UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31,
2015
Or
[ ] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________
to ________
Commission file number: 0-14939
AMERICA’S
CAR-MART, INC.
(Exact name of registrant as specified in
its charter)
Texas |
63-0851141 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
802 Southeast Plaza Ave., Suite 200,
Bentonville, Arkansas 72712
(Address of principal executive offices)
(zip code)
(479) 464-9944
(Registrant's telephone number, including
area code)
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. Yes ý No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ý No
o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
Accelerated filer ý |
Non-accelerated filer o |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding
of each of the issuer’s classes of common stock, as of the latest practicable date.
|
|
Outstanding at |
|
|
Title of Each Class |
March 3,
2015 |
|
|
Common stock, par value $.01 per share |
8,575,248
|
|
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements | |
America ’s Car-Mart, Inc. |
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands except share and per share amounts)
| |
January 31, 2015 | |
April 30, 2014 |
Assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 1,564 | | |
$ | 289 | |
Accrued interest on finance receivables | |
| 1,763 | | |
| 1,830 | |
Finance receivables, net | |
| 329,803 | | |
| 293,299 | |
Inventory | |
| 38,248 | | |
| 30,115 | |
Prepaid expenses and other assets | |
| 4,067 | | |
| 3,496 | |
Goodwill | |
| 355 | | |
| 355 | |
Property and equipment, net | |
| 33,896 | | |
| 33,913 | |
| |
| | | |
| | |
Total Assets | |
$ | 409,696 | | |
$ | 363,297 | |
| |
| | | |
| | |
| |
| | | |
| | |
Liabilities, mezzanine equity and equity: | |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 13,179 | | |
$ | 8,542 | |
Deferred payment protection plan revenue | |
| 15,188 | | |
| 13,233 | |
Deferred service contract revenue | |
| 9,582 | | |
| 4,234 | |
Accrued liabilities | |
| 11,858 | | |
| 10,824 | |
Income taxes payable, net | |
| 1,649 | | |
| 782 | |
Deferred income tax liabilities, net | |
| 19,058 | | |
| 15,244 | |
Revolving credit facilities | |
| 112,560 | | |
| 97,032 | |
Total liabilities | |
| 183,074 | | |
| 149,891 | |
| |
| | | |
| | |
Commitments and contingencies (Note J) | |
| | | |
| | |
| |
| | | |
| | |
Mezzanine equity: | |
| | | |
| | |
Mandatorily redeemable preferred stock | |
| 400 | | |
| 400 | |
| |
| | | |
| | |
Equity: | |
| | | |
| | |
Preferred stock, par value $.01 per share, 1,000,000 shares authorized; none issued or outstanding | |
| - | | |
| - | |
Common stock, par value $.01 per share, 50,000,000 shares authorized; 12,609,890 and 12,452,809 issued at January 31, 2015 and April 30, 2014, respectively, of which 8,571,248 and 8,735,842 were outstanding at January 31, 2015 and April 30, 2014, respectively | |
| 126 | | |
| 125 | |
Additional paid-in capital | |
| 60,367 | | |
| 55,734 | |
Retained earnings | |
| 286,558 | | |
| 264,348 | |
Less: Treasury stock, at cost, 4,038,642 and 3,716,967 shares at January 31, 2015 and April 30, 2014, respectively | |
| (120,929 | ) | |
| (107,301 | ) |
Total stockholders' equity | |
| 226,122 | | |
| 212,906 | |
Non-controlling interest | |
| 100 | | |
| 100 | |
Total equity | |
| 226,222 | | |
| 213,006 | |
| |
| | | |
| | |
Total Liabilities, Mezzanine Equity and Equity | |
$ | 409,696 | | |
$ | 363,297 | |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Condensed Consolidated Statements of Operations | |
| America’s Car-Mart, Inc. | |
(Unaudited)
(Dollars in thousands except share and per share amounts)
| |
Three Months Ended January 31, | |
Nine Months Ended January 31, |
| |
2015 | |
2014 | |
2015 | |
2014 |
Revenues: | |
| | | |
| | | |
| | | |
| | |
Sales | |
$ | 116,406 | | |
$ | 108,400 | | |
$ | 349,300 | | |
$ | 325,314 | |
Interest and other income | |
| 15,094 | | |
| 14,188 | | |
| 43,410 | | |
| 41,249 | |
Total revenue | |
| 131,500 | | |
| 122,588 | | |
| 392,710 | | |
| 366,563 | |
| |
| | | |
| | | |
| | | |
| | |
Costs and expenses: | |
| | | |
| | | |
| | | |
| | |
Cost of sales, excluding depreciation shown below | |
| 66,672 | | |
| 62,092 | | |
| 200,299 | | |
| 187,537 | |
Selling, general and administrative | |
| 21,139 | | |
| 19,650 | | |
| 62,615 | | |
| 59,045 | |
Provision for credit losses | |
| 30,206 | | |
| 36,776 | | |
| 89,453 | | |
| 91,602 | |
Interest expense | |
| 788 | | |
| 779 | | |
| 2,183 | | |
| 2,291 | |
Depreciation and amortization | |
| 935 | | |
| 835 | | |
| 2,782 | | |
| 2,407 | |
Loss on disposal of property and equipment | |
| - | | |
| 37 | | |
| 20 | | |
| 76 | |
Total costs and expenses | |
| 119,740 | | |
| 120,169 | | |
| 357,352 | | |
| 342,958 | |
| |
| | | |
| | | |
| | | |
| | |
Income before taxes | |
| 11,760 | | |
| 2,419 | | |
| 35,358 | | |
| 23,605 | |
| |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
| 4,299 | | |
| 949 | | |
| 13,118 | | |
| 8,789 | |
Net income | |
$ | 7,461 | | |
$ | 1,470 | | |
$ | 22,240 | | |
$ | 14,816 | |
| |
| | | |
| | | |
| | | |
| | |
Less: Dividends on mandatorily redeemable preferred stock | |
| (10 | ) | |
| (10 | ) | |
| (30 | ) | |
| (30 | ) |
Net income attributable to common stockholders | |
$ | 7,451 | | |
$ | 1,460 | | |
$ | 22,210 | | |
$ | 14,786 | |
| |
| | | |
| | | |
| | | |
| | |
Earnings per share: | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | 0.87 | | |
$ | 0.16 | | |
$ | 2.57 | | |
$ | 1.65 | |
Diluted | |
$ | 0.82 | | |
$ | 0.16 | | |
$ | 2.45 | | |
$ | 1.56 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 8,587,761 | | |
| 8,917,826 | | |
| 8,636,036 | | |
| 8,984,958 | |
Diluted | |
| 9,036,086 | | |
| 9,370,635 | | |
| 9,067,195 | | |
| 9,449,380 | |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Condensed Consolidated Statements of Cash Flows | |
| America’s Car-Mart, Inc. | |
(Unaudited)
(In thousands)
| |
Nine Months Ended January 31, |
Operating Activities: | |
2015 | |
2014 |
Net income | |
$ | 22,240 | | |
$ | 14,816 | |
Adjustments to reconcile net income to net cash used
in operating activities: | |
| | | |
| | |
Provision for credit losses | |
| 89,453 | | |
| 91,602 | |
Losses on claims for payment protection plan | |
| 7,840 | | |
| 6,745 | |
Depreciation and amortization | |
| 2,782 | | |
| 2,407 | |
Amortization of debt issuance costs | |
| 165 | | |
| 163 | |
Loss on disposal of property and equipment | |
| 20 | | |
| 76 | |
Stock based compensation | |
| 605 | | |
| 1,147 | |
Deferred income taxes | |
| 3,814 | | |
| (1,817 | ) |
Change in operating assets and liabilities: | |
| | | |
| | |
Finance receivable originations | |
| (334,769 | ) | |
| (308,330 | ) |
Finance receivable collections | |
| 168,784 | | |
| 155,481 | |
Accrued interest on finance receivables | |
| 67 | | |
| (136 | ) |
Inventory | |
| 24,055 | | |
| 31,427 | |
Prepaid expenses and other assets | |
| (736 | ) | |
| (868 | ) |
Accounts payable and accrued liabilities | |
| 6,756 | | |
| 912 | |
Deferred payment protection plan revenue | |
| 1,955 | | |
| 754 | |
Deferred service contract revenue | |
| 5,348 | | |
| 1,089 | |
Income taxes, net | |
| 1,824 | | |
| 3,028 | |
Excess tax benefit from share based compensation | |
| (957 | ) | |
| (120 | ) |
Net cash used in operating activities | |
| (754 | ) | |
| (1,624 | ) |
Investing Activities: | |
| | | |
| | |
Purchase of property and equipment | |
| (2,805 | ) | |
| (5,541 | ) |
Proceeds from sale of property and equipment | |
| 20 | | |
| 2 | |
Net cash used in investing activities | |
| (2,785 | ) | |
| (5,539 | ) |
Financing Activities: | |
| | | |
| | |
Exercise of stock options and warrants | |
| 2,927 | | |
| 719 | |
Excess tax benefit from share based compensation | |
| 957 | | |
| 120 | |
Issuance of common stock | |
| 145 | | |
| 152 | |
Purchase of common stock | |
| (13,628 | ) | |
| (8,739 | ) |
Dividend payments | |
| (30 | ) | |
| (30 | ) |
Debt issuance costs | |
| (256 | ) | |
| (200 | ) |
Change in cash overdrafts | |
| (1,085 | ) | |
| 149 | |
Proceeds from revolving credit facilities | |
| 268,840 | | |
| 237,263 | |
Payments on revolving credit facilities | |
| (253,056 | ) | |
| (222,287 | ) |
Net cash provided by financing activities | |
| 4,814 | | |
| 7,147 | |
Increase (decrease) in cash and cash equivalents | |
| 1,275 | | |
| (16 | ) |
Cash and cash equivalents, beginning of period | |
| 289 | | |
| 272 | |
Cash and cash equivalents, end of period | |
$ | 1,564 | | |
$ | 256 | |
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 two operating subsidiaries, America’s Car Mart, Inc., an Arkansas corporation (“Car-Mart of Arkansas”), and
Colonial Auto Finance, Inc., an Arkansas corporation (“Colonial”). Collectively, Car-Mart of Arkansas and Colonial
are referred to herein as “Car-Mart.” The Company primarily sells older model used vehicles and provides financing
for substantially all of its customers. Many of the Company’s customers have limited financial resources and would not qualify
for conventional financing as a result of limited credit histories or past credit problems. As of January 31, 2015, the Company
operated 138 dealerships located primarily in small cities throughout the South-Central United States.
B – Summary of Significant Accounting
Policies
General
The accompanying condensed
consolidated balance sheet as of April 30, 2014, which has been derived from audited financial statements, and the unaudited interim
condensed financial statements as of January 31, 2015 and 2014, 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 nine months
ended January 31, 2015 are not necessarily indicative of the results that may be expected for the year ending April 30, 2015. 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, 2014.
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company 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 under the current accounting guidance. The Company operates in the Integrated Auto Sales and Finance segment of the used
car market. In this industry, the nature of the sale and the financing of the transaction, financing processes, the type of customer
and the methods used to distribute the Company’s products and services, including the actual servicing of the contracts as
well as the regulatory environment in which the Company operates, all have similar characteristics. Each of our individual dealerships
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 one reportable segment.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the period. Actual results could
differ from those estimates. Significant estimates include, but are not limited to, the Company’s allowance for credit losses.
