World Acceptance Corporation Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended March 31, 2018; the request references 2017 Q4, but the filing is an annual report for fiscal 2018 and includes fourth-quarter data. World Acceptance operates a small-loan consumer finance business through 1,308 branches in 15 U.S. states and Mexico. It offers installment loans, credit insurance, automobile-club memberships, and tax-preparation services.
- Gross loans receivable totaled $1.105 billion at March 31, 2018, across approximately 953,000 loans.
- U.S. operations represented 91.6% of revenue; Mexico represented 8.4%.
- Tax-preparation revenue was approximately $16.8 million from approximately 77,000 returns.
Financial performance and key metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Total revenue | $548.7 million | $531.7 million | +3.2% |
| Interest and fee income | $481.7 million | $468.8 million | +2.8% |
| Provision for loan losses | $131.0 million | $128.6 million | +1.9% |
| General and administrative expense | $297.4 million | $267.7 million | +11.1% |
| Interest expense | $19.1 million | $21.5 million | -11.2% |
| Income before taxes | $101.2 million | $114.0 million | -11.2% |
| Net income | $53.7 million | $73.6 million | -27.1% |
| Diluted EPS | $5.99 | $8.38 | -28.5% |
| Operating margin | 21.9% | 25.5% | -3.6 points |
| Effective tax rate | 46.9% | 35.4% | +11.5 points |
Net cash provided by operating activities was $218.0 million, compared with $219.4 million in fiscal 2017. Investing activities used $169.8 million, primarily for loan growth, acquisitions, and capital expenditures. Cash and cash equivalents increased to $32.1 million from $15.2 million.
- Net loans receivable increased to $725.2 million from $695.7 million.
- The allowance for loan losses increased to $80.8 million from $72.2 million, equal to 10.0% of loans receivable net of unearned amounts and deferred fees.
- Net charge-offs were $122.8 million, or 14.9% of average net loans, compared with 15.7% in fiscal 2017.
- Contractual loans at least 61 days past due increased to $97.7 million, or 8.8% of gross loans, from $82.6 million, or 7.8%.
- Total debt was $244.9 million and shareholders’ equity was $541.1 million, producing a debt-to-equity ratio of approximately 0.5 to 1.
- The company had $234.8 million of unused borrowing availability under its $480.0 million revolving facility, subject to borrowing-base limitations.
Material changes versus the prior comparable period
- Gross loans receivable grew 4.3% during fiscal 2018 after declining in fiscal 2017; average net loans increased 3.4%.
- Revenue growth was offset by materially higher expenses, including personnel expense up $11.0 million, advertising up $4.4 million, and other expense up $12.5 million.
- Other expense included approximately $7.2 million related to the Mexico investigation.
- Income tax expense increased $7.1 million. The fiscal 2018 tax rate reflected approximately $10.5 million for revaluation of deferred tax assets and liabilities and approximately $4.9 million for the foreign transition tax under the Tax Cuts and Jobs Act.
- The company opened 30 branches and acquired five, but merged or closed 54 branches, including 33 Mexico payroll-deduct branches. Year-end branch count declined by 19 to 1,308.
- The company stopped originating payroll-deduct “Viva” loans in Mexico during fiscal 2018.
- Fourth-quarter fiscal 2018 revenue was $151.9 million and net income was $29.1 million, compared with $144.6 million and $31.9 million, respectively, in the prior-year fourth quarter.
Guidance, outlook, risks, contingencies, and unusual items
- Management planned to open or acquire approximately 25 U.S. branches during fiscal 2019 and stated that operating cash flow and available borrowings should fund expected expansion and loan growth.
- The revolving credit facility was scheduled to mature June 15, 2019, but a June 1, 2018 amendment subsequently extended maturity to June 15, 2020.
- The company was in compliance with its debt covenants at March 31, 2018. Covenants restrict additional debt, dividends, repurchases, acquisitions, investments, asset sales, and other activities.
- The company continued an internal investigation of possible improper payments and books-and-records issues in Mexico potentially implicating the Foreign Corrupt Practices Act. The SEC issued a formal order of investigation, and the company was cooperating with the SEC and Department of Justice. Potential fines, disgorgement, penalties, operational restrictions, and credit-agreement consequences were not reasonably estimable.
- The CFPB concluded its prior investigation and notified the company in January 2018 that it would not pursue enforcement action. Future CFPB supervision and rulemaking remain risks.
- Senior-management turnover was significant. James H. Wanserski became interim president and chief executive officer in January 2018 while the board searched for a permanent replacement.
- The company faces substantial regulatory, credit, interest-rate, foreign-exchange, litigation, cybersecurity, employee-turnover, and reputational risks. A national or state 36% rate cap could materially impair or eliminate current operations.
- The company settled a shareholder securities class action for $16 million, funded by directors’ and officers’ liability insurers, and settled derivative litigation involving governance changes and $475,000 of insured attorneys’ fees. Neither settlement included an admission of wrongdoing.
- The company adopted ASU 2016-09 with an approximately $2.4 million equity reclassification. It was evaluating the future impact of the expected-credit-loss standard, which could materially affect loan-loss provisions and allowances.
Most important facts for investors to verify
- Whether loan growth can continue without further deterioration in contractual delinquency and credit losses.
- The ultimate outcome, cost, and potential credit-facility consequences of the Mexico FCPA investigation.
- The effect of higher operating expenses, management turnover, and branch closures on future margins.
- The company’s ability to refinance or extend the revolving credit facility and maintain covenant compliance.
- The effect of future CFPB, state, federal, and interest-rate regulation on permissible loan pricing and product economics.
- The size and timing of any impact from adoption of the expected-credit-loss accounting standard.
- Whether management’s planned fiscal 2019 branch expansion produces acceptable returns while the company prioritizes loan funding over share repurchases.