The following discussion should be read in conjunction with the Company’s consolidated financial statements and accompanying notes in Item 8 of this Annual Report on Form 10-K.
OverviewAmerica's Car-Mart, Inc. , aTexas corporation (the "Company"), is one of the largest publicly held automotive retailers inthe United States focused exclusively on the "Integrated Auto Sales and Finance" segment of the used car market. References to the Company include the Company's consolidated subsidiaries. The Company's operations are principally conducted through its two operating subsidiaries,America's Car Mart, Inc. , anArkansas corporation ("Car-Mart ofArkansas "), andColonial Auto Finance, Inc. , anArkansas corporation ("Colonial"). Collectively, Car-Mart ofArkansas and Colonial are referred to herein as "Car-Mart." The Company primarily sells older model used vehicles and provides financing for substantially all of its customers. Many of the Company's customers have limited financial resources and would not qualify for conventional financing as a result of limited credit histories or past credit problems. As ofApril 30, 2022 , the Company operated 154 dealerships located primarily in small cities throughout the South-Central United States. 24
-------------------------------------------------------------------------------- Car-Mart has been operating since 1981. Car-Mart has grown its revenues between approximately 4% and 32% per year over the last ten years (average 11%). Growth results from same dealership revenue growth and the addition of new dealerships. Revenue increased 32.0% for the fiscal year endedApril 30, 2022 compared to fiscal 2021 primarily due to a 22.2% increase in average retail sales price, a 6.7% increase in units sold and a 37.4% increase in interest income. The Company added three new dealerships in fiscal 2022. The Company earns revenue from the sale of used vehicles, and in most cases a related service contract and an accident protection plan product, as well as interest income and late fees from the related financing. The Company's cost structure is more fixed in nature and is sensitive to volume changes. Revenues can be affected by our level of competition, which is influenced to a large extent by the availability of funding to the sub-prime automobile industry, together with the availability and resulting purchase cost of the types of vehicles the Company purchases for resale. Revenues can also be affected by the macro-economic environment. Down payments, contract term lengths and proprietary credit scoring are critical to helping customers succeed and are monitored closely by corporate management at the point of sale. After the sale, collections, delinquencies and charge-offs are crucial elements of the Company's evaluation of its financial condition and results of operations and are monitored and reviewed on a continuous basis. Management believes that developing and maintaining a relationship with its customers and earning their repeat business is critical to the success and growth of the Company and can serve to offset the effects of increased competition and negative macro-economic factors.
The Company is focused on the benefits of excellent customer service and its “local” face-to-face offering with the goal of helping customers succeed, while continuing to improve the Company’s digital services and offerings to meet growing demands for an online retail experience. Over the past few years, the company has focused on providing a good mix of vehicles in different price ranges to increase affordability for customers.
The purchase price the Company pays for its vehicles can also have a significant effect on revenues, liquidity and capital resources. Because the Company bases its selling price on the purchase cost of the vehicle, increases in purchase costs result in increased selling prices. As the selling price increases, it becomes more difficult to keep the gross margin percentage and contract term in line with historical results because the Company's customers have limited incomes and their car payments must remain affordable within their individual budgets. Decreases in the overall volume of new car sales, particularly domestic brands, lead to decreased supply and generally increased prices in the used car market. Also, expansions or constrictions in consumer credit, as well as general economic conditions, can have an overall effect on the demand and the resulting purchase cost of the types of vehicles the Company purchases for resale. The COVID-19 pandemic and the resulting economic effects have had an impact on the availability and prices of the vehicles the Company purchases. Over the past two years, the reduction in new car production, fewer off-lease vehicles and fewer repossessions in the overall market have negatively impacted the availability of product and resulted in higher purchase costs. The Company constantly reviews and adjusts purchasing avenues in order to obtain an appropriate flow of vehicles. While the Company anticipates that the availability of used vehicles will remain constricted and keep purchase costs elevated in the near future, any decline in overall market pressures affecting the availability and costs of used vehicles could result in lower inventory purchase costs and present an opportunity for the Company to purchase slightly newer, lower mileage vehicle for its customers. The Company consistently focuses on collections. Each dealership is responsible for its own collections with supervisory involvement of the corporate office. Over the last five fiscal years, the Company's credit losses as a percentage of sales have ranged from approximately 20.3% in fiscal 2021 to 28.7% in fiscal 2018 (average of 24.4%). Credit losses as a percentage of sales have steadily improved on an annual basis in each of the past