.0 | 24.6 | 18.6 | |||||||||||||||
|
Total |
299,614 | 325,339 | (7.9 | ) | 124.6 | 118.6 | ||||||||||||||
|
Costs and expenses: |
||||||||||||||||||||
|
Cost of sales, excluding depreciation shown below |
158,250 | 181,823 | (13.0 | ) | 65.8 | 66.3 | ||||||||||||||
|
Selling, general and administrative |
43,562 | 44,737 | (2.6 | ) | 18.1 | 16.3 | ||||||||||||||
|
Provision for credit losses |
89,582 | 85,650 | 4.6 | 37.3 | 31.2 | |||||||||||||||
|
Interest expense |
16,731 | 9,765 | 71.3 | 7.0 | 3.6 | |||||||||||||||
|
Depreciation and amortization |
1,712 | 1,537 | 11.4 | 0.7 | 0.6 | |||||||||||||||
|
Loss on disposal of property and equipment |
119 | 68 | 75.0 | - | - | |||||||||||||||
|
Total |
309,956 | 323,580 | (4.2 | ) | 128.9 | 118.0 | ||||||||||||||
|
Pretax (loss) income |
$ | (10,342 | ) | $ | 1,759 | (4.3 | )% | 0.6 | % | |||||||||||
|
Operating Data: |
||||||||||||||||||||
|
Retail units sold |
11,664 | 14,508 | ||||||||||||||||||
|
Average dealerships in operation |
154 | 155 | ||||||||||||||||||
|
Average units sold per dealership per month |
25.2 | 31.2 | ||||||||||||||||||
|
Average retail sales price |
$ | 19,455 | $ | 18,091 | ||||||||||||||||
|
Gross profit per retail unit sold |
$ | 7,043 | $ | 6,373 | ||||||||||||||||
|
Same store revenue growth |
(9.3 | )% | 12.3 | % | ||||||||||||||||
|
Period End Data: |
||||||||||||||||||||
|
Dealerships open |
154 | 157 | ||||||||||||||||||
|
Accounts over 30 days past due |
3.3 | % | 3.7 | % | ||||||||||||||||
Revenues decreased by approximately $25.7 million, or 7.9%, for the three months ended January 31, 2024 as compared to the same period in the prior fiscal year. The decrease resulted from a decline in revenue at dealerships that operated a full three months in both the current and prior year quarter ($30.0 million decrease) and by dealerships that were closed during the prior year quarter ($2.4 million decrease); partially offset by revenue growth from dealerships opened or acquired after the prior year quarter ($6.7 million). The decline in revenue was related to a 19.6% decrease in retail units sold, largely reflecting the challenging macroeconomic environment for our customers, partially offset by a 16.0% increase in interest income and a 7.5% increase in the average retail sales price. Interest income increased approximately $8.2 million for the three months ended January 31, 2024, as compared to the same period in the prior fiscal year, due to the $162.1 million increase in average finance receivables.
Cost of sales, as a percentage of sales, decreased to 65.8% for the three months ended January 31, 2024 compared to 66.3% for the same period of the prior fiscal year, resulting in a gross margin as a percentage of sales of 34.2% for the current year period compared to 33.7% for the prior year period. The improvement in gross margin resulted from better operational execution in pricing discipline and our continued focus on inventory efficiencies in procurement, remarketing, and repairs as well as an improvement in APP claims.
Gross margin as a percentage of sales is significantly impacted by the average retail sales price of the vehicles the Company sells, which is largely a function of the Company’s purchase cost. The average retail sales price for the third quarter of fiscal 2024 was $19,455, a $1,364 increase over the prior year quarter. The increase in the average retail selling price was equally attributable to the vehicle price as well as increases in the ancillary products. As purchase costs increase, the margin between the purchase cost and the sales price of the vehicles the Company sells generally narrows on a percentage basis because the Company must offer affordable prices to its customers. The Company has implemented initiatives around vehicle reconditioning efforts and scaling that are expected to provide a better volume of affordable units.
Selling, general and administrative expenses, as a percentage of sales, were 18.1% for the three months ended January 31, 2024, an increase of 1.8% 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 decreased approximately $1.3 million in the third quarter of fiscal 2024 compared to the same period of the prior fiscal year. The decrease resulted from cost cutting measures implemented in the second quarter, combined with a decrease in commissions expense which was partially offset by increased collections costs due primarily to a higher frequency of repossessions.
