World Acceptance Corporation — Form 10-Q Summary
Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company operating through offices in the United States and Mexico. This unaudited Form 10-Q covers the three months ended June 30, 2013, the first quarter of fiscal 2014, with comparison to the three months ended June 30, 2012. The company had 1,210 offices at June 30, 2013, versus 1,145 a year earlier.
Key Financial Metrics
| Metric | Q1 Fiscal 2014 | Q1 Fiscal 2013 | Change |
|---|---|---|---|
| Total revenue | $145.3 million | $132.8 million | +9.4% |
| Interest and fee income | $128.0 million | $115.3 million | +11.0% |
| Provision for loan losses | $28.7 million | $23.6 million | +21.5% |
| General and administrative expense | $75.2 million | $69.2 million | +8.8% |
| Income before taxes | $36.6 million | $36.1 million | +1.4% |
| Net income | $23.1 million | $22.6 million | +2.2% |
| Diluted EPS | $1.87 | $1.63 | +14.7% |
| Operating margin | 28.4% | 30.2% | Down 180 bps |
| Net income margin | 15.9% | 17.0% | Down approximately 110 bps |
| Operating cash flow | $55.5 million | $48.0 million | +15.4% |
Gross loans receivable were $1.125 billion at June 30, 2013, up from $1.067 billion at March 31, 2013 and $1.027 billion at June 30, 2012. Net loans receivable were $756.9 million, compared with $722.1 million at March 31, 2013. The allowance for loan losses was $61.6 million, or approximately 5.5% of gross loans.
Past-due receivables totaled $94.7 million, or 8.4% of gross loans, compared with 7.9% at March 31, 2013 and 7.0% at June 30, 2012. Accounts at least 61 days past due increased to 2.8% of gross loans on a recency basis and 4.2% on a contractual basis.
Cash and cash equivalents were $11.4 million at quarter-end. The company generated $55.5 million of operating cash flow but used $67.6 million in investing activities, primarily for loan growth. Financing activities provided $12.2 million.
Senior notes payable were $449.0 million, compared with $400.3 million at March 31, 2013. The company reported $156.3 million of unused borrowing availability under its $680.0 million revolving credit facility, plus an additional $74.7 million that could become available with growth in eligible finance receivables. The debt-to-equity ratio was 1.3:1.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven principally by an 8.9% increase in average net loans and higher interest and fee income.
- Net income increased only 2.2% because loan-loss provision expense grew faster than revenue and interest expense increased 19.1%.
- Annualized net charge-offs as a percentage of average net loans increased from 12.2% to 13.5%. Management stated this was the second consecutive quarter of year-over-year increases after 15 quarters of declines.
- General and administrative expense rose 8.9%, primarily from personnel costs associated with branch expansion, merit increases, incentives and higher stock-based compensation.
- The effective income tax rate declined to 36.9% from 37.4%, principally because of increased Mexican permanent deductions.
- The company repurchased 412,815 shares for $37.7 million during the quarter, at an average price of $91.41 per share. Approximately $19.8 million remained available under repurchase authorizations as of August 2, 2013.
- Weighted-average diluted shares declined to 12.3 million from 13.9 million, contributing to the stronger EPS growth relative to net income growth.
Guidance, Outlook, Risks and Unusual Items
- Management planned to open or acquire at least 60 U.S. branches and 16 Mexican branches during fiscal 2014.
- Management believed operating cash flow and revolving-credit borrowings would be adequate to fund loan growth, acquisitions and expansion for the next 12 months and the foreseeable future.
- The revolving credit facility matures on November 19, 2014 and is subject to borrowing-base and financial covenants. Management stated that the company was in compliance as of June 30, 2013.
- A proposed Missouri ballot initiative could limit consumer-loan annual interest rates to 36% if placed on the November 2014 ballot. The filing states that the outcome and potential impact are uncertain.
- The company identified a previously reported material weakness in internal control over financial reporting related to the allowance for loan losses and accounting for renewals. Remediation had begun, but management stated that the weakness had not yet been remediated; disclosure controls were therefore not effective at June 30, 2013.
- Foreign currency translation generated a $3.0 million comprehensive loss during the quarter. Mexican operations represented approximately 8.7% of total revenue.
- A 1% change in interest rates would affect annual interest expense by approximately $0.9 million based on the period-end debt balance.
- The company was involved in routine litigation and stated that reasonably possible losses from pending matters were not expected to be material, although outcomes cannot be predicted with certainty.
- Results are seasonal: loan demand generally peaks from October through December and repayment is generally highest from January through March.
- The filing contains no formal earnings or revenue guidance beyond the branch expansion plans and liquidity expectations described above.
Important Facts for Investors to Verify
- Whether delinquency, charge-off and loan-loss trends continue to deteriorate and whether the allowance remains adequate.
- Progress toward remediating the material weakness in internal control over financial reporting, particularly controls over loan renewals and the allowance for loan losses.
- Availability and renewal terms of the revolving credit facility before its November 2014 maturity.
- Potential effects of the Missouri ballot initiative and other state or federal regulatory changes on pricing and operating results.
- The sustainability of loan growth and branch expansion relative to funding costs, credit losses and operating expenses.
- The extent to which continued share repurchases increase leverage and support diluted EPS.
- Exposure to variable interest rates, Mexican peso fluctuations and changing economic conditions in the company’s lending markets.