five fiscal years from a historical high in fiscal 2018, as improvements in collection processes and higher recovery rates on repossessions have progressively offset continuing competitive pressures. The Company's credit loss results were temporarily negatively impacted during the fourth quarter of fiscal 2020 by the impacts of COVID-19, including the Company's suspension of certain collection activities for a period of time and the Company's decision to increase the allowance for credit losses as a result of the pandemic from 24.5% to 26.5%, resulting in a$9.1 million pretax charge to the provision for credit losses. However, credit loss results improved substantially in fiscal 2021 due to a lower frequency of losses and lower severity of loss amounts relative to the principal balance as the CARES Act enhanced unemployment and stimulus funds, combined with the Company's commitment to working with customers, aided customers' ability to make their vehicle payments. The improvement in credit losses as a percentage of sales for fiscal 2021 was further accelerated by the Company's decision during the fourth quarter of fiscal 2021 to reduce the allowance for credit losses back to 24.5% of finance receivables, net of deferred revenue, which resulted in a$15.1 million pretax decrease in the provision for credit losses. The fiscal year 2022 credit losses began to normalize to pre-pandemic levels but were still below historical levels despite the increase in the average retail sales price. Based on the Company's current analysis of loan losses, the allowance for credit losses remains at 24.5% atApril 30, 2022 . 25 -------------------------------------------------------------------------------- Historically, credit losses, on a percentage basis, tend to be higher at new and developing dealerships than at mature dealerships. Generally, this is because the management at new and developing dealerships tends to be less experienced in making credit decisions and collecting customer accounts and the customer base is less seasoned. Normally more mature dealerships have more repeat customers and, on average, repeat customers are a better credit risk than non-repeat customers. Credit losses and charge-offs can also be impacted by market and economic factors, including a competitive used vehicle financing environment and macro-economic conditions such as inflation in the price of gasoline, groceries and other staple items and overall unemployment levels, as well as the personal income levels of the Company's customers. Negative macro-economic issues, however, do not always lead to higher credit loss results for the Company because the Company provides basic affordable transportation which in many cases is not a discretionary expenditure for customers. In an effort to offset credit losses and to operate more efficiently, the Company continues to look for improvements to its business practices, including better underwriting and better collection procedures. The Company has a proprietary credit scoring system which enables the Company to monitor the quality of contracts. Corporate office personnel monitor proprietary credit scores and work with dealerships when the distribution of scores falls outside of prescribed thresholds. The Company also uses credit reporting and the use of global positioning system ("GPS") units on vehicles. Additionally, the Company has placed significant focus on the collection area as the Company's training department continues to spend significant time and effort on collections improvements. The Company's vice president of collections oversees the collections department and provides timely oversight and additional accountability on a consistent basis. The Company believes that the proper execution of its business practices is the single most important determinant of its long-term credit loss experience. Historically, the Company's gross margin as a percentage of sales has been fairly consistent from year to year at approximately 40% or 41% over each of the previous five fiscal years. The Company's gross margin is based upon the cost of the vehicle purchased, with lower-priced vehicles typically having higher gross margin percentages but lower gross profit dollars, and is also affected by the percentage of wholesale sales to retail sales, which relates for the most part to repossessed vehicles sold at or near cost. The gross margin percentage decreased in fiscal 2022 to 37.4% from 40.7% in the prior fiscal year, while gross margin dollars per retail unit sold increased by$760 , primarily as a result of the Company selling on average a higher priced vehicle in fiscal 2022. The Company expects that increasing vehicle purchase costs and sales prices will continue to put pressure on its gross margin percentage over the near term as the demand for the vehicles the Company purchases will remain high. The Company successfully manages the business based upon gross margin dollars as demonstrated with the increase during the last three fiscal years in the gross margin dollars per retail unit sold. Hiring, training and retaining qualified associates is critical to the Company's success. The rate at which the Company adds new dealerships and is able to implement operating initiatives is limited by the number of trained managers and support personnel the Company has at its disposal. Excessive turnover, particularly at the dealership manager level, could impact the Company's ability to add new dealerships and to meet operational initiatives. The landscape for hiring remains very competitive as the business activity and workforce participation continue to adjust post-pandemic. The Company has continued to add resources to recruit, train, and develop personnel, especially personnel targeted to fill dealership manager positions. The Company expects to continue to invest in the development of its workforce. 26 --------------------------------------------------------------------------------