Provision for credit losses as a percentage of sales was 37.3% for the three months ended January 31, 2024 compared to 31.2% for the prior year period. The provision for credit losses as a percentage of sales was higher during the current year period primarily due to the growth in the balance of finance receivables, net of deferred revenue of $114.9 million, as well as being amplified with a decrease in sales of $33.9 million compared to the prior year period. An increase in net charge-offs also contributed to the higher provision. Net charge-offs as a percentage of average finance receivables increased to 6.8% for the three months ended January 31, 2024 compared to the prior year period of 5.9%. The Company experienced an increase in both the frequency and severity of losses. Severity was driven by longer contract terms and lower recovery values.
Interest expense as a percentage of sales increased to 7.0% for the three months ended January 31, 2024, compared to 3.6% for the prior year period. In dollar terms, interest expense increased $7.0 million due to increasing interest rates and an increase in the average borrowings of approximately $145.2 million during the three-month period ended January 31, 2024.
Nine months ended January 31, 2024 vs. Nine months ended January 31, 2023
Consolidated Operations
(Operating Statement Dollars in Thousands)
|
% Change |
As a % of Sales |
|||||||||||||||||||
|
Nine Months Ended |
2024 |
Nine Months Ended |
||||||||||||||||||
|
2024 |
2023 |
2023 |
2024 |
2023 |
||||||||||||||||
|
Revenues: |
||||||||||||||||||||
|
Sales |
$ | 854,170 | $ | 869,775 | (1.8 | )% | 100.0 | % | 100.0 | % | ||||||||||
|
Interest income |
175,051 | 143,690 | 21.8 | 20.5 | 16.5 | |||||||||||||||
|
Total |
1,029,221 | 1,013,465 | 1.6 | 120.5 | 116.5 | |||||||||||||||
|
Costs and expenses: |
||||||||||||||||||||
|
Cost of sales, excluding depreciation shown below |
560,692 | 578,547 | (3.1 | ) | 65.6 | 66.5 | ||||||||||||||
|
Selling, general and administrative |
134,895 | 130,881 | 3.1 | 15.8 | 15.0 | |||||||||||||||
|
Provision for credit losses |
321,300 | 250,719 | 28.2 | 37.6 | 28.8 | |||||||||||||||
|
Interest expense |
47,587 | 25,460 | 86.9 | 5.6 | 2.9 | |||||||||||||||
|
Depreciation and amortization |
5,101 | 3,997 | 27.6 | 0.6 | 0.5 | |||||||||||||||
|
Loss on disposal of property and equipment |
359 | 320 | 12.2 | - | - | |||||||||||||||
|
Total |
1,069,934 | 989,924 | 8.1 | 125.3 | 113.8 | |||||||||||||||
|
Pretax (loss) income |
$ | (40,713 | ) | $ | 23,541 | (4.8 | )% | 2.7 | % | |||||||||||
|
Operating Data: |
||||||||||||||||||||
|
Retail units sold |
42,738 | 45,929 | ||||||||||||||||||
|
Average stores in operation |
154 | 154 | ||||||||||||||||||
|
Average units sold per store per month |
30.8 | 33.1 | ||||||||||||||||||
|
Average retail sales price |
$ | 19,062 | $ | 18,059 | ||||||||||||||||
|
Gross profit per retail unit |
$ | 6,867 | $ | 6,341 | ||||||||||||||||
|
Same store revenue change |
1.0 | % | 18.3 | % | ||||||||||||||||
|
Period End Data: |
||||||||||||||||||||
|
Stores open |
154 | 157 | ||||||||||||||||||
|
Accounts over 30 days past due |
3.3 | % | 3.7 | % | ||||||||||||||||
Revenues increased by approximately $15.8 million, or 1.6%, for the nine months ended January 31, 2024 as compared to the same period in the prior fiscal year. The increase resulted from revenue growth at dealerships that operated a full nine months in both the current and prior year period ($9.8 million) and revenue growth from dealerships opened or acquired during or after the prior year quarter ($11.7 million), partially offset by dealerships closed after the prior year quarter ($5.7 million). Revenue growth was primarily related to a 21.8% increase in interest income and a 5.6% increase in the average retail sales price, partially offset by a 6.9% decrease in retail units sold. Interest income increased approximately $31.4 million for the nine months ended January 31, 2024, as compared to the same period in the prior fiscal year, due to the $220.2 million increase in average finance receivables.
