World Acceptance Corporation — Q2 FY2017 Form 10-Q Summary
Business context and reporting period
World Acceptance Corporation is a consumer finance company providing small- and medium-term loans, related credit insurance, and ancillary services to customers with limited access to other credit. The unaudited filing covers the three and six months ended September 30, 2016, corresponding to the second quarter and first six months of fiscal 2017. The company operated 1,322 offices at period-end, including U.S. and Mexican locations.
Key financial metrics
| Metric | Three months ended Sept. 30, 2016 | Three months ended Sept. 30, 2015 | Six months ended Sept. 30, 2016 | Six months ended Sept. 30, 2015 |
|---|---|---|---|---|
| Total revenue | $129.3 million | $136.4 million | $256.3 million | $273.6 million |
| Income before taxes | $24.4 million | $28.1 million | $51.0 million | $66.1 million |
| Net income | $15.5 million | $19.2 million | $32.1 million | $42.8 million |
| Diluted EPS | $1.76 | $2.22 | $3.65 | $4.93 |
| Operating income margin | 23.2% | 26.0% | 24.2% | 28.8% |
| Return on average assets, trailing twelve months | 9.0% | 12.4% | 9.0% | 12.4% |
- Net loans receivable were $714.1 million at September 30, 2016, compared with $706.7 million at March 31, 2016 and $764.0 million at September 30, 2015.
- Gross loans receivable were $1.096 billion at September 30, 2016, up from $1.067 billion at March 31, 2016 but down from $1.163 billion at September 30, 2015.
- The allowance for loan losses was $76.4 million, or approximately 9.7% of net loans, compared with 9.5% at September 30, 2015.
- Contractual past-due receivables were $129.2 million, or 11.8% of gross loans, versus 10.8% at March 31, 2016 and 11.1% at September 30, 2015.
- Net cash provided by operating activities for the six months was $102.7 million, compared with $84.3 million in the prior-year period. Investing activities used $84.0 million, principally for loan growth, and financing activities used $14.4 million.
- Cash and cash equivalents were $16.3 million at September 30, 2016, compared with $12.4 million at March 31, 2016.
- Senior notes payable were $360.6 million, down from $374.7 million at March 31, 2016. The company reported $97.9 million of unused borrowing availability.
- Shareholders’ equity was $417.8 million, producing a debt-to-equity ratio of approximately 0.9:1.0.
Material changes versus the prior comparable periods
- Second-quarter revenue declined 5.2%, while six-month revenue declined 6.3%, primarily because of lower average earning loans, unfavorable foreign exchange movements, and lower insurance commissions.
- Second-quarter net income fell 19.3%; six-month net income fell 25.0%. Diluted EPS declined 20.7% for the quarter and 26.0% for the six-month period.
- Six-month provision for loan losses increased 6.4% despite lower revenue. Annualized net charge-offs as a percentage of average net loans increased to 15.3% from 12.8%; the prior-year period benefited from sales of previously charged-off accounts.
- General and administrative expense decreased 3.5% for the six months, although G&A as a percentage of revenue increased to 49.3% from 47.9%.
- Interest expense decreased 12.8% for the six months as average debt outstanding declined 25.2%, from $489.3 million to $366.2 million.
- The effective tax rate increased to 36.6% for the quarter and 37.0% for the six months, compared with 31.8% and 35.2%, respectively, primarily because the prior-year periods benefited from state tax reserve releases and refund claims.
- Foreign currency translation produced a $7.5 million loss in accumulated other comprehensive income during the six months.
- The company opened six branches and merged 23 branches during the first six months. No acquisitions were completed.
Guidance, outlook, commentary, risks and unusual items
- No quantitative earnings guidance was provided. Management planned to open or acquire 15 U.S. branches and 10 Mexican branches during fiscal 2017 and expected operating cash flow and available borrowings to fund loan growth and expansion for at least the next 12 months.
- The revolving credit facility was amended in July 2016, extends to June 15, 2018, and has $460.0 million of commitments at September 30, 2016. Commitments are scheduled to decline to $370.0 million on March 31, 2017, subject to an accordion feature allowing requests up to $500.0 million. The company was in compliance with its financial covenants.
- Borrowings bear interest at LIBOR plus 4.0%, subject to a 5.0% minimum. Management estimated that a 1.0 percentage-point rate change would affect annual interest expense by approximately $1.9 million.
- The CFPB investigation remains unresolved. The company received a Civil Investigative Demand in 2014 and a NORA letter in 2015 and cannot predict the timing or outcome. Potential consequences could include penalties, restitution, litigation, operational changes, or restrictions on lending.
- CFPB proposals concerning ability-to-repay requirements, vehicle-secured loans, arbitration agreements, and supervision of larger installment lenders could increase compliance costs or restrict certain products, although management did not expect the proposals as then described to have a material immediate impact.
- The company stopped making loans to active-duty military personnel and their dependents effective September 1, 2016, in response to expanded Military Lending Act restrictions.
- A shareholder putative class action survived the defendants’ motion to dismiss in August 2016; class-certification proceedings and discovery were ongoing. A related derivative action remained subject to pending motions to dismiss. The company could not reasonably estimate potential losses.
- Management identified loan-loss allowances, share-based compensation, and income taxes as critical accounting estimates. Several recently issued accounting standards remained under evaluation.
- Seasonality is significant: loan demand generally peaks in the third fiscal quarter and repayments are generally highest in the fourth quarter.
Most important facts for investors to verify
- Whether delinquency, charge-off, and allowance trends continue to worsen and pressure earnings or capital.
- The March 31, 2017 reduction in revolving-credit commitments and the company’s ability to maintain sufficient borrowing-base availability.
- Developments in the CFPB investigation, proposed rules, Military Lending Act compliance, and related litigation.
- The effect of Mexican peso movements on revenue, net loans, comprehensive income, and reported earnings.
- Whether branch expansion and loan growth generate adequate returns amid lower average loan balances and higher credit costs.
- Any lender consent required for future share repurchases; no common stock was repurchased during the six months ended September 30, 2016.