Car-Mart(CRMT) - 2023 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Presents the unaudited financial information for America's Car-Mart, Inc., covering statements, notes, and management's analysis Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements, including balance sheets, operations, cash flows, equity, and explanatory notes, with error corrections Condensed Consolidated Balance Sheets Summarizes the company's financial position, detailing assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheets (Dollars in thousands) | (Dollars in thousands) | October 31, 2022 (Unaudited) | April 30, 2022 | |:-----------------------|:-----------------------------|:---------------| | Assets: | | | | Total Assets | $1,306,170 | $1,154,696 | | Liabilities: | | | | Total Liabilities | $813,453 | $677,762 | | Equity: | | | | Total Equity | $492,317 | $476,534 | - Total Assets increased by $151,474 thousand (13.1%) from April 30, 2022, to October 31, 2022, primarily driven by an increase in Finance receivables, net, and Inventory[7] - Total Liabilities increased by $135,691 thousand (20.0%) over the same period, largely due to a significant increase in the Revolving line of credit[7] Condensed Consolidated Statements of Operations Details the company's revenues, costs, expenses, and net income for the reported interim periods Condensed Consolidated Statements of Operations (Dollars in thousands) | (Dollars in thousands) | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | |:-----------------------|:--------------------------------|:--------------------------------|:------------------------------|:------------------------------| | Total Revenues | $351,840 | $284,539 | $690,658 | $562,028 | | Total Costs & Expenses | $347,782 | $254,334 | $668,876 | $498,647 | | Net Income | $3,139 | $23,425 | $16,836 | $49,479 | | Basic EPS | $0.49 | $3.59 | $2.64 | $7.53 | | Diluted EPS | $0.48 | $3.41 | $2.56 | $7.14 | - Net income for the three months ended October 31, 2022, decreased significantly by 86.6% YoY, from $23,425 thousand to $3,139 thousand[9] - For the six months ended October 31, 2022, net income decreased by 66.0% YoY, from $49,479 thousand to $16,836 thousand[9] - Basic EPS for the three months decreased from $3.59 to $0.49, and for the six months, it decreased from $7.53 to $2.64[9] Condensed Consolidated Statements of Cash Flows Reports cash inflows and outflows from operating, investing, and financing activities for the interim periods Condensed Consolidated Statements of Cash Flows (In thousands) | (In thousands) | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | |:-------------------------------|:------------------------------|:------------------------------| | Net cash used in operating activities | $(92,678) | $(69,951) | | Net cash used in investing activities | $(16,667) | $(7,069) | | Net cash provided by financing activities | $103,852 | $76,251 | | Decrease in cash, cash equivalents, and restricted cash | $(5,493) | $(769) | - Net cash used in operating activities increased by 32.5% YoY, from $(69,951) thousand to $(92,678) thousand, primarily due to higher finance receivable originations[11][184] - Net cash used in investing activities more than doubled, increasing from $(7,069) thousand to $(16,667) thousand, driven by increased purchases of property and equipment[11] - Net cash provided by financing activities increased by 36.2% YoY, from $76,251 thousand to $103,852 thousand, largely due to increased proceeds from the revolving line of credit[11] Condensed Consolidated Statements of Equity Outlines changes in shareholders' equity, including common stock, retained earnings, and treasury stock Condensed Consolidated Statements of Equity (In thousands) | (In thousands) | October 31, 2022 (Unaudited) | April 30, 2022 | |:---------------|:-----------------------------|:---------------| | Common Stock | $137 | $136 | | Additional Paid-In Capital | $107,275 | $103,113 | | Retained Earnings | $682,226 | $665,410 | | Treasury Stock | $(297,421) | $(292,225) | | Total Equity | $492,317 | $476,534 | - Total equity increased by $15,783 thousand from April 30, 2022, to October 31, 2022, primarily due to net income and stock-based compensation, partially offset by treasury stock repurchases[14] Notes to Consolidated Financial Statements (Unaudited) Provides detailed explanations of the company's organization, accounting policies, and specific financial statement line items A – Organization and Business Describes the company's business model as an integrated auto sales and finance retailer of used vehicles - America's Car-Mart, Inc. is a publicly held automotive retailer focused on the 'Integrated Auto Sales and Finance' segment of the used car market[18] - The Company primarily sells older model used vehicles and provides financing to customers with limited financial