Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company offering primarily short-term consumer loans through offices in the United States and Mexico. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended December 31, 2012; fiscal 2013 ends March 31, 2013. The Company operated 1,186 offices at quarter-end, compared with 1,120 at December 31, 2011.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2012 | Nine Months Ended Dec. 31, 2012 |
|---|---|---|
| Total revenue | $149.6 million | $421.9 million |
| Net income | $20.7 million | $66.2 million |
| Net margin | 13.8% | 15.7% |
| Diluted EPS | $1.58 | $4.93 |
| Operating income margin | 25.0% | 28.1% |
| Provision for loan losses | $37.4 million | $93.4 million |
| Interest expense | $4.4 million | $12.4 million |
| Net cash provided by operating activities | Not separately reported | $156.0 million |
- Gross loans receivable were $1.184 billion at December 31, 2012, up from $972.7 million at March 31, 2012 and $1.066 billion at December 31, 2011. Net loans receivable were $792.2 million.
- The allowance for loan losses was $66.8 million, or approximately 5.6% of gross loans. Contractual past-due receivables were $96.5 million, or 8.2% of gross loans, versus 7.4% a year earlier.
- Cash and cash equivalents were $17.2 million. The Company generated $156.0 million of operating cash flow but used $231.3 million in investing activities, primarily to fund loan growth.
- Senior revolving debt was $492.7 million, compared with $229.3 million at March 31, 2012. The $50.0 million junior subordinated note outstanding at March 31, 2012 had been repaid. Debt-to-equity was 1.37:1.
- The revolving facility had a $680.0 million commitment, $151.7 million of unused borrowing availability under borrowing-base limitations, and an additional $35.6 million that could become available with growth in eligible finance receivables. The facility matures November 19, 2014.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue increased 10.1% to $149.6 million, while nine-month revenue increased 7.8% to $421.9 million. Interest and fee income rose 11.3% for the quarter and 7.8% for the nine-month period, primarily reflecting higher average net loans.
- Third-quarter net income increased 5.6% and nine-month net income increased 5.0%. Diluted EPS increased from $1.30 to $1.58 for the quarter and from $4.08 to $4.93 for the nine-month period, aided by fewer weighted-average shares.
- Average net loans increased 11.3% year over year in the quarter and 10.7% for the nine-month period. Same-office revenue increased 7.3% for the quarter and 5.5% for the nine-month period.
- Provision for loan losses increased 3.6% in the quarter and 4.9% for the nine-month period, less than the rate of loan growth. Annualized net charge-offs declined from 15.9% to 15.6% in the quarter and from 14.4% to 14.0% for the nine-month period.
- General and administrative expense increased 12.9% in the quarter and 9.3% for the nine-month period. The Company cited higher salaries, employee health costs, incentives, branch expansion and equity compensation. G&A as a percentage of revenue increased to 50.0% from 48.7% in the quarter and to 49.8% from 49.1% for the nine-month period.
- Interest expense increased 31.9% in the quarter and 16.2% for the nine-month period because of higher average debt balances, partly offset by lower effective borrowing rates.
- The Company repurchased 2.018 million shares for $141.0 million during the first nine months and 923,937 shares for $65.9 million during the quarter. As of February 6, 2013, $11.0 million remained available under outstanding repurchase authorizations.
- On November 19, 2012, the Company amended its revolving credit agreement, extending the maturity to November 19, 2014 and increasing or establishing the revolving commitment at $680.0 million, while modifying certain covenants and commitment-fee provisions.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management planned to open or acquire at least 50 U.S. branches and 10 Mexican branches during fiscal 2013. Forty-nine branches had been opened or acquired during the first nine months.
- The Company stated that operating cash flow and available borrowings were expected to fund loan growth, acquisitions, branch expansion and scheduled debt obligations for the next 12 months and foreseeable future. It also noted that additional borrowing capacity may periodically be needed, with no assurance that increases will be available on reasonable terms.
- Management identified a timing shift in cash-method interest and fee revenue between the September and December quarters, estimated at $2.0 million to $2.5 million. Seasonal demand is highest in October through December, while repayment is generally highest in the following quarter.
- Missouri proponents refiled a ballot initiative that would limit consumer-loan annual interest rates to 36% for the November 2014 ballot. The Company is opposing the initiative, but its placement on the ballot and outcome remain uncertain.
- The Company discussed uncertainty regarding the authority of the Consumer Financial Protection Bureau following litigation challenging the President’s recess appointment of its director. Changes in federal or state regulation, including interest-rate limits, could materially affect operations.
- Interest-rate exposure is material: a one-percentage-point change in borrowing rates would change annual interest expense by approximately $1.0 million based on the December 31, 2012 debt balance. Mexican operations represented approximately 7.1% of nine-month revenue, and foreign-currency translation produced a $0.7 million loss in other comprehensive income.
- The Company reported routine litigation and stated that reasonably possible losses from currently pending matters were not expected to be material. It also reported approximately $3.1 million of gross unrecognized tax benefits and $1.7 million expected to be resolved within 12 months.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2012, and reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Verify the sustainability of loan growth and whether delinquency, charge-off and allowance trends remain favorable as the portfolio expands.
- Assess leverage, borrowing-base availability, covenant compliance and the November 2014 revolving-facility maturity.
- Evaluate the effect of continued share repurchases on liquidity, debt-to-equity and diluted EPS.
- Monitor Missouri’s proposed 36% rate-cap initiative and broader state, federal and CFPB regulatory developments.
- Consider the effect of seasonal revenue recognition and the disclosed $2.0 million to $2.5 million quarterly timing shift on period-to-period comparisons.
- Review management’s assumptions for loan-loss reserves, share-based compensation, income taxes and Mexican foreign-currency exposure.