World Acceptance Corporation 10-Q Summary
Business Context and Reporting Period
World Acceptance Corporation is a U.S. consumer finance company providing small and medium-term loans, credit insurance, ancillary products and tax-return preparation services to customers with limited access to traditional credit. This Form 10-Q covers the quarter and nine months ended December 31, 2018, the third quarter and first nine months of fiscal 2019. Results primarily reflect the U.S. operating segment because the Mexico subsidiaries were sold effective July 1, 2018 and classified as discontinued operations.
Loan demand is seasonal, generally strongest from October through December, while the fourth fiscal quarter typically benefits from higher repayments and operating results.
Key Financial Metrics
| Metric | Three months ended December 31, 2018 | Nine months ended December 31, 2018 |
|---|---|---|
| Total revenue | $137.6 million, up 9.5% | $387.5 million, up 7.3% |
| Income from continuing operations | $6.3 million | $36.0 million |
| Net income (loss) | $6.3 million | $(0.7) million |
| Diluted EPS from continuing operations | $0.67 | $3.88 |
| Provision for loan losses | $48.9 million | $119.9 million |
| General and administrative expense | $77.0 million | $209.7 million |
| Operating income as a percentage of revenue | 8.5% | 15.0% |
| Net charge-offs as a percentage of average net loans | 17.0% | 15.5% |
| Net cash provided by operating activities | Not separately presented | $164.2 million |
At December 31, 2018, gross loans receivable were $1.259 billion, up 11.7% from December 31, 2017, and net loans receivable were $829.5 million. The allowance for loan losses was $91.3 million, or approximately 9.9% of net loans. Past-due receivables totaled $144.1 million, or 11.4% of gross loans, compared with 10.9% a year earlier.
Cash and cash equivalents were $11.1 million, compared with $12.5 million at March 31, 2018. Debt consisted primarily of $308.0 million outstanding under a $480.0 million revolving credit facility, with $171.7 million of unused availability. Shareholders’ equity was $574.1 million and the debt-to-equity ratio was 0.5 to 1.0.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased $11.9 million, driven primarily by higher average net loans. Average net loans increased 10.5% year over year; management reported some yield pressure from refinancing into larger, lower-rate loans and rate reductions in certain markets.
- Quarterly income from continuing operations rose from $0.2 million to $6.3 million, primarily because the prior-year quarter included a $10.5 million discrete tax charge related to the Tax Cuts and Jobs Act. The current-quarter effective tax rate was 11.8%, versus 98.7% in the prior-year quarter.
- Underlying operating performance weakened: quarterly operating income declined 42.5%, while provision for loan losses increased 21.0% and G&A expense increased 18.7%. Operating margin declined from 16.2% to 8.5%.
- Personnel expense increased 29.2% in the quarter, including approximately $6.2 million of additional share-based compensation related to the new long-term incentive program and director awards.
- Net charge-offs increased, and contractual delinquency of 61 days or more rose to 7.5% from 7.3%. Management increased the allowance by $1.95 million during the second quarter because of higher front-end delinquencies.
- Nine-month net loss reflected a $38.4 million loss on disposal of the Mexico operations. Excluding discontinued operations, continuing-operations income increased 53.4% to $36.0 million.
- The Company completed 97 acquisitions during the nine months, including 14 branches acquired through business combinations and 83 loan-portfolio purchases, for aggregate purchase price of $39.2 million. Branches open at period-end increased to 1,204 from 1,174.
- Net cash used in investing activities was $248.4 million, primarily reflecting $240.0 million of loan growth, acquisitions and capital expenditures. Financing activities provided $60.6 million net, including borrowings and repayments under the revolving facility.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantitative earnings guidance. Management expects operating cash flow and available revolver capacity to fund loan growth, acquisitions, branch expansion and other needs for at least the next twelve months. The Company remains focused on maintaining sufficient capital for loan growth before repurchasing shares. A December 2018 authorization permits up to $75.0 million of repurchases, with $73.1 million remaining at year-end, subject to credit-agreement limits.
The revolving credit facility matures June 15, 2020, bears interest at the greater of 4.0% or one-month LIBOR plus a margin of 3.0% to 4.0%, and is secured by substantially all company assets. A one-percentage-point change in rates would affect annual interest expense by approximately $3.1 million based on the December 31, 2018 balance. The Company stated that it was in compliance with its financial covenants.
The principal unresolved contingency is the ongoing SEC and DOJ investigation into possible FCPA and local-law violations involving payments and other matters at the former Mexico operations. The Company cannot reasonably estimate potential fines, penalties, disgorgement, remediation or other liabilities. Under the Mexico sale agreement, it may also be required to indemnify the purchasers for certain investigation-related claims. An adverse outcome could affect liquidity, results, reputation, business practices and compliance with debt covenants.
Credit risk remains significant: delinquency and net charge-off rates increased while the loan portfolio expanded. The Company also identifies regulatory, interest-rate, economic, cybersecurity, funding, acquisition and accounting-change risks. Adoption of the expected-credit-loss standard could materially affect the provision for loan losses and allowance; the Company was still evaluating the impact. The Company expected the forthcoming lease standard to increase assets and liabilities without a material effect on operations or liquidity.
The Mexico sale generated approximately $44.36 million of proceeds and eliminated ongoing foreign-currency exposure. The transaction also produced the reported disposal loss and a $31.3 million reclassification of cumulative foreign-currency translation adjustments.
Important Facts for Investors to Verify
- Whether rising delinquencies and net charge-offs continue to outpace loan growth and require additional provisioning.
- The sustainability of earnings after excluding the prior-year tax charge and other unusual items, including elevated share-based compensation.
- The status, potential financial exposure and debt-covenant implications of the SEC and DOJ Mexico investigation and related indemnification obligations.
- Actual borrowing-base availability, covenant headroom, refinancing plans and sensitivity to LIBOR or other interest-rate changes.
- The effect of the expected-credit-loss accounting standard on the allowance, provision and reported earnings.
- Whether portfolio growth, acquisitions and branch expansion produce adequate risk-adjusted returns despite lower portfolio yields and higher operating costs.
- The pace and economic effect of share repurchases relative to the Company’s stated priority of funding loan growth.