resources or credit histories[18] - As of October 31, 2022, the Company operated 154 dealerships mainly in small cities across the South-Central United States[18] B – Summary of Significant Accounting Policies Details the key accounting principles and estimates used in preparing the interim financial statements - The financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, with all necessary adjustments included[19] - The Company operates as one reportable segment: Integrated Auto Sales and Finance, as individual dealerships meet aggregation criteria[21] - Significant estimates include the allowance for credit losses[22] - Restricted cash, totaling $32,565 thousand at October 31, 2022, is related to securitization transactions and is held for non-recourse note holders[28][30] - The Company recognizes transfers of auto finance receivables into term securitization as secured borrowings, consolidating the trust as the primary beneficiary[31][32] - Finance receivables are collateralized by vehicles, with an average interest rate of approximately 16.5%; accounts are charged-off when timely collection is not probable, typically around 68 days past due[34][39] - The allowance for credit losses is management's best estimate of lifetime expected losses, considering historical data, contract characteristics, delinquency levels, and macroeconomic factors[41][45] - Revenue from used vehicle sales is recognized at contract signing and vehicle possession, while service contract and accident protection plan revenues are deferred and recognized over time[62] - The effective income tax rates were 22.7% and 21.9% for the six months ended October 31, 2022 and 2021, respectively[55] - The Company is evaluating ASU 2022-02 (Financial Instruments – Credit Losses), effective for fiscal years beginning after December 15, 2022, for its impact on financial statements[69] C – Finance Receivables, Net Provides details on the company's finance receivables, including terms, credit quality, and allowance for losses - Finance receivables are installment sale contracts for used vehicles, with fixed interest rates of 16.5% (19.5%-21.5% in Illinois) and terms of 18-54 months[70] Finance Receivables, Net (In thousands) | (In thousands) | October 31, 2022 | April 30, 2022 | |:---------------------------------------|:-----------------|:---------------| | Gross contract amount | $1,584,745 | $1,378,803 | | Less unearned finance charges | $(325,096) | $(277,306) | | Principal balance | $1,259,649 | $1,101,497 | | Less allowance for credit losses | $(272,730) | $(237,823) | | Finance receivables, net | $986,919 | $863,674 | - Net charge-offs as a percentage of average finance receivables increased to 11% for the six months ended October 31, 2022, compared to 8.4% in the prior year, driven by increased frequency and severity of losses[75] - Principal collections as a percentage of average finance receivables decreased to 17.4% for the six months ended October 31, 2022, from 21.9% in the prior year, mainly due to term extensions and fewer early payoffs[76] Finance Receivables Principal Balance by Delinquency (Dollars in thousands) | (Dollars in thousands) | October 31, 2022 Principal Balance | Percent of Portfolio | April 30, 2022 Principal Balance | Percent of Portfolio | October 31, 2021 Principal Balance | Percent of Portfolio | |:-----------------------|:-----------------------------------|:---------------------|:---------------------------------|:---------------------|:-----------------------------------|:---------------------| | Current | $1,028,291 | 81.63% | $958,808 | 87.05% | $819,314 | 84.78% | | 3 - 29 days past due | $185,434 | 14.72% | $109,873 | 9.97% | $108,563 | 11.23% | | 30 - 60 days past due | $35,258 | 2.80% | $22,477 | 2.04% | $24,499 | 2.53% | | 61 - 90 days past due | $7,151 | 0.57% | $7,360 | 0.67% | $7,509 | 0.78% | | > 90 days past due | $3,515 | 0.28% | $2,979 | 0.27% | $6,540 | 0.68% | | Total | $1,259,649 | 100.00% | $1,101,497 | 100.00% | $966,425 | 100.00% | - The portfolio weighted average contract term increased to 44.8 months at October 31, 2022, from 40.0 months at October 31, 2021, primarily due to a 15.9% increase in the average selling price[82] D – Property and Equipment Presents the breakdown and net value of the company's land, buildings, and other fixed assets Property and Equipment (In thousands) | (In thousands) | October 31, 2022 | April 30, 2022 | |:---------------------------------------|:-----------------|:---------------| | Land | $12,454 | $11,749 | | Buildings and improvements | $18,836 | $13,876 | | Furniture, fixtures and equipment | $18,176 | $16,189 | | Leasehold improvements | $43,214 | $36,392 | | Construction in progress | $15,143 | $14,234 | | Less accumulated depreciation and amortization | $(42,654) | $(41,002) | | Total | $65,169 | $51,438 | - Total property