America’s Car-Mart, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended April 30, 2019. The filing also reports fourth-quarter results for the three months ended April 30, 2019; this is not a calendar-year 2018 report. Amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
America’s Car-Mart sells older-model used vehicles and finances substantially all sales to customers who often have limited or impaired credit histories. It operated 144 dealerships across 11 states at year-end, after opening five locations during FY2019. Revenue comes from vehicle sales, related service contracts and payment protection plans, and interest and fees on customer finance contracts.
Financial results and key metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $669.1 | $612.2 |
| Sales | $586.5 | $537.5 |
| Interest and other income | $82.6 | $74.7 |
| Gross profit | $242.6 | $222.3 |
| Income before income taxes | $59.9 | $38.9 |
| Net income | $47.6 | $36.5 |
| Diluted EPS | $6.73 | $4.90 |
| Net cash provided by operating activities | $24.9 | $10.0 |
- Revenue grew 9.3%; management attributed the increase mainly to a 4.9% rise in average retail price, 4.1% more retail units sold, and 10.6% growth in interest and other income. Same-store revenue growth was 8.4%.
- Gross margin on vehicle sales was approximately 41.4% of sales, broadly unchanged from FY2018. SG&A was $107.2 million, or 18.3% of sales, versus $99.0 million, or 18.4%.
- Provision for credit losses declined to $146.4 million, or 25.0% of sales, from $149.1 million, or 27.7%. Net charge-offs were 25.7% of average finance receivables, down from 28.8%; over-30-day delinquencies were 2.9% at year-end versus 3.5%.
- Interest expense increased 40.8% to $7.9 million, reflecting higher average borrowings and interest rates. The average receivables yield was 15.6%, versus 15.2%.
- Finance receivables, net, were $415.5 million, up 8.3%; inventory was $37.5 million, up 11.5%. Total assets were $492.5 million and total equity was $260.5 million.
- Debt facilities totaled $152.9 million, compared with $152.4 million; the company reported a debt-to-equity ratio of 0.59:1. Cash was $1.8 million, with approximately $53 million of additional revolver availability. Credit-facility covenants were met.
- Capital spending was $4.0 million. The company repurchased $26.6 million of shares. It paid $40,000 of subsidiary preferred dividends and states that it has not paid cash dividends on common stock.
Fourth-quarter results and material changes
FY2019 fourth-quarter revenue was $176.9 million, versus $169.5 million in the prior-year quarter; gross profit was $63.6 million versus $61.2 million; net income was $14.6 million versus $10.2 million; and diluted EPS was $2.07 versus $1.43. The fourth quarter was the highest-revenue quarter of FY2019, consistent with the company’s seasonal pattern.
- FY2019 net income rose 30.4%, while diluted EPS increased 37.3%, supported by improved credit-loss results and fewer weighted-average shares.
- Net operating cash flow improved to $24.9 million from $10.0 million, while finance receivables grew $31.9 million. The business uses operating cash and revolving borrowings to fund receivables growth, capital expenditures, and repurchases.
- Credit performance improved, which management linked to collection-process improvements, stronger repossession recoveries, and a somewhat improved macroeconomic environment. However, the portfolio’s current-account share fell year over year; management attributed much of the movement to payment-date timing, while over-30-day delinquency improved.
- FY2018 income taxes included an $8.1 million discrete deferred-tax benefit from the Tax Cuts and Jobs Act. FY2019’s tax provision was $12.2 million, compared with $2.4 million in FY2018, so prior-year net income was affected by this unusual tax benefit.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance is provided. Management expects receivables growth generally to be slightly above revenue growth, and plans approximately $6.6 million of property and equipment purchases over the next 12 months, subject to operating results. It believes liquidity will be adequate for foreseeable needs.
- Management expects vehicle supply constraints and purchase-cost pressure to persist near term, with gross margin percentages remaining under pressure. Increased subprime auto financing competition has contributed to lower down payments and longer contract terms, which can weaken collections and increase credit losses.
- Major risks include borrower defaults and repossessions, estimation risk in the credit-loss allowance, vehicle inventory availability and cost, competition, economic and employment conditions, geographic concentration, employee recruitment and retention, regulation and CFPB oversight, and cybersecurity and information-system disruptions.
- The $127.8 million credit-loss allowance equaled 25.0% of the stated principal balance after specified unearned revenues. Management noted that a one-percentage-point change in the allowance as a percentage of finance receivables would change pretax income by approximately $5.1 million.
- Revolving facilities were extended to December 3, 2021, with total permitted commitments increased to $215 million. Borrowings are variable-rate; the company estimated that a 1% rate increase on year-end revolving debt would raise annual interest expense by approximately $1.5 million.
- Operating lease commitments, including reasonably assured renewal periods, totaled $48.1 million. Adoption of the new lease standard was expected to increase reported assets and liabilities by approximately $35–$40 million without materially affecting income or cash flows.
- The company identified a tax contingency involving intercompany receivable sales between its operating and finance subsidiaries. If the company’s interpretation of tax regulations is not sustained, tax expense and the timing of tax payments could increase. Ordinary-course litigation was not expected to have a material effect, though outcomes are uncertain.
- Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether improved collections and lower charge-offs are sustained, and how portfolio delinquency, repossessions, recoveries, and the allowance develop.
- Whether revenue and dealership growth can continue without worsening underwriting, contract terms, or credit performance.
- Whether vehicle sourcing costs and inventory availability constrain margins or sales, and whether gross margin holds near FY2019 levels.
- Revolver availability, borrowing-base capacity, variable interest costs, covenant headroom, and refinancing plans ahead of the December 2021 maturity.
- The potential financial and cash-tax impact of the intercompany receivables tax position, lease-standard adoption, and any material litigation developments.