World Acceptance Corporation: Q2 Fiscal 2019 Form 10-Q Summary
Business context and reporting period
World Acceptance Corporation is a U.S. small-loan consumer finance company serving customers with limited access to other credit. It offers small and larger installment loans, credit insurance, tax-return preparation, and ancillary products through its branch network. This Form 10-Q covers the quarter and six months ended September 30, 2018, within fiscal 2019. Results are presented primarily as continuing U.S. operations because the Mexico subsidiaries were sold effective July 1, 2018.
Key financial metrics
| Metric | Three months ended September 30, 2018 | Three months ended September 30, 2017 | Six months ended September 30, 2018 | Six months ended September 30, 2017 |
|---|---|---|---|---|
| Total revenue from continuing operations | $127.1 million | $118.9 million | $249.9 million | $235.6 million |
| Income from continuing operations | $14.1 million | $12.0 million | $29.7 million | $23.2 million |
| Net income (loss) | $14.5 million | $9.8 million | $(7.0) million | $22.9 million |
| Diluted EPS from continuing operations | $1.51 | $1.35 | $3.20 | $2.62 |
| Provision for loan losses | $40.4 million | $32.8 million | $70.9 million | $60.5 million |
| Net charge-offs as a percentage of average net loans | 14.4% | 13.4% | 14.7% | 13.8% |
- Gross loans receivable were $1.127 billion at September 30, 2018, up 10.0% from September 30, 2017. Net loans receivable were $749.8 million after unearned interest, insurance and fees and the $79.3 million allowance for loan losses.
- Loan volume increased to $647.3 million in the quarter and $1.320 billion for the six months, compared with $602.9 million and $1.223 billion, respectively, in the prior-year periods.
- Operating income as a percentage of revenue declined to 17.2% in the quarter and 18.5% for the six months, from 19.6% in each comparable 2017 period.
- Past-due receivables were $129.0 million, or 11.5% of gross loans, at September 30, 2018, compared with 10.7% at March 31, 2018 and 11.2% at September 30, 2017. Loans 60 or more days delinquent totaled $84.3 million.
- Cash provided by operating activities was $95.3 million for the six months, compared with $94.0 million in the prior-year period. Investing activities used $111.3 million, primarily for loan growth, acquisitions, and capital expenditures.
- Cash and cash equivalents were $5.6 million at September 30, 2018, compared with $12.5 million at March 31, 2018.
- Debt outstanding was $230.2 million under a $480.0 million revolving credit facility, with $249.5 million of unused borrowing availability. The debt-to-equity ratio was 0.4 to 1.0, compared with 0.7 to 1.0 at September 30, 2017.
- The effective borrowing rate, including fees and debt issuance cost amortization, was 6.8% for the six months. A 1.0 percentage-point change in interest rates would affect annual interest expense by approximately $2.3 million based on period-end borrowings.
Material changes versus the prior comparable periods
- Quarterly revenue increased 6.9%, while income from continuing operations increased 16.8%, primarily due to higher loan balances and lower income tax expense.
- Six-month revenue increased 6.1%, and income from continuing operations increased 27.8%. The continuing-operations effective tax rate declined to 21.6% from 37.2% for the prior-year period; the quarterly rate declined to 20.4% from 35.1%, reflecting the lower U.S. federal corporate tax rate under the Tax Cuts and Jobs Act.
- Credit costs weakened: quarterly provision for loan losses increased 23.0%, and the six-month provision increased 17.2%. Management attributed the increase primarily to higher net charge-offs, loan growth, and higher front-end delinquencies. Portfolio yield also declined modestly as performing customers were refinanced into larger, lower-rate loans and rates were reduced in certain markets.
- General and administrative expense increased 3.5% for the quarter and 2.9% for the six months, but declined as a percentage of revenue to 51.1% and 53.1%, respectively.
- Interest expense declined 13.2% for the quarter and 7.2% for the six months because average debt outstanding was lower.
- The Mexico disposal produced a $38.4 million loss on disposal for the six months, partly offset by a $0.6 million gain in the second quarter. Consequently, consolidated six-month net income became a $7.0 million loss despite stronger continuing operations. The sale generated approximately $37.5 million of cash proceeds during the six months.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects operating cash flow and available revolver borrowings to fund loan growth, acquisitions, branch expansion, and expected needs for at least the next 12 months and beyond.
- The company opened 14 branches, acquired three branches, and merged five branches during the first six months. It had 1,189 branches at period-end.
- Management stated that all credit facility covenants were satisfied at September 30, 2018. The facility matures June 15, 2020, is secured by substantially all company assets, and permits lenders to establish reserves against borrowing availability for regulatory or operational risks.
- The SEC and DOJ continue investigating potential FCPA and local-law violations involving payments, books and records, and compensation matters in Mexico. The company cannot estimate potential fines, disgorgement, penalties, remediation costs, or other losses. It also has indemnification obligations to the Mexico purchasers for certain pre-sale investigations, which could adversely affect liquidity and results.
- The company believes the CFPB’s existing small-dollar lending rule will not materially affect current procedures, but potential future CFPB supervision of larger installment lenders could increase reporting and examination obligations.
- The company adopted several accounting standards during the period without a material reported impact. It is evaluating expected-credit-loss and lease standards; the expected-credit-loss standard could materially affect the provision and allowance for loan losses.
- On October 15, 2018, the board approved a long-term incentive program involving service and performance-based options and restricted stock. Estimated total future equity compensation expense was $87.8 million, subject to performance and service conditions.
- Loan demand is seasonal, generally strongest from October through December and weakest from January through March. Interim results may not represent full-year performance.
Facts investors should verify
- Whether rising delinquencies, charge-offs, and the higher allowance ultimately pressure earnings as the loan portfolio grows.
- The resolution, financial exposure, and potential credit-agreement consequences of the Mexico investigation and related indemnification obligations.
- The sustainability of earnings growth after separating the Mexico disposal loss and considering the lower portfolio yield.
- Liquidity and borrowing-base availability given only $5.6 million of cash, $230.2 million of debt, and collateral-performance covenants.
- The effect of future expected-credit-loss accounting adoption on the allowance and reported earnings.
- The timing and potential dilution or compensation expense from the October 2018 long-term incentive awards.