and equipment, net, increased by $13,731 thousand (26.7%) from April 30, 2022, to October 31, 2022[91] E – Accrued Liabilities Details various accrued expenses, including employee compensation, deferred sales tax, and interest payable Accrued Liabilities (In thousands) | (In thousands) | October 31, 2022 | April 30, 2022 | |:-------------------------------|:-----------------|:---------------| | Employee compensation | $11,854 | $12,865 | | Deferred sales tax | $8,354 | $7,388 | | Reserve for APP claims | $4,561 | $4,761 | | Fair value of contingent consideration | $3,544 | $3,544 | | Health insurance payable | $977 | $1,041 | | Accrued interest payable | $1,486 | $813 | | Other | $2,545 | $2,218 | | Total | $33,321 | $32,630 | - Total accrued liabilities increased by $691 thousand (2.1%) from April 30, 2022, to October 31, 2022, primarily due to increases in deferred sales tax and accrued interest payable[92] F – Debt Facilities Describes the company's debt structure, including non-recourse notes and revolving credit facilities Debt Facilities (In thousands) | (In thousands) | October 31, 2022 | April 30, 2022 | |:-------------------------------|:-----------------|:---------------| | Non-recourse notes payable, net | $249,622 | $395,986 | | Revolving line of credit, net | $302,123 | $44,670 | | Total debt | $551,745 | $440,656 | - Total debt increased by $111,089 thousand (25.2%) from April 30, 2022, to October 31, 2022[94] - The revolving line of credit increased significantly from $44,670 thousand to $302,123 thousand, while non-recourse notes payable decreased from $395,986 thousand to $249,622 thousand[94] - The revolving credit facilities mature in September 2024, with an interest rate of SOFR plus 2.35% (6.25% at Oct 31, 2022)[103] - Non-recourse notes payable were issued in April 2022 with a weighted average fixed coupon rate of 5.14% and mature through April 2029[106] G – Fair Value Measurements Explains the methodologies and categorization of fair value measurements for financial instruments - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[109][110][111] Fair Value Measurements (In thousands) | (In thousands) | October 31, 2022 Carrying Value | October 31, 2022 Fair Value | April 30, 2022 Carrying Value | April 30, 2022 Fair Value | |:------------------------------|:--------------------------------|:----------------------------|:------------------------------|:--------------------------| | Cash and cash equivalents | $4,529 | $4,529 | $6,916 | $6,916 | | Restricted cash | $32,565 | $32,565 | $35,671 | $35,671 | | Finance receivables, net | $986,919 | $774,684 | $854,290 | $677,421 | | Accounts payable | $24,763 | $24,763 | $20,055 | $20,055 | | Revolving line of credit | $302,123 | $302,123 | $44,670 | $44,670 | | Non-recourse notes payable | $249,622 | $249,622 | $395,986 | $395,986 | - The fair value of finance receivables, net, was $774,684 thousand at October 31, 2022, which is lower than its carrying value of $986,919 thousand, reflecting a discount based on potential third-party sale[114] H – Weighted Average Shares Outstanding Provides the basic and diluted weighted average shares outstanding for EPS calculations Weighted Average Shares Outstanding | | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | |:--------------------------------|:--------------------------------|:--------------------------------|:------------------------------|:------------------------------| | Weighted average shares outstanding-basic | 6,368,840 | 6,529,846 | 6,371,083 | 6,567,020 | | Dilutive options and restricted stock | 179,431 | 333,427 | 203,845 | 363,584 | | Weighted average shares outstanding-diluted | 6,548,271 | 6,863,273 | 6,574,928 | 6,930,604 | - Basic weighted average shares outstanding decreased by 2.5% for the three months and 3.0% for the six months ended October 31, 2022, compared to the prior year[115] - Diluted weighted average shares outstanding decreased by 4.6% for the three months and 5.1% for the six months ended October 31, 2022, compared to the prior year[115] I – Stock-Based Compensation Details the expense and activity related to the company's stock option and restricted stock awards - Total stock-based compensation expense was approximately $2.8 million ($2.1 million after tax) for the six months ended October 31, 2022, down from $3.9 million ($3.0 million after tax) in the prior year[116] - The Company granted 137,500 stock options with a fair value of $5.0 million during the six months ended October 31, 2022, compared to 30,000 options with a fair value of $2.1 million in the prior year[122] - Unrecognized compensation cost for unvested options was $5.2 million with a weighted-average remaining vesting period of 1.4 years as of October 31, 2022[123] - The aggregate intrinsic value of outstanding options decreased from $24.2 million at October 