Consolidated Operations
(Operating Statement Dollars in Thousands)
% Change
2022 2021
Years Ended April 30, vs. vs. As a % of Sales
2022 2021 2020 2021 2020 2022 2021 2020
Operating
Statement:
Revenues:
Sales $ 1,060,512 $ 808,065 $ 652,992 31.2 % 23.7 % 100.0 % 100.0 % 100.0 %
Interest and
other income 151,853 110,545 91,619 37.4 20.7 14.3 13.7 14.0
Total 1,212,365 918,610 744,611 32.0 23.4 114.3 113.7 114.0
Costs and
expenses:
Cost of sales,
excluding
depreciation
shown below 663,631 479,153 388,475 38.5 % 23.3 % 62.6 59.3 59.5
Selling, general
and
administrative 156,130 130,855 117,762 19.3 11.1 14.7 16.2 18.0
Provision for
credit losses 257,101 163,662 162,246 57.1 0.9 24.2 20.3 24.8
Interest expense 10,919 6,820 8,052 60.1 (15.3 ) 1.0 0.8 1.2
Depreciation and
amortization 4,033 3,719 3,839 8.4 (3.1 ) 0.4 0.5 0.6
Gain on disposal
of property and
equipment 149 (40 ) (114 ) - - - - -
Total 1,091,963 784,169 680,260 39.3 15.3 103.0 97.0 104.1
Income before
income taxes $ 120,402 $ 134,441 $ 64,351 11.4 % 16.6 % 9.9 %
Operating Data
(Unaudited):
Retail units sold 60,595 56,806 52,914 6.7 % 7.4 %
Average
dealerships in
operation 152 150 146 1.3 2.7
Average units
sold per
dealership per
month 33.2 31.6 30.2 5.1 4.6
Average retail
sales price $ 16,649 $ 13,621 $ 11,793 22.2 15.5
Gross profit per
retail unit sold $ 6,550 $ 5,790 $ 4,999 13.1 15.8
Same store
revenue growth 30.5 % 18.7 % 9.3 %
Receivables
average yield 15.8 % 15.9 % 15.7 %
2022 Compared to 2021
Total revenues increased $293.8 million , or 32.0%, in fiscal 2022, as compared
to revenue growth of 23.4% in fiscal 2021, principally as a result of (i)
revenue growth from dealerships that operated a full twelve months in both
fiscal years ($276.7 million ), and (ii) revenue from stores opened or acquired
during or after the year ended April 30, 2021 ($17.1 million ), partially offset
by (iii) decreased revenue from dealerships closed during or after the year
ended April 30, 2021 ($86,000 ). The increase in revenue for fiscal 2022 is
attributable to (i) a 22.2% increase in average retail sales price, (ii) a 6.7%
increase in retail units sold and (iii) a 37.4% increase in interest and other
income, due to the $265.1 million increase in average finance receivables.
Cost of sales, as a percentage of sales, increased to 62.6% compared to 59.3% in
fiscal 2021, resulting in a decrease in the gross margin percentage to 37.4% of
sales in fiscal 2022 from 40.7% of sales in fiscal 2021. On a dollar basis, our
gross margin per retail unit sold increased by $760 in fiscal 2022 compared to
fiscal 2021. The average retail sales price for fiscal 2022 was $16,649 , a
$3,028 increase over the prior fiscal year, reflecting the high demand for used
cars, especially in the market we serve. As purchase costs increase, the margin
between the purchase cost and the sales price of the vehicles we sell generally
narrows on a percentage basis because the Company must offer affordable prices
to our customers. Demand for the vehicles we purchase for resale has remained
high and the supply has continued to be restricted due to lower repossessions
and lower levels of new car production. While the long-term impact of COVID-19
and the ongoing microchip supply shortages on new car production and sales and
the availability of used vehicles in our market is undetermined at this time,
the Company has seen disruptions in the supply of vehicles since the beginning
of the pandemic and expects the supply to be tighter in the near-term relative
to demand, resulting in the continuation of elevated purchase costs.
27
--------------------------------------------------------------------------------
Selling, general and administrative expenses, as a percentage of sales decreased
to 14.7% in fiscal 2022 from 16.2% for fiscal 2021. Selling, general and
administrative expenses are, for the most part, more fixed in nature. However,
we have recently made increasing investments in several areas including
recruiting, training and retention, inventory procurement and management,
customer experience and digital efforts. In dollar terms, selling, general and
administrative expenses increased $25.3 million from fiscal 2021. The increase
is primarily focused on continued investments in our associates in the wages and
benefit areas and building our customer experience team and investing in
procurement. We continue to focus on controlling costs, while at the same time
ensuring a solid infrastructure to ensure a high level of support for our
customers.
Provision for credit losses as a percentage of sales increased to 24.2% for
fiscal 2022 compared to 20.3% for fiscal 2021. Net charge-offs as a percentage
of average finance receivables increased to 20.2% for fiscal 2022 compared to
19.3% for the prior year. The stimulus payments during fiscal 2021 had positive
impacts on collections and net charge-off metrics. From a long-term historical
perspective, the current fiscal year net charge-offs were much improved and
below historical levels despite the increase in the average retail sales price.
The frequency of losses increased compared to the prior year as credit losses
began to normalize to pre-pandemic levels. The Company uses several operational
initiatives (including credit reporting and the use of GPS units on vehicles) to
improve collections and continually pushes for improvements and better execution
of its collection practices. The Company believes that the proper execution of
its business practices is the single most important determinant of credit loss
experience and will continue to focus on improvements in oversight and
accountability provided by the Company's investments in our corporate
infrastructure within the collections area.