Concentration of Risk
The Company provides
financing in connection with the sale of substantially all of its vehicles. These sales are made primarily to customers residing
in Alabama, Arkansas, Georgia, Kentucky, Mississippi, Missouri, Oklahoma, Tennessee, and Texas, with approximately 32% of revenues
resulting from sales to Arkansas customers.
Periodically, the Company maintains cash in financial institutions in excess of the
amounts insured by the federal government. The Company’s revolving credit facilities mature in October 2017. The Company
expects that these credit facilities will be renewed or refinanced on or before the scheduled maturity dates.
Restrictions on Distributions/Dividends
The Company’s
revolving credit facilities generally limit distributions by the Company to its shareholders in order to repurchase the Company’s
common stock. The distribution limitations under the Credit Facilities allow the Company to repurchase the Company’s stock
so long as: either (a) the aggregate amount of such repurchases does not exceed $40 million beginning October 8, 2014 and the sum
of borrowing bases combined minus the principal balances of all revolver loans after giving effect to such repurchases is equal
to or greater than 30% of the sum of the borrowing bases, or (b) the aggregate amount of such repurchases does not exceed 75% of
the consolidated net income of the Company measured on a trailing twelve month basis; provided that immediately before and after
giving effect to the stock repurchases, at least 12.5% of the aggregate funds committed under the credit facilities remain available.
Thus, the Company is limited in the amount of dividends or other distributions it can make to its shareholders without the consent
of the Company’s lenders.
Cash Equivalents
The Company considers
all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.
Finance Receivables, Repossessions
and Charge-offs and Allowance for Credit Losses
The
Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts
typically carry interest rates ranging from 11% to 19% using the simple effective interest method including any deferred fees.
Contract origination costs are not significant. The installment sale contracts are not pre-computed contracts whereby borrowers
are obligated to pay back principal plus the full amount of interest that will accrue over the entire term of the contract. Finance
receivables are collateralized by vehicles sold and consist of contractually scheduled payments from installment contracts net
of unearned finance charges and an allowance for credit losses. Unearned finance charges represent the balance of interest receivable
to be earned over the entire term of the related installment contract, less the earned amount ($1.8 million at January 31,
2015 and at April 30, 2014), and as such, has been reflected as a reduction
to the gross contract amount in arriving at the principal balance in finance receivables. An account is considered delinquent
when a contractually scheduled payment has not been received by the scheduled payment date. 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 Consolidated Balance
Sheets. Delinquent contracts are addressed and either made current by the customer, which is the case in most situations, or the
vehicle is repossessed or written off if the collateral cannot be recovered quickly. Customer payments are set to match their pay-day
with approximately 75% of payments due on either a weekly or bi-weekly basis. The frequency of the payment due dates combined with
the declining value of collateral lead to prompt resolutions on problem accounts. Accounts are delinquent when the customer
is one day or more behind on their contractual payments. At January 31, 2015, 5.2% of the Company’s finance receivable
balances were 30 days or more past due compared to 5.8% at January 31, 2014.
Substantially all
of the Company’s automobile contracts involve contracts made to individuals with impaired or limited credit histories, or
higher debt-to-income ratios than permitted by traditional lenders. Contracts made with buyers who are restricted in their ability
to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher
losses than contracts made with buyers with better credit.
The Company strives
to keep its delinquency percentages low, and not to repossess vehicles. Accounts two days late are sent a notice in the mail. Accounts
three days late are contacted by telephone. Notes from each telephone contact are electronically maintained in the Company’s
computer system. 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. The Company attempts to resolve payment
delinquencies amicably prior to repossessing a vehicle. Periodically, the Company enters into contract modifications with its customers
to extend the payment terms. The Company only enters into a contract modification or extension if it believes such action will
increase the amount of monies the Company will ultimately realize on the customer’s account and that the customer will be
more likely to succeed in meeting their contractual obligations. 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. Other than the extension of additional
time, concessions are not granted to customers at the time of modifications. Modifications are minor and are made for pay-day 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 and on-line 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 receivable balance charged-off. On average, accounts are approximately
66 days past due at the time of charge-off. For previously charged-off accounts that are subsequently recovered, the amount of
such recovery is credited to the allowance for credit losses.
The Company maintains
an allowance for credit losses on an aggregate basis, as opposed to a contract-by-contract basis, at an amount it considers sufficient
to cover estimated losses inherent in the portfolio at the balance sheet date in the collection of its finance receivables currently
outstanding. The Company accrues an estimated loss as it is probable that the entire amount will not be collected and the amount
of the loss can be reasonably estimated in the aggregate. The allowance for credit losses is based primarily upon historical credit
loss experience, with consideration given to recent credit loss trends and changes in contract characteristics (i.e., average amount
financed and term), delinquency levels, collateral values, economic conditions and underwriting and collection practices. The allowance
for credit losses is periodically reviewed by management with any changes reflected in current operations. Although it is at least
reasonably possible that events or circumstances could occur in the future that are not presently foreseen which could cause actual
credit losses to be materially different from the recorded allowance for credit losses, the Company believes that it has given
appropriate consideration to all relevant factors and has made reasonable assumptions in determining the allowance for credit losses.
The calculation of the allowance for credit losses uses the following primary factors:
·
The number of units repossessed or charged-off as a percentage of total units financed over specific historical periods of time
from one year to five years.
·
The average net repossession and charge-off loss per unit during the last eighteen months, segregated by the number of months since
the contract origination date, and adjusted for the expected future average net charge-off loss per unit. Approximately 50% of
the charge-offs that will ultimately occur in the portfolio are expected to occur within 10-11 months following the balance sheet
date. The average age of an account at charge-off date is 11.3 months.
·
The timing of repossession and charge-off losses relative to the date of sale (i.e., how long it takes for a repossession or charge-off
to occur) for repossessions and charge-offs occurring during the last eighteen months.
A point estimate is
produced by this analysis which is then supplemented by any positive or negative subjective factors to arrive at an overall reserve
amount that management considers to be a reasonable estimate of losses inherent in the portfolio at the balance sheet date that
will be realized via actual charge-offs in the future. While challenging economic conditions can negatively impact credit losses,
the effectiveness of the execution of internal policies and procedures within the collections area and the competitive environment
on the lending side have historically had a more significant effect on collection results than macro-economic issues. The allowance
for credit losses at January 31, 2015 of $95.3 million was 23.8% of the principal balance in finance receivables of $425.1 million,
less unearned payment protection plan revenue of $15.2 million and unearned service contract revenue of $9.6 million. Previously
the allowance as a percentage of finance receivable principal balance, net of deferred payment protection plan revenue was 23.5%,
and did not include a reduction for the deferred service contract revenue. This change did not have a material impact on net income
or earnings per share and was not significant to any prior period.
In most states, the
Company offers retail customers who finance their vehicle the option of purchasing a payment protection plan product as an add-on
to the installment sale contract. This product contractually obligates the Company to cancel the remaining principal outstanding
for any contract where the retail customer has totaled the vehicle, as defined, or the vehicle has been stolen. The Company periodically
evaluates anticipated losses to ensure that if anticipated losses exceed deferred payment protection plan revenues, an additional
liability is recorded for such difference. No such liability was required at January 31, 2015 or 2014.
Inventory
Inventory consists of
used vehicles and is valued at the lower of cost or market on a specific identification basis. Vehicle reconditioning costs are
capitalized as a component of inventory. Repossessed vehicles and trade-in vehicles are recorded at fair value, which approximates
wholesale value. The cost of used vehicles sold is determined using the specific identification method.
Goodwill
Goodwill
reflects the excess of purchase price over the fair value of specifically identified net assets purchased. Goodwill and
intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests at the
Company’s year-end. The impairment tests are based on the comparison of the fair value of the reporting unit to the
carrying value of such unit. If the fair value of the reporting unit falls below its carrying value, the Company performs the
second step of the two-step goodwill impairment process to determine the amount, if any, that the goodwill is impaired. The
second step involves determining the fair value of the identifiable assets and liabilities and the implied goodwill. The
implied goodwill is compared to the carrying value of the goodwill to determine the impairment, if any. There was no
impairment of goodwill during fiscal 2014, and to date, there has been none in fiscal 2015.
Property and Equipment
Property and equipment
are stated at cost. Expenditures for additions, renewals 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 |
3 |
to |
7 |
years |
Leasehold improvements |
5 |
to |
15 |
years |
Buildings and improvements |
18 |
to |
39 |
years |
Property and equipment
are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying values of the impaired assets exceed the fair value of such assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Cash Overdraft
As checks are presented
for payment from the Company’s primary disbursement bank account, monies are automatically drawn against cash collections
for the day and, if necessary, are drawn against one of its revolving credit facilities. Any cash overdraft balance principally
represents outstanding checks, net of any deposits in transit that as of the balance sheet date had not yet been presented for
payment. Any cash overdraft balance is reflected in accrued liabilities on the Company’s Condensed Consolidated Balance Sheets.
Deferred Sales Tax
Deferred sales tax
represents a sales tax liability of the Company for vehicles sold on an installment basis in the states of Alabama and Texas. Under
Alabama and Texas law, for vehicles sold on an installment basis, the related sales tax is due as the payments are collected from
the customer, rather than at the time of sale. Deferred sales tax liabilities
are reflected in accrued liabilities on the Company’s Condensed Consolidated Balance Sheets.
Income Taxes
Income taxes are accounted
for under the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates expected to apply
in the years in which these temporary 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.
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 2012.
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, 2015 or April 30, 2014.
Revenue Recognition
Revenues are generated
principally from the sale of used vehicles, which in most cases includes a service contract and a payment protection plan product,
interest income and late fees earned on finance receivables. Revenues are net of taxes collected from customers and remitted to
government agencies. Cost of vehicle sales include costs incurred by the Company to prepare the vehicle for sale including license
and title costs, gasoline, transport services and repairs.
Revenues from the sale
of used vehicles are recognized when the sales contract is signed, the customer has taken possession of the vehicle and, if applicable,
financing has been approved. Revenues from the sale of service contracts are recognized ratably over the expected duration of the
product. Service contract revenues are included in sales and the related expenses are included in cost of sales. Payment protection
plan revenues are initially deferred and then recognized to income using the “Rule of 78’s” interest method over
the life of the contract so that revenues are recognized in proportion to the amount of cancellation protection provided. Payment
protection plan revenues are included in sales and related losses are included in cost of sales as incurred. Interest income is
recognized on all active finance receivable accounts using the simple effective interest method. Active accounts include all accounts
except those that have been paid-off or charged-off.
Sales consist of the following:
| |
Three Months Ended January 31, | |
Nine Months Ended January 31, |
(In thousands) | |
2015 | |
2014 | |
2015 | |
2014 |
Sales – used autos | |
$ | 103,002 | | |
$ | 97,171 | | |
$ | 311,039 | | |
$ | 290,221 | |
Wholesales – third party | |
| 4,175 | | |
| 3,855 | | |
| 13,734 | | |
| 13,078 | |
Service contract sales | |
| 5,101 | | |
| 3,758 | | |
| 13,084 | | |
| 11,386 | |
Payment protection plan revenue | |
| 4,128 | | |
| 3,616 | | |
| 11,443 | | |
| 10,629 | |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 116,406 | | |
$ | 108,400 | | |
$ | 349,300 | | |
$ | 325,314 | |
Revenues from late
fees were approximately $1.7 million and $1.6 million for the nine months ended January 31, 2015 and 2014, respectively. Late fees
are recognized when collected and are reflected in interest and other income. Finance receivables more than 90 days past due were
approximately $2.4 million at January 31, 2015 and 2014.
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.