31, 2021, to $5.1 million at October 31, 2022[126] - Unrecognized compensation cost for unvested restricted stock awards was $6.2 million with a weighted-average remaining period of 4.4 years as of October 31, 2022[129] J – Commitments and Contingencies Outlines the company's lease obligations, letters of credit, and potential tax-related contingencies - The Company leases approximately 81% of its dealership and office facilities, with rent expense of $4.4 million for the six months ended October 31, 2022, up from $3.9 million in the prior year[132] Maturity of Lease Liabilities (In thousands) | Maturity of lease liabilities | Amount (in thousands) | |:------------------------------|:----------------------| | 2023 (remaining) | $3,791 | | 2024 | $7,261 | | 2025 | $7,151 | | 2026 | $6,581 | | 2027 | $6,058 | | Thereafter | $51,065 | | Total undiscounted operating lease payments | $81,907 | | Less: imputed interest | $(20,411) | | Present value of operating lease liabilities | $61,496 | - The Company has two standby letters of credit totaling $750,000 at October 31, 2022[134] - A tax deduction from intercompany sales of finance receivables between subsidiaries (Car-Mart of Arkansas and Colonial) reduces the overall effective state income tax rate, but failure to satisfy regulations could increase the rate[135] K – Supplemental Cash Flow Information Provides additional details on non-cash investing and financing activities and other cash flow items Supplemental Cash Flow Information (In thousands) | (In thousands) | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | |:----------------------------------------------------------------------------|:------------------------------|:------------------------------| | Interest paid | $15,023 | $4,430 | | Income taxes paid, net | $3,888 | $8,777 | | Inventory acquired in repossession and accident protection plan claims | $61,222 | $33,881 | | Reduction in net receivables for deferred ancillary product revenue at time of charge-off | $13,714 | $6,602 | | Net settlement option exercises | $- | $4,291 | - Interest paid increased significantly to $15,023 thousand for the six months ended October 31, 2022, from $4,430 thousand in the prior year[137] - Income taxes paid, net, decreased to $3,888 thousand from $8,777 thousand YoY[137] L – Correction of an Immaterial Error in Previously Issued Financial Statements Explains the correction of immaterial errors in prior financial statements related to revenue and credit loss classification - Immaterial errors were identified and corrected in historical financial statements related to the classification of deferred revenue of ancillary products at charge-off and the calculation for allowance for credit losses[138] - The correction reclassified deferred revenue from sales revenue to a reduction in customer accounts receivable at charge-off, impacting sales revenue, net charge-offs, provision for credit losses, and deferred tax liability[138] Balance Sheet Corrections (In thousands) | (In thousands) | April 30, 2022 As Previously Reported | Corrections | April 30, 2022 As Corrected | |:---------------------------------------------|:--------------------------------------|:------------|:----------------------------| | Finance receivables, net | $854,290 | $9,384 | $863,674 | | Deferred income tax liabilities, net | $28,233 | $2,216 | $30,449 | | Retained earnings | $658,242 | $7,168 | $665,410 | Statement of Operations Corrections (In thousands) | (In thousands) | Six Months Ended Oct 31, 2021 As Previously Reported | Corrections | Six Months Ended Oct 31, 2021 As Corrected | |:---------------------------------------------|:-----------------------------------------------------|:------------|:-------------------------------------------| | Sales | $498,025 | $(6,602) | $491,423 | | Provision for credit losses | $115,055 | $(8,714) | $106,341 | | Provision for income taxes | $13,409 | $493 | $13,902 | | Net income | $47,860 | $1,619 | $49,479 | | Net income attributable to common shareholders | $47,840 | $1,619 | $49,459 | | Basic EPS | $7.28 | $0.25 | $7.53 | | Diluted EPS | $6.90 | $0.24 | $7.14 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's analysis of financial performance, condition, and liquidity, including forward-looking statements and critical estimates Forward-Looking Information Discusses statements about future objectives and performance, highlighting potential risks that could cause actual results to differ - The report contains forward-looking statements regarding future objectives, plans, goals, and expectations for operating performance, including revenue growth, credit losses, and liquidity[143] - Actual results may differ materially due to various risks, such as general economic conditions, credit facility availability, underwriting effectiveness, competition, and regulatory