Interest expense for fiscal 2022 as a percentage of sales increased slightly to
1.0% in fiscal 2022 from 0.8% in fiscal 2021. The increase in interest expense
is primarily due to the higher average borrowings in fiscal 2022 ($331.6 million
in fiscal 2022 compared to $215.0 million for fiscal 2021).
2021 Compared to 2020
Total revenues increased $174.0 million , or 23.4%, in fiscal 2021, as compared
to revenue growth of 11.3% in fiscal 2020, principally as a result of (i)
revenue growth from dealerships that operated a full twelve months in both
fiscal years ($137.6 million ), and (ii) revenue from stores opened or acquired
during or after the year ended April 30, 2020 ($36.7 million ), partially offset
by (iii) decreased revenue from dealerships closed during or after the year
ended April 30, 2020 ($333,000 ). The increase in revenue for fiscal 2021 is
attributable to (i) a 15.5% increase in average retail sales price, (ii) a 7.4%
increase in retail units sold and (iii) a 20.7% increase in interest and other
income.
Cost of sales, as a percentage of sales, decreased slightly to 59.3% compared to
59.5% in fiscal 2020, resulting in a slight improvement in the gross margin
percentage to 40.7% of sales in fiscal 2021 from 40.5% of sales in fiscal 2020.
On a dollar basis, our gross margin per retail unit sold increased by $791 in
fiscal 2021 compared to fiscal 2020. The average retail sales price for fiscal
2021 was $13,621 , a $1,828 increase over the prior fiscal year, reflecting the
high demand for used cars, especially in the market we serve. As purchase costs
increase, the margin between the purchase cost and the sales price of the
vehicles we sell generally narrows on a percentage basis because the Company
must offer affordable prices to our customers. However, during fiscal 2021, the
pressure on the cost of sales and gross margin percentages from the increase in
average purchase costs was more than offset by improved wholesale margins,
strong demand and low supply of lower priced units, and reduced repair expenses
to prepare purchased vehicles for resale. Demand for the vehicles we purchase
for resale remained high during fiscal 2021 and the supply continued to be
restricted due to lower repossessions, lower levels of new car production and
sales and additional demand due to stimulus money.
Selling, general and administrative expenses, as a percentage of sales decreased
to 16.2% in fiscal 2021 from 18.0% for fiscal 2020. Selling, general and
administrative expenses remained, for the most part, more fixed in nature. In
dollar terms, overall selling, general and administrative expenses increased
$13.1 million from fiscal 2020. The increase was primarily focused on
investments in our associates, especially building our customer experience team
and investing in procurement, combined with increased commissions due to higher
net income.
28
-------------------------------------------------------------------------------- Provision for credit losses as a percentage of sales decreased to 20.3% for fiscal 2021 compared to 24.8% for fiscal 2020. Net charge-offs as a percentage of average finance receivables decreased to 19.3% for fiscal 2021 compared to 23.1% for the prior year. The decrease in net charge-offs for fiscal 2021 primarily resulted from a lower frequency of losses combined with a lower severity of losses, primarily due to improvements in collections as a result of the stimulus money and enhanced unemployment, as well as higher recovery rates on repossessions. As a result of the improved credit losses, improved delinquencies at yearend, as well as our outlook for projected losses, the Company decreased the allowance for credit losses during the fourth quarter of fiscal 2021 from 26.5% to 24.5%, a$15.1 million pretax decrease to the provision for credit losses. The Company believes the somewhat improved macro-economic environment prior to the pandemic mitigated the competitive pressures and positively impacted credit loss results for fiscal 2021. Interest expense for fiscal 2021 as a percentage of sales decreased slightly to 0.8% in fiscal 2021 from 1.2% in fiscal 2020. Although the Company had higher average borrowings in fiscal 2021 ($215.0 million in fiscal 2021 compared to$179.9 million for fiscal 2020), the lower interest rates offset the interest on the higher debt balances. Financial Condition
The following table presents the main accounts of the Company’s balance sheet as at
April 30,
2022 2021 2020
Assets:
Finance receivables, net $ 854,290 $ 625,119 $ 466,141
Inventory 115,302 82,263 36,414
Income taxes receivable, net 274 - -
Property and equipment, net 51,438 34,719 30,140
Liabilities:
Accounts payable and accrued liabilities 52,685 49,486 32,846
Deferred revenue 92,491 56,810 36,121
Income taxes payable, net - 150 3,841
Deferred income tax liabilities, net 28,233 20,007 12,979
Non-recourse notes payable 395,986 - -
Revolving line of credit 44,670 225,924 215,568
29
-------------------------------------------------------------------------------- The following table shows receivables growth compared to revenue growth during each of the past three fiscal years. For fiscal year 2022, growth in finance receivables, net of deferred revenue, of 34.1% exceeded revenue growth of 32.0%. The Company currently anticipates going forward that the growth in finance receivables will generally be slightly higher than overall revenue growth on an annual basis due to overall term length increases in our installment sales contracts in recent years, partially offset by improvements in underwriting and collection procedures in an effort to reduce credit losses. The average term for installment sales contracts atApril 30, 2022 was 42.9 months, compared to 37.3 months forApril 30, 2021 . Years Ended April 30, 2022 2021 2020 Growth in finance receivables, net of deferred revenue 34.1 % 28.7 % 14.4 % Revenue growth 32.0 % 23.4 % 11.3 % At fiscal year-end 2022, inventory increased 40.2% ($33.0 million ), compared to fiscal year-end 2021, primarily due to increasing our investment in inventory quantities to accommodate the higher sales volumes and provide customers a quality mix of vehicles, combined with the higher cost of the vehicles we purchase. The Company strives to improve the quality of the inventory and maintain adequate turns while maintaining inventory levels to ensure adequate supply of vehicles, in volume and mix, and to meet sales demand. Property and equipment, net, increased by approximately$16.7 million as ofApril 30, 2022 as compared to fiscal 2021. We incurred approximately$20.9 million in expenditures during fiscal year 2022, primarily related to technology investments, designed to attract additional sales opportunities, and remodeling or relocating existing locations. The net increase to property and equipment, net, was partially offset by depreciation expense of$4.0 million and disposals of approximately$200,000 in furniture and equipment. Accounts payable and accrued liabilities increased by approximately$3.2 million atApril 30, 2022 as compared toApril 30, 2021 primarily due to higher accounts payable related to increased inventory and sales activity, and higher deferred sales tax related to the increase in sales. Deferred revenue increased$35.7 million atApril 30, 2022 overApril 30, 2021 , primarily resulting from the increase in sales of the accident protection plan and service contract products, as well as the increased terms on the service contracts. Deferred income tax liabilities, net, increased approximately$8.2 million atApril 30, 2022 as compared toApril 30, 2021 , due primarily to the increase in finance receivables, net. OnApril 27, 2022 , the Company completed an asset-backed securitization offering through which an indirect subsidiary of the Company issued four classes of non-recourse notes payable in an aggregate principal amount of$400.0 million , with a weighted average fixed coupon rate of 5.14% per annum and scheduled maturities throughApril 20, 2029 . The notes are collateralized by auto loans directly originated by us. Net proceeds from the offering (after deducting the underwriting discount payable to the initial purchasers and other fees) were approximately$396.0 million , a portion of which were used to pay outstanding debt under our revolving line of credit and to make the initial deposit into a reserve account for the notes and the remainder of which are being used for other general purposes. See Note F for further details on these non-recourse notes payable. Borrowings on the Company's revolving credit facilities fluctuate primarily based upon a number of factors including (i) net income, (ii) finance receivables changes, (iii) income taxes, (iv) capital expenditures, (v) common stock repurchases and (vi) other sources of financing, such as our recent issuance of asset-backed non-recourse notes. Historically, income from continuing operations, as well as borrowings on the revolving credit facilities, have funded the Company's finance receivables growth, capital asset purchases and common stock repurchases. In fiscal 2022, the Company had a$175.0 million net increase in total debt, net of cash, used to contribute to the funding of finance receivables growth of$292.0 million , an inventory increase of$33.0 million , net capital expenditures of$20.9 million and common stock repurchases of$34.7 million . These investments reflect our commitment to providing the necessary inventory and facilities to support a growing customer base. 30 --------------------------------------------------------------------------------
Cash and capital resources
The following table presents certain historical information regarding the company’s cash flow statements (in thousands):
Years Ended April 30,
2022 2021 2020
Operating activities:
Net income $ 93,307 $ 104,139 $ 51,343
Provision for credit losses 257,101 163,662
162,246
Losses on claims for accident protection plan 21,871 18,954
17,966
Depreciation and amortization 4,033 3,719
3,839
Amortization of debt issuance costs 775 391 273 Stock based compensation 5,496 5,962 4,732 Deferred income taxes 8,226 7,028 (1,280 ) Finance receivable originations (1,009,859 ) (762,716 ) (604,497 ) Finance receivable collections 417,796 370,254
322 180
Accrued interest on finance receivables (1,559 ) (269 ) (750 ) Inventory 50,881 5,019
53,827
Accounts payable and accrued liabilities 5,166 14,766
1,009
Deferred accident protection plan revenue 11,232 8,224
3,113
Deferred service contract revenue 24,449 12,465 1,049 Income taxes, net (424 ) (3,691 ) 5,788 Other (2,775 ) (1,719 ) 79 Total (114,284 ) (53,812 ) 20,917 Investing activities: Purchase of investments (1,343 ) - (4,648 ) Purchase of property and equipment (20,921 ) (8,952 ) (5,422 ) Proceeds from sale of property and equipment 20 694 184 Total (22,244 ) (8,258 ) (9,886 ) Financing activities: Debt facilities, net (186,037 ) 9,965 62,377 Non-recourse debt, net 399,994 - - Change in cash overdrafts (1,802 ) 1,802 (1,274 ) Purchase of common stock (34,698 ) (10,616 ) (16,009 ) Dividend payments (40 ) (40 ) (40 ) Exercise of stock options, including tax benefits and issuance of common stock (1,195 ) 4,292
1,723
Total 176,222 5,403
46,777
