Car-Mart(CRMT) - 2023 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the period ended January 31, 2023, show significant growth in assets, primarily driven by an increase in finance receivables, while total revenues for the nine-month period grew 19.8% year-over-year, net income declined sharply from $68.6 million to $18.3 million due to substantially higher provisions for credit losses and interest expenses, and the statements also include a correction of an immaterial error from previously issued financials related to deferred revenue and the allowance for credit losses Condensed Consolidated Balance Sheets The balance sheet shows significant asset growth, primarily in finance receivables, funded by an increase in non-recourse notes payable Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Jan 31, 2023 (Unaudited) | Apr 30, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $4,322 | $6,916 | | Finance receivables, net | $1,023,181 | $863,674 | | Inventory | $131,616 | $115,302 | | Total Assets | $1,384,680 | $1,154,696 | | Liabilities & Equity | | | | Non-recourse notes payable | $588,310 | $395,986 | | Revolving line of credit | $27,782 | $44,670 | | Total Liabilities | $889,036 | $677,762 | | Total Equity | $495,244 | $476,534 | - Total assets grew by 20% from April 30, 2022, to January 31, 2023, primarily due to an 18.5% increase in net finance receivables[10] - Total liabilities increased by 31.2% over the same period, largely driven by a 48.6% rise in non-recourse notes payable used to fund the growth in receivables[10] Condensed Consolidated Statements of Operations Despite revenue growth, net income significantly declined due to higher credit loss provisions and increased interest expenses Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Jan 31, 2023 | Three Months Ended Jan 31, 2022 | Nine Months Ended Jan 31, 2023 | Nine Months Ended Jan 31, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $326,530 | $287,292 | $1,017,189 | $849,320 | | Provision for credit losses | $85,650 | $61,646 | $250,719 | $167,987 | | Interest expense | $9,765 | $2,944 | $25,460 | $7,439 | | Net Income | $1,508 | $19,140 | $18,344 | $68,618 | | Diluted EPS | $0.23 | $2.82 | $2.79 | $9.97 | - For the nine months ended January 31, 2023, total revenues increased 19.8% YoY, but net income plummeted by 73.3% due to a 49.2% increase in the provision for credit losses and a 242.3% increase in interest expense[12] Condensed Consolidated Statements of Cash Flows Operating activities consumed significant cash, primarily offset by cash provided from financing activities, largely through non-recourse notes Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Nine Months Ended Jan 31, 2023 | Nine Months Ended Jan 31, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | ($123,339) | ($102,671) | | Net cash used in investing activities | ($25,034) | ($15,199) | | Net cash provided by financing activities | $171,256 | $117,580 | - The company experienced a significant cash outflow from operations, primarily due to finance receivable originations ($841.4 million) outpacing collections ($308.7 million)[14] - Financing activities provided net cash of $171.3 million, largely from proceeds from non-recourse notes payable ($400.2 million), which was used to fund operations, investments, and pay down the revolving line of credit[14] Notes to Consolidated Financial Statements (Unaudited) Key notes detail the company's integrated auto sales and finance operations, significant credit loss allowance, recent debt offerings, and correction of prior immaterial errors - The company operates in the Integrated Auto Sales and Finance segment, selling older model used vehicles and providing financing to customers with limited credit histories through 157 dealerships as of January 31, 2023 (Note A)[21] - The allowance for credit losses is a significant estimate, calculated to cover expected lifetime losses. As of January 31, 2023, the allowance was $283 million, or 23.65% of the relevant finance receivables principal balance (Note B)[25][43] - The company completed two non-recourse notes payable offerings: $400.0 million in April 2022 with a 5.14% weighted average coupon rate, and $400.2 million in January 2023 with an 8.68% rate (Note F)[94][95] - Immaterial errors in prior financial statements were corrected, related to the classification of deferred ancillary product revenue at charge-off and the allowance for credit losses calculation. This increased previously reported net income for the nine months ended Jan 31, 2022, by $2.0 million (Note L)[120][121] - Subsequent to the quarter end, on February 22, 2023, the company amended its loan agreement to expand its borrowing base by including vehicle contracts with terms up to 72 months (Note M)[122] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 19.8% revenue growth for the first nine months of fiscal 2023 to a 13.3% increase in average retail sales price and a 4.0% increase in units sold, however, profitability was severely impacted by a decline in gross margin percentage (33.3% vs 36.8%) due to higher vehicle costs, and a significant increase in the provision for credit losses to 28.7% of sales as credit performance normalizes post-stimulus, while rising interest rates also drove interest expense up 242.3%, and the company is funding its growth in finance receivables through increased debt, including two recent securitization transactions, with management also disclosing and remediating a material weakness in internal controls related to its credit loss allowance calculation Results of Operations Revenue growth was offset by declining gross margins and