Treasury Stock
The Company purchased
321,675 shares of its common stock for a total cost of $13.6 million during the first nine months of fiscal 2015 and 212,620 shares
for a total cost of $8.7 million during the first nine months of fiscal 2014. Treasury stock may be used for issuances under the
Company’s stock-based compensation plans or for other general corporate purposes.
Recent Accounting Pronouncements
Occasionally, new
accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting
bodies which the Company adopts as of the specified effective date. Unless otherwise discussed, the Company believes the impact
of recently issued standards which are not yet effective will not have a material impact on its consolidated financial statements
upon adoption.
Revenue Recognition.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes existing revenue
recognition guidance. The new guidance in ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer
of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of
revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized
from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual and interim periods beginning after December
15, 2016, using one of two retrospective application methods. The Company is currently evaluating the potential effects of the
adoption of this update on the consolidated financial statements.
Reclassifications
The Company has made reclassifications
to certain amounts in the accompanying Condensed Consolidated Balance Sheet as of April 30, 2014 to reclassify deferred service
contract revenue from accrued liabilities to deferred service contract revenue. The reclassification did not have an impact on
net income or earnings per share.
C – Finance Receivables
The Company originates
installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts typically include
interest rates ranging from 11% to 19% per annum, are collateralized by the vehicle sold and typically provide for payments over
periods ranging from 18 to 36 months. The weighted average interest rate for the portfolio was approximately 14.9% at January 31,
2015. The Company’s finance receivables are aggregated as one class of loans, which is sub-prime consumer automobile contracts.
The level of risks inherent in the Company’s financing receivables is managed as one homogeneous pool. The components of
finance receivables are as follows:
(In thousands) | |
January 31, 2015 | |
April 30, 2014 |
| |
| | | |
| | |
Gross contract amount | |
$ | 481,945 | | |
$ | 432,327 | |
Less unearned finance charges | |
| (56,869 | ) | |
| (52,995 | ) |
Principal balance | |
| 425,076 | | |
| 379,332 | |
Less allowance for credit losses | |
| (95,273 | ) | |
| (86,033 | ) |
| |
| | | |
| | |
Finance receivables, net | |
$ | 329,803 | | |
$ | 293,299 | |
Changes in the finance
receivables, net are as follows:
| |
Nine Months Ended January 31, |
(In thousands) | |
2015 | |
2014 |
Balance at beginning of period | |
$ | 293,299 | | |
$ | 288,049 | |
Finance receivable originations | |
| 334,769 | | |
| 308,330 | |
Finance receivable collections | |
| (168,784 | ) | |
| (155,481 | ) |
Provision for credit losses | |
| (89,453 | ) | |
| (91,602 | ) |
Losses on claims for payment protection plan | |
| (7,840 | ) | |
| (6,745 | ) |
Inventory acquired in repossession and payment protection plan claims | |
| (32,188 | ) | |
| (32,842 | ) |
| |
| | | |
| | |
Balance at end of period | |
$ | 329,803 | | |
$ | 309,709 | |
Changes in the finance
receivables allowance for credit losses are as follows:
| |
Nine Months Ended January 31, |
(In thousands) | |
2015 | |
2014 |
| |
|
Balance at beginning of period | |
$ | 86,033 | | |
$ | 75,345 | |
Provision for credit losses | |
| 89,453 | | |
| 91,602 | |
Charge-offs, net of recovered collateral | |
| (80,213 | ) | |
| (76,005 | ) |
| |
| | | |
| | |
Balance at end of period | |
$ | 95,273 | | |
$ | 90,942 | |
The factors which
influenced management’s judgment in determining the amount of the additions to the allowance charged to provision for credit
losses are described below:
The level of actual
charge-offs, net of recovered collateral, is the most important factor in determining the charges to the provision for credit losses.
This is due to the fact that once a contract becomes delinquent the account is either made current by the customer, the vehicle
is repossessed or the account is written off if the collateral cannot be recovered. Net charge-offs as a percentage of average
finance receivables increased slightly to 19.9% for the nine months ended January 31, 2015 compared to 19.8% for the same period
in the prior year. The increase in net charge-offs for the first nine months of fiscal 2015 resulted primarily from the increased
severity of losses resulting from lower wholesale values at repossession. The decrease in the current year provision compared to
the prior year quarter is primarily the result of the increase in our provision percentage applied to the growth in finance receivables,
net at January 31, 2014 resulting in a $7.7 million increase in the provision.
Collections and delinquency
levels can have a significant effect on additions to the allowance and are reviewed frequently. Collections as a percentage of
average finance receivables were 41.9% for the nine months ended January 31, 2015 compared to 40.5% for the prior year period.
The increase in collections as a percentage of average finance receivables was primarily due to lower delinquencies and lower contract
modifications, partially offset by the slightly longer overall contract term as compared to the first nine months of the prior
year. Delinquencies greater than 30 days were 5.2% for January 31, 2015 and 5.8% at January 31, 2014.
Macro-economic
factors, the competitive environment, and more importantly, proper execution of operational policies and procedures can have a
significant effect on additions to the allowance charged to the provision. Higher unemployment levels, higher gasoline prices and
higher prices for staple items can potentially have a significant effect. While the decreasing gas prices provided some relief
to our customers during the second and third quarters of fiscal 2015, we believe our customers continue to be under significant
pressure due to the persistent difficult macro-economic environment for the Company’s customer base.
We expect these conditions to continue in the near to mid-term future. The Company continues to focus on operational improvements
within the collections area such as credit reporting for customers and implementation of GPS technology on vehicles sold.
Credit quality information
for finance receivables is as follows:
(Dollars in thousands) | |
January 31, 2015 | |
April 30, 2014 | |
January 31, 2014 |
| |
| |
| |
| |
| |
| |
|
| |
| Principal Balance | | |
| Percent of Portfolio | | |
| Principal Balance | | |
| Percent of Portfolio | | |
| Principal Balance | | |
| Percent of Portfolio | |
Current | |
$ | 352,969 | | |
| 83.03 | % | |
$ | 300,478 | | |
| 79.21 | % | |
$ | 321,511 | | |
| 80.24 | % |
3 - 29 days past due | |
| 49,944 | | |
| 11.75 | % | |
| 62,108 | | |
| 16.38 | % | |
| 55,873 | | |
| 13.95 | % |
30 - 60 days past due | |
| 14,972 | | |
| 3.52 | % | |
| 10,926 | | |
| 2.88 | % | |
| 14,620 | | |
| 3.65 | % |
61 - 90 days past due | |
| 4,827 | | |
| 1.14 | % | |
| 4,665 | | |
| 1.23 | % | |
| 6,221 | | |
| 1.55 | % |
> 90 days past due | |
| 2,364 | | |
| 0.56 | % | |
| 1,155 | | |
| 0.30 | % | |
| 2,426 | | |
| 0.61 | % |
Total | |
$ | 425,076 | | |
| 100.00 | % | |
$ | 379,332 | | |
| 100.00 | % | |
$ | 400,651 | | |
| 100.00 | % |
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. The Saturday end date for the quarter ended January 31, 2015 contributed
to the improvement in the aging of the portfolio, along with the improved collections.
Substantially all
of the Company’s automobile contracts involve contracts made to individuals with impaired or limited credit histories, or
higher debt-to-income ratios than permitted by traditional lenders. Contracts made with buyers who are restricted in their ability
to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher
losses than contracts made with buyers with better credit. The Company monitors contract term length, down payment percentages,
and collections for credit quality indicators.
| |
Nine Months Ended January 31, |
| |
2015 | |
2014 |
| |
| |
|
Principal collected as a percent of average finance receivables | |
| 41.9 | % | |
| 40.5 | % |
Average down-payment percentage | |
| 6.2 | % | |
| 5.6 | % |
Average originating contract term (in months) | |
| 27.5 | | |
| 27.4 | |
| |
January 31, 2015 | |
January 31, 2014 |
Portfolio weighted average contract term, including modifications (in months) | |
| 29.7 | | |
| 29.5 | |
The increase in the
principal collected as a percent of average finance receivables was primarily due to lower delinquencies and lower contract modifications,
partially offset by the slightly longer overall contract term as compared to the first nine months of the prior year. The increases
in the portfolio weighted average contract term are primarily related to efforts to keep payments affordable, for competitive
reasons and to continue to work more with our customers when they experience financial difficulties. In order to remain competitive
term lengths may continue to increase.
D – Property and Equipment
A summary of property
and equipment is as follows:
(In thousands) | |
January 31, 2015 | |
April 30, 2014 |
Land | |
$ | 6,249 | | |
$ | 6,330 | |
Buildings and improvements | |
| 11,508 | | |
| 11,116 | |
Furniture, fixtures and equipment | |
| 10,964 | | |
| 10,293 | |
Leasehold improvements | |
| 20,501 | | |
| 19,673 | |
Construction in progress | |
| 3,169 | | |
| 2,344 | |
Accumulated depreciation and amortization | |
| (18,495 | ) | |
| (15,843 | ) |
| |
| | | |
| | |
Total | |
$ | 33,896 | | |
$ | 33,913 | |
E – Accrued Liabilities
A summary of accrued liabilities is as follows:
(In thousands) | |
January 31, 2015 | |
April 30, 2014 |
Employee compensation | |
$ | 4,778 | | |
$ | 3,228 | |
Cash overdrafts (see Note B) | |
| - | | |
| 1,085 | |
Deferred sales tax (see Note B) | |
| 2,870 | | |
| 2,513 | |
Interest | |
| 245 | | |
| 212 | |
Other | |
| 3,965 | | |
| 3,786 | |
| |
| | | |
| | |
Total | |
$ | 11,858 | | |
$ | 10,824 | |
F – Debt Facilities
A summary of revolving credit facilities
is as follows:
(In thousands) |
| |
Aggregate | |
Interest | |
| |
Balance at |
| |
Amount | |
Rate | |
Maturity | |
January 31, 2015 | |
April 30, 2014 |
Revolving credit facilities | |
$ | 145,000 | | |
| LIBOR + 2.375% | | |
| October 8, 2017 | | |
$ | 112,560 | | |
$ | 97,032 | |
( 2.42% at January 31, 2015 and 2.40% at April 30, 2014)
On March 9, 2012, the Company entered
into an Amended and Restated Loan and Security Agreement (“Credit Facilities”) with a group of lenders providing revolving
credit facilities totaling $125 million. Prior to fiscal 2015, the Credit Facilities were amended on September 30, 2012, February
4, 2013, June 24, 2013 and February 13, 2014, respectively. The first amendment to the Credit Facilities increased the total revolving
commitment to $145 million. The second amendment amended the definition of eligible vehicle contracts to include contracts with
36-42 month terms. The third amendment extended the term to June 24, 2016, provided the option to request revolver commitment
increases for up to an additional $55 million and provided for a 0.25% decrease in each of the three pricing tiers for determining
the applicable interest rate. The fourth amendment amended the structure of the debt covenants as related to the application of
the fixed charge coverage ratio calculation. As amended, the fixed charge coverage ratio calculation will be required only
if availability, as defined, under the revolving credit facilities is less than certain specified thresholds. The amendment
also increased the allowable capital expenditures to $10 million in the aggregate during any fiscal year and allows for the sale
of certain vehicle contracts to third parties.
