World Acceptance Corporation — Form 10-Q Summary
Business context and reporting period
World Acceptance Corporation is a consumer finance company operating through 1,248 offices in the United States and Mexico. This unaudited Form 10-Q covers the three and nine months ended December 31, 2013, the third quarter and first nine months of fiscal 2014.
Key financial metrics
| Metric | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2013 |
|---|---|---|
| Total revenue | $160.5 million | $455.7 million |
| Income before taxes | $36.5 million | $107.7 million |
| Net income | $23.0 million | $67.6 million |
| Diluted EPS | $1.98 | $5.65 |
| Operating income as % of revenue | 26.2% | 27.0% |
| Provision for loan losses | $41.1 million | $108.0 million |
- At December 31, 2013, gross loans receivable were $1.264 billion and net loans receivable were $842.1 million, compared with $1.067 billion and $722.1 million, respectively, at March 31, 2013.
- Cash and cash equivalents were $19.4 million, compared with $11.6 million at March 31, 2013.
- Net cash provided by operating activities for the nine months was $175.0 million, compared with $156.0 million in the prior-year period. Investing activities used $236.5 million, primarily for loan growth, while financing activities provided $69.7 million.
- Senior notes payable were $583.3 million, up from $400.3 million at March 31, 2013. Shareholders’ equity was $328.6 million, producing debt-to-equity of approximately 1.8:1.
- The $680.0 million revolving credit facility had $95.0 million of available borrowing capacity, plus $1.7 million potentially available upon growth in eligible receivables. The facility matures November 19, 2015 and bears interest at LIBOR plus 3.0%, subject to a 4.0% minimum.
Material changes versus the prior comparable period
- Third-quarter revenue increased 7.3% and net income increased 11.0%; diluted EPS increased from $1.58 to $1.98, aided by a lower share count following repurchases.
- Nine-month revenue increased 8.0%, while net income increased only 2.2% to $67.6 million. Diluted EPS increased from $4.93 to $5.65.
- Interest and fee income increased 9.1% in the quarter and 9.7% year to date, primarily from higher average net loans and fee changes in Texas, Georgia and Indiana.
- Provision for loan losses increased 10.0% in the quarter and 15.6% year to date. Annualized net charge-offs rose to 15.7% from 15.6% in the quarter and to 14.9% from 14.0% year to date.
- Contractual past-due receivables rose to $109.7 million, or 8.7% of gross loans, versus $96.5 million, or 8.2%, at December 31, 2012. Loans 61 or more days delinquent increased to 3.2% of gross loans on a recency basis from 2.9%.
- General and administrative expense increased 3.3% in the quarter and 6.9% year to date. As a percentage of revenue, it improved to 48.2% from 50.0% in the quarter and to 49.3% from 49.8% year to date.
- Interest expense increased 25.9% in the quarter and 25.1% year to date due primarily to higher average debt balances.
- The company opened or acquired 45 offices during the first nine months, compared with 49 in the prior-year period, bringing the total to 1,248.
Guidance, outlook, risks and unusual items
- Management estimated that Texas and Georgia fee changes could increase fiscal 2014 interest and fee revenue by $4 million to $6 million.
- The company planned to open or acquire at least 57 U.S. branches and 16 Mexican branches during fiscal 2014. Management believes operating cash flow and borrowing capacity will fund planned expansion and loan growth for the next 12 months and beyond.
- Management stated that third-quarter results are seasonally lower than other quarters because loan demand peaks in October through December and repayments are generally highest in the fourth quarter.
- A Missouri ballot initiative seeking to limit consumer-loan annual interest rates to 36% could appear on the November 2014 ballot. The company is opposing the initiative through trade associations, but its outcome is uncertain.
- Credit quality and allowance estimates remain significant risks. The allowance for loan losses was $74.6 million at December 31, 2013, and management’s estimates could change with economic conditions, delinquency trends and charge-offs.
- The company had a previously reported material weakness in internal control over financial reporting related to allowance-for-loan-loss and loan-renewal accounting processes. Remediation had begun, but management could not yet conclude that the weakness was remediated; disclosure controls and procedures were therefore ineffective as of December 31, 2013.
- The company repurchased 618,400 shares for $56.9 million during the quarter. Remaining repurchase capacity under outstanding authorizations was $13.8 million as of February 4, 2014.
- Foreign-currency translation produced a $3.7 million loss in accumulated other comprehensive income for the nine months. Mexican operations represented approximately 8.3% of total revenue.
- A 1.0% change in interest rates would affect annual interest expense by approximately $1.0 million based on the period-end debt balance. The company also faces regulatory, tax, litigation, economic, foreign operations and funding risks.
- Pending litigation is described as arising in the ordinary course of business, and management does not believe reasonably possible losses will be material. The filing does not provide a clear quantified aggregate exposure.
Investor facts to verify
- Whether delinquency, charge-off and allowance trends continue to deteriorate as the loan portfolio expands.
- Whether the reported material weakness is remediated in subsequent filings and whether disclosure controls become effective.
- The availability and terms of additional borrowing capacity as debt approaches the revolving facility limits and the November 2015 maturity.
- The effect of Missouri and other state or federal regulatory initiatives on fees, loan pricing and permissible products.
- Whether planned branch expansion and share repurchases remain consistent with liquidity, covenant and capital requirements.
- The sustainability of earnings growth given rising interest expense, higher credit costs and reliance on loan growth.