Cost of sales, as a percentage of sales, decreased to 65.6% for the nine months ended January 31, 2024 compared to 66.5% for the same period of the prior fiscal year, resulting in a gross margin as a percentage of sales of 34.4% for the current year period compared to 33.5% for the prior year period. On a dollar basis, our gross margin per retail unit sold increased by $526 for the nine months ended January 31, 2024 compared to the same period in the prior year. The average retail sales price for the nine months ended January 31, 2024 was $19,062, an increase of $1,003 or 5.6% over the prior year period. The primary driver of the decrease in cost of sales was a decrease in wholesale losses and our continued focus on inventory efficiencies in procurement, remarketing, and repairs.
Selling, general and administrative expenses, as a percentage of sales, were 15.8% for the nine months ended January 31, 2024, an increase of 0.8% from the same period of the prior fiscal year. In dollar terms, overall selling, general and administrative expenses increased approximately $4.0 million in the nine months ended January 31, 2024, compared to the same period of the prior fiscal year. The increase primarily relates to the Company’s investments in several areas including senior management, inventory procurement and management, customer experience and digital efforts. Increased collections costs due primarily to the higher frequency of repossessions, the addition of a new dealership through acquisition since last year and the continuing impact of general inflation contributed to the remaining increase. The Company continues to focus on controlling costs, while at the same time ensuring a solid infrastructure to support a growing customer base with a high level of support for its customers.
Provision for credit losses as a percentage of sales was 37.6% for the nine months ended January 31, 2024 compared to 28.8% for the nine months ended January 31, 2023. Net charge-offs as a percentage of average finance receivables were 20.0% for the nine months ended January 31, 2023 and 16.9% for the prior year period. The frequency of losses accounted for over 60% of the credit loss increase. Severity was also higher due to the longer terms and lower recovery values. Rapid vehicle depreciation exhibited last year caused some of the loans originated in calendar years 2021 and 2022 to experience higher frequency and severity of loss. The majority of these loan pools have been paid off at this point in their life cycle. The Company has increased the allowance for credit losses rate from 23.91% at April 30, 2023 to 25.74% at January 31, 2024.
Interest expense as a percentage of sales increased to 5.6% for the nine months ended January 31, 2024, compared to 2.9% for the prior year period. In dollar terms, interest expense increased $22.1 million due to increasing interest rates and an increase in the average borrowings of approximately $178.1 million during the nine-month period ended January 31, 2024. Approximately 65% of the increase in interest expense was related to the increase in rates over the same period of the prior fiscal year.
Financial Condition
The following table sets forth the major balance sheet accounts of the Company as of the dates specified (in thousands):
|
January 31, 2024 |
April 30, 2023 |
|||||||
|
Assets: |
||||||||
|
Finance receivables, net |
$ | 1,085,772 | $ | 1,063,460 | ||||
|
Inventory |
109,313 | 109,290 | ||||||
|
Income tax receivable, net |
814 | 9,259 | ||||||
|
Property and equipment, net |
60,893 | 61,682 | ||||||
|
Liabilities: |
||||||||
|
Accounts payable and accrued liabilities |
52,853 | 55,108 | ||||||
|
Deferred revenue |
118,413 | 120,469 | ||||||
|
Deferred tax liabilities, net |
20,348 | 39,315 | ||||||
|
Non-recourse notes payable |
684,688 | 471,367 | ||||||
|
Revolving line of credit |
55,374 | 167,231 | ||||||
Finance receivables, net, have increased 2.1% and 7.2% since April 30, 2023 and January 31, 2023, respectively, while revenues have grown 1.6% compared to the prior year period. This is consistent with the historical pattern of the growth in finance receivables slightly exceeding overall revenue growth on an annual basis due to overall term length increases. The growth rate of finance receivables, net, has started to normalize (only 50 basis points higher than overall revenue growth), and management expects it to continue to normalize as the economic environment improves.
During the first nine months of fiscal 2024, inventory increased by $23,000 compared to inventory at April 30, 2023. The stabilization of inventory reflects the Company’s initiatives around inventory life cycle efficiencies from procurement, reconditioning, wholesale efforts and repairs after the sale. Annualized inventory turns remained relatively consistent for the current year quarter at 5.8 versus the prior year’s third quarter at 5.9.