On October 8, 2014,
the Company entered into a fifth amendment to the Credit Facilities, which extended the term of the Credit Facilities to October
8, 2017, added a new pricing tier for determining the applicable interest rate, and provided for a 0.125% increase in each of the
three existing pricing tiers. The fifth amendment also amended one of two alternative distribution limitations related to repurchases
of the Company’s stock. With respect to such limitation, the amendment (i) reset the $40 million aggregate limit on repurchases
beginning with October 8, 2014, (ii) redefined the aggregate amount of repurchases to be net of proceeds received from the exercise
of stock options, and (iii) changed the requirement that the sum of borrowing bases combined minus the principal balances of all
revolver loans after giving effect to such repurchases be equal to or greater than 30% of the sum of the borrowing bases.
The revolving credit
facilities are collateralized primarily by finance receivables and inventory, are cross collateralized and contain a guarantee
by the Company. Interest is payable monthly under the revolving credit facilities. The Credit Facilities provide for four pricing
tiers for determining the applicable interest rate, based on the Company’s consolidated leverage ratio for the preceding
fiscal quarter. The current applicable interest rate under the Credit Facilities is generally LIBOR plus 2.375%. 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) limitations on the payment of dividends
or distributions.
The distribution limitations
under the Credit Facilities allow the Company to repurchase the Company’s stock so long as: either (a) the aggregate amount
of such repurchases does not exceed $40 million beginning October 8, 2014 and the sum of borrowing bases combined minus the principal
balances of all revolver loans after giving effect to such repurchases is equal to or greater than 30% of the sum of the borrowing
bases, or (b) the aggregate amount of such repurchases does not exceed 75% of the consolidated net income of the Company measured
on a trailing twelve month basis; provided that immediately before and after giving effect to the stock repurchases, at least 12.5%
of the aggregate funds committed under the credit facilities remain available.
The Company was in
compliance with the covenants at January 31, 2015. 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, 2015, the Company
had additional availability of approximately $33.2 million under the revolving credit facilities.
The Company recognized
$165,000 and $163,000 of amortization for the nine months ended January 31, 2015 and 2014, respectively, related to debt issuance
costs. The amortization is reflected as interest expense in the Company’s Consolidated Statements of Operations.
G – Fair Value Measurements
The table below summarizes
information about the fair value of financial instruments included in the Company’s financial statements at January 31, 2015
and April 30, 2014:
| |
January 31, 2015 | |
April 30, 2014 |
(In thousands) | |
Carrying Value | |
Fair Value | |
Carrying Value | |
Fair Value |
| |
| |
| |
| |
|
Cash | |
$ | 1,564 | | |
$ | 1,564 | | |
$ | 289 | | |
$ | 289 | |
Finance receivables, net | |
| 329,803 | | |
| 261,422 | | |
| 293,299 | | |
| 233,289 | |
Accounts payable | |
| 13,179 | | |
| 13,179 | | |
| 8,542 | | |
| 8,542 | |
Revolving credit facilities | |
| 112,560 | | |
| 112,560 | | |
| 97,032 | | |
| 97,032 | |
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 are as follows:
Financial
Instrument |
Valuation Methodology |
|
|
Cash |
The carrying amount is considered to be a reasonable estimate of fair value due to the short-term nature of the financial instrument. |
|
|
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 had a third party appraisal in November 2012 that indicated a range of 35% to 40% discount to face would be a reasonable fair value in a negotiated third party transaction. The sale of finance receivables from Car-Mart of Arkansas to Colonial is made at a 38.5% discount. For financial reporting purposes these sale transactions are eliminated. Since the Company does not intend to offer the receivables for sale to an outside third party, the expectation is that the net book value at January 31, 2015, will be ultimately collected. By collecting the accounts internally the Company expects to realize more than a third party purchaser would expect to collect with a servicing requirement and a profit margin included. |
|
|
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. |
|
|
Revolving credit facilities |
The fair value approximates carrying value due to the variable interest rates charged on the borrowings, which reprice frequently. |
|
|
H – Weighted Average Shares Outstanding
Weighted average shares
of common stock outstanding, which are used in the calculation of basic and diluted earnings per share, are as follows:
| |
Three Months Ended January 31, | |
Nine Months Ended January 31, |
| |
2015 | |
2014 | |
2015 | |
2014 |
Weighted average shares outstanding-basic | |
| 8,587,761 | | |
| 8,917,826 | | |
| 8,636,036 | | |
| 8,984,958 | |
Dilutive options and restricted stock | |
| 448,325 | | |
| 452,809 | | |
| 431,159 | | |
| 464,422 | |
Weighted average shares outstanding-diluted | |
| 9,036,086 | | |
| 9,370,635 | | |
| 9,067,195 | | |
| 9,449,380 | |
| |
| | | |
| | | |
| | | |
| | |
Antidilutive securities not included: | |
| | | |
| | | |
| | | |
| | |
Options | |
| 74,000 | | |
| 80,000 | | |
| 77,667 | | |
| 73,333 | |
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 currently being utilized are the 2007 Stock Option
Plan (“2007 Plan”) and the Stock Incentive Plan (“Incentive Plan”). The Company recorded total stock based
compensation expense for all plans of $605,000 ($381,000 after tax effects) and $1.1 million ($720,000 after tax effects) for the
nine months ended January 31, 2015 and 2014, respectively. Tax benefits were recognized for these costs at the Company’s
overall effective tax rate.
Stock Options
The Company has options
outstanding under two stock option plans approved by the shareholders, the 1997 Stock Option Plan (“1997 Plan”) and
the 2007 Plan. While previously granted options remain outstanding, no additional option grants may be made under the 1997 Plan.
The shareholders of the Company approved an amendment to the Company’s 2007 Plan on October 13, 2010. The amendment increased
from 1,000,000 to 1,500,000 the number of options to purchase our common stock that may be issued under the 2007 Plan. The 2007
Plan provides for the grant of options to purchase shares of the Company’s common stock to employees, directors and certain
advisors of the Company at a price not less than the fair market value of the stock on the date of grant and for periods not to
exceed ten years. Options granted under the Company’s stock option plans expire in the calendar years 2014 through 2024.
| |
1997 Plan | |
2007 Plan |
| |
| |
|
Minimum exercise price as a percentage of fair market value at date of grant | |
| 100 | % | |
| 100 | % |
Last expiration date for outstanding options | |
| July 2, 2017 | |
| November 20, 2024 |
Shares available for grant at January 31, 2015 | |
| - | | |
| 278,500 | |
The fair value of options
granted is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions in the table below.
| |
Nine Months Ended January 31, |
| |
2015 | |
2014 |
Expected term (years) | |
| 5.4 | | |
| 5.0 | |
Risk-free interest rate | |
| 1.64 | % | |
| 0.67 | % |
Volatility | |
| 34 | % | |
| 50 | % |
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 89,000
and 25,000 options granted during the nine months ended January 31, 2015 and 2014, respectively. The grant-date fair value of options
granted during the nine months ended January 31, 2015 and 2014 was $1.4 million and $487,000, respectively. The options were granted
at fair market value on the date of grant.
Stock
option compensation expense on a pre-tax basis was $511,000 ($321,000 after tax effects) and
$1.0 million ($654,000 after tax effects) for the nine months ended
January 31, 2015 and 2014, respectively. As of January 31, 2015, the Company had approximately $1.3 million of total unrecognized
compensation cost related to unvested options. These unvested outstanding options have a weighted-average remaining vesting period
of 1.82 years.
The aggregate intrinsic
value of outstanding options at January 31, 2015 and 2014 was $30.5 million and $19.3 million, respectively.
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
Consolidated Statements of Cash Flows.
| |
Nine Months Ended January 31, |
(Dollars in thousands) | |
2015 | |
2014 |
| |
| | | |
| | |
Options Exercised | |
| 153,250 | | |
| 30,500 | |
Cash Received from Option Exercises | |
$ | 2,927 | | |
$ | 719 | |
Intrinsic Value of Options Exercised | |
$ | 4,026 | | |
$ | 563 | |
As of January 31, 2015
there were 847,750 vested and exercisable stock options outstanding with an aggregate intrinsic value of $27.1 million and a weighted
average remaining contractual life of 4.29 and a weighted average exercise price of $21.16.
Stock Incentive Plan
The shareholders of
the Company approved an amendment to the Company’s Stock Incentive Plan on October 14, 2009. The amendment increased from
150,000 to 350,000 the number of shares of common stock that may be issued under the Stock Incentive Plan. For shares
issued under the Stock Incentive Plan, the associated compensation expense is generally recognized equally over the vesting periods
established at the award date and is subject to the employee’s continued employment by the Company.
There
were no restricted shares granted during the first nine months of fiscal 2015 or fiscal 2014. A total of 187,027 shares remained
available for award at January 31, 2015. There were 20,000 unvested
shares at January 31, 2015 with a weighted average grant date fair value of $24.47.
The
Company recorded compensation cost of $68,000 ($43,000 after tax effects) and
$78,000 ($49,000 after tax effects) related to the Stock Incentive
Plan during the nine months ended January 31, 2015 and 2014, respectively. As of January 31, 2015, the Company had approximately
$23,000 of total unrecognized compensation cost related to unvested awards granted under the
Stock Incentive Plan, which the Company expects to recognize over a weighted-average remaining period of 0.24 years.
There were no modifications
to any of the Company’s outstanding share-based payment awards during fiscal 2014 or during the first nine months of fiscal
2015.
J – Commitments and Contingencies
The Company has a
standby letter of credit relating to an insurance policy totaling $600,000 at January 31, 2015.
K - Supplemental Cash Flow Information
Supplemental cash flow
disclosures are as follows:
| |
Nine Months Ended January 31, |
(in thousands) | |
2015 | |
2014 |
Supplemental disclosures: | |
| | | |
| | |
Interest paid | |
$ | 2,151 | | |
$ | 2,282 | |
Income taxes paid, net | |
| 7,480 | | |
| 7,578 | |
| |
| | | |
| | |
Non-cash transactions: | |
| | | |
| | |
Inventory acquired in repossession and payment protection plan claims | |
| 32,188 | | |
| 32,842 | |
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 consolidated financial statements and notes thereto appearing elsewhere in this
report.
Forward-Looking Information
This Quarterly Report
on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements address the Company’s future objectives, plans and goals, as well as the Company’s
intent, beliefs and current expectations regarding future operating performance, and can generally be identified by words such
as “may”, “will”, “should”, “could”, “believe”, “expect”,
“anticipate”, “intend”, “plan”, “foresee”, and other similar words or phrases.
Specific events addressed by these forward-looking statements include, but are not limited to:
| · | new dealership openings; |
| · | performance of new dealerships; |
| · | same dealership revenue growth; |
| · | the Company’s collection results, including but not limited to collections during income tax refund periods; |
| · | investment in development of workforce; |
| · | gross margin percentages; |
| · | financing the majority of growth from profits; |
| · | having adequate liquidity to satisfy its capital needs; |
| · | security breaches, cyber-attacks, or fraudulent activity; |
| · | compliance with tax regulations; and |
| · | the Company’s business and growth strategies. |
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, but are not limited to:
| · | the availability of credit facilities to support the Company’s business; |
| · | the Company’s ability to underwrite and collect its contracts effectively; |
| · | dependence on existing management; |
| · | availability of quality vehicles at prices that will be affordable to customers; |
| · | changes in consumer finance laws or regulations, including but not limited to rules and regulations that could be enacted by
federal and state governments; and |
| · | general economic conditions in the markets in which the Company operates, including but not limited to fluctuations in gas
prices, grocery prices and employment levels. |
The Company undertakes
no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they
are made.
