Enova International, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; the figures below also include separately reported fourth-quarter results. Enova became an independent, publicly traded company on November 13, 2014, following its spin-off from Cash America.
Business context and financial results
Enova provides online unsecured short-term loans, lines of credit and installment loans to consumers and small businesses. It operated in 35 U.S. states and in the United Kingdom, Australia, Canada, Brazil and China. The company extended approximately $2.2 billion in credit during 2014 and reported one operating segment.
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $809.8 million | $765.3 million |
| Gross profit / margin | $543.1 million / 67.1% | $450.3 million / 58.8% |
| Operating income | $215.0 million | $142.6 million |
| Net income | $111.7 million | $78.0 million |
| Diluted EPS | $3.38 | $2.36 |
| Adjusted EBITDA / margin (non-GAAP) | $233.7 million / 28.9% | $162.2 million / 21.2% |
| Cash from operating activities | $429.9 million | $438.3 million |
Fourth quarter: Revenue was $194.7 million versus $208.8 million in Q4 2013; net income was $22.5 million versus $19.7 million, and diluted EPS was $0.68 versus $0.60.
Revenue mix: U.S. revenue was $474.7 million (58.6% of total), while international revenue was $335.1 million (41.4%). The U.K. contributed $325.0 million, or 40.1% of consolidated revenue. By product, short-term loans provided 31.7% of revenue, lines of credit 37.7%, and installment loans 30.5%.
Liquidity, debt and portfolio
- At year-end, cash and cash equivalents were $75.1 million; total assets were $760.2 million and stockholders’ equity was $154.0 million. The reported current ratio was 6.9x.
- Long-term debt had a carrying value of $494.2 million, representing $500 million of 9.75% senior notes due June 2021. Annual cash interest on the notes is $48.75 million.
- The $75 million unsecured revolver had no borrowings; $6.6 million of standby letters of credit left $68.4 million available. Enova reported compliance with debt covenants at year-end.
- Net cash used in investing was $313.1 million, including $291.2 million of net consumer-loan investment and $13.3 million of capital expenditures. Financing activities used $79.0 million; cash increased $27.6 million during the year.
- Gross combined consumer-loan balances, including loans guaranteed for third-party lenders, were $424.8 million, down from $427.2 million. Net combined balances were $358.3 million, up 4.5%. The company-owned loan allowance was $64.9 million; the liability for guaranteed loans was $1.6 million. Net charge-offs were $283.7 million.
Material changes versus prior periods
- Revenue rose 5.8% year over year, principally from U.S. growth; domestic revenue increased 20.0% to $474.7 million. International revenue declined 9.4%, primarily due to U.K. regulatory changes.
- Short-term-loan revenue fell 34.0% to $257.2 million, while line-of-credit revenue rose 79.0% to $305.1 million and installment-loan revenue rose 21.0% to $246.7 million. The portfolio continued shifting toward lines of credit and installment loans.
- Gross margin increased 8.3 percentage points. Management attributed the improvement to a greater share of returning borrowers, improved collections, lower loss experience and stricter U.K. underwriting. Cost of revenue declined 15.3% to $266.8 million.
- Operating expenses increased 6.6% to $328.0 million. General and administrative expense rose 27.8% to $107.9 million, reflecting incentive accruals, added technology and analytics staff, spin-off-related professional costs and U.K. compliance expenses.
- Interest expense increased 94.4% to $38.5 million as Enova replaced affiliate borrowing with higher-cost senior notes. The weighted-average interest rate rose to 8.11% from 4.72%.
- The spin-off replaced Cash America affiliate financing with independent debt and a revolving facility. Enova paid Cash America $122.4 million in dividends before the separation; it does not anticipate common-stock dividends in the foreseeable future.
Outlook, risks and unusual items
- U.K. regulation: FCA rules and operational changes—including affordability checks, stricter underwriting and changes to collections—reduced U.K. loan volumes, balances and revenue in the second half of 2014. Enova expected the effects to remain significant in the first half of 2015; the 2014 results do not reflect the full impact. A U.K. cap on high-cost short-term credit took effect January 2, 2015. Enova discontinued new U.K. line-of-credit accounts and stopped further draws on existing accounts from January 1, 2015; it expected new and existing short-term and installment products to offset lost revenue, but that outcome was uncertain.
- Enova held interim FCA permission and had applied for full authorization for its U.K. high-cost short-term business; the filing states full authorization was not assured. FCA review could require remediation, customer redress, fines, operating restrictions or cessation of a U.K. lending business. The company also reported serious FCA concerns regarding compliance, affordability assessments, debt forbearance and effective supervision.
- U.S. regulatory exposure: Enova remained subject to the 2013 CFPB Consent Order, which included a $5 million penalty allocated $2.5 million to Enova and required strengthened compliance controls and periodic reporting. The CFPB was considering further short-term lending rules. State and local restrictions, licensing requirements and scrutiny of lead providers could also constrain operations.
- Other risks and contingencies: Risks include loan-loss estimation, access to ACH payment processing, litigation, data security, foreign exchange and the company’s ability to service or refinance debt. A certified class action alleging unauthorized marketing text messages and a California regulator’s January 2015 order concerning loan-contract and payment practices remained unresolved; Enova disputed the claims, and loss ranges were not estimable. The California order specified a $10,000 administrative penalty and potential forfeiture of charges and fees on transactions found unlawful.
- Management forecast 2015 capital expenditures of $32 million to $37 million, primarily for a headquarters relocation and technology development. No formal earnings or revenue guidance was provided.
- Unusual transition items included $16.3 million of debt issuance costs and increased stand-alone public-company costs. Historical pre-spin-off cost allocations from Cash America may not represent future expenses. Enova reported no goodwill impairment at December 31, 2014; goodwill was $255.9 million.
Important facts for investors to verify
- Track U.K. lending volumes, collections, loan losses and margins after the FCA rule changes, and confirm the status and conditions of full FCA authorization.
- Assess whether replacement U.K. products can offset discontinued line-of-credit revenue, and whether stricter underwriting and improved credit performance persist.
- Review loan-loss allowances, charge-offs and delinquency trends by product; compare company-owned balances with guaranteed third-party loans and related liabilities.
- Monitor cash generation against $500 million of senior-note principal, annual interest obligations, covenant requirements and the remaining revolver availability.
- Follow outcomes and any financial exposure from the CFPB Consent Order, the California order and the class-action litigation; the filing does not provide clear estimated loss ranges for the pending matters.
- Evaluate stand-alone operating costs, planned capital expenditures and the effects of foreign exchange on international results.