Property and equipment, net, decreased by $789,000 at January 31, 2024 as compared to property and equipment, net, at April 30, 2023. The Company incurred $4.9 million in expenditures during the first nine months of fiscal 2024 primarily related to remodeling or relocating existing locations in order to support growth. The Company incurred $5.1 million in depreciation expense during the first nine months of fiscal 2024.
Accounts payable and accrued liabilities decreased by $2.3 million during the first nine months of fiscal 2024 as compared to accounts payable and accrued liabilities at April 30, 2023, related primarily to the decreased selling, general and administrative expenditures in the most recent quarter.
Income taxes receivable, net, was $814,000 at January 31, 2024 compared to income taxes receivable, net, of $9.3 million at April 30, 2023, primarily due applying overpayments of taxes towards current year tax liabilities and refunds of overpaid taxes on prior year returns.
Deferred revenue decreased $2.1 million at January 31, 2024 as compared to April 30, 2023, primarily resulting from lower ancillary product sales over the recent months.
Deferred income tax liabilities, net, decreased approximately $19 million at January 31, 2024 as compared to April 30, 2023, due primarily to a $13.5 million current year net operating loss.
The Company has completed two asset-backed securitization offerings of non-recourse notes during fiscal 2024 in January 2024 and in July 2023 in aggregate principal amounts of $360.3 million and $250.0 million with weighted average fixed coupon rates of 8.8% and 9.5% per annum and scheduled maturities through June 20, 2030 and January 21, 2031, respectively. The net proceeds of these issuances were used to pay outstanding debt under the Company’s revolving credit facilities, provide additional operating liquidity, and make the initial deposits into collection and reserve accounts for the benefit of noteholders. See Note F for further details on these non-recourse notes payable and the revolving line of credit.
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) funds available from asset-backed securitization offerings, (iv) income taxes, (v) capital expenditures, and (vi) 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. The Company also utilizes the securitization market to increase its borrowing capacities, with issuances of asset-backed non-recourse notes which may cause the revolving line of credit to fluctuate between securitization issuances. The overall increase in total borrowings during the third quarter of fiscal 2024 was made to support an increase in finance receivables, with longer terms, and a growing customer base. This was partially offset by the payoff in December 2023 of the April 2022 asset-backed notes. In the first nine months of fiscal 2024, the Company funded finance receivables growth of $55.5 million, inventory growth of $23,000, and capital expenditures of $4.9 million with income from operations and a $75.0 million increase in total debt, net of cash.
Liquidity and Capital Resources
The following table sets forth certain summarized historical information with respect to the Company’s Condensed Consolidated Statements of Cash Flows (in thousands):
|
Nine Months Ended |
||||||||
|
2024 |
2023 |
|||||||
|
Operating activities: |
||||||||
|
Net (loss) income |
$ | (31,819 | ) | $ | 18,344 | |||
|
Provision for credit losses |
321,300 | 250,719 | ||||||
|
Losses on claims for accident protection plan |
24,480 | 17,717 | ||||||
|
Depreciation and amortization |
5,101 | 3,997 | ||||||
|
Stock based compensation |
2,882 | 4,154 | ||||||
|
Finance receivable originations |
(794,477 | ) | (841,445 | ) | ||||
|
Finance receivable collections |
324,703 | 308,671 | ||||||
|
Inventory |
103,451 | 76,933 | ||||||
|
Accounts payable and accrued liabilities |
(5,824 | ) | 6,760 | |||||
|
Deferred accident protection plan revenue |
(1,926 | ) | 13,987 | |||||
|
Deferred service contract revenue |
(130 | ) | 17,565 | |||||
|
Income taxes, net |
8,232 | (6,632 | ) | |||||
|
Deferred income taxes |
(18,967 | ) | 6,884 | |||||
|
Accrued interest on finance receivables |
(1,255 | ) | (1,323 | ) | ||||
|
Other |
1,077 | (287 | ) | |||||
|
Total |
(63,172 | ) | (123,956 | ) | ||||
|
Investing activities: |
||||||||
|
Purchase of property and equipment |
(4,864 | ) | (19,002 | ) | ||||
|
Other |
(4,465 | ) | (5,415 | ) | ||||
|
Total |
(9,329 | ) | (24,417 | ) | ||||
|
Financing activities: |
||||||||
|
Revolving credit facilities, net |
(112,522 | ) | (17,599 | ) | ||||
|
Non-recourse notes payable, net |
215,890 | 190,849 | ||||||
|
Change in cash overdrafts |
2,183 | 3,795 | ||||||
|
Debt issuance costs |
(5,892 | ) | (2,001 | ) | ||||
|
Purchase of common stock |
(336 | ) | (5,196 | ) | ||||
|
Dividend payments |
(30 | ) | (30 | ) | ||||
|
Exercise of stock options and issuance of common stock |
(237 | ) | 1,438 | |||||
|
Total |
99,056 | 171,256 | ||||||
|
Increase in cash, cash equivalents, and restricted cash |
$ | 26,555 | $ | 22,883 | ||||
The primary drivers of cash flows include (i) top line sales, (ii) interest income on finance receivables, (iii) gross margin percentages on vehicle sales, and (iv) credit losses, a significant portion of which relates to the collection of principal on finance receivables. Historically, most or all of the cash generated from operations has been used to fund finance receivables growth, capital expenditures, and common stock repurchases. To the extent finance receivables grow, capital expenditures and common stock repurchases exceed income from operations, we have historically increased our borrowings under our revolving credit facilities and more recently through the securitization market.