Overview
America’s Car-Mart,
Inc., a Texas corporation (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 two operating subsidiaries, America’s Car Mart, Inc., an Arkansas corporation (“Car-Mart of Arkansas”), and
Colonial Auto Finance, Inc., an Arkansas corporation (“Colonial”). Collectively, Car-Mart of Arkansas and Colonial
are referred to herein as “Car-Mart”. The Company primarily sells older model used vehicles and provides financing
for substantially all of its customers. Many of the Company’s customers have limited financial resources and would not qualify
for conventional financing as a result of limited credit histories or past credit problems. As of January 31, 2015, the Company
operated 138 dealerships located primarily in small cities throughout the South-Central United States.
Car-Mart has been
operating since 1981. Car-Mart has grown its revenues between 3% and 16% per year over the last ten fiscal years (average 11%).
Growth results from same dealership revenue growth and the addition of new dealerships. Revenue increased 7.1% for the first nine
months of fiscal 2015 compared to the same period of fiscal 2014 due primarily to a 9.6% increase in retail units sold and a 5.2%
increase in interest income. The average retail sales price decreased 2.0% to $9,571 for the first nine months of fiscal 2015 from
$9,762 for the first nine months of fiscal 2014.
The Company’s
primary focus is on collections. Each dealership is responsible for its own collections with supervisory involvement of the corporate
office. During the last five fiscal years, the Company’s credit losses as a percentage of sales have ranged between approximately
20.2% in fiscal 2010 and 27.4% in fiscal 2014 (25.7% excluding the effect of the increase in the allowance for credit losses made
in in the third quarter of fiscal 2014), an average of 22.5%. Operational improvements during fiscal 2009 and fiscal 2010 led to
improved credit losses in fiscal 2010 as the provision for credit losses was 20.2% of sales for the year ended April 30, 2010.
The Company experienced credit losses of 20.8% of sales for fiscal 2011 and 21.1% of sales for fiscal 2012. In fiscal 2011 the
higher credit losses primarily related to credit losses during the second fiscal quarter as the Company experienced some modest
operational difficulties. In fiscal 2012 the Company experienced slightly higher credit losses; however, the losses were within
the range of credit losses that the Company targets annually. With the acceptable and consistent credit results over the previous
years and the overall quality of the portfolio at April 30, 2012, management reduced the allowance for credit losses as a percentage
of finance receivables at April 30, 2012 to 21.5% from 22.0%. The allowance for credit losses had been 22% of finance receivables
since October 2006. Credit losses as a percentage of sales in fiscal 2013 increased to 23.1% primarily due to increased contract
term lengths and lower down payments resulting from increased competitive pressures as well as higher charge-offs which resulted,
to an extent, from negative macro-economic factors affecting the Company’s customer base. These competitive pressures intensified
and, along with a continued negative macro-economic environment for our customers, further impacted the Company’s credit
losses in fiscal 2014. As a result of the increased credit losses and with the expectation that charge-offs will remain elevated,
management increased the allowance for credit losses to 23.5% at January 31, 2014. Credit losses as a percentage of sales for fiscal
2014 were 27.4% (25.7% excluding the effect of the increase in the allowance for credit losses) compared to 23.1% of sales for
the prior year period, resulting from lower finance receivable collections and higher charge-offs compounded by the effect of lower
wholesale sales. Credit losses as a percentage of sales for the first nine months of fiscal 2015 were 25.6% compared to 28.2% (25.8%
excluding the effect of the increase in the allowance for credit losses) of sales for the prior year period.
Historically, credit
losses, on a percentage basis, tend to be higher at new and developing dealerships than at mature dealerships. Generally, this
is the case because the management at new and developing dealerships tends to be less experienced in making credit decisions and
collecting customer accounts and the customer base is less seasoned. Normally the older, more mature dealerships have more repeat
customers and on average, repeat customers are a better credit risk than non-repeat customers. Negative macro-economic issues do
not always lead to higher credit loss results for the Company because the Company provides basic affordable transportation which
in many cases is not a discretionary expenditure for customers. However, the Company does believe that general inflation, particularly
within staple items such as groceries and gasoline, as well as overall unemployment levels and potentially lower or stagnant personal
income levels affecting customers can have, and have had in recent quarters, a negative impact on collections. Additionally, increased
competition for used vehicle financing can have, and management believes it is currently having, a negative effect on collections
and charge-offs.
In an effort to offset
the elevated credit losses and lower collection levels and to operate more efficiently, the Company continues to look for improvements
to its business practices, including better underwriting and better collection procedures. The Company has a proprietary credit
scoring system which enables the Company to monitor the quality of contracts. Corporate office personnel monitor proprietary credit
scores and work with dealerships when the distribution of scores falls outside of prescribed thresholds. The Company has implemented
credit reporting and has begun installing global positioning system (“GPS”) technology on vehicles. Additionally, the
Company has placed significant focus on the collection area as the Company’s training department continues to spend significant
time and effort on collections improvements. The Support Operations Officer oversees the collections department and provides timely
oversight and additional accountability on a consistent basis. In addition, the Company has a Servicing and Collections Manager
who assists with managing the Company’s servicing and collections practices and provides additional monitoring and training.
Also, turnover at the dealership level for collections positions is down compared to historical levels, which management believes
has a positive effect on collection results. The Company believes that the proper execution of its business practices is the single
most important determinant of its long term credit loss experience.
The Company’s
gross margins as a percentage of sales have been fairly consistent from year to year. Over the last five fiscal years, the Company’s
gross margins as a percentage of sales have ranged between approximately 42% and 44%. Gross margin as a percentage of sales for
fiscal 2014 was 42.2%. The Company’s gross margins are based upon the cost of the vehicle purchased, with lower-priced vehicles
typically having higher gross margin percentages. Gross margins in recent years have been negatively affected by the increase in
the average retail sales price (a function of a higher purchase price) and higher operating costs, mostly related to increased
vehicle repair costs and higher fuel costs. Additionally, the percentage of wholesale sales to retail sales, which relate for the
most part to repossessed vehicles sold at or near cost, can have a significant effect on overall gross margins. Annual gross margin
percentages over the five-year period peaked in fiscal 2010 partially as a result of higher retail sales levels and a strong wholesale
market for repossessed vehicles due to overall used vehicle supply shortages. The gross margin percentage in fiscal 2011 and fiscal
2012 was negatively affected by higher wholesale sales, increased average retail selling price, higher inventory repair costs and
lower margins on the payment protection plan and service contract products. Gross margin improved slightly in fiscal 2013 due to
improved wholesale results partially offset by higher losses under the payment protection plan. The gross margin for fiscal 2014
was affected by higher inventory repair costs resulting from continued efforts to help our customers succeed and to meet competitive
pressures and higher claims under the payment protection plan. For the first nine months of fiscal 2015, the gross margin as a
percentage of sales was 42.7%, up slightly from 42.4% for the first nine months of fiscal 2014. This increase related to lower
relative wholesale values and lower repair costs as well as benefits from selling lower priced vehicles, which carry a higher gross
profit percentage. The Company expects that its gross margin percentage will not change significantly in the near term from the
current level (42% range).
Hiring, training and
retaining qualified associates are critical to the Company’s success. The rate at which the Company adds new dealerships
and is able to implement operating initiatives is limited by the number of trained managers and support personnel the Company has
at its disposal. Excessive turnover, particularly at the dealership manager level, could impact the Company’s ability to
add new dealerships and to meet operational initiatives. The Company has added resources to recruit, train, and develop personnel,
especially personnel targeted to fill dealership manager positions. The Company expects to continue to invest in the development
of its workforce.
Consolidated Operations
(Operating Statement Dollars in Thousands)
| |
| |
| |
% Change | |
As a % of Sales |
| |
Three Months Ended | |
2015 | |
Three Months Ended |
| |
January 31, | |
vs. | |
January 31, |
| |
2015 | |
2014 | |
2014 | |
2015 | |
2014 |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales | |
$ | 116,406 | | |
$ | 108,400 | | |
| 7.4 | % | |
| 100.0 | % | |
| 100.0 | % |
Interest income | |
| 15,094 | | |
| 14,188 | | |
| 6.4 | | |
| 13.0 | | |
| 13.1 | |
Total | |
| 131,500 | | |
| 122,588 | | |
| 7.3 | | |
| 113.0 | | |
| 113.1 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Costs and expenses: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of sales, excluding depreciation shown below | |
| 66,672 | | |
| 62,092 | | |
| 7.4 | | |
| 57.3 | | |
| 57.3 | |
Selling, general and administrative | |
| 21,139 | | |
| 19,650 | | |
| 7.6 | | |
| 18.2 | | |
| 18.1 | |
Provision for credit losses | |
| 30,206 | | |
| 36,776 | | |
| (17.9 | ) | |
| 25.9 | | |
| 33.9 | |
Interest expense | |
| 788 | | |
| 779 | | |
| 1.2 | | |
| 0.7 | | |
| 0.7 | |
Depreciation and amortization | |
| 935 | | |
| 835 | | |
| 12.0 | | |
| 0.8 | | |
| 0.8 | |
Loss on disposal of property and equipment | |
| - | | |
| 37 | | |
| (100.0 | ) | |
| - | | |
| - | |
Total | |
| 119,740 | | |
| 120,169 | | |
| (0.4 | ) | |
| 102.9 | | |
| 110.9 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Pretax income | |
$ | 11,760 | | |
$ | 2,419 | | |
| | | |
| 10.1 | % | |
| 2.2 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Operating Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Retail units sold | |
| 11,495 | | |
| 10,735 | | |
| | | |
| | | |
| | |
Average stores in operation | |
| 137 | | |
| 129 | | |
| | | |
| | | |
| | |
Average units sold per store per month | |
| 28.0 | | |
| 27.7 | | |
| | | |
| | | |
| | |
Average retail sales price | |
$ | 9,764 | | |
$ | 9,739 | | |
| | | |
| | | |
| | |
Same store revenue change | |
| 2.8 | % | |
| (2.8 | )% | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Period End Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Stores open | |
| 138 | | |
| 130 | | |
| | | |
| | | |
| | |
Accounts over 30 days past due | |
| 5.2 | % | |
| 5.8 | % | |
| | | |
| | | |
| | |
Three Months Ended January 31, 2015
vs. Three Months Ended January 31, 2014
Revenues increased by
$8.9 million, or 7.3%, for the three months ended January 31, 2015 as compared to the same period in the prior fiscal year. The
increase was the result of (i) revenue from dealerships opened after January 31, 2014 ($5.5 million) and (ii) revenue growth from
dealerships that operated a full three months in both periods ($3.4 million). We believe the increase resulted from solid execution
in our sales efforts, a focus on lot by lot productivity and possibly some indirect benefits from improved consumer sentiment related
in part to lower gasoline prices. Competition is still intense; however, we are focused on providing an affordable vehicle with
reasonable payment terms and offering excellent customer service.
Cost of sales as a
percentage of sales remained constant at 57.3% for the three months ended January 31, 2015 compared to the same period of the prior
fiscal year. The average retail sales price for the third quarter of fiscal 2015 increased $25 from the third quarter of fiscal
2014. The Company will continue to focus efforts on minimizing the average retail sales price in order to help keep the contract
terms shorter, which helps customers to maintain appropriate equity in their vehicles. The consumer demand for vehicles the Company
purchases for resale remains high. This high demand has been exacerbated by the recent increases in funding to the used vehicle
financing market and until more recently by the overall decrease in new car sales during the recession when compared to pre-recession
levels. Both the supply of vehicles as well as the availability of funding to the used vehicle finance market can result in higher
purchase costs for the Company. However, recent increases in new car sales have had a positive effect on purchase costs. Average
selling prices and top line sales levels in relation to wholesale volumes, resulting from credit loss experience, can have a significant
effect on gross margin percentages.
