Business Context and Reporting Period
World Acceptance Corporation, a consumer finance company operating primarily in the United States and Mexico, filed this unaudited Form 10-Q for the quarter and nine months ended December 31, 2014, its fiscal 2015 third quarter. The company had 1,314 offices at period-end, compared with 1,248 a year earlier.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2014 | Year-over-Year Change | Nine Months Ended Dec. 31, 2014 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $153.6 million | (4.3%) | $456.5 million | 0.2% |
| Income before taxes | $28.7 million | (21.3%) | $99.2 million | (7.9%) |
| Net income | $18.5 million | (19.4%) | $62.3 million | (7.9%) |
| Diluted EPS | $2.01 | ($0.09) | $6.64 | $0.66 |
| Net margin | 12.0% | Down from 14.3% | 13.7% | Down from 14.8% |
| Operating cash flow | Not separately provided | — | $173.1 million | Down from $175.0 million |
| Gross loans receivable | $1.263 billion at Dec. 31 | Up from $1.112 billion at Mar. 31 | — | — |
| Net loans receivable | $832.6 million at Dec. 31 | Up from $750.7 million at Mar. 31 | — | — |
| Senior notes payable | $592.0 million at Dec. 31 | Up from $505.5 million at Mar. 31 | — | — |
Quarterly expenses included $38.3 million of provision for loan losses, $80.6 million of general and administrative expense, and $6.0 million of interest expense. Nine-month provision for loan losses was $105.3 million, general and administrative expense was $234.3 million, and interest expense was $17.6 million.
At December 31, 2014, cash and cash equivalents were $16.8 million, total assets were $938.3 million, total liabilities were $625.3 million, and shareholders’ equity was $313.1 million. Debt-to-equity was approximately 1.9:1. The allowance for loan losses was $85.0 million, compared with $63.3 million at March 31, 2014.
Cash Flow, Debt, and Liquidity
- Nine-month operating cash flow was $173.1 million. Investing activities used $200.8 million, primarily because of a $192.5 million increase in loans receivable.
- Financing activities provided $25.8 million, including $258.5 million of borrowings and $172.1 million of repayments under the revolving facility.
- Cash declined by $2.8 million during the nine months to $16.8 million.
- The company had a $680.0 million revolving credit facility, with $592.0 million outstanding and $71.3 million of unused borrowing availability at December 31, 2014. An additional $16.4 million could become available as eligible receivables grow.
- The facility bears interest at LIBOR plus 3.0%, subject to a 4.0% minimum; the effective rate including commitment fees was 4.3%. The facility reduces to $630.0 million on June 15, 2015 and matures June 15, 2016.
- Substantially all assets are pledged as collateral. Management stated that the company was in compliance with its debt covenants and expects operating cash flow and borrowing capacity to fund operations and planned expansion.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue fell 4.3% and net income fell 19.4%, primarily due to lower interest and fee income, lower insurance and other income, increased delinquencies, higher expenses, and foreign exchange effects.
- Nine-month revenue was essentially flat, but net income declined 7.9% because general and administrative expense and interest expense increased faster than revenue.
- Quarterly general and administrative expense increased 4.2%; the prior-year period benefited from a $2.9 million reversal of accrued compensation related to the former COO. Current-quarter expense also included higher legal costs.
- Nine-month general and administrative expense increased 4.4% and included a $1.2 million loss from fraud discovered at a branch.
- Average net loans increased 3.2% for the nine months, but revenue from offices open throughout both comparable periods declined 0.7% for the nine months and 5.6% for the quarter.
- Loans 60 days or more delinquent on a recency basis increased to 5.0% from 3.2% a year earlier, although the quarterly figure declined from 5.2% at September 30, 2014. Total contractual past-due receivables were 10.2% of gross loans, versus 8.7% at both March 31 and December 31, 2013.
- Annualized net charge-offs as a percentage of average net loans decreased to 12.8% for the nine months from 14.9%, but increased slightly to 15.5% for the quarter from 15.7% a year earlier.
- Share count declined materially because of repurchases. The company repurchased 800,291 shares for $63.4 million during the nine months, but made no repurchases during the quarter. Remaining repurchase authorization was $8.1 million as of February 4, 2015.
- Management revised prior-period EPS disclosures after identifying immaterial errors involving restricted stock in weighted-average share calculations. The revisions did not affect net income, balance sheets, cash flows, or shareholders’ equity.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management planned to open or acquire at least 50 U.S. branches and 20 Mexican branches during fiscal 2015. Four acquisitions were completed during the first nine months for aggregate purchase price of approximately $1.7 million.
- The company expects seasonal variation: loan demand is generally highest from October through December, while the fourth fiscal quarter typically has lower loan volume and higher repayments. Management cautioned that third-quarter results are generally lower than other quarters.
- The World Class Buying Club product is being wound down. Remaining inventory was approximately $900,000 at December 31, 2014; the product contributed $830,000 of other income and $490,000 of interest and fees during the quarter, while generating $880,000 of net charge-offs.
- The CFPB investigation initiated by a March 2014 Civil Investigative Demand remained under review. The company had provided requested information but had received no formal resolution. Potential enforcement, penalties, restitution, litigation, or required business-practice changes could materially affect results.
- A shareholder putative class action alleges securities-law violations related to the CFPB disclosure and alleged weaknesses in accounting for certain loan refinancings. The company moved to dismiss and stated that it cannot reasonably estimate potential losses.
- New Mexico lawmakers were considering proposed 36% rate-cap legislation, although related measures were tabled on February 4, 2015. Changes in state or federal lending regulation remain a material risk.
- Foreign currency translation produced an $8.5 million loss for the nine months, primarily reflecting the Mexican peso. Mexican operations represented approximately 8.9% of nine-month revenue.
- The company recognized $4.7 million of share-based compensation in the quarter and $12.5 million in the nine-month period. Approximately $19.7 million of unrecognized stock-option compensation and $11.9 million of expected unrecognized performance-award compensation remained at December 31, 2014.
- A 1.0% change in interest rates would affect annual interest expense by approximately $1.0 million based on the December 31 debt balance.
Important Facts for Investors to Verify
- Whether elevated delinquencies, the branch incentive changes, and the $85.0 million allowance adequately reflect future credit losses.
- The ultimate outcome and potential financial impact of the CFPB investigation and shareholder class action.
- Availability and renewal terms of revolving-credit capacity, including the June 2015 reduction in the facility and June 2016 maturity.
- The effect of continued share repurchases on leverage, liquidity, and per-share results.
- The financial impact of winding down the World Class Buying Club and other declining non-interest revenue products.
- Exposure to Mexican peso volatility, collection issues affecting Mexican payroll-deduct loans, and potential regulatory changes such as rate caps.
- Whether planned branch expansion can generate sufficient loan growth and returns while maintaining credit quality and covenant compliance.