Increase (decrease) in cash, cash equivalents, and restricted cash$ 39,694 $ (56,667 ) $ 57,808 The primary drivers of operating profits and cash flows include (i) top line sales (ii) interest income on finance receivables, (iii) gross margin percentages on vehicle sales, and (iv) credit losses, a significant portion of which relates to the collection of principal on finance receivables. Historically, most of the cash generated from operations has been used to fund finance receivables growth, capital expenditures and common stock repurchases. To the extent finance receivables growth, common stock repurchases and capital expenditures exceed income from operations we historically increased our borrowings under our revolving credit facilities and most recently also utilized the securitization market. DuringApril 2022 , we completed our first asset-backed securitization transaction that diversified our funding sources. The majority of the Company's growth has been self-funded. 31 -------------------------------------------------------------------------------- Cash flows from operations in fiscal 2022 compared to fiscal 2021 decreased primarily as a result of (i) an increase in finance receivable originations and (ii) an increase in inventory, partially offset by increases in (iii) finance receivable collections and (iv) deferred revenue. Finance receivables, net, increased by$229.2 million during fiscal 2022. Cash flows from operations in fiscal 2021 compared to fiscal 2020 decreased primarily as a result of (i) an increase in finance receivable originations, (ii) an increase in inventory and (iii) a decrease in income taxes payable, partially offset by (iv) an increase in finance receivable collections, (v) an increase in accounts payable and accrued liabilities and (vi) an increase in deferred revenue. Finance receivables, net, increased by$159.0 million during fiscal 2021. The purchase price the Company pays for a vehicle has a significant effect on liquidity and capital resources. Because the Company bases its selling price on the purchase cost for the vehicle, increases in purchase costs result in increased selling prices. As the selling price increases, it generally becomes more difficult to keep the gross margin percentage and contract term in line with historical results because the Company's customers have limited incomes and their car payments must remain affordable within their individual budgets. Several external factors can negatively affect the purchase cost of vehicles. Decreases in the overall volume of new car sales, particularly domestic brands, lead to decreased supply in the used car market. Also, constrictions in consumer credit, as well as general economic conditions, can increase overall demand for the types of vehicles the Company purchases for resale as used vehicles become more attractive than new vehicles in times of economic instability. A negative shift in used vehicle supply, combined with strong demand, results in increased used vehicle prices and thus higher purchase costs for the Company. Sustained macro-economic pressures affecting our customers have helped keep demand high in recent years for the types of vehicles we purchase. This strong demand, coupled with modest levels of new vehicle sales in recent years, have led to a generally ongoing tight supply of used vehicles available to the Company in both quality and quantity. The impacts of the COVID-19 pandemic on the business operations of auctions and wholesalers as well as slowdowns in new car production and sales during the past fiscal year due to the pandemic and other supply chain issues further increased the price and reduced the quantity of used cars available for purchase by the Company. The Company expects these effects on used vehicle supply to continue for the short term. The Company has devoted significant efforts to improving its purchasing processes to ensure adequate supply at appropriate prices, including expanding its purchasing territories to larger cities in close proximity to its dealerships and increasing its efforts to purchase vehicles from individuals at the dealership level as well as via the internet. The Company has also increased the level of accountability for its purchasing agents including updates to sourcing and pricing guidelines. The Company continues to make corporate level purchases and form relationships with national vendors that can supply a large quantity of high-quality vehicles. Even with these efforts, the Company expects gross margin percentages to remain under pressure over the near term. The Company believes that the amount of credit available for the sub-prime auto industry will remain relatively consistent with levels in recent years, which management expects will contribute to continued strong overall demand for most, if not all, of the vehicles the Company purchases for resale. Increased competition resulting from availability of funding to the sub-prime auto industry generally contributes to lower down payments and longer terms, which can have a negative effect on collection percentages, liquidity and credit losses when compared to historical periods. The availability of credit was somewhat dampened for consumers during fiscal year 2022, although with the high demand of used vehicles and related financing, the availability of credit has loosened more recently. 32
-------------------------------------------------------------------------------- The Company's liquidity is also impacted by our credit losses. Macro-economic factors such as unemployment levels and general inflation can significantly affect our collection results and ultimately credit losses. Currently, as our customers look to cover rising costs of non-discretionary items, such as groceries and gasoline, it may impact their ability to make their car payments. Additionally, the long-term economic impact of the COVID-19 pandemic and the resulting effects on the Company's collections and credit loss results remains uncertain. The Company has made improvements to its business processes within the last few years to strengthen controls and provide stronger infrastructure to support its collections efforts. The Company continues to strive to reduce credit losses in spite of the current economic challenges and continued competitive pressures by improving deal structures. Management continues to focus on improved execution at the dealership level, specifically as related to working individually with customers concerning collection issues. The Company has generally leased the majority of the properties where its dealerships are located. As ofApril 30, 2022 , the Company leased approximately 81% of its dealership properties. AtApril 30, 2022 , the Company had$81.9 million of operating lease commitments, including$18.0 million of non-cancelable lease commitments under the lease terms, and$63.9 million of lease commitments for renewal periods at the Company's option that are reasonably assured. Of the$81.9 million total lease obligations,$48.3 million of these commitments will become due in more than five years. The Company expects to continue to lease the majority of the properties where its dealerships are located. The Company's revolving credit facilities generally restrict distributions by the Company to its shareholders. The distribution limitations under the credit facilities allow the Company to repurchase the Company's stock so long as either: (a) the aggregate amount of such repurchases afterSeptember 30, 2021 does not exceed$50 million , net of proceeds received from the exercise of stock options, and the total availability under the credit facilities is equal to or greater than 20% of the sum of the borrowing bases, in each case after giving effect to such repurchases (repurchases under this item are excluded from fixed charges for covenant calculations), or (b) the aggregate amount of such repurchases does not exceed 75% of the consolidated net income of the Company measured on a trailing twelve month basis; provided that immediately before and after giving effect to the stock repurchases, at least 12.5% of the aggregate funds committed under the credit facilities remain available. Thus, although the Company does routinely repurchase stock, the Company is limited in its ability to pay dividends or make other distributions to its shareholders without the consent of the Company's lenders. AtApril 30, 2022 , the Company had approximately$6.9 million of cash on hand and$197.8 million of availability under its revolving credit facilities (see Note F to the Consolidated Financial Statements in Item 8). On a short-term basis, the Company's principal sources of liquidity include income from operations and borrowings under its revolving credit facilities. On a longer-term basis, the Company expects its principal sources of liquidity to consist of income from operations and borrowings under revolving credit facilities or fixed interest term loans. The Company's revolving credit facilities mature inSeptember 2024 and the Company expects that it will be able to renew or refinance its revolving credit facilities on or before the date they mature. The Company has also recently accessed the securitization market with an inaugural issuance inApril 2022 of$400 million in aggregate principal amount of non-recourse asset-backed notes. The Company expects that it will continue to access this market in diversifying and growing the business. Furthermore, while the Company has no specific plans to issue further debt or equity securities, the Company believes, if necessary, it could raise additional capital through the issuance of such securities. The Company expects to use cash from operations and borrowings to (i) grow its finance receivables portfolio, (ii) purchase fixed assets of approximately$25 million in the next 12 months to add technology improvements and to refurbish existing dealerships and adding new dealerships, subject to strong operating results, (iii) repurchase shares of common stock when favorable conditions exist and (iv) reduce debt to the extent excess cash is available. The Company estimates that total interest payments on its outstanding debt facilities as ofApril 30, 2022 , are approximately$240.8 million , assuming an increase in average total debt of approximately$212.0 million with an average annual rate increase of approximately 2%, with approximately$28.0 million in interest payable during fiscal 2023.
The Company believes that it will have sufficient liquidity to continue to grow its revenues and meet its capital requirements for the foreseeable future.
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Off-balance sheet arrangements
The Company has two stand-by letters of credit relating to insurance policies totaling
With the exception of its letter of credit, the Company is not party to any off-balance sheet arrangement which, in the opinion of management, is reasonably likely to have a current or future impact on the financial position, income or expenses, operating results, cash, capital expenditures or capital resources that are important to investors.
Related finance company
Car-Mart ofArkansas and Colonial do not meet the affiliation standard for filing consolidated income tax returns, and as such they file separate federal and state income tax returns. Car-Mart ofArkansas routinely sells its finance receivables to Colonial at what the Company believes to be fair market value and is able to take a tax deduction at the time of sale for the difference between the tax basis of the receivables sold and the sales price. These types of transactions, based upon facts and circumstances, have been permissible under the provisions of the Internal Revenue Code as described in theTreasury Regulations. For financial accounting purposes, these transactions are eliminated in consolidation and a deferred income tax liability has been recorded for this timing difference. The sale of finance receivables from Car-Mart ofArkansas to Colonial provides certain legal protection for the Company's finance receivables and, principally because of certain state apportionment characteristics of Colonial, also has the effect of reducing the Company's overall effective state income tax rate by approximately 250 basis points. The actual interpretation of the Regulations is in part a facts and circumstances matter. The Company believes it satisfies the material provisions of the Regulations. Failure to satisfy those provisions could result in the loss of a tax deduction at the time the receivables are sold and have the effect of increasing the Company's overall effective income tax rate as well as the timing of required tax payments.