changes[144] Overview Provides a high-level summary of the company's financial performance, revenue drivers, and strategic investments - Revenue increased 22.9% for the first six months of fiscal 2023, driven by a 31.2% increase in interest income, a 15.9% increase in average retail sales price, and a 4.6% increase in retail units sold[148] - The average retail sales price increased due to tight supply and high demand for used vehicles, although slight declines in used vehicle values began toward the end of the second quarter[149] - Provision for credit losses as a percentage of sales was 27.6% for the first six months of fiscal 2023, normalizing to pre-pandemic levels after positive impacts from stimulus payments in prior years[150][151] - Gross profit dollars per retail unit sold increased by $285 (4.7%) for the first six months of fiscal 2023, but gross margin as a percentage of sales decreased to 33.2% from 36.9% due to higher purchase costs and inflationary pressures[154] - Total collections of principal, interest, and late fees increased by $33.8 million (12.8%) YoY for the first six months of fiscal 2023, but principal collections as a percentage of average finance receivables decreased to 17.4% from 21.9% due to longer contract terms[155] - The Company is investing in people, digital/technology, procurement/inventory management, and customer experience, including recent additions to its senior management team[157] Three months ended October 31, 2022 vs. Three months ended October 31, 2021 Compares the company's financial results for the three-month periods, highlighting key revenue and expense trends Operating Statement (Dollars in Thousands) | (Operating Statement Dollars in Thousands) | October 31, 2022 | October 31, 2021 | % Change | |:-------------------------------------------|:-----------------|:-----------------|:---------| | Sales | $303,554 | $247,520 | 22.6% | | Interest income | $48,286 | $37,019 | 30.4% | | Total Revenues | $351,840 | $284,539 | 23.7% | | Cost of sales | $206,142 | $157,167 | 31.2% | | Selling, general and administrative | $42,911 | $37,161 | 15.5% | | Provision for credit losses | $88,828 | $56,491 | 57.2% | | Interest expense | $8,350 | $2,513 | 232.3% | | Pretax income | $4,058 | $30,205 | -86.6% | - Total revenues increased by 23.7% YoY, driven by a 30.4% increase in interest income and a 13.2% increase in average retail sales price[161] - Cost of sales as a percentage of sales increased to 67.9% from 63.5%, leading to a gross margin decrease to 32.1% from 36.5%, primarily due to wholesale losses and higher inventory procurement costs[162] - Provision for credit losses as a percentage of sales increased to 29.3% from 22.8%, reflecting a $158.2 million growth in finance receivables and increased frequency and severity of losses[166] - Interest expense as a percentage of sales increased to 2.8% from 1.0%, due to rising interest rates and a $232.1 million increase in average borrowings[167] Six months ended October 31, 2022 vs. Six months ended October 31, 2021 Compares the company's financial results for the six-month periods, focusing on revenue, costs, and profitability changes Operating Statement (Dollars in Thousands) | (Operating Statement Dollars in Thousands) | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | % Change | |:-------------------------------------------|:------------------------------|:------------------------------|:---------| | Sales | $598,031 | $491,423 | 21.7% | | Interest income | $92,627 | $70,605 | 31.2% | | Total Revenues | $690,658 | $562,028 | 22.9% | | Cost of sales | $399,257 | $309,930 | 28.8% | | Selling, general and administrative | $86,145 | $75,961 | 13.4% | | Provision for credit losses | $165,068 | $106,341 | 55.2% | | Interest expense | $15,695 | $4,496 | 249.1% | | Pretax income | $21,782 | $63,381 | -65.6% | - Total revenues increased by 22.9% YoY, primarily due to a 15.9% increase in average retail sales price and a 4.6% increase in retail units sold[170] - Gross margin as a percentage of sales decreased to 33.2% from 36.9%, mainly due to wholesale losses and higher inventory procurement costs[171] - Provision for credit losses as a percentage of sales increased to 27.6% from 21.6%, with net charge-offs as a percentage of average finance receivables rising to 11.0% from 8.4%[174] - Interest expense as a percentage of sales increased to 2.6% from 0.9%, driven by rising interest rates and a $236.9 million increase in average borrowings[175] Financial Condition Analyzes changes in key balance sheet items, including receivables, inventory, and property and equipment Financial Condition (In thousands) | (In thousands) | October 31, 2022 | April 30, 2022 | |:---------------------------------|:-----------------|:---------------| | Finance receivables, net | $986,919 | $863,674 | | Inventory | $130,298 | $115,302 | | Income tax receivable, net | $4,389 | $274 | | Property and equipment, net | $65,169 | $51,438 | | Accounts payable and accrued liabilities | $58,084 | $52,685 | | Deferred revenue | $106,508 | $92,491 | | Deferred tax liabilities, net | $35,620 | $30,449 | | Non-recourse notes payable | $249,622 | $395,986 | | Revolving line of credit | $302,123 | $44,670 | - Finance receivables, net, increased by 14.3% since April 30, 2022, and 30.3% since October 31, 2021, consistent with historical patterns of growth slightly exceeding revenue growth[176] - Inventory increased by $15.0 million due to higher sales volumes, increased investment in inventory quantities, and higher costs for vehicle preparation[177] - Property and equipment, net, increased by $13.7 million, primarily from $16.5 million in technology investments and remodeling/relocating existing dealerships[178] - Deferred revenue increased by $14.0 million, mainly from increased sales of accident protection plans and service contracts with longer terms[181] Liquidity and Capital Resources Discusses the company's cash flows, debt capacity, and future capital allocation plans - Cash flows from operations decreased for the six months ended October 31, 2022, primarily due to larger finance receivable originations and deferred revenue, partially offset by increased collections[184] - Increased vehicle purchase costs lead to higher selling prices, which can pressure gross margins and contract terms due to customers' limited incomes[185] - The supply of used vehicles remains tight due to modest new vehicle sales and pandemic-related disruptions, although slight declines in used car prices began in Q2 fiscal 2023[188] - The Company's revolving credit facilities restrict distributions and stock repurchases, allowing repurchases up to $50 million (net of stock option proceeds) or 75% of consolidated net income, subject to availability[192] - At October 31, 2022, the Company had $4.5 million cash on hand and $72.8 million additional availability under its revolving credit facilities[193] - Future capital will be used to grow finance receivables, purchase $25 million in fixed assets (technology, refurbishments, new dealerships), repurchase common stock, and reduce debt[194] Off-Balance Sheet Arrangements Identifies and describes any material off-balance sheet arrangements that could impact financial condition - The Company has two standby letters of credit totaling $750,000 at October 31, 2022, related to insurance policies[196] - No other material off-balance sheet arrangements are expected to significantly impact the Company's financial condition or results[197] Related Finance Company Contingency Explains the tax implications of intercompany finance receivable sales and associated regulatory risks - Intercompany sales of finance receivables between Car-Mart of Arkansas and Colonial allow for a tax deduction, reducing the effective state income tax rate by approximately 250 basis points[199] - Failure to comply with IRS regulations regarding these transactions could result in the loss of the tax deduction and an increase in the effective income tax rate[199] Critical Accounting Estimates Highlights the most significant accounting estimates, particularly the allowance for credit losses, and their underlying assumptions - The most significant accounting estimate is the allowance for credit losses, which covers estimated losses on outstanding finance receivables[201][202] - At October 31, 2022, the allowance for credit losses was $272.7 million, representing 23.65% of the principal balance in finance receivables[202] - The calculation considers historical loss experience, recent trends, contract characteristics, delinquency levels, collateral values, economic conditions, and underwriting/collection practices[203][204][205][206] Recent Accounting Pronouncements Discusses the potential impact of newly issued accounting standards on the company's financial statements - The Company is evaluating ASU 2022-02, 'Financial Instruments – Credit Losses,' which changes the methodology for measuring and timing of recording credit losses, effective for fiscal years beginning after December 15, 2022[211] Seasonality Describes the seasonal patterns in vehicle sales and their potential impact on annual revenues and operating results - The Company's third fiscal quarter (November-January) is historically the slowest for vehicle sales, while the first (May-July) and fourth (February-April) quarters are the busiest[212] - Adverse conditions during peak sales quarters could disproportionately impact annual revenues and operating results[213] Item 3. Quantitative and Qualitative Disclosures about Market Risk Outlines the company's exposure to market risks, primarily interest rate fluctuations on debt obligations - The Company's primary market risk