World Acceptance Corporation 2019 Form 10-K Summary
Business context and reporting period
World Acceptance Corporation operates a small-loan consumer finance business serving primarily underbanked customers. As of March 31, 2019, it operated 1,193 branches in 16 U.S. states, offered installment loans generally ranging from $100 to $15,970, and provided credit insurance, automobile club memberships, and tax-preparation services. The filing covers the fiscal year ended March 31, 2019; it is not a quarterly filing, despite the request metadata referencing 2018 Q4.
The Company completed the sale of its Mexico operations effective July 1, 2018, for approximately $44.36 million. Mexico is reported as discontinued operations.
Financial performance and key metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Total revenue from continuing operations | $544.5 million | $502.7 million | Up 8.3% |
| Interest and fee income | $469.2 million | $435.7 million | Up 7.7% |
| Provision for loan losses | $148.4 million | $117.6 million | Up 26.2% |
| General and administrative expense | $288.3 million | $269.1 million | Up 7.1% |
| Income from continuing operations | $73.9 million | $49.1 million | Up 50.5% |
| Net income | $37.2 million | $53.7 million | Down 30.6% |
| Diluted EPS from continuing operations | $8.03 | $5.48 | Up 46.5% |
| Diluted EPS including discontinued operations | $4.05 | $5.99 | Down 32.4% |
| Net cash provided by operating activities | $244.7 million | $218.0 million | Up 12.2% |
Operating income, defined as revenue less loan-loss provision and general and administrative expense, was approximately $107.8 million, or 19.8% of revenue, compared with 23.1% in fiscal 2018. The lower margin primarily reflected higher credit losses.
- Gross loans receivable increased to $1.128 billion from $1.004 billion, up 12.3%.
- Net loans receivable increased to $837.1 million from $745.2 million.
- The allowance for loan losses increased to $81.5 million from $66.1 million, equal to 9.7% of net loans receivable versus 8.9%.
- Net charge-offs rose to 16.1% of average net loans receivable from 14.9%; contractual loans at least 61 days past due increased to 7.8% of gross loans from 7.5%.
- Insurance, tax-preparation, automobile-club, and other income totaled $75.4 million, including $21.5 million from tax preparation and $45.2 million from insurance revenue.
- Cash and cash equivalents were $9.3 million at March 31, 2019, compared with $12.5 million from continuing operations at the prior year-end.
Debt, liquidity, and capital allocation
- Total debt was $251.9 million, compared with $244.9 million, and shareholders’ equity was $552.1 million, producing a debt-to-equity ratio of approximately 0.5 to 1.0.
- The revolving credit facility had aggregate commitments of $480.0 million, with $227.8 million of unused borrowing availability at year-end, subject to borrowing-base limitations and covenants. The facility matures June 15, 2020.
- The facility bears interest based on LIBOR plus a margin of 3.0% to 4.0%, with a minimum rate of 4.0%. The fiscal 2019 effective rate, including commitment fees, was 6.7%. A one-percentage-point change in LIBOR would change annual interest expense by approximately $2.5 million based on the year-end balance.
- Management stated that operating cash flow and available borrowings should fund expected branch expansion, loan growth, and other liquidity needs for at least the next 12 months. The Company was in compliance with debt covenants at March 31, 2019.
- The Company repurchased $74.5 million of common stock during fiscal 2019. Only approximately $0.5 million remained under the applicable repurchase authorization at year-end. No cash dividends have been paid since 1989.
Material changes versus the prior comparable period
- Revenue and loan balances grew materially, supported by higher average loans, increased loan volume, branch additions, and stronger tax-preparation activity.
- Credit performance deteriorated: the provision for loan losses rose 26.2%, the net charge-off ratio increased to 16.1%, and delinquency increased. New borrowers represented 17.0% of the year-end portfolio, up from 13.7%, and management identified this mix shift as a contributor to higher losses.
- Continuing-operations earnings improved substantially because of revenue growth and a much lower effective tax rate of 17.8%, compared with 49.3%. Fiscal 2018 included significant TCJA-related charges, including deferred-tax remeasurement and foreign transition tax.
- Reported net income declined because fiscal 2019 included a $38.4 million loss on disposal of the Mexico operations, including approximately $31.3 million related to accumulated foreign-currency translation losses.
- General and administrative expense increased, including a significant increase in share-based compensation. Fiscal 2019 stock-based compensation was $17.6 million, compared with $5.4 million.
- The Company opened 25 branches and acquired 17, partially offset by 26 branch mergers or consolidations, resulting in 16 net additional branches.
Outlook, risks, contingencies, and unusual items
- Management planned to open or acquire approximately 50 branches in fiscal 2020, subject to attractive locations, personnel availability, financing, and regulatory approvals. The Company also purchased approximately $45.0 million of loans from a competitor in the first quarter of fiscal 2020.
- The Company remains subject to extensive state and federal regulation. Rate caps, restrictions on loan terms or collections, licensing changes, CFPB supervision, and changes to consumer-protection rules could materially reduce profitability or require operations to be modified or discontinued.
- The CFPB’s rule concerning certain consumer loans was subject to proposed amendments, with payment provisions expected to apply August 19, 2019. The Company expected to modify payment procedures if applicable.
- An SEC and DOJ investigation continues concerning potential FCPA and other legal violations related to the former Mexico operations. The Company cannot reasonably estimate potential fines, penalties, disgorgement, or other liabilities and has agreed to indemnify the Mexico purchasers for certain pre-sale investigation-related claims. A qualifying outcome could also trigger a debt-agreement default.
- Key financial risks include borrower credit deterioration, higher interest rates and LIBOR uncertainty, dependence on revolving-credit funding, regulatory and litigation exposure, cybersecurity and data-privacy incidents, employee turnover, and concentration in four states that generated approximately 57% of revenue.
- The Company expects adoption of the current expected-credit-loss standard to potentially have a material effect on the provision for loan losses and allowance. Lease accounting adoption on April 1, 2019 resulted in a $95.1 million right-of-use asset and a $92.3 million lease liability, with a $2.8 million retained-earnings adjustment.
- Management and RSM US LLP concluded that internal control over financial reporting was effective, and RSM issued unqualified audit opinions on the financial statements and internal controls.
Investor verification checklist
- Verify the sustainability of the 16.1% net charge-off rate, the increase in delinquencies, and the adequacy of the $81.5 million allowance.
- Assess whether loan growth and the increased mix of new borrowers can continue without further deterioration in credit quality.
- Review the final outcome and potential financial, liquidity, covenant, and reputational effects of the Mexico FCPA investigation and related indemnification obligations.
- Confirm availability, borrowing-base capacity, covenant headroom, maturity, and refinancing plans for the revolving credit facility due in June 2020.
- Evaluate the impact of CFPB and state regulatory developments, including possible rate caps and payment-procedure requirements.
- Separate recurring operating performance from the Mexico disposal loss, TCJA-related tax effects, and elevated share-based compensation.
- Review the impact of adopting the expected-credit-loss standard and lease accounting on future reported earnings, assets, liabilities, and equity.