The Company’s policy is to recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no penalties or interest payable to the
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Critical Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles inthe United States of America requires the Company to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the Company's estimates. The Company believes the most significant estimate made in the preparation of the Consolidated Financial Statements in Item 8 relates to the determination of its allowance for credit losses, which is discussed below. The Company's accounting policies are discussed in Note B to the Consolidated Financial Statements in Item 8. The Company maintains an allowance for credit losses on an aggregate basis at a level it considers sufficient to cover estimated losses expected to be incurred on the portfolio at the measurement date in the collection of its finance receivables currently outstanding. AtApril 30, 2022 , the weighted average total contract term was 42.9 months with 34.2 months remaining. The reserve amount in the allowance for credit losses atApril 30, 2022 ,$247.2 million , was 24.5% of the principal balance in finance receivables of$1.1 billion , less unearned accident protection plan revenue of$48.6 million and unearned service contract revenue of$43.9 million . In the fourth quarter of fiscal 2021, the Company decreased the allowance for credit losses as a percentage of finance receivables from 26.5% to 24.5% as a result of improved credit losses and delinquencies, as well as changes in our outlook for projected losses. The decrease resulted in a$15.1 million pretax decrease to the provision for credit losses. The allowance for credit losses remained at 24.5% atApril 30, 2022 . The estimated reserve amount is the Company's anticipated future net charge-offs for losses expected to be incurred on the portfolio at the measurement date. The allowance takes into account historical credit loss experience (both timing and severity of losses), with consideration given to recent credit loss trends and changes in contract characteristics (i.e., average amount financed, months outstanding at loss date, term and age of portfolio), delinquency levels, collateral values, economic conditions and underwriting and collection practices. The allowance for credit losses is reviewed at least quarterly by management with any changes reflected in current operations. The calculation of the allowance for credit losses uses the following primary factors:
? The number of units taken back or written off as a percentage of the total number of units
funded over specific historical periods ranging from one to five years.
? The average repossessed and charged net loss per unit over the last
eighteen months, separated by the number of months elapsed since the contract
original date, and adjusted for expected future average net load
loss per unit. About 50% of the unit charges that will eventually
occur in the portfolio are expected to occur within 10-12 months of the
balance sheet date. The average age of an account at charge date is 12 years
months.
? The timing of repossession and imputed losses relative to the date of sale
(i.e. how long it takes for a repossession or charge to occur) for
seizures and allocations made during the last eighteen months.
? An adjustment over the first twelve months to reflect the significant increase
the average amount financed and the resulting monthly payment and duration
length.
? A forecast of expected losses for a period of one year, including
considerations for the impact of forecasted levels of inflation and the
discontinuation of COVID-19 pandemic government provided benefits.
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-------------------------------------------------------------------------------- A historical point loss rate is produced by this analysis which is then adjusted to reflect current conditions and the Company's reasonable and supportable forecast of expected losses for a period of one year, including the review of static pools coupled with any positive or negative subjective factors to arrive at an overall reserve amount that management considers to be a reasonable estimate of losses to be incurred on the portfolio at the measurement date. While challenging economic conditions can negatively impact credit losses, the effectiveness of the execution of internal policies and procedures within the collections area and the competitive environment on the lending side have historically had a more significant effect on collection results than macro-economic issues.
Recent accounting pronouncements
Occasionally, new accounting pronouncements are issued by theFinancial Accounting Standards Board ("FASB") or other standard setting bodies which the Company will adopt as of the specified effective date. Unless otherwise discussed, the Company believes the implementation of recently issued standards which are not yet effective will not have a material impact on its consolidated financial statements upon adoption.
Recently Adopted Accounting Pronouncements
InMarch 2020 , the FASB issued ASU 2020-04, Reference Rate Reform. The pronouncement provides optional guidance for a limited period of time to ease the potential burden of accounting for reference rate reform. This guidance is effective for all entities as ofMarch 12, 2020 , throughDecember 31, 2022 . DuringApril 2022 , the Company replaced LIBOR as the applicable benchmark interest rate on its revolving line of credit with the daily simple Secured Overnight Financing Rate ("SOFR"). The replacement of the rate to SOFR did not have a material impact on the Company's financial position or results of operations. Non-GAAP Financial Measure
The reconciliation between the Company’s debt-to-equity ratio and the adjusted debt-to-equity ratio, net of cash, to shareholders’ equity for the year ending
April 30, 2022
Debt to Equity 0.94
Cash to Equity 0.09
Debt net of Cash to Equity 0.85
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