Selling, general and
administrative expenses as a percentage of sales were 18.2% for the three months ended January 31, 2015, an increase of 0.1% from
the same period of the prior fiscal year. In dollar terms, overall selling, general and administrative expenses increased $1.5
million in the third quarter of fiscal 2015 compared to the same period of the prior fiscal year, consisting primarily of increased
payroll costs, incremental costs at new dealerships, higher marketing and advertising costs as well as the increased costs related
to the GPS implementation.
Provision for credit
losses as a percentage of sales was 25.9% for the three months ended January 31, 2015 compared to 33.9% (26.8% excluding the effect
of the $7.7 million increase in the allowance for credit losses) for the three months ended January 31, 2014. Net charge-offs
as a percentage of average finance receivables were 6.5% for the three months ended January 31, 2015 compared to 6.7% for the
prior year quarter. The decrease resulted from a slightly lower frequency of losses and a lower severity of losses. The lower
severity of losses resulted from a combination of accounts being a little older at time of loss and improved collections. The
Company has implemented several operational initiatives (including credit reporting and installing GPS technology on vehicles)
for the collections area and continues to push for improvements and better execution of its collection practices. However, the
extended challenging macro-economic and competitive conditions are expected to continue to put pressure on our customers and the
resulting collections of our finance receivables. The Company believes that the proper execution of its business practices remains
the single most important determinant of its long-term credit loss experience.
Interest expense for
the three months ended January 31, 2015 as a percentage of sales remained constant at 0.7% for the three months ended January 31,
2015 compared to the same period in prior year. Average borrowings during the three months ended January 31, 2015 were
$110.2 million consistent with the prior year quarter.
Consolidated Operations
(Operating Statement Dollars in Thousands)
| |
| |
| |
% Change | |
As a % of Sales |
| |
Nine Months Ended | |
2015 | |
Nine Months Ended |
| |
January 31, | |
vs. | |
January 31, |
| |
2015 | |
2014 | |
2014 | |
2015 | |
2014 |
Revenues: | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales | |
$ | 349,300 | | |
$ | 325,314 | | |
| 7.4 | % | |
| 100.0 | % | |
| 100.0 | % |
Interest income | |
| 43,410 | | |
| 41,249 | | |
| 5.2 | | |
| 12.4 | | |
| 12.7 | |
Total | |
| 392,710 | | |
| 366,563 | | |
| 7.1 | | |
| 112.4 | | |
| 112.7 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Costs and expenses: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cost of sales, excluding depreciation shown below | |
| 200,299 | | |
| 187,537 | | |
| 6.8 | | |
| 57.3 | | |
| 57.6 | |
Selling, general and administrative | |
| 62,615 | | |
| 59,045 | | |
| 6.0 | | |
| 17.9 | | |
| 18.2 | |
Provision for credit losses | |
| 89,453 | | |
| 91,602 | | |
| (2.3 | ) | |
| 25.6 | | |
| 28.2 | |
Interest expense | |
| 2,183 | | |
| 2,291 | | |
| (4.7 | ) | |
| 0.6 | | |
| 0.7 | |
Depreciation and amortization | |
| 2,782 | | |
| 2,407 | | |
| 15.6 | | |
| 0.8 | | |
| 0.7 | |
Loss on Disposal of Property and Equipment | |
| 20 | | |
| 76 | | |
| (73.7 | ) | |
| - | | |
| - | |
Total | |
| 357,352 | | |
| 342,958 | | |
| 4.2 | | |
| 102.3 | | |
| 105.4 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Pretax income | |
$ | 35,358 | | |
$ | 23,605 | | |
| | | |
| 10.1 | % | |
| 7.3 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Operating Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Retail units sold | |
| 35,061 | | |
| 31,986 | | |
| | | |
| | | |
| | |
Average stores in operation | |
| 136 | | |
| 127 | | |
| | | |
| | | |
| | |
Average units sold per store per month | |
| 28.6 | | |
| 28.0 | | |
| | | |
| | | |
| | |
Average retail sales price | |
$ | 9,571 | | |
$ | 9,762 | | |
| | | |
| | | |
| | |
Same store revenue change | |
| 1.7 | % | |
| 1.8 | % | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Period End Data: | |
| | | |
| | | |
| | | |
| | | |
| | |
Stores open | |
| 138 | | |
| 130 | | |
| | | |
| | | |
| | |
Accounts over 30 days past due | |
| 5.2 | % | |
| 5.8 | % | |
| | | |
| | | |
| | |
Nine Months Ended January 31, 2015 vs. Nine Months Ended
January 31, 2014
Revenues increased
by $26.1 million, or 7.1%, for the nine months ended January 31, 2015 as compared to the same period in the prior fiscal year.
The increase was principally the result of (i) revenue growth from stores that operated a full nine months in both periods ($6.1
million), (ii) revenue growth from stores opened during the nine months ended January 31, 2014 ($6.0 million), and (iii) revenue
from stores opened after January 31, 2014 ($14.0 million).
Cost of sales as a percentage
of sales decreased 0.3% to 57.3% for the nine months ended January 31, 2015 from 57.6% in the same period of the prior fiscal year.
The decrease from the prior year period relates to benefits from selling lower priced vehicles, which carry a higher gross profit
percentage, lower relative wholesale values and lower repair costs. The average retail sales price decreased 2.0% to $9,571 for
the nine months ended January 31, 2015 compared to $9,762 for the nine months ended January 31, 2014. The Company will continue
to focus efforts on holding down purchase costs (and the related selling price) and expects to see gross margin percentages generally
in the 42% range over the near term. Average selling prices and top line sales levels in relation to wholesale volumes, resulting
from credit loss experience, can have a significant effect on gross margin percentages.
Selling, general and
administrative expense as a percentage of sales was 17.9% for the nine months ended January 31, 2015, a decrease of 0.3% from the
same period of the prior fiscal year. Selling, general and administrative expenses are, for the most part, more fixed in nature.
The overall dollar increase of $3.6 million related primarily to higher payroll costs and incremental costs related to new locations
and higher marketing and advertising costs as well as the increased costs related to the GPS implementation.
Provision for credit losses
as a percentage of sales was 25.6% for the nine months ended January 31, 2015 compared to 28.2% (25.8% excluding the effect of
the $7.7 million increase in the allowance for credit losses) in the same period of the prior fiscal year. Net charge-offs as a
percentage of average finance receivables were 19.9% for the nine months ended January 31, 2015 compared to 19.8% for the prior
year quarter. Continuing macro-economic challenges and competitive conditions continue to put pressure on our customers and the
resulting collections of our finance receivables, although the lower gas prices during the second and third quarters of fiscal
2015 provided some relief for our customers. The Company has implemented several operational initiatives (including credit reporting
and installing GPS technology on vehicles) for the collections area and continually pushes for improvements and better execution
of its collection practices. The Company believes that the proper execution of its business practices is the single most important
determinate of credit loss experience and that the negative impact on credit losses in both the current and prior year periods
resulting from negative macro-economic and competitive pressures has been somewhat mitigated by the improvements in oversight and
accountability provided by the Company’s investments in our corporate infrastructure within the collection area.
Interest expense as a
percentage of sales decreased slightly to 0.6% for the nine months ended January 31, 2015 compared to 0.7% for the same period
of the prior fiscal year. The overall dollar decrease in interest expense was attributable to lower average borrowings during the
nine months ended January 31, 2015 as compared to the same period in the prior fiscal year ($103.0 million compared to $104.0 million).
Financial Condition
The following table sets
forth the major balance sheet accounts of the Company as of the dates specified (in thousands):
| |
January 31, 2015 | |
April 30, 2014 |
Assets: | |
| | | |
| | |
Finance receivables, net | |
$ | 329,803 | | |
$ | 293,299 | |
Inventory | |
| 38,248 | | |
| 30,115 | |
Property and equipment, net | |
| 33,896 | | |
| 33,913 | |
| |
| | | |
| | |
Liabilities: | |
| | | |
| | |
Accounts payable and accrued liabilities | |
| 25,037 | | |
| 19,366 | |
Deferred revenue | |
| 24,770 | | |
| 17,467 | |
Income taxes payable, net | |
| 1,649 | | |
| 782 | |
Deferred tax liabilities, net | |
| 19,058 | | |
| 15,244 | |
Debt facilities | |
| 112,560 | | |
| 97,032 | |
Historically, finance
receivables tended to grow slightly faster than revenue. This has been due, in large part, to an increasing weighted
average term necessitated by increases in the average retail sales price over recent years. The weighted average term for installment
sales contracts at January 31, 2015 increased slightly as compared to January 31, 2014 (29.7 months vs. 29.5 months). Benefits
related to software and operational changes made in an effort to shorten relative terms by maximizing up-front equity and scheduling
payments to coincide with anticipated income tax refunds have helped maintain the overall term length in the face of the increasing
average retail sales prices over recent years. However, in response to current competitive and economic conditions, the Company
has made and is continuing to make some structural changes to its installment contracts which include increases to the overall
length of contract terms, mitigated somewhat due to declines in the average retail sales price in fiscal 2015. Revenue growth results
from same store revenue growth and the addition of new dealerships. The Company currently anticipates going forward
that the growth in finance receivables will be higher than overall revenue growth on an annual basis due to the overall term length
increases partially offset by improvements in underwriting and collection procedures.
During the first nine
months of fiscal 2015, inventory increased 27.0% ($8.1 million) as compared to inventory at April 30, 2014. The increase in inventory
was made in preparation of the fourth quarter income tax time sales effort. The Company strives to offer a broad mix and sufficient
quantities of vehicles to adequately serve its expanding customer base. The Company will continue to manage inventory levels in
the future to ensure adequate supply, in volume and mix, and to meet anticipated sales demand.
Property and equipment,
net, remained relatively constant at January 31, 2015 as compared to property and equipment, net, at April 30, 2014. The Company
incurred $2.8 million of expenditures related to new dealerships as well as to refurbish and expand existing locations, offset
by depreciation expense.
Accounts payable and
accrued liabilities increased $5.7 million during the first nine months of fiscal 2015 as compared to accounts payable and accrued
liabilities at April 30, 2014 related primarily to higher inventory levels and higher expenditures for cost of goods sold and selling,
general and administrative costs.
Deferred revenue increased
$7.3 million at January 31, 2015 as compared to April 30, 2014 due to increased sales of the payment protection plan product and
service contracts and the longer term on the new service contracts.
Income taxes payable, net,
increased $867,000 at January 31, 2015 as compared to April 30, 2014 primarily due to the timing of quarterly tax payments and
the refund of the majority of the receivable existing at April 30, 2014.
Deferred income tax liabilities,
net, increased $3.8 million at January 31, 2015 as compared to April 30, 2014 due primarily to the increase in finance receivables
and the book/tax difference on fixed assets.
Borrowings on the Company’s
revolving credit facilities fluctuate primarily based upon a number of factors including (i) net income, (ii) finance receivables
changes, (iii) income taxes, (iv) capital expenditures and (v) common stock repurchases. Historically, income from continuing
operations, as well as borrowings on the revolving credit facilities, have funded the Company’s finance receivables growth,
capital asset purchases and common stock repurchases. In the first nine months of fiscal 2015, the Company funded finance receivables
growth of $45.7 million and an $8.1 million increase in inventory, capital expenditures of $2.8 million and common stock repurchases
of $13.6 million with a $15.5 million increase in its debt facilities.