exposure is to changes in interest rates, particularly on its revolving credit facilities[214][215] - A 1% increase in interest rates on the $302.1 million revolving line of credit outstanding at October 31, 2022, would result in an approximate $3.0 million increase in annual interest expense[215] - Finance receivables carry a fixed interest rate of 16.5% (19.5%-21.5% in Illinois), while revolving credit facilities have variable interest rates[216] Item 4. Controls and Procedures Details the evaluation of disclosure controls and procedures, including identified material weaknesses and remediation efforts a) Evaluation of Disclosure Controls and Procedures%20Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Reports on management's assessment of the effectiveness of disclosure controls and identified material weaknesses - Management identified a material weakness in internal control over financial reporting at October 31, 2022, related to the lack of precision in reviewing inputs and results for the CECL analysis[218] - This material weakness was due to a reduction in technical accounting expertise and lack of segregation of duties from recent staffing turnover[218] - Despite the material weakness, management concluded that the condensed consolidated financial statements fairly present the Company's financial position, results of operations, and cash flows[219] Management's Remediation Efforts Describes the actions being taken by management to address and remediate the identified material weakness - Remediation efforts include filling vacant positions, expanding technical accounting expertise, implementing third-party software, and strengthening review controls on the CECL analysis[221] - The material weakness will be considered remediated after controls operate effectively for a sufficient period and are tested[222] b) Changes in Internal Control Over Financial Reporting%20Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) Discusses any changes in internal control over financial reporting during the period - The Company is actively taking actions to remediate the identified material weakness in internal control over financial reporting[223] Inherent Limitations on Effectiveness of Controls Acknowledges that internal control systems provide reasonable, but not absolute, assurance against misstatements - Management acknowledges that control systems provide only reasonable, not absolute, assurance and may not prevent or detect all misstatements due to inherent limitations and resource constraints[224] PART II Covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings States that ongoing legal proceedings are not expected to materially impact the company's financial position - The Company is a defendant in various legal proceedings in the ordinary course of business[227] - The Company does not anticipate that the final outcome of these proceedings will have a material adverse effect on its financial position, results of operations, or cash flows[227] Item 1A. Risk Factors Confirms no material changes to the company's previously disclosed risk factors since the last annual report - No material changes to the Company's risk factors have occurred since the disclosure in its Form 10-K for the fiscal year ended April 30, 2022[228] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports on common stock repurchase activity and the company's dividend policy, including credit facility limitations - No shares were repurchased under the Company's stock repurchase program during the second quarter of fiscal 2023[229] - The Company has not historically issued dividends and does not expect to do so in the foreseeable future[230] - The Company's ability to pay dividends or make other distributions is limited by its revolving credit facilities, requiring lender consent[230] Item 3. Defaults Upon Senior Securities Indicates that this item is not applicable, signifying no defaults on senior securities - This item is not applicable[231] Item 4. Mine Safety Disclosure Indicates that this item is not applicable, signifying no mine safety disclosures - This item is not applicable[232] Item 5. Other Information Indicates that this item is not applicable, signifying no other material information to disclose - This item is not applicable[233] Item 6. Exhibits Lists all documents filed as exhibits to the Form 10-Q, including organizational and certification documents - The exhibits include Articles of Incorporation, Amended and Restated Bylaws, an Employment Agreement, CEO and CFO certifications, and various Inline XBRL documents[235] SIGNATURES Provides the official signatures of the Chief Executive Officer and Chief Financial Officer, certifying the report - The report is signed by Jeffrey A. Williams, Chief Executive Officer, and Vickie D. Judy, Chief Financial Officer, on December 9, 2022[239][240]