World Acceptance Corporation — Fiscal 2014 Form 10-K Summary
Business context and reporting period
World Acceptance Corporation operates a small-loan consumer finance business through 1,271 offices in 14 U.S. states and Mexico as of March 31, 2014. It primarily offers installment loans of approximately $300 to $4,000, generally with terms of four to 42 months, to consumers with limited access to traditional credit. Ancillary activities include credit insurance, automobile club memberships, a buying club, tax-return preparation and financial-services software through ParaData.
The filing covers the fiscal year ended March 31, 2014, with comparative fiscal years ended March 31, 2013 and March 31, 2012. Fiscal fourth-quarter results were seasonally strong, with net income of $39.0 million versus $37.9 million in the prior-year fourth quarter.
Key financial metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Total revenues | $617.6 million | $583.7 million | 5.8% increase |
| Interest and fee income | $542.2 million | $505.5 million | 7.3% increase |
| Insurance commissions and other income | $75.5 million | $78.2 million | 3.5% decrease |
| Provision for loan losses | $126.6 million | $114.3 million | 10.7% increase |
| General and administrative expenses | $299.6 million | $285.7 million | 4.9% increase |
| Interest expense | $21.2 million | $17.4 million | 21.9% increase |
| Income before taxes | $170.2 million | $166.3 million | 2.4% increase |
| Net income | $106.6 million | $104.1 million | 2.4% increase |
| Diluted EPS | $9.08 | $7.88 | 15.2% increase |
| Net cash from operating activities | $246.0 million | $232.0 million | 6.0% increase |
Operating margin was 31.0%, compared with 31.5% in fiscal 2013, and return on average assets was 12.3%, compared with 13.0%. The effective tax rate was approximately 37.4% in both years.
Gross loans receivable increased to $1.112 billion from $1.067 billion. Net loans receivable increased to $750.7 million from $722.1 million, while the allowance for loan losses increased to $63.3 million from $60.0 million. Net charge-offs rose to $123.0 million from $109.0 million, and net charge-offs as a percentage of average net loans increased to 14.7% from 13.9%.
At March 31, 2014, total assets were $850.0 million, total debt was $505.5 million and shareholders’ equity was $307.4 million. The debt-to-equity ratio was approximately 1.6 to 1.0. Cash and cash equivalents were $19.6 million.
Material changes versus the prior comparable period
- Average net loans receivable increased 7.0%, supporting the increase in interest and fee income.
- The office network expanded by 68 net offices to 1,271; the Company opened 69 new offices, purchased one office and merged two offices.
- Credit performance weakened: contractual loans at least 61 days past due increased to 5.3% of gross loans from 4.4%, while the allowance ratio increased to 7.8% from 7.7%.
- Insurance commissions and other income declined primarily because of lower automobile club and World Class Buying Club sales and lower Tennessee insurance commissions. Tax-preparation revenue increased to $9.1 million from $8.7 million.
- Interest expense increased as average debt outstanding rose 26.6%.
- Fiscal 2014 stock repurchases totaled $190.5 million for approximately 2.1 million shares. The reduced share count contributed to the substantially faster growth in diluted EPS than in net income.
- Shareholders’ equity declined from $366.4 million to $307.4 million, principally reflecting share repurchases and the fiscal-year foreign-currency translation loss of $3.7 million.
- The Company experienced the departure and replacement of its CFO and COO during fiscal 2014.
Liquidity, debt and cash flow
Operating cash flow was $246.0 million. Investing activities used $165.6 million, primarily for the $157.1 million increase in net loans receivable, while financing activities used $71.8 million, including $190.5 million of share repurchases.
The Company had a $680.0 million revolving credit facility expiring November 19, 2015. Borrowings bear interest at LIBOR plus 3.0%, subject to a 4.0% minimum. Amounts outstanding were $505.5 million at March 31, 2014, with $88.9 million of unused borrowing availability under borrowing-base limitations and an additional $85.6 million potentially available if eligible receivables grow. The Company was in compliance with its debt covenants.
Contractual debt maturities shown in the filing consist of $505.5 million due in fiscal 2016. Management stated that operating cash flow and available borrowings should be adequate for the next 12 months and the foreseeable future, but noted that future increases in borrowing capacity may be required and are not assured.
Guidance, outlook, risks and unusual items
- Management planned to open or acquire at least 50 U.S. offices, approximately 20 Mexico offices and enter at least one new U.S. state in fiscal 2015, while evaluating acquisitions.
- The CFPB issued a Civil Investigative Demand on March 12, 2014 concerning marketing, offering and extension of credit. The Company provided the requested information and had received no response as of the filing. Potential outcomes include enforcement actions, monetary liabilities, restitution, penalties, operational changes or restrictions on the business; no loss amount was estimated.
- A shareholder securities class-action complaint was filed on April 22, 2014, alleging misleading statements before disclosure of the CFPB investigation. The Company stated that it believes the complaint is without merit and intends to defend it.
- The business is highly dependent on consumer repayment capacity, loan-loss estimates, refinancing activity and economic conditions. Approximately 73.5% of fiscal 2014 originations were refinancings, and approximately 83.9% of loans were generated through refinancings or loans to previous customers.
- Regulatory changes or rate caps at the state or federal level could reduce or eliminate the profitability of the Company’s lending model. The filing specifically identifies potential 36% rate-cap initiatives as potentially business-ending.
- Mexico represented 8.2% of fiscal 2014 revenues and 8.8% of gross loans receivable. The Company is exposed to foreign-currency, political, regulatory and operational risks; the fiscal-year translation adjustment was a $3.7 million loss.
- Interest-rate sensitivity is material because the debt is floating-rate: a 1% change in LIBOR would change annual interest expense by approximately $0.8 million based on the March 31, 2014 balance.
- No goodwill impairment was recorded. The filing identifies the allowance for loan losses, share-based compensation and income taxes as critical accounting policies involving significant management judgment.
- The Company has not paid cash dividends since 1989 and expects to prioritize reinvestment and share repurchases, subject to debt-covenant restrictions.
Most important facts for an investor to verify
- Current status, scope and potential financial exposure of the CFPB investigation and the related shareholder litigation.
- Whether delinquency and net charge-off trends continue to worsen and whether the $63.3 million allowance remains adequate.
- Availability, renewal and covenant compliance of the revolving credit facility before its November 2015 maturity.
- Whether planned U.S. and Mexico expansion produces adequate loan growth and branch profitability without excessive operating or credit costs.
- The sustainability of earnings per share growth given heavy share repurchases, rising leverage and declining shareholders’ equity.
- Potential state or federal changes to interest rates, fees, licensing, collections and consumer-protection requirements.
- Foreign-exchange effects and the operating performance of the expanding Mexico portfolio.
- The impact of executive turnover and approximately 30.8% annual office-employee turnover on controls, collections and branch execution.