America’s Car-Mart, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended October 31, 2016, the second quarter and first half of fiscal 2017. The company sells older-model used vehicles and finances substantially all customers, many of whom have limited credit histories. It operated 143 dealerships, primarily in the South-Central United States.
Financial and operating metrics
| Metric | Three months ended Oct. 31, 2016 | Six months ended Oct. 31, 2016 |
|---|---|---|
| Total revenue | $150.2 million; up 12.9% year over year | $296.1 million; up 7.4% |
| Net income | $5.0 million, versus a $0.5 million loss | $12.1 million, versus $4.1 million |
| Diluted EPS | $0.62, versus $(0.06) | $1.48, versus $0.46 |
| Gross margin on vehicle sales | 41.4%, versus 39.2% | 41.6%, versus 40.2% |
| Credit-loss provision | $39.4 million; 29.6% of sales | $72.8 million; 27.7% of sales |
| Operating cash flow | Not separately presented | $(9.9) million, versus $5.6 million provided |
For the six-month period, sales rose 7.2% and interest income rose 9.1%. Retail units sold increased 4.3%, and average retail selling price increased to $10,442 from $10,098. Management attributed revenue growth to higher unit volume, selling prices, interest rates, and the finance-receivables portfolio.
At October 31, finance receivables, net were $363.0 million, up from $334.8 million at April 30; inventory was $32.4 million. The allowance for credit losses was $111.3 million, or 25% of principal balance after specified deferred revenues. Receivables more than 30 days past due were 4.8%, compared with 3.5% a year earlier. Net charge-offs as a percentage of average receivables improved to 14.0% for the half-year from 15.6%, while collections as a percentage of average receivables declined to 25.6% from 27.7%.
Cash was $0.17 million at period end. Debt facilities and notes payable totaled $124.7 million, versus $107.9 million at April 30; revolving borrowings were approximately $124.5 million. The company reported about $45 million of additional borrowing availability and compliance with debt covenants. Total assets were $435.2 million and total liabilities were $200.0 million.
Material changes versus comparable periods
- Second-quarter revenue increased 12.9%, and the company moved from a prior-year quarterly loss to a profit. First-half net income increased to $12.1 million from $4.1 million.
- Gross margin improved, which management linked mainly to lower wholesale volumes and repair costs. Credit-loss provision as a percentage of sales also declined year over year, though delinquency levels rose versus October 2015.
- Operating cash flow turned negative, primarily reflecting finance-receivable originations and business growth. The company funded receivables and inventory growth, capital expenditures, and $8.1 million of share repurchases partly through a $16.8 million increase in net revolving debt.
- Interest expense increased 27.6% for the half-year, principally due to higher average borrowings. The company raised its retail installment contract rate from 15.0% to 16.5% in May 2016.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance was provided. Management expects finance-receivables growth to generally exceed revenue growth modestly, partly due to longer contract terms.
- Management expects near-term credit losses to be higher than historical ranges, citing competitive pressure and economic challenges affecting customers. It noted longer terms, higher contract modifications, and lower collections as pressures; collection execution remains a key focus.
- Management expects gross margin percentage to remain under pressure near term. Tight used-vehicle supply and elevated purchase costs may persist, although stronger new-car sales could provide some relief. The company expects to spend approximately $3.2 million on property and equipment over the next 12 months and stated it believes liquidity will be adequate.
- On December 12, 2016, after quarter-end, the company amended and restated its credit agreement: commitments rose from $172.5 million to $200 million and maturity was extended to December 12, 2019, among other changes.
- Credit risk is central: substantially all receivables are subprime consumer auto contracts. A 1% change in the allowance as a percentage of receivables would change pretax results by approximately $4.5 million. Used-vehicle prices, customer employment and living costs, collections, competition, and access to credit are identified risks.
- The company disclosed a $1 million standby letter of credit and ordinary-course legal proceedings, which management does not expect to have a material adverse effect. It also described a tax contingency concerning its intercompany receivables-sale treatment; an adverse interpretation could increase taxes and alter payment timing.
- The prior-year comparison includes a $3 million noncash after-tax allowance increase referenced by management when presenting adjusted credit-loss comparisons. The filing also reports a $399,000 loss on disposal of property and equipment for the six months.
Important facts for investors to verify
- Whether delinquency and collection trends stabilize, and whether the allowance remains adequate as the portfolio grows and contract terms lengthen.
- How the higher contract rate affects customer affordability, collections, and finance income.
- Whether operating cash flow and liquidity remain sufficient to fund receivables growth, repurchases, and planned capital spending without continued debt increases.
- The impact of used-vehicle acquisition costs, wholesale volumes, and repair expenses on gross margins.
- The terms and borrowing-base availability under the December 2016 credit agreement, along with compliance with its covenants and share-repurchase limits.
- Any developments in the tax contingency and the expected effects of upcoming accounting standards; the filing says the company was still evaluating their effects.