Cash flows used in operating activities for the nine months ended January 31, 2024 compared to the same period in the prior fiscal year decreased primarily as a result of an increase in the provision for credit losses, a decrease in finance receivable originations and an increase in inventory acquired in repossessions, partially offset by a decrease in deferred income taxes and a net loss. Finance receivables, net, increased by $22.3 million from April 30, 2023 to January 31, 2024.
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 generally 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 vehicle 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 vehicle sales, particularly domestic brands, lead to decreased supply in the used vehicle 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.
Sustained macro-economic pressures affecting our customers have helped keep demand high in recent years for the types of vehicles we purchase. This strong demand, coupled with modest levels of new vehicle sales in recent years, have led to a generally ongoing tight supply of used vehicles available to the Company in both quality and quantity. Wholesale prices have begun to soften but remain high by historical standards. The Company expects the tight used vehicle supply and strong demand for the types of vehicles we purchase to continue to keep purchase costs and resulting sales prices elevated for the short-term but anticipates that continuing strong wage increases for our customers will cause affordability to improve gradually over the next couple of years.
The Company has devoted significant efforts to improving its purchasing processes to ensure adequate supply at appropriate prices, including expanding its purchasing territories to larger cities in close proximity to its dealerships and forming relationships with reconditioning partners to reduce purchasing costs. The Company has also increased the level of accountability for its purchasing agents including updates to sourcing and pricing guidelines. The Company continues to build relationships with national vendors that can supply a large quantity of high-quality vehicles.
The Company’s liquidity is also impacted by our credit losses. Macro-economic factors such as unemployment levels and general inflation can significantly affect our collection results and ultimately credit losses. The recent inflationary environment, with rising costs of non-discretionary items, such as groceries and gasoline, has negatively impacted our customers’ ability to make payments on their vehicles and resulted in increased charge-offs in recent periods and may continue to impact customers’ ability to make their vehicle payments in the near term. The Company has made improvements to its business processes within the last few years to strengthen controls and provide stronger infrastructure to support its collections efforts. The Company continues to strive to reduce credit losses in spite of the current economic challenges and continued competitive pressures by improving deal structures. 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 January 31, 2024, 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 so long as either: (a) the aggregate amount of repurchases after September 30, 2021 does not exceed $50 million, net of proceeds received from the exercise of stock options and the total availability under the credit facilities is equal to or greater than 20% of the sum of the borrowing bases, in each case after giving effect to such repurchases (repurchases under this item are excluded from fixed charges for covenant calculations), 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 Company’s stock repurchases, at least 12.5% of the aggregate funds committed under the credit facilities remains available. Thus, although the Company does routinely repurchase stock, the Company is limited in its ability to pay dividends or make other distributions to its shareholders without the consent of the Company’s lenders.
At January 31, 2024, the Company had approximately $4.2 million of cash on hand and approximately an additional $125.6 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 long-term basis, the Company expects its principal sources of liquidity to consist of income from operations, borrowings under revolving credit facilities or fixed interest term loans and proceeds from the issuance of non-recourse asset-backed notes. The Company’s revolving credit facilities mature in September 2025 and the Company expects that it will be able to renew or refinance its revolving credit facilities on or before the date they mature. The Company continues to access the securitization market, with its most recent issuance in January 2024. The Company expects that it will continue to access this market in diversifying and growing the business. Furthermore, while the Company has no other specific plans to issue further 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 fixed assets of approximately $10 million in the next 12 months as we complete facility updates and general fixed asset requirements, (iii) fund dealership acquisitions as opportunities arise on terms acceptable to the Company, (iv) repurchase shares of common stock when favorable conditions exist and (v) 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.
