America’s Car-Mart, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended January 31, 2012; comparative periods ended January 31, 2011. The interim financial statements are unaudited. The company sells used vehicles and finances substantially all customer purchases, operating 111 dealerships at period end.
Financial performance
| Metric | Three months ended Jan. 31, 2012 | Nine months ended Jan. 31, 2012 |
|---|---|---|
| Sales | $94.0 million, up 13.5% | $284.4 million, up 14.7% |
| Total revenue, including interest income | $105.4 million, up 13.8% | $316.7 million, up 14.8% |
| Net income | $7.3 million, up 28.4% | $23.3 million, up 17.7% |
| Diluted EPS | $0.73, versus $0.52 | $2.28, versus $1.77 |
| Income before taxes | $11.7 million, up 30.1% | $37.5 million, up 18.9% |
| Provision for credit losses | $20.9 million; 22.2% of sales | $62.1 million; 21.8% of sales |
For the quarter, cost of sales was 57.8% of sales, versus 58.2% a year earlier; SG&A was 18.3%, versus 19.2%. For the nine months, cost of sales rose to 57.5% from 57.2%, while SG&A declined to 17.6% from 18.3%. Management said vehicle purchase and transport costs, wholesale mix, and product margins affected cost of sales. Nine-month interest expense was $1.7 million, down from $2.2 million; higher average borrowings were offset by lower variable rates.
Cash flow, balance sheet and liquidity
- Net cash used in operating activities was $6.0 million for the nine months, compared with $1.7 million provided a year earlier. Management attributed the pressure primarily to growth in finance receivables and inventory.
- Finance receivables, net, were $253.6 million at January 31, up from $222.3 million at April 30, 2011. Inventory was $29.8 million, versus $23.6 million.
- Cash was $0.4 million. Revolving debt was $83.9 million, up from $47.5 million at April 30, 2011. The $105 million facility matures in November 2013; reported additional borrowing availability was $21 million. The company reported compliance with its covenants.
- Total assets were $314.5 million and total liabilities $130.4 million. The filing does not provide a current ratio or other conventional liquidity ratio.
- The company repurchased $29.95 million of shares during the nine months. Financing activities also included $36.3 million of net additional debt. The facility amendment permitted up to $40 million in fiscal 2012 repurchases, subject to financial-ratio requirements.
Material changes and operating indicators
- Nine-month revenue growth reflected 8.3% same-store growth, additional revenue from newer locations, 10.9% more retail units sold, a 3.6% increase in average retail selling price, and higher interest and wholesale sales. Same-store revenue increased 7.9% in the quarter and 8.3% year to date.
- The allowance for credit losses rose to $68.7 million from $60.2 million at April 30, 2011. Net charge-offs as a percentage of average finance receivables were 17.7%, unchanged year over year for the nine-month period; collections as a percentage of average receivables declined to 46.3% from 48.8%.
- At January 31, 4.7% of receivables were at least 30 days past due, versus 4.6% a year earlier. Receivables over 90 days past due were $978,000, compared with $482,000. The filing says the current 3–29 day delinquency category was affected by payment timing at period end.
- The company’s share repurchases reduced weighted average basic shares to 9.9 million for the nine months from 11.0 million a year earlier, contributing to per-share earnings growth.
Outlook, risks and unusual items
- Management expected near-term gross margin to be around 42% and annual credit losses to remain in a 20%–22% of sales range, while warning that actual results could differ. It said a fourth-quarter allowance reduction was possible if credit performance remained consistent; this was not a commitment.
- Management expected approximately $4 million of property and equipment purchases over the next 12 months for dealership additions, refurbishment and expansion, and stated it believed liquidity would be adequate for foreseeable needs.
- Key risks include subprime customer credit and collections, inflation and fuel costs, unemployment, vehicle supply and purchase prices, interest-rate exposure on variable-rate debt, dealership staffing and execution, and dependence on revolving credit availability. A 1% increase in interest rates on period-end debt would increase annual interest expense by approximately $839,000.
- An IRS dispute regarding the timing and deductibility of payment-protection-plan-related items remained under review in the Appeals Office. The company intended to contest the proposed adjustments; management described the issue as one of tax-payment timing, not the overall tax provision. The filing does not state a clear amount of potential payment exposure.
- The company terminated its $20 million interest-rate swap in April 2011 for $1.3 million; no swap was in effect at quarter end. No goodwill impairment was reported for fiscal 2012 to date.
Important facts for investors to verify
- Whether collection rates and delinquency trends improve, and whether the $68.7 million credit-loss allowance remains adequate.
- Whether reported $21 million of revolving-facility availability is sufficient as receivables grow, and the company’s ability to renew or refinance the facility before its November 2013 maturity.
- Whether vehicle sourcing costs, wholesale volumes and product margins support management’s near-term gross-margin expectation.
- The status and possible cash-tax consequences of the IRS matter and the related receivables-sale tax treatment.
- Future share repurchases, debt growth and compliance with lender restrictions and financial covenants.