World Acceptance Corporation Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2015, with comparative fiscal years ended March 31, 2014 and March 31, 2013. The filing also presents fourth-quarter results for the three months ended March 31, 2015. World Acceptance operates a small-loan consumer finance business through 1,320 branches in 15 U.S. states and Mexico.
Business Context
- Primary products are short- and medium-term installment loans, related credit insurance, automobile club memberships, tax preparation, and limited ancillary services.
- Gross loans receivable totaled $1.11 billion at March 31, 2015, including $94.3 million from Mexico. Approximately 91.4% of fiscal 2015 revenue came from U.S. customers and 8.6% from Mexico.
- The Company opened 69 branches, acquired two, and closed or merged 22 underperforming branches during fiscal 2015. Net branch growth was 49.
- Management planned approximately 30 new U.S. branches and 10 new Mexico branches for fiscal 2016, subject to regulatory approvals, financing, locations, and staffing.
Key Financial Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Total revenue | $610.2 million | $599.3 million | 1.8% increase |
| Net income | $110.8 million | $106.6 million | 4.0% increase |
| Diluted EPS | $11.90 | $9.60 | 24.0% increase |
| Operating margin | 32.7% | 31.9% | 80 basis-point increase |
| Net margin | 18.2% | 17.8% | Approximately 40 basis-point increase |
| Provision for loan losses | $118.8 million | $126.6 million | 6.1% decrease |
| Net charge-offs | $110.6 million | $123.0 million | 10.1% decrease |
| Net charge-offs / average net loans | 12.9% | 14.7% | 180 basis-point decrease |
| General and administrative expense | $292.1 million | $281.2 million | 3.8% increase |
| Interest expense | $23.3 million | $21.2 million | 9.9% increase |
- Interest and fee income was $524.3 million, essentially unchanged from $523.8 million despite a 2.4% increase in average net loans receivable.
- Insurance commissions and other income increased 13.8% to $85.9 million, primarily because of a $16.0 million sale of previously charged-off accounts that generated a $10.0 million after-tax gain. This was an unusual and non-recurring contributor to earnings.
- Tax preparation revenue increased 8.5% to $9.9 million, with approximately 56,000 returns prepared.
- At March 31, 2015, loans receivable net of unearned interest, insurance and fees were $812.7 million, the allowance for loan losses was $70.4 million, and net loans receivable were $742.3 million.
- Contractual delinquency of 60 days or more increased to 7.0% of gross loans from 5.3%; excluding Mexico payroll-deduct loans, the ratio was 6.1%.
- The Company reported $241.9 million of operating cash flow, compared with $246.0 million in fiscal 2014. Investing activities used $108.3 million and financing activities used $112.5 million. Cash increased to $38.3 million from $19.6 million.
Debt, Liquidity and Capital Allocation
- Total debt was $501.2 million at March 31, 2015, compared with $505.5 million at March 31, 2014. Debt-to-equity was approximately 1.6 to 1.
- The revolving credit facility had commitments of $680.0 million through June 15, 2015, reducing to $630.0 million thereafter, and matures June 15, 2016. Borrowings bear interest at the greater of 4.0% or one-month LIBOR plus 3.0%.
- Unused borrowing availability was approximately $81.6 million under borrowing-base limitations, with an additional $96.6 million potentially available if eligible receivables increase.
- The Company was in compliance with debt covenants at year-end. Contractual debt maturities show the full $501.2 million outstanding balance due in fiscal 2017.
- The Company repurchased 1.4 million shares for $115.3 million during fiscal 2015 and had $11.5 million of remaining repurchase authorization as of May 29, 2015. No cash dividends have been paid since 1989.
Material Changes and Unusual Items
- A system change reduced refinancings in which the customer received less than 10% of the refinanced loan proceeds, contributing to lower loan volume and weaker underlying operating income.
- A change to branch incentive compensation effective July 1, 2014 allowed continued collection efforts on loans 91 days or more past due. Management stated that this lowered reported charge-offs but increased delinquency; excluding the change, the estimated fiscal 2015 net charge-off ratio was approximately 14.1%.
- The Company wound down its World Class Buying Club in the third quarter. It no longer finances new product purchases but continues to service outstanding contracts.
- The Company revised prior-period revenue and expense classifications for loan origination costs under ASC 310-20. The revisions did not affect net income, equity, cash flow, or EPS.
- Foreign currency translation produced a $10.8 million loss in other comprehensive income, compared with a $3.7 million loss in fiscal 2014.
- McGladrey LLP replaced KPMG as independent registered public accounting firm. McGladrey issued unqualified opinions on the fiscal 2015 financial statements and internal control over financial reporting.
Outlook, Risks and Contingencies
- The Company expected operating cash flow and available revolver capacity to fund branch expansion, loan growth, acquisitions, debt repayment, and share repurchases for the next twelve months, while acknowledging that additional financing may periodically be required.
- The CFPB investigation initiated by a March 2014 Civil Investigative Demand remained ongoing. The Company could not predict its timing or outcome, and disclosed potential exposure to enforcement actions, fines, penalties, restitution, litigation, settlements, or required changes to business practices.
- A proposed CFPB framework could affect vehicle-secured loans with terms longer than 45 days and APRs above 36%. Management estimated that potentially covered loans represented approximately 13% of loan accounts and 20% of gross portfolio volume.
- The Company faces significant state and federal regulatory risk, including potential interest-rate caps, licensing restrictions, consumer-protection requirements, and restrictions on refinancing or collection practices.
- A shareholder securities class action related to alleged disclosures concerning the CFPB investigation and loan-refinancing accounting survived the Company’s motion to dismiss in May 2015. The Company intended to seek interlocutory appeal and stated that it could not reasonably estimate potential losses.
- Principal operating risks include borrower credit losses, rising delinquencies, interest-rate increases, reliance on secured revolving debt, Mexico political and currency risks, union remittance risk, employee turnover, fraud, information-system disruptions, and concentration in four major states.
- In the third quarter, a Mexican union refused to remit $2.6 million related to payroll-deduct loans, creating potential collection and delinquency risk.
Investor Verification Points
- Verify the final outcome and financial impact of the CFPB investigation and any related regulatory rulemaking.
- Assess whether delinquency and charge-off trends normalize after the branch incentive-plan change and whether the allowance remains adequate.
- Review the June 2016 revolver maturity, borrowing-base availability, covenant compliance, and refinancing plans for the $501.2 million debt balance.
- Separate recurring operating performance from the fiscal 2015 gain on sale of charged-off accounts.
- Monitor the shareholder securities litigation and any related internal-control or refinancing-accounting developments.
- Evaluate the sustainability of aggressive share repurchases given leverage, regulatory uncertainty, and funding requirements for loan and branch growth.