Off-Balance Sheet Arrangements
The Company has two standby letters of credit relating to insurance policies totaling $3.9 million at January 31, 2024.
Other than its letters of credit, the Company is not a party to any off-balance sheet arrangement that management believes is reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Related Finance Company Contingency
Car-Mart of Arkansas and Colonial do not meet the affiliation standard for filing consolidated income tax returns, and as such they file separate federal and state income tax returns. Car-Mart of Arkansas routinely sells its finance receivables to Colonial at what the Company believes to be fair market value and is able to take a tax deduction at the time of sale for the difference between the tax basis of the receivables sold and the sales price. These types of transactions, based upon facts and circumstances, have been permissible under the provisions of the Internal Revenue Code as described in the Treasury Regulations. For financial accounting purposes, these transactions are eliminated in consolidation and a deferred income tax liability has been recorded for this timing difference. The sale of finance receivables from Car-Mart of Arkansas to Colonial provides certain legal protection for the Company’s finance receivables and, principally because of certain state apportionment characteristics of Colonial, also has the effect of reducing the Company’s overall effective state income tax rate by approximately 250 basis points. The actual interpretation of the Regulations is in part a facts and circumstances matter. The Company believes it satisfies the material provisions of the Regulations. Failure to satisfy those provisions could result in the loss of a tax deduction at the time the receivables are sold and have the effect of increasing the Company’s overall effective income tax rate as well as the timing of required tax payments.
The Company’s policy is to recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no accrued penalties or interest as of January 31, 2024.
Critical Accounting Estimates
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.
During the second quarter of the 2024 fiscal year, the Company implemented third-party software to assist in calculating the Company’s allowance for credit losses. After implementation, the Company’s quantitative portion of the allowance for credit losses is measured using an undiscounted cash flow (“CF”) model, whereby the undiscounted cash flows are adjusted by a prepayment rate and then the loss rate is applied and compared to the amortized cost basis of finance receivables to reflect management’s estimate of expected credit losses. The CF model is based on relevant installment sale contract level characteristics of the Company’s finance receivables, such as contract terms and interest rates, as well as the following assumptions:
|
● |
a historical loss period, which represents a full economic credit cycle utilizing loss experience, to calculate the historical loss rate; and |
|
● |
expected prepayment rates based on our historical experience. |
The Company’s allowance for credit losses also considers qualitative factors not captured within the CF modeled results such as changes in underwriting and collection practices, economic trends, changes in volume and terms of installment sales contracts, credit quality trends, installment sale contract review results, collateral trends, and concentrations of credit. The Company’s qualitative factors incorporate a macroeconomic variable forecast of inflation over a reasonable and supportable forecast period of one year that affects its customers’ non-discretionary income and ability to repay. The reasonable and supportable forecast period of one year is based on management’s current review of the reliability of extended forecasts and is applied as an adjustment to the historical loss rate.
The Company maintains an allowance for credit losses on an aggregate basis at a level it considers sufficient to cover estimated losses expected to be incurred on the portfolio at the measurement date in the collection of its finance receivables currently outstanding. At January 31, 2024, the weighted average contract term was 47.6 months with 35.8 months remaining. The allowance for credit losses at January 31, 2024 of $335.1 million, was 25.74% of the principal balance in finance receivables of $1.4 billion, less unearned accident protection plan revenue of $51.1 million and unearned service contract revenue of $67.3 million, less APP claims of $9.1 million.
The allowance for credit losses is a critical accounting estimate for the following reasons:
|
● |
estimates relating to the allowance for credit losses require management to project future loan performance, including cash flows, prepayments, and charge-offs; |
|
|
● |
the allowance for credit losses is influenced by factors outside of management’s control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions including, but not limited to, inflation; and |
|
|
● |
judgment is required to determine whether the model used to generate the allowance for credit losses produces results that appropriately reflect a current estimate of lifetime expected credit losses. |
Because management’s estimate of the allowance for credit losses involves a high degree of judgment, such as the subjectivity of the assumptions used, there is uncertainty inherent in such estimates. Changes in these estimates could significantly impact the allowance and provision for credit losses.
