Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company offering small and larger installment loans, credit insurance, and ancillary products to consumers with limited access to traditional credit. U.S. branches also provide tax-preparation services. This unaudited Form 10-Q covers the three and nine months ended December 31, 2017, the third quarter and first nine months of fiscal 2018. Results are seasonal, with typically higher loan demand in October–December and stronger repayment and earnings in January–March.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2017 | Year-over-year change | Nine months ended Dec. 31, 2017 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $136.9 million | Up 4.7% | $396.8 million | Up 2.5% |
| Operating income | $20.3 million | Up 3.6% | $66.6 million | Down 18.5% |
| Net income | $1.7 million | Down 82.6% | $24.5 million | Down 41.2% |
| Diluted EPS | $0.19 | Down from $1.10 | $2.76 | Down from $4.75 |
| Net income margin | Approximately 1.2% | Down from approximately 7.4% | Approximately 6.2% | Down from approximately 10.8% |
| Provision for loan losses | $43.8 million | Up 9.4% | $113.6 million | Up 5.3% |
| General and administrative expense | $72.9 million | Up 2.3% | $216.7 million | Up 9.6% |
| Net cash from operating activities | Not separately reported | — | $145.6 million | Down from $156.0 million |
- Gross loans receivable were $1.229 billion at December 31, 2017, up from $1.060 billion at March 31, 2017 and $1.165 billion at December 31, 2016. Net loans receivable were $790.9 million.
- The allowance for loan losses was $96.5 million, compared with $72.2 million at March 31, 2017 and $81.8 million at December 31, 2016.
- Contractually past-due receivables totaled $149.4 million, or 12.2% of gross loans, versus 11.1% at March 31, 2017 and 11.3% at December 31, 2016. Loans 60 or more days delinquent totaled $105.0 million.
- Cash and cash equivalents were $25.0 million, up from $15.2 million at March 31, 2017.
- Senior notes payable were $376.9 million, compared with $295.1 million at March 31, 2017. Debt-to-equity was 0.8:1.0.
- The revolving facility had $480.0 million of commitments, $102.9 million of unused borrowing availability, and a June 15, 2019 maturity. The effective borrowing cost for the nine-month period was 5.8%.
- Investing cash outflows were $219.5 million, primarily reflecting a $202.1 million increase in loans receivable, plus $8.8 million for acquired loan assets and $6.8 million for property and equipment. Financing activities provided $84.5 million.
- The company operated 1,334 offices at period-end, compared with 1,323 in the prior-year period; it opened 22 branches and merged 18 during the first nine months.
Material Changes Versus the Prior Comparable Period
- Revenue grew due primarily to higher average earning loans. Average net loans increased 5.4% in the quarter and 2.8% for the nine-month period.
- Loan-loss provision increased because of higher loan growth, a prior-year U.S. provision reduction, and increasing delinquencies in Mexico. Consolidated net charge-offs nevertheless declined by $1.1 million in the quarter and $5.5 million for the nine-month period.
- Nine-month general and administrative expense increased $19.1 million. Drivers included higher part-time staffing, advertising, and $7.0 million of additional legal and professional expense related primarily to the Mexico investigation. Direct Mexico-investigation expense was $1.9 million in the quarter.
- Interest expense declined 5.2% in the quarter and 14.3% for the nine-month period, reflecting lower average debt outstanding.
- The December 2017 Tax Cuts and Jobs Act produced a provisional $10.5 million discrete tax expense from revaluing deferred tax assets and liabilities. The quarterly effective tax rate rose to 89.0% from 32.7%; excluding the discrete charge, management reported an effective rate of 20.1%.
- Foreign-currency translation generated a $3.3 million comprehensive loss for the nine-month period.
- The company completed 28 acquisitions during the first nine months, including three branches and 25 loan portfolios, for total purchase consideration of $10.7 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expects the quarterly effective tax rate to normalize to approximately 34.0% in the fourth quarter, excluding additional discrete items. The Tax Act accounting remains provisional, and the transition-tax calculation was not yet completed at December 31, 2017.
- Management believes operating cash flow and available revolver capacity will fund loan growth, acquisitions, branch expansion, and operations for the next 12 months and beyond. The company was in compliance with its debt covenants at December 31, 2017.
- Share repurchases were suspended after the first quarter of fiscal 2018 because of the Mexico investigation. The March 2015 authorization had $1.9 million remaining, but the timing of any resumption was uncertain.
- The Mexico investigation concerns potential improper payments and related books-and-records and compensation matters from approximately 2010–2017. The company is cooperating with the SEC and DOJ, which could seek fines, disgorgement, penalties, remedial measures, a monitor, or operational restrictions. Any settlement amount was not reasonably estimable.
- The CFPB notified the company on January 18, 2018 that it had concluded its investigation and would not pursue an enforcement action.
- The company reported ineffective disclosure controls and continuing material weaknesses in internal control over financial reporting relating to Mexico vendor payments, compliance with U.S. and foreign laws, and corporate governance. Remediation remains ongoing.
- President and CEO Janet Matricciani departed effective January 22, 2018 and was replaced by Interim CEO James H. Wanserski. The separation agreement includes approximately $1.6 million of severance, other benefits, and approximately $930,000 of additional equity-award expense expected in the fourth quarter.
- The shareholder class action settlement was approved for $16.0 million, funded by directors’ and officers’ insurance. A related derivative-action settlement included governance measures and $475,000 of insured legal fees. Neither settlement included an admission of wrongdoing.
- Interest-rate exposure is material: a one-percentage-point change in rates would affect annual interest expense by approximately $3.8 million based on the period-end debt balance.
Important Facts for Investors to Verify
- Whether Mexico-investigation findings, enforcement actions, penalties, disgorgement, operational changes, or credit-agreement consequences arise.
- Whether the reported material weaknesses are remediated and whether disclosure controls become effective.
- The final accounting impact of the Tax Act, including the transition tax and any revisions to the provisional $10.5 million deferred-tax revaluation charge.
- Trends in delinquencies, charge-offs, allowance coverage, and Mexico loan performance as the loan portfolio expands.
- Liquidity headroom, borrowing-base availability, covenant compliance, and refinancing risk before the June 2019 revolver maturity.
- The effect of senior-management turnover and the timing and cost of appointing a permanent CEO.
- Whether loan growth converts into improved profitability after elevated credit losses, operating costs, investigation expenses, and tax effects.