World Acceptance Corporation: Q3 Fiscal 2020 Form 10-Q Summary
Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company offering small and medium-term loans, credit insurance, tax-return preparation, and ancillary products to customers with limited access to traditional credit. This Form 10-Q covers the three and nine months ended December 31, 2019, corresponding to the third quarter and first nine months of fiscal 2020. Results exclude the Mexico operations, which were sold effective July 1, 2018 and are reported as discontinued operations in prior periods.
Loan demand is seasonal, generally highest from October through December. Third-quarter results are typically weaker than fourth-quarter results because loan repayment is generally highest from January through March.
Financial Performance and Key Metrics
| Metric | Three Months Ended December 31, 2019 | Prior Comparable Period | Nine Months Ended December 31, 2019 | Prior Comparable Period |
|---|---|---|---|---|
| Total revenue | $147.1 million | $137.6 million | $427.1 million | $387.5 million |
| Income from continuing operations | $(5.8) million | $6.3 million | $7.0 million | $36.0 million |
| Net income (loss) | $(5.8) million | $6.3 million | $7.0 million | $(0.7) million |
| Operating income margin | 1.2% | 8.5% | 6.4% | 15.0% |
| Provision for loan losses | $55.2 million | $48.9 million | $149.5 million | $119.9 million |
| General and administrative expense | $90.1 million | $77.0 million | $250.4 million | $209.7 million |
| Interest expense | $7.1 million | $4.6 million | $17.9 million | $13.0 million |
| Basic EPS | $(0.81) | $0.69 | $0.89 | $3.96 |
Revenue grew 6.9% in the quarter and 10.2% for the nine-month period, primarily from higher average loan balances. Gross loans receivable increased 9.0% year over year to $1.37 billion, while net loans receivable increased 9.3% to approximately $1.01 billion. Loan volume increased to $858.0 million in the quarter and $2.34 billion for the nine-month period.
Profitability deteriorated materially. The third-quarter loss primarily reflected an $8.0 million accrual related to the potential resolution of the Mexico investigation, higher credit losses, increased operating expenses, and higher interest expense. The nine-month decline also reflects substantially higher provision expense, general and administrative costs, interest expense, and stock-based compensation.
Net charge-offs as a percentage of average net loans increased to 18.1% for the quarter from 17.0% and to 17.1% for the nine-month period from 15.5%. The allowance for loan losses was $113.1 million, or 11.2% of net loans, compared with 9.9% at December 31, 2018. Contractual past-due receivables were 12.6% of gross loans, compared with 11.4% at March 31, 2019 and December 31, 2018.
Balance Sheet, Cash Flow, Debt, and Liquidity
- Total assets were $1.14 billion at December 31, 2019, compared with $855.0 million at March 31, 2019.
- Cash and cash equivalents were $12.0 million, compared with $9.3 million at March 31, 2019.
- Senior notes payable and revolving credit borrowings were $583.7 million, compared with $251.9 million at March 31, 2019. The senior debt-to-equity ratio was 1.5:1.0.
- Shareholders’ equity was $392.2 million, down from $552.1 million, principally reflecting $190.0 million of share repurchases and operating results.
- Operating activities generated $170.6 million of cash during the first nine months, versus $164.2 million in the prior comparable period.
- Investing activities used $308.8 million, principally for loan growth, acquisitions, intangible assets, and property and equipment.
- Financing activities provided $140.9 million, including $473.3 million of borrowings, offset by $141.5 million of debt repayments and $190.0 million of share repurchases.
- The amended revolving credit facility has aggregate commitments of $685.0 million, matures June 7, 2022, and had approximately $101.0 million of unused availability at December 31, 2019.
- The Company was in compliance with its debt covenants at December 31, 2019. Key requirements include minimum consolidated net worth of $375.0 million, a minimum fixed-charge coverage ratio of 2.75:1.0, and specified limits on leverage, loan losses, and collateral performance.
Material Changes Versus the Prior Comparable Period
- Revenue increased, but operating income margin declined from 8.5% to 1.2% in the quarter and from 15.0% to 6.4% for the nine-month period.
- Provision for loan losses increased 12.8% in the quarter and 24.7% for the nine-month period, reflecting higher net charge-offs and deteriorating delinquency metrics.
- General and administrative expense increased 17.1% in the quarter and 19.4% for the nine-month period. The increase included higher personnel costs, acquisitions-related amortization, occupancy costs, and stock-based compensation.
- Average debt outstanding increased 108.1% in the quarter and 65.8% for the nine-month period, resulting in higher interest expense.
- The Company repurchased 1.39 million shares for $190.0 million during the first nine months, leaving approximately $10.0 million under the current authorization at December 31, 2019. No shares were repurchased during the quarter.
- The Company completed 171 acquisitions during the first nine months, including 37 branch acquisitions and 134 loan-portfolio acquisitions, compared with 97 total acquisitions in the prior period.
- The Company adopted the lease accounting standard on April 1, 2019, recognizing a $122.8 million right-of-use asset and a $123.7 million lease liability at December 31, 2019. Adoption did not affect the statement of operations.
- Common shares outstanding declined to approximately 7.93 million from 9.28 million at March 31, 2019, primarily because of repurchases.
Guidance, Outlook, Commentary, and Risks
Management believes operating cash flow and available borrowings will be adequate to fund loan growth, acquisitions, branch expansion, and other expected needs for the next 12 months and beyond. The filing does not provide formal earnings or revenue guidance.
Management expects the increased proportion of new borrowers, identified as the riskiest customer category, to contribute to continued increases in delinquencies and charge-offs. New borrowers represented 35.5% of the portfolio at December 31, 2019, compared with 34.0% one year earlier.
The SEC and DOJ investigation into historical Mexico operations remains unresolved. The Company proposed an $8.0 million resolution framework to the SEC in January 2020 and accrued that amount at December 31, 2019. The ultimate settlement, timing, related professional fees, potential disgorgement, fines, penalties, indemnification claims, and possible credit-agreement consequences could exceed the accrual and cannot be predicted from the filing.
The Company is exposed to regulatory and litigation risk, including potential changes to CFPB requirements for consumer lending, state regulation, FCPA-related matters, cybersecurity threats, credit losses, interest-rate changes, acquisition integration risk, and dependence on revolving debt. A 1.0 percentage-point change in the interest rate on the December 31, 2019 debt balance would change annual interest expense by approximately $5.8 million.
The Company is evaluating the expected-credit-loss standard. Preliminary testing indicated that the allowance for loan losses could increase by $10.0 million to $20.0 million upon implementation, although the ultimate effect remains uncertain.
Important Facts for Investors to Verify
- Final terms, timing, and total economic impact of any SEC or DOJ resolution of the Mexico investigation.
- Whether rising delinquencies, new-borrower concentration, and net charge-offs continue to pressure the allowance and earnings.
- Compliance with revolving-credit covenants and remaining borrowing-base availability as loan performance changes.
- The sustainability of loan growth and whether revenue growth can offset credit losses, operating expenses, and funding costs.
- The effect of the expected-credit-loss accounting standard, including whether the allowance increase approaches or exceeds the preliminary $10.0 million to $20.0 million estimate.
- The remaining authorization and covenant capacity for share repurchases relative to the Company’s need to fund loan growth.
- Execution and credit performance of the expanded acquisition program, including integration costs and acquired portfolio quality.