World Acceptance Corporation: Q2 FY2020 Form 10-Q Summary
Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company offering small and larger installment loans, credit insurance, ancillary products and income-tax preparation services to customers with limited access to traditional credit. The filing covers the quarter and six months ended September 30, 2019, the second quarter of fiscal 2020. Results exclude the Mexico operations sold effective July 1, 2018, which are presented as discontinued operations in prior-period results.
Key Financial Metrics
| Metric | Three months ended September 30, 2019 | Year-over-year change | Six months ended September 30, 2019 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $141.6 million | Up 11.4% | $280.0 million | Up 12.0% |
| Income from continuing operations | $4.2 million | Down 70.0% | $12.8 million | Down 56.8% |
| Diluted EPS from continuing operations | $0.51 | Down from $1.51 | $1.50 | Down from $3.20 |
| Provision for loan losses | $53.0 million | Up 31.2% | $94.3 million | Up 32.9% |
| General and administrative expense | $78.5 million | Up 20.8% | $160.2 million | Up 20.7% |
| Net cash provided by operating activities | Not separately provided | — | $118.2 million | Up from $95.3 million |
Operating income as a percentage of revenue declined to 7.2% in the quarter and 9.1% for the six-month period, compared with 17.2% and 18.5%, respectively, in the prior-year periods. Net income margins were approximately 3.0% for the quarter and 4.6% for the six-month period. Trailing-12-month return on average assets was 6.0%, and return on average equity was 10.8%.
- Gross loans receivable were $1.274 billion at September 30, 2019, up 13.1% from September 30, 2018.
- Net loans receivable before the allowance for loan losses were $939.8 million; loans receivable, net of unearned amounts and the allowance, were $838.4 million.
- The allowance for loan losses was $101.5 million, or 10.8% of net loans before the allowance, versus 9.6% a year earlier.
- Annualized net charge-offs as a percentage of average net loans increased to 16.8% for the quarter and 16.6% for the six months, from 14.4% and 14.7%, respectively.
- Contractual past-due receivables were $157.7 million, or 12.4% of gross loans, at September 30, 2019, versus 11.5% a year earlier. On a recency basis, past-due receivables were $135.8 million, or 10.7% of gross loans.
- Cash and cash equivalents were $10.2 million at September 30, 2019.
- Senior notes payable were $518.8 million, compared with $251.9 million at March 31, 2019. Shareholders’ equity was $394.9 million, resulting in a senior debt-to-equity ratio of 1.3 to 1.0.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher average loan balances. Average net loans increased 14.3% in the quarter and 14.2% for the six months.
- Credit costs increased materially as net charge-offs and delinquency levels rose. Management attributed part of the deterioration to growth in new borrowers, its riskiest customer category; new-borrower balances represented 35.8% of the portfolio versus 32.0% a year earlier.
- General and administrative expenses grew faster than revenue. Personnel expense included substantially higher stock-based compensation related to the long-term incentive program and director awards; total stock-based compensation was $8.3 million in the quarter and $16.6 million for the six months.
- Interest expense increased 52.2% in the quarter and 28.0% for the six months, reflecting higher average debt, partially offset by lower LIBOR and a lower interest margin.
- The company completed substantially more expansion activity, acquiring 37 branches and 134 loan portfolios during the six months, versus three branches and 28 portfolios in the prior-year period. Branches open at period-end increased to 1,234 from 1,189.
- The company repurchased 1,392,180 shares for $190.0 million during the six months, including 1,251,103 shares for $168.2 million in the quarter. Shares outstanding declined to 7,945,842 from 9,284,118 at March 31, 2019.
- The six-month 2018 results included a $36.7 million loss from discontinued Mexico operations, including a $38.4 million loss on disposal. Current-period net income was therefore not directly comparable with reported consolidated net loss in the prior year.
Liquidity, Debt and Cash Flow
Operating cash flow was $118.2 million for the six months. Investing activities used $196.6 million, including $130.0 million for loan growth, $47.0 million for acquired loan portfolios and branches, $14.5 million for acquisition-related intangible assets, and $5.1 million for property and equipment. Financing activities provided $79.3 million, including $358.2 million of borrowings, $91.3 million of debt repayments and $190.0 million of share repurchases. Cash increased by $0.9 million to $10.2 million.
In June 2019, the company amended and restated its revolving credit facility, increasing lender commitments from $480.0 million to $685.0 million and extending maturity to June 7, 2022. Borrowings were $518.8 million at September 30, with $165.9 million of unused availability, subject to borrowing-base limitations. The effective interest rate was 5.9% annualized for the six months. A one-percentage-point change in the borrowing rate would affect annual interest expense by approximately $5.2 million based on the period-end debt balance.
The company was in compliance with its debt covenants at September 30, 2019. The facility requires, among other matters, minimum consolidated net worth of $375.0 million, a minimum fixed-charge coverage ratio of 2.5 to 1.0, and limits related to debt, loan losses and collateral performance.
Guidance, Outlook, Commentary and Risks
- No specific earnings or revenue guidance was provided. Management stated that operating results are seasonal, with generally higher loan demand from October through December and stronger repayment activity from January through March.
- Management expects the increased proportion of new borrowers to continue contributing to higher delinquencies and charge-offs.
- Management believes operating cash flow and revolver availability will be adequate to fund loan growth, acquisitions and branch expansion for the next 12 months and foreseeable future, subject to credit-facility restrictions and borrowing-base availability.
- The SEC and DOJ investigation into possible FCPA and local-law violations involving the former Mexico operations remains unresolved. Potential fines, penalties, disgorgement, remediation, monitors, third-party claims and indemnification obligations to the purchasers could materially affect liquidity and results. The company cannot reasonably estimate any additional liability.
- The CFPB’s rule governing certain consumer loans remains subject to regulatory changes. The compliance date for ability-to-repay provisions was delayed to November 19, 2020, and rescission has been proposed. Payment-related requirements could require changes to loan-payment procedures and affect costs, refinancing and profitability.
- The company adopted the lease accounting standard on April 1, 2019, recording a $119.4 million right-of-use asset and $120.1 million lease liability at September 30, 2019. Adoption did not affect reported operating results.
- The company is evaluating the future accounting impact of the expected-credit-loss standard; management stated adoption could materially affect loan-loss provision and the allowance for loan losses.
Most Important Facts for Investors to Verify
- Whether the rise in delinquencies, charge-offs and the allowance ratio persists as the portfolio expands and the new-borrower mix increases.
- The sustainability of profitability given provision expense and G&A growth exceeding revenue growth.
- Revolver availability, borrowing-base calculations, covenant compliance and sensitivity to LIBOR or other benchmark-rate changes.
- The ultimate financial, regulatory and credit-agreement consequences of the Mexico investigation and related indemnification obligations.
- The cash requirements and returns associated with acquisitions, branch expansion and continued share repurchases.
- The effect of future credit-loss accounting adoption and CFPB or other regulatory changes on reported earnings and lending practices.