America’s Car-Mart, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended April 30, 2014. The filing’s fourth quarter covers February–April 2014; it is not a calendar-year 2013 quarter. All dollar amounts below are in U.S. dollars.
Business context
America’s Car-Mart sells older-model used vehicles and finances substantially all customer purchases, primarily for customers with limited or impaired credit histories. It operated 134 dealerships at year-end, up from 124 a year earlier, across the South-Central United States. Arkansas generated approximately 35% of revenue.
Financial performance and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenue | $489.2 million | $464.7 million | +5.3% |
| Net income attributable to common stockholders | $21.1 million | $32.1 million | -34.3% |
| Diluted EPS | $2.25 | $3.36 | -33.0% |
| Income before taxes | $33.7 million | $50.7 million | -33.5% |
| Net cash from operating activities | $21.9 million | $(1.3) million | Improved |
| Capital expenditures | $7.1 million | $5.7 million | Increased |
- Sales were $434.5 million, up 4.5%; interest and other income was $54.7 million, up 11.7%. Retail units sold rose 4.5% to 42,551, while average retail price increased 0.5% to $9,768.
- Gross profit was $183.2 million; gross margin was 42.2% of vehicle sales, within management’s stated recent range of approximately 42%–44%. Cost of sales rose to 57.8% of sales from 57.5%.
- Provision for credit losses rose 24.2% to $119.2 million, or 27.4% of sales versus 23.1%. Excluding the third-quarter reserve increase, management reported the FY2014 loss ratio as 25.7%. Net charge-offs were 28.2% of average finance receivables versus 25.2%.
- Management increased the allowance for credit losses from 21.5% to 23.5% of the relevant receivable balance, recording a $7.7 million charge ($4.9 million after tax). The year-end allowance was $86.0 million.
- Finance receivables, net, were $293.3 million versus $288.0 million; inventory was $30.1 million versus $32.8 million. Total assets were $363.3 million and total equity was $213.0 million.
- Revolving debt was $97.0 million, down from $99.6 million; the credit facility carried interest at LIBOR plus 2.25% (2.40% at year-end), with maturity in June 2016. The company reported approximately $46 million of additional borrowing availability and compliance with covenants.
- Cash was $289,000 at year-end. The company reported a debt-to-equity ratio of 0.46 to 1.0, defined using revolving facilities divided by total equity.
Fourth-quarter results and changes versus prior year
FY2014 fourth-quarter revenue was $122.6 million versus $125.5 million in FY2013, down approximately 2.3%. Gross profit was $45.4 million versus $47.4 million, and net income was $6.3 million versus $8.8 million. Diluted EPS was $0.68 versus $0.92. The fourth quarter followed a sharply weaker third quarter, when net income was $1.5 million versus $8.0 million a year earlier.
For the full year, revenue growth slowed to 5.3% from 8.0%; same-store revenue declined 0.8% after growing 3.3% in FY2013. Growth from new dealerships and interest income offset the decline at locations operating throughout both periods. Profit fell principally as credit-loss provision, cost of sales, and SG&A increased faster than revenue.
Outlook, commentary, risks and contingencies
- Management targeted eight selective dealership openings for FY2015, subject to operating performance, and expected approximately $4.5 million of property and equipment purchases over the next 12 months. It said gross margin should remain near the 42% range and believed liquidity would be adequate for foreseeable needs.
- Management expected credit losses to remain above historical levels in the near to mid-term, citing competition, longer contract terms, lower collections, and pressure on customers. It also expected finance receivables to grow slightly faster than revenue over time, partly because of longer terms.
- Competitive financing pressure has contributed to lower down payments and longer contracts. The portfolio’s weighted-average contract term, including modifications, was 29.8 months, compared with 29.3 months a year earlier; principal collected as a percentage of average receivables fell to 58.0% from 60.6%.
- Delinquencies of 30 days or more improved to 4.4% of receivables from 5.1%; however, annual net charge-offs increased. Management identified the allowance estimate as a critical, judgment-sensitive accounting estimate; a 1 percentage-point change in the reserve rate would affect pretax results by approximately $3.7 million.
- Other material risks include access to credit facilities and covenant compliance, used-vehicle availability and purchase costs, consumer-finance regulation including potential CFPB rules, economic and weather conditions, geographic concentration, and information-system or cybersecurity failures.
- Ordinary-course legal proceedings were not expected by management to have a material adverse effect, though outcomes cannot be predicted with certainty. A tax treatment involving intercompany receivable sales could increase taxes or alter their timing if the company’s interpretation is not sustained. The IRS completed examinations for FY2010–FY2011 with timing adjustments and a net refund.
- The company reported an unqualified audit opinion on its financial statements and effective internal control over financial reporting. Revolving credit facilities and operating leases were disclosed; operating lease commitments totaled $39.2 million, including reasonably assured renewal periods.
Key investor verification points
- Assess whether credit-loss trends, collections, contract extensions, and the 23.5% allowance remain adequate as competition and customer pressures persist.
- Review how much of revenue and profit growth depends on new dealerships and interest income, given negative same-store revenue growth and weaker FY2014 fourth-quarter results.
- Verify borrowing-base availability, covenant headroom, refinancing plans ahead of the June 2016 facility maturity, and the effect of variable rates on financing costs.
- Monitor vehicle sourcing costs, gross margins, repair and payment-protection-plan claims, and progress toward management’s planned dealership openings and capital spending.
- Consider the sensitivity of results to the allowance estimate, regional concentration, consumer-credit regulation, and the intercompany receivable-sale tax position.