Liquidity and Capital Resources
The following table sets
forth certain summarized historical information with respect to the Company’s Statements of Cash Flows (in thousands):
| |
Nine Months Ended January 31, |
| |
2015 | |
2014 |
Operating activities: | |
| | | |
| | |
Net income | |
$ | 22,240 | | |
$ | 14,816 | |
Provision for credit losses | |
| 89,453 | | |
| 91,602 | |
Losses on claims for payment protection plan | |
| 7,840 | | |
| 6,745 | |
Depreciation and amortization | |
| 2,782 | | |
| 2,407 | |
Stock based compensation | |
| 605 | | |
| 1,147 | |
Finance receivable originations | |
| (334,769 | ) | |
| (308,330 | ) |
Finance receivable collections | |
| 168,784 | | |
| 155,481 | |
Inventory | |
| 24,055 | | |
| 31,427 | |
Accounts payable and accrued liabilities | |
| 6,756 | | |
| 912 | |
Deferred payment protection plan revenue | |
| 1,955 | | |
| 754 | |
Deferred service contract revenue | |
| 5,348 | | |
| 1,089 | |
Income taxes, net | |
| 1,824 | | |
| 3,028 | |
Deferred income taxes | |
| 3,814 | | |
| (1,817 | ) |
Accrued interest on finance receivables | |
| 67 | | |
| (136 | ) |
Other | |
| (1,508 | ) | |
| (749 | ) |
Total | |
| (754 | ) | |
| (1,624 | ) |
| |
| | | |
| | |
Investing activities: | |
| | | |
| | |
Purchase of property and equipment | |
| (2,805 | ) | |
| (5,541 | ) |
Proceeds from sale of property and equipment | |
| 20 | | |
| 2 | |
Total | |
| (2,785 | ) | |
| (5,539 | ) |
| |
| | | |
| | |
Financing activities: | |
| | | |
| | |
Debt facilities, net | |
| 15,528 | | |
| 14,776 | |
Change in cash overdrafts | |
| (1,085 | ) | |
| 149 | |
Purchase of common stock | |
| (13,628 | ) | |
| (8,739 | ) |
Dividend payments | |
| (30 | ) | |
| (30 | ) |
Exercise of stock options and warrants, including | |
| | | |
| | |
tax benefits and issuance of common stock | |
| 4,029 | | |
| 991 | |
Total | |
| 4,814 | | |
| 7,147 | |
Increase (decrease) in Cash | |
$ | 1,275 | | |
$ | (16 | ) |
The primary drivers
of operating profits and cash flows include (i) top line sales (ii) interest rates on finance receivables, (iii) gross margin percentages
on vehicle sales, and (iv) credit losses, a significant portion of which relates to the collection of principal on finance receivables.
The Company generates cash flow from income from operations. Historically, most or all of this cash is used to fund
finance receivables growth, capital expenditures and common stock repurchases. To the extent finance receivables growth,
capital expenditures and common stock repurchases exceed income from operations generally the Company increases its borrowings
under its revolving credit facilities. The majority of the Company’s growth has been self-funded.
Cash flows from operations
for the nine months ended January 31, 2015 compared to the same period in the prior fiscal year were negatively impacted by (i)
an increase in finance receivables, (ii) an increase in inventory, (iii) lower non-cash charge for credit losses, partially offset
by (iv) an increase in deferred service contract revenue and deferred income taxes and (v) an increase in accounts payable and
accrued liabilities. Finance receivables, net, increased by $36.5 million from April 30, 2014 to January 31, 2015.
The purchase price
the Company pays for a vehicle has a significant effect on liquidity and capital resources. Because the Company bases its selling
price on the purchase cost for the vehicle, increases in purchase costs result in increased selling prices. As the selling price
increases, it becomes more difficult to keep the gross margin percentage and contract term in line with historical results because
the Company’s customers have limited incomes and their car payments must remain affordable within their individual budgets.
Several external factors can negatively affect the purchase cost of vehicles. Decreases in the overall volume of new car sales,
particularly domestic brands, lead to decreased supply in the used car market. Also, the expansion of the customer base due in
part to 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.
New vehicle sales decreased
dramatically beginning with the economic recession of 2008. While sales levels for new vehicles have risen steadily since the trough
in 2009, and new vehicle sales in 2013 were near pre-recession levels, such sales have continued to remain below pre-recession
levels. In addition, the challenging macro-economic environment, together with the constriction in consumer credit starting in
2008, contributed to increased demand for the types of vehicles the Company purchases and a resulting increase in used car prices.
These negative macro-economic conditions have continued to affect our customers in the years since the recession and, in turn,
have helped keep demand high for the types of vehicles we purchase. This increased demand, coupled with the depressed levels of
new vehicle sales, had negatively impacted the used vehicle supply available to the Company. Management expects the tight supply
of vehicles and resulting pressure for increases in vehicle purchase costs to continue, although some relief is expected resulting
from the continuing steady increases in new car sales levels since 2009.
The Company has devoted
significant efforts to improve 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 increasing its efforts to purchase vehicles from
individuals at the dealership level as well as via the internet. The Company has also increased the level of accountability for
its purchasing agents including the establishment of sourcing and pricing guidelines. Based on these efforts, the Company expects
to maintain gross margin percentages generally in the 42% range in the near term with overall contract terms increasing due in
part to competitive pressures, somewhat mitigated by software and operational changes which have been made to structure seasonal
payments during income tax refund periods.
The Company believes
that the amount of credit available for the sub-prime auto finance industry has increased in recent quarters, and while the increase
appears to have leveled off in recent months, management expects the availability of consumer credit within the automotive industry
to be higher over the near term when compared to historical levels and that this will contribute to continued strong overall demand
for most, if not all, of the vehicles the Company purchases for resale. Increased competition resulting from availability
of funding to the sub-prime auto industry has contributed to lower down payments and longer terms, which have had a negative effect
on collection percentages, liquidity and credit losses when compared to prior periods.
Macro-economic factors
can have an effect on credit losses and resulting liquidity. General inflation, particularly within staple items such as groceries
and gasoline, as well as overall unemployment levels can have a significant effect on collection results and ultimately credit
losses. 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 anticipates that credit losses in the near term will be
higher than historical ranges due to significant continued macro-economic challenges for the Company’s customer base as well
as increased competitive pressures. Management continues to focus on improved execution at the dealership level, specifically as
related to working individually with its customers concerning collection issues.
The Company has generally
leased the majority of the properties where its dealerships are located. As of January 31, 2015, the Company leased approximately
87% of its dealership properties. The Company expects to continue to lease the majority of the properties where its dealerships
are located.
The Company’s
revolving credit facilities generally limit distributions by the Company to its shareholders in order to repurchase the Company’s
common stock. The distribution limitations under the Credit Facilities allow the Company to repurchase the Company’s stock
so long as: either (a) the aggregate amount of such repurchases does not exceed $40 million beginning October 8, 2014 and the sum
of borrowing bases combined minus the principal balances of all revolver loans after giving effect to such repurchases is equal
to or greater than 30% of the sum of the borrowing bases, or (b) the aggregate amount of such repurchases does not exceed 75% of
the consolidated net income of the Company measured on a trailing twelve month basis; provided that immediately before and after
giving effect to the stock repurchases, at least 12.5% of the aggregate funds committed under the credit facilities remain available.
Thus, the Company is limited in the amount of dividends or other distributions it can make to its shareholders without the consent
of the Company’s lenders.
At January 31, 2015,
the Company had $1.6 million of cash on hand and an additional $33.2 million of availability under its revolving credit facilities
(see Note F to the Consolidated Financial Statements). On a short-term basis, the Company’s principal sources
of liquidity include income from operations and borrowings under its revolving credit facilities. On a longer-term basis,
the Company expects its principal sources of liquidity to consist of income from operations and borrowings under revolving credit
facilities and/or fixed interest term loans. The Company’s revolving credit facilities mature in October 2017,
and the Company expects that it will be able to renew or refinance its revolving credit facilities on or before the date they mature.
Furthermore, while the Company has no specific plans to issue debt or equity securities, the Company believes, if necessary, it
could raise additional capital through the issuance of such securities.
The Company expects
to use cash to (i) grow its finance receivables portfolio, (ii) purchase property and equipment of approximately $4.5 million in
the next 12 months in connection with refurbishing existing dealerships and adding new dealerships, (iii) repurchase shares of
common stock when favorable conditions exist and (iv) reduce debt to the extent excess cash is available. Potential future changes
to the structuring of customer contracts could have the effect of reducing the level of capital allocated to our stock repurchase
program when compared to levels in recent history.
The Company believes
it will have adequate liquidity to continue to grow its revenues and to satisfy its capital needs for the foreseeable future.
Contractual Payment Obligations
There have been no material
changes outside of the ordinary course of business in the Company’s contractual payment obligations from those reported at
April 30, 2014 in the Company’s Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
The Company has entered
into operating leases for approximately 87% of its dealerships and office facilities. Generally these leases are for periods of
three to five years and usually contain multiple renewal options. The Company uses leasing arrangements to maintain flexibility
in its dealership locations and to preserve capital. The Company expects to continue to lease the majority of its dealerships and
office facilities under arrangements substantially consistent with the past.
The Company has a
standby letter of credit relating to an insurance policy totaling $600,000 at January 31, 2015.
Other than its operating
leases and the letter of credit, the Company is not a party to any off-balance sheet arrangement that management believes is reasonably
likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to investors.
Related Finance Company Contingency
Car-Mart of Arkansas
and Colonial do not meet the affiliation standard for filing consolidated income tax returns, and as such they file separate federal
and state income tax returns. Car-Mart of Arkansas routinely sells its finance receivables to Colonial at what the Company believes
to be fair market value and is able to take a tax deduction at the time of sale for the difference between the tax basis of the
receivables sold and the sales price. These types of transactions, based upon facts and circumstances, have been permissible under
the provisions of the Internal Revenue Code as described in the Treasury Regulations. For financial accounting purposes, these
transactions are eliminated in consolidation and a deferred income tax liability has been recorded for this timing difference.
The sale of finance receivables from Car-Mart of Arkansas to Colonial provides certain legal protection for the Company’s
finance receivables and, principally because of certain state apportionment characteristics of Colonial, also has the effect of
reducing the Company’s overall effective state income tax rate by approximately 200 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, 2015.
Critical Accounting Policies
The preparation of financial
statements in conformity with generally accepted accounting principles in the United States of America requires the Company to
make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from the Company’s estimates. The Company believes the most significant
estimate made in the preparation of the accompanying Condensed Consolidated Financial Statements relates to the determination of
its allowance for credit losses, which is discussed below. The Company’s accounting policies are discussed in
Note B to the accompanying Condensed Consolidated Financial Statements.
The Company maintains
an allowance for credit losses on an aggregate basis at an amount it considers sufficient to cover estimated losses in the collection
of its finance receivables. At January 31, 2015, the weighted average total contract term was 29.7 months with 21.2
months remaining. The reserve amount in the allowance for credit losses at January 31, 2015, $95.3 million, was 23.8% of the principal
balance in finance receivables of $425.1 million, less unearned payment protection plan revenue of $15.2 million and unearned service
contract revenue of $9.6 million.