significantly higher credit loss provisions, leading to a sharp drop in pretax income Comparison of Operations: Three Months Ended Jan 31, 2023 vs 2022 | Metric | Q3 FY2023 | Q3 FY2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $326.5M | $287.3M | 13.7% | | Gross Margin % | 33.6% | 36.7% | (3.1 p.p.) | | Provision for Credit Losses (% of Sales) | 31.1% | 24.8% | 6.3 p.p. | | Pretax Income | $1.8M | $25.3M | (92.9%) | Comparison of Operations: Nine Months Ended Jan 31, 2023 vs 2022 | Metric | YTD FY2023 | YTD FY2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $1,017.2M | $849.3M | 19.8% | | Gross Margin % | 33.3% | 36.8% | (3.5 p.p.) | | Provision for Credit Losses (% of Sales) | 28.7% | 22.7% | 6.0 p.p. | | Pretax Income | $23.5M | $88.7M | (73.5%) | - For the nine-month period, revenue growth was driven by a 13.3% increase in average retail sales price to $18,059 and a 4.0% increase in retail units sold[151] - Net charge-offs as a percentage of average finance receivables increased to 16.9% for the nine-month period, up from 13.3% in the prior year, reflecting normalization from stimulus-aided lows[154] Financial Condition Net finance receivables and inventory increased, with growth funded by a recent asset-backed securitization - Net finance receivables increased by 18.5% since April 30, 2022, consistent with historical trends where receivables growth slightly outpaces revenue growth[157] - Inventory grew by $16.3 million since April 30, 2022, to support higher sales volumes and due to increased costs to prepare vehicles for resale[158] - The company completed a $400.2 million asset-backed securitization on January 31, 2023, using the proceeds to pay down its revolving credit facilities and support growth[163] Liquidity and Capital Resources Operations consumed significant cash, primarily for finance receivable originations, with liquidity primarily sourced from borrowings and recent securitization market access - The company used $123.3 million in cash from operations in the first nine months of fiscal 2023, primarily to fund $841.4 million in new finance receivable originations[166][168] - Primary sources of liquidity are income from operations and borrowings. The company has recently accessed the securitization market to increase borrowing capacity and diversify funding[164][167] - As of January 31, 2023, the company had $4.3 million in cash and approximately $148 million of availability under its revolving credit facilities[176] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk related to its debt obligations, with the revolving credit facility of $27.8 million at quarter-end having a variable interest rate, where a hypothetical 1% increase in interest rates would increase annual interest expense by approximately $280,000, and while existing non-recourse notes are fixed-rate, future securitizations would likely carry higher rates in the current environment - The company's main market risk exposure is to interest rate changes on its debt obligations, particularly its revolving credit facilities[191] - The outstanding balance on the variable-rate revolving line of credit was $27.8 million at January 31, 2023. A 1% increase in interest rates would result in an additional annual interest expense of about $280,000[192] Item 4. Controls and Procedures Management disclosed a material weakness in internal control over financial reporting, identified in the previous quarter, related to the precision of review controls for the Current Expected Credit Losses (CECL) analysis, and due to this weakness, the CEO and CFO concluded that disclosure controls and procedures were not effective as of January 31, 2023, with the company actively remediating the issue by hiring new personnel with technical accounting expertise and engaging third-party advisors - A material weakness was identified in the company's internal control over financial reporting concerning the precision of management's review of the CECL analysis for the allowance for credit losses[195] - As a result of the material weakness, the CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of January 31, 2023[196] - Remediation efforts are underway, including hiring a new Senior Director of Finance and Reporting in January 2023 and engaging a third-party advisory service with CECL expertise[198] Part II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business but does not expect the outcomes to have a material adverse effect on its financial position, results of operations, or cash flows - The company is a defendant in various legal proceedings arising from its ordinary course of business[204] - Management does not anticipate that the final outcome of these proceedings will have a material adverse effect on the company's financials[204] Item 1A. Risk Factors There have been no material changes to the company's risk factors from those disclosed in its Annual Report on Form 10-K for the fiscal year ended April 30, 2022 - No material changes to the company's risk factors have occurred since the last annual report filing for the fiscal year ended April 30, 2022[205] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares of its common stock under its authorized repurchase program during the third quarter of fiscal 2023, and has not historically paid dividends and does not expect to in the foreseeable future, with payments also being restricted by its credit agreements - No shares were repurchased under the company's stock repurchase program during the third quarter of fiscal 2023[206] - The company does not expect to pay cash dividends in the foreseeable future, and its ability to do so is limited by its lenders[207]