Recent Accounting Pronouncements
Occasionally, new accounting pronouncements are issued by the FASB or other standard-setting bodies, which the Company will adopt as of the specified effective date. Unless otherwise discussed, the Company believes the implementation of recently issued standards which are not yet effective will not have a material impact on its consolidated financial statements upon adoption.
Adopted in Current Period
In March 2022, the FASB issued an accounting pronouncement (ASU 2022-02) related to troubled debt restructurings (“TDRs”) and vintage disclosures for financing receivables. The amendments in this update eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current period gross write-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. In regard to loan modifications, management notes that the Company primarily modifies a customer’s installment sale contract to allow for insignificant payment delays. This type of modification is generally done to account for payday changes for the customer and minor vehicle repairs.
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. The Company expects this pattern to continue in future years.
If conditions arise that impair vehicle sales during the first or fourth fiscal quarters, the adverse effect on the Company’s revenues and operating results for the year could be disproportionately large.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk on its financial instruments from changes in interest rates. In particular, the Company has historically had exposure to changes in the federal primary credit rate and has exposure to changes in the prime interest rate of its lender. The Company does not use financial instruments for trading purposes but has in the past entered into an interest rate swap agreement to manage interest rate risk.
Interest rate risk. The Company’s exposure to changes in interest rates relates primarily to its debt obligations. The Company is exposed to changes in interest rates as a result of its revolving credit facilities, and the interest rates charged to the Company under its credit facilities fluctuate based on its primary lender’s base rate of interest. The Company had an outstanding balance on its revolving line of credit of $55.4 million at January 31, 2024. The impact of a 1% increase in interest rates on this amount of debt would result in increased annual interest expense of approximately $554,000 and a corresponding decrease in net income before income tax.
The Company’s earnings are impacted by its net interest income, which is the difference between the income earned on interest-bearing assets and the interest paid on interest-bearing notes payable. During the third quarter, the Company increased the interest rate by 0.25%. The Company’s finance receivables now carry a fixed annual interest rate of 18.25% (up from 18.0%) for all states, except Arkansas at 16.75% (which is subject to a usury cap of 17.0%), Illinois (remains at 19.5% – 21.5%), and Smart Auto dealerships in Tennessee (which originate at up to 23.0%), based on the Company’s contract interest rate as of the contract origination date, while its revolving credit facilities contain variable interest rates that fluctuate with market interest rates.
Item 4. Controls and Procedures
|
a) |
Evaluation of Disclosure Controls and Procedures |
Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of January 31, 2024. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of January 31, 2024. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), to allow timely decisions regarding required disclosure.
|
b) |
Changes of Disclosure Controls and Procedures |
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
In the ordinary course of business, the Company has become a defendant in various types of legal proceedings. While the outcome of these proceedings cannot be predicted with certainty, the Company does not expect the final outcome of any of these proceedings, individually or in the aggregate, to have a material adverse effect on the Company’s financial position, results of operations or cash flows.
There have been no material changes to the Company’s risk factors as previously disclosed in Item 1A to Part I of the Company’s Form 10-K for the fiscal year ended April 30, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company is authorized to repurchase shares of its common stock under its common stock repurchase program. On December 14, 2020, the Board of Directors authorized the repurchase of up to an additional one million shares along with the balance remaining under its previous authorization approved and announced on November 16, 2017. No shares were repurchased under the Company’s stock repurchase program during the third quarter of fiscal 2024.
The Company has not historically issued any dividends and does not expect to do so in the foreseeable future. Payment of cash dividends in the future will be determined by the Company’s Board of Directors and will depend upon, among other things, the Company’s future earnings, operations, capital requirements and surplus, general financial condition, contractual restrictions that may exist, and such other factors as the Board of Directors may deem relevant. The Company is also limited in its ability to pay dividends or make other distributions to its shareholders without the consent of its lender. Please see “Liquidity and Capital Resources” under Item 2 of Part I for more information regarding this limitation.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosure
Not applicable.
During the three months ended January 31, 2024, of the Company’s directors or officers adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| America’s Car-Mart, Inc. | ||
| By: | /s/ Douglas Campbell | |
| Douglas Campbell | ||
| President and Chief Executive Officer | ||
| By: | /s/ Vickie D. Judy | |
| Vickie D. Judy | ||
| Chief Financial Officer | ||
| (Principal Financial Officer) | ||
Dated: March 11, 2024