The estimated reserve
amount is the Company’s anticipated future net charge-offs for losses incurred through the balance sheet date. The allowance
takes into account historical credit loss experience (both timing and severity of losses), with consideration given to recent credit
loss trends and changes in contract characteristics (i.e., average amount financed, months outstanding at loss date, term and age
of portfolio), delinquency levels, collateral values, economic conditions and underwriting and collection practices. The allowance
for credit losses is reviewed at least quarterly by management with any changes reflected in current operations. The
calculation of the allowance for credit losses uses the following primary factors:
· | | The number of units repossessed
or charged-off as a percentage of total units financed over specific historical periods of time from one year to five years. |
· | | The average net repossession
and charge-off loss per unit during the last eighteen months segregated by the number of months since the contract origination
date and adjusted for the expected future average net charge-off loss per unit. About 50% of the charge-offs that will
ultimately occur in the portfolio are expected to occur within 10-11 months following the contract origination date. The
average age of an account at charge-off date is 11.3 months. |
· | | The timing of repossession
and charge-off losses relative to the date of sale (i.e., how long it takes for a repossession or charge-off to occur) for repossessions
and charge-offs occurring during the last eighteen months. |
A point estimate is
produced by this analysis which is then supplemented by any positive or negative subjective factors to arrive at an overall reserve
amount that management considers to be a reasonable estimate of losses inherent in the portfolio at the balance sheet date that
will be realized via actual charge-offs in the future. Although it is at least reasonably possible that events or circumstances
could occur in the future that are not presently foreseen which could cause actual credit losses to be materially different from
the recorded allowance for credit losses, the Company believes that it has given appropriate consideration to all relevant factors
and has made reasonable assumptions in determining the allowance for credit losses. While challenging economic conditions can negatively
impact credit losses, the effectiveness of the execution of internal policies and procedures within the collections area and the
competitive environment on the funding side have historically had a more significant effect on collection results than macro-economic
issues. A 1% change, as a percentage of Finance receivables net of deferred revenue, in the allowance for credit losses would equate
to an approximate pre-tax change of $4.0 million.
Recent Accounting Pronouncements
Occasionally, new
accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting
bodies which the Company adopts as of the specified effective date. Unless otherwise discussed, the Company believes the impact
of recently issued standards which are not yet effective will not have a material impact on its consolidated financial statements
upon adoption.
Revenue Recognition.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes existing revenue
recognition guidance. The new guidance in ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer
of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of
revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized
from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual and interim periods beginning after December
15, 2016, using one of two retrospective application methods. The Company is currently evaluating the potential effects of the
adoption of this update on the consolidated financial statements.
Seasonality
The Company’s
third fiscal quarter (November through January) was historically the slowest period for vehicle sales. Conversely, the Company’s
first and fourth fiscal quarters (May through July and February through April) were historically the busiest times for vehicle
sales. Therefore, the Company generally realized a higher proportion of its revenue and operating profit during the first and fourth
fiscal quarters. However, during recent fiscal years, tax refund anticipation sales have begun in early November and continued
through January (the Company’s third fiscal quarter). The success of the tax refund anticipation sales effort has led to
higher sales levels during the third fiscal quarters and the Company expects this trend to continue in future periods. However,
a shift in the timing of actual tax refund dollars in the Company’s markets shifted some sales and collections from the third
to the fourth quarter in each of the last three fiscal years and is expected to have a similar effect in future years. If conditions
arise that impair vehicle sales during the first, third or fourth fiscal quarters, the adverse effect on the Company’s revenues
and operating results for the year could be disproportionately large.
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 exposure
to changes in the prime interest rate of its lender. The Company does not use financial instruments for trading purposes.
The Company has in the past entered into an interest rate swap agreement to manage interest rate risk; however, as of January 31,
2015, the Company has no interest rate swap agreement in effect.
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 total indebtedness of $112.6 million outstanding
at January 31, 2015. The impact of a 1% increase in interest rates on this amount of debt would result in increased annual interest
expense of approximately $1.1 million 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. The Company’s finance receivables generally bear interest at fixed
rates ranging from 11% to 19%, while its revolving credit facilities contain variable interest rates that fluctuate with market
interest rates. Prior to June 2009, interest rates charged on finance receivables originated in the State of Arkansas were limited
to the federal primary credit rate plus 5%. Typically, the Company had charged interest on its Arkansas contracts at or near the
maximum rate allowed by law. Thus, while the interest rates charged on the Company’s contracts do not fluctuate once established,
new contracts originated in Arkansas were set at a spread above the federal primary credit rate which does fluctuate. Effective
June 26, 2009, the Company began charging 12% on contracts originated in Arkansas. This was due to the passage by the U.S. Congress
of the Supplemental Appropriations Act of 2009 which was signed into law on June 24, 2009. Within this legislation was a provision
that allowed the Company to charge up to 17% on sales financed to customers in Arkansas, which expired via a sunset clause on December
31, 2010. On November 2, 2010, voters in Arkansas approved a state constitutional amendment to allow up to 17% interest for non-bank
loans and contracts in the state effectively making the Federal legislation permanent. Subsequently, an appeal challenging the
constitutionality of the amendment was filed with the Arkansas Supreme Court. In June 2011, the Arkansas Supreme Court upheld the
amendment. In mid-July 2011, the Company began charging a fixed 15% interest rate on new contracts for all dealerships in all states
in which the Company operates. At January 31, 2015, approximately 33% of the Company’s finance receivables were originated
in Arkansas.
Item 4. Controls
and Procedures
| a) | Evaluation of Disclosure Controls and Procedures |
Based on management’s
evaluation (with the participation of the Company’s Chief Executive Officer and Chief Financial Officer), as of January 31,
2015, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that 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”)), are effective to provide reasonable assurance 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 in Internal Control Over Financial Reporting |
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.
Item 4T. Controls and Procedures
Not applicable
PART II
Item 1. Legal Proceedings
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.
Item 1A. Risk Factors
Other than the risk
factor set forth below, there have been no material changes to the Company’s risk factors as previously disclosed in Item
1A to Part 1 of the Company’s Form 10-K for the fiscal year ended April 30, 2014.
The used automotive
retail industry operates in a highly regulated environment with significant attendant compliance costs and penalties for non-compliance.
The used automotive
retail industry is subject to a wide range of federal, state, and local laws and regulations, such as local licensing requirements
and laws regarding advertising, vehicle sales, financing, and employment practices. Facilities and operations are also subject
to federal, state, and local laws and regulations relating to environmental protection and human health and safety. The violation
of these laws and regulations could result in administrative, civil, or criminal penalties against the Company or in a cease and
desist order. As a result, the Company has incurred, and will continue to incur, capital and operating expenditures, and other
costs in complying with these laws and regulations. Further, over the past several years, private plaintiffs and federal, state,
and local regulatory and law enforcement authorities have increased their scrutiny of advertising, sales and finance activities
in the sale of motor vehicles.
Additionally, the
Company anticipates that it could be subject to new regulations in connection with federal laws enacted by the United States Congress
to establish the CFPB with potentially broad regulatory powers over consumer credit products and services such as those offered
by the Company. The CFPB can exercise full regulatory, supervisory and enforcement powers over certain non-bank providers of consumer
financial products and services such as the Company. The CFPB’s powers include supervisory authority over certain providers
of consumer financial products and services; the authority to adopt rules describing specified acts and practices as being “unfair,”
“deceptive” or “abusive,” and hence unlawful; the authority to impose recordkeeping obligations; and the
authority to enforce various federal laws related to consumer finance. On October 8, 2014, the CFPB published a proposed rule defining
larger participants of the automobile financing market for purposes of routine examination and supervision. If adopted in its present
form, it is possible that the Company’s finance subsidiary, Colonial, may be deemed a “larger participant” and
therefore subject to examination and supervision by the CFPB. The notice and comment period for the proposed rule ended on December
8, 2014, and a final rule is expected to be issued in the near term. The impact, if any, to the Company’s business and operations
of this proposed rule, if adopted, and any future regulations which may be proposed or adopted by the CFPB remains uncertain. However,
CFPB supervision and regulation may increase the Company’s compliance costs, require changes to its business practices, affect
its competitiveness, impair its profitability, harm its reputation or otherwise adversely affect its business.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
The Company is authorized
to repurchase up to one million shares of its common stock under the common stock repurchase program amended and approved by the
Board of Directors on November 19, 2014. The following table sets forth information with respect to purchases made by or on behalf
of the Company of shares of the Company’s common stock during the periods indicated:
Issuer
Purchases of Equity Securities
|
Period | |
Total
Number of
Shares
Purchased | |
Average
Price Paid
per Share | |
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1) | |
Maximum Number
of Shares that
May Yet Be
Purchased Under
the Plans
or Programs(1) |
November 1, 2014 through November 30, 2014 | |
| - | | |
$ | 0.00 | | |
| - | | |
| 1,000,000 | |
December 1, 2014 through December 31, 2014 | |
| 51,467 | | |
$ | 49.56 | | |
| 51,467 | | |
| 948,533 | |
January 1, 2015 through January 31, 2015 | |
| 15,000 | | |
$ | 53.38 | | |
| 15,000 | | |
| 933,533 | |
Total | |
| 66,467 | | |
$ | 50.43 | | |
| 66,467 | | |
| 933,533 | |
| (1) | The above described stock repurchase program has no expiration date. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibit
Number |
|
Description of Exhibit |
|
|
|
3.1 |
|
Articles of Incorporation of the Company, as amended. (Incorporated by reference to Exhibits 4.1-4.8 to the Company's Registration Statement on Form S-8 filed with the SEC on November 16, 2005 (File No. 333-129727)). |
|
|
|
3.2 |
|
Amended and Restated Bylaws of the Company dated December 4, 2007. (Incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2007 filed with the SEC on December 7, 2007). |
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). |
|
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act. |
|
|
|
32.1 |
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS |
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XBRL Instance Document |
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101.SCH |
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XBRL Taxonomy Extension Schema Document |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
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XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
SIGNATURES
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.
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America’s Car-Mart, Inc. |
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By: s
William H. Henderson |
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William H. Henderson |
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Chief Executive Officer |
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(Principal Executive Officer) |
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By: s
Jeffrey A. Williams |
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Jeffrey A. Williams |
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Chief Financial Officer and Secretary |
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(Principal Financial and Accounting Officer) |
Dated: March 3, 2015
33
Exhibit
31.1
Certification
I, William H. Henderson, certify that:
1. | | I have reviewed this quarterly report on Form 10-Q of America’s Car-Mart, Inc.
for the period ended January 31, 2015; |
2. | | Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
3. | | Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
4. | | The registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | | Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared; |
(b) | | Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and |
(d) | | Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and |
5. | | The registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | | All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and |
(b) | | Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting. |
March 3, 2015 |
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s William H. Henderson |
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William H. Henderson |
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Chief Executive Officer |
Exhibit 31.2
Certification
I, Jeffrey A. Williams, certify that:
1. | | I have reviewed this quarterly report on Form 10-Q of America’s Car-Mart, Inc.
for the period ended January 31, 2015; |
2. | | Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
3. | | Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
4. | | The registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | | Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared; |
(b) | | Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and |
(d) | | Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and |
5. | | The registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) | | All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and |
(b) | | Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting. |
March 3, 2015 |
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s Jeffrey A. Williams |
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Jeffrey A. Williams |
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Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION
1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the
Quarterly Report of America’s Car-Mart, Inc. (the “Company”) on Form 10-Q for the quarter ended January 31, 2015
filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, William H. Henderson,
Chief Executive Officer of the Company, and Jeffrey A. Williams, Chief Financial Officer of the Company, certify in our capacities
as officers of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of our knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company. |
By: s William H.
Henderson
William H. Henderson
Chief Executive Officer
March 3, 2015
By: s Jeffrey A.
Williams
Jeffrey A. Williams
Chief Financial Officer
and Secretary
March 3, 2015
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