World Acceptance Corporation — Form 10-Q Summary
Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company offering small and larger short- and medium-term loans, credit insurance, ancillary products, tax preparation services, and financial software. This unaudited Form 10-Q covers the quarter and six months ended September 30, 2015, the second quarter and first six months of fiscal 2016. Results are seasonally affected by higher loan demand in October–December and higher repayments in January–March.
Key Financial Metrics
| Metric | Three months ended Sept. 30, 2015 | Year-over-year change | Six months ended Sept. 30, 2015 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $136.4 million | Down 7.9% | $273.6 million | Down 7.0% |
| Income before taxes | $28.1 million | Down 18.0% | $66.1 million | Down 6.2% |
| Net income | $19.2 million | Down 9.8% | $42.8 million | Down 2.3% |
| Diluted EPS | $2.22 | Down from $2.30 | $4.93 | Up from $4.62 |
| Operating income margin | 26.0% | Down from 27.2% | 28.8% | Up from 27.9% |
| Net margin | Approximately 14.1% | Down from approximately 14.4% | Approximately 15.7% | Up from approximately 14.9% |
| Operating cash flow | Not separately reported | — | $84.3 million | Down from $117.3 million |
At September 30, 2015, gross loans receivable were $1.163 billion, up from $1.110 billion at March 31, 2015 but down from $1.194 billion at September 30, 2014. Net loans receivable were $764.0 million, compared with $742.3 million at March 31, 2015. The allowance for loan losses was $80.3 million, compared with $70.4 million at March 31, 2015 and $81.8 million at September 30, 2014.
Contractually past-due receivables totaled $128.8 million, or 11.1% of gross loans, versus 10.9% at March 31, 2015 and 11.4% a year earlier. Loans 61 or more days delinquent totaled $81.9 million. Annualized net charge-offs were 13.6% of average net loans in the quarter and 12.8% for the six-month period.
Cash and cash equivalents were $12.6 million at September 30, 2015, down from $38.3 million at March 31, 2015. Six-month investing cash outflows were $94.8 million, primarily reflecting a $91.2 million increase in loans receivable. Financing cash outflows were $14.5 million, including net debt repayments and $5.5 million of loan costs. No common stock was repurchased during the six months.
Senior notes payable totaled $489.6 million, down from $501.2 million at March 31, 2015. The company had $109.7 million of unused borrowing availability under its revolving credit facility. Debt-to-equity was approximately 1.4 to 1. The facility bears interest at LIBOR plus 4.0%, subject to a 5.0% minimum, and matures June 15, 2017. Commitments reduce to $500 million on March 31, 2016 and $400 million on March 31, 2017. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower average earning loans, lower loan volumes, reduced insurance commissions and lower ancillary product revenue. Mexican revenue was also reduced by unfavorable foreign exchange, with an estimated revenue impact of $2.6 million in the quarter and $4.6 million for the six months.
- Quarterly provision for loan losses increased 3.9% to $37.6 million, while the six-month provision decreased 4.9% to $63.8 million. Management attributed the quarterly increase partly to maintaining provision above rolling twelve-month net charge-offs.
- General and administrative expense declined 11.5% for the quarter and 9.6% for the six months. The reductions included releases of performance-based restricted-stock accruals and executive-related equity incentive accruals, partly offset by a $1.3 million loss on the sale of the corporate aircraft and $1.2 million of expense related to an uncompleted bond offering.
- Interest expense rose 20.6% in the quarter and 9.9% for the six months, reflecting higher effective borrowing rates despite lower average debt balances.
- The effective tax rate declined to 31.8% from 38.0% in the quarter and to 35.2% from 37.8% for the six months, primarily due to reduced tax reserves following a favorable state court ruling and state refund claims.
- Diluted shares declined to 8.65 million for the quarter and 8.68 million for the six months, versus 9.26 million and 9.48 million, respectively, in the prior-year periods.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management planned to open or acquire at least 30 U.S. branches and 10 Mexican branches in fiscal 2016. During the first six months, 29 branches were opened and three were merged into existing branches; period-end offices totaled 1,346 versus 1,293 a year earlier.
- The company stated that it no longer considered EPS targets of $14.50 and $16.00 under certain Group B performance awards probable through March 31, 2017. This resulted in approximately $2.6 million of compensation expense release in the quarter and $6.0 million for the six months, contributing to lower reported personnel expense.
- The CFPB investigation remains active. After receiving a Civil Investigative Demand in 2014, the company received an August 2015 NORA letter indicating that CFPB enforcement staff was considering recommending legal action. The company submitted its response on August 28, 2015 and cannot predict the timing or outcome. Potential consequences include fines, restitution, litigation, operational changes, or material effects on profitability.
- Shareholder securities litigation and consolidated derivative litigation remain pending. The company cannot reasonably estimate potential losses and states that an adverse outcome could materially affect results in a particular period.
- Proposed CFPB rules concerning longer-term, higher-APR and vehicle-secured loans could increase underwriting requirements and restrict refinancing. Proposed arbitration rules could increase legal and compliance costs.
- New Military Lending Act rules expand protections and a 36% MAPR cap for covered borrowers. Although effective October 1, 2015, key limitations apply to transactions originated or established on or after October 3, 2016 and may require additional disclosures, borrower-status checks, or changes to loan products.
- Foreign currency translation produced a $7.4 million comprehensive loss for the six months. International revenue represented approximately 7.8% of total revenue, compared with 9.0% in the prior-year period.
- A 1% change in interest rates would change annual interest expense by approximately $0.9 million based on the September 30 debt balance. Management believes operating cash flow and available borrowings are adequate for expected needs over the next 12 months and beyond.
Important Facts for Investors to Verify
- Monitor the CFPB investigation, any enforcement action, and the potential financial or operational consequences.
- Assess whether rising delinquency and charge-off rates require additional loan-loss provisions or pressure liquidity.
- Review the scheduled reductions in revolving-credit commitments and compliance with borrowing-base and financial covenants.
- Separate recurring operating performance from unusual benefits and charges, including restricted-stock accrual releases, executive departures, aircraft disposal losses, and uncompleted financing costs.
- Evaluate the effect of lower loan volumes, Mexican peso movements, and seasonal third-quarter performance on future revenue and cash needs.
- Track the implementation of CFPB and Military Lending Act requirements, including possible effects on vehicle-secured loans and refinancing activity.