World Acceptance Corporation — Fiscal 2017 Third-Quarter Form 10-Q Summary
Business context and reporting period
World Acceptance Corporation is a consumer finance company providing small and medium-sized loans, credit insurance, ancillary products and services, and tax-return preparation in its U.S. branches. It also operates in Mexico. This unaudited Form 10-Q covers the three and nine months ended December 31, 2016, within fiscal 2017; the comparable periods ended December 31, 2015. Results are seasonally affected, with loan demand generally highest in the third fiscal quarter and repayments generally highest in the fourth quarter.
Key financial metrics
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Total revenue | $130.8 million | $139.7 million | $387.2 million | $413.3 million |
| Net income | $9.6 million | $14.8 million | $41.7 million | $57.6 million |
| Diluted EPS | $1.10 | $1.70 | $4.75 | $6.63 |
| Net margin | 7.4% | 10.6% | 10.8% | 13.9% |
| Operating income as a percentage of revenue | 15.0% | 23.4% | 21.1% | 27.0% |
| Provision for loan losses | $40.0 million | $35.4 million | $107.9 million | $99.2 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $156.0 million | $140.4 million |
At December 31, 2016, gross loans receivable were $1.165 billion, up from $1.067 billion at March 31, 2016 but down 4.4% from December 31, 2015. Net loans receivable were $755.9 million, compared with $706.7 million at March 31, 2016. The allowance for loan losses was $81.8 million, or approximately 7.0% of gross loans. Loans 60 or more days delinquent totaled $88.7 million, and contractual past-due receivables represented 11.3% of gross loans versus 10.9% at December 31, 2015.
Cash and cash equivalents were $16.0 million at December 31, 2016, compared with $12.4 million at March 31, 2016. Nine-month investing cash use was $170.3 million, principally reflecting a $166.2 million increase in loans receivable and $4.9 million of property and equipment purchases. Financing activities provided $18.7 million, including net borrowings and $5.0 million of share repurchases.
Senior notes payable totaled $397.9 million, compared with $374.7 million at March 31, 2016. The revolving credit facility had $460.0 million of commitments, $61.3 million of unused borrowing availability, and a 5.0% minimum borrowing rate. Commitments are scheduled to decline to $370.0 million on March 31, 2017, and borrowings mature June 15, 2018. The company reported compliance with its debt covenants. Shareholders’ equity was $422.0 million, producing a debt-to-equity ratio of approximately 0.9 to 1.0.
Material changes versus the prior comparable period
- Third-quarter revenue decreased 6.4%, while nine-month revenue decreased 6.3%, primarily because of lower average earning loans and unfavorable Mexican peso exchange rates. The company estimated that currency movements reduced third-quarter revenue by $1.9 million.
- Third-quarter net income declined 34.6% and nine-month net income declined 27.5%. Diluted EPS decreased 35.3% for the quarter and 28.4% for the nine-month period.
- The provision for loan losses increased 12.8% in the quarter and 8.7% for the nine months. Annualized net charge-offs as a percentage of average net loans increased to 16.9% from 14.6% in the quarter and to 15.8% from 13.4% for the nine months.
- General and administrative expense declined modestly in the quarter and 2.4% for the nine months, helped by lower personnel, field-call, occupancy and other costs. However, G&A increased as a percentage of revenue to 54.5% for the quarter and 51.0% for the nine months.
- Interest expense decreased 26.2% in the quarter and 17.7% for the nine months, reflecting lower average debt outstanding.
- The effective income tax rate fell to 32.7% from 42.2% in the quarter, primarily because the prior-year period included increased reserves related to a state ruling. The nine-month rate declined to 36.0% from 37.2%, partly due to the release of tax reserves following the expiration of a statute of limitations.
- The company opened 15 branches and merged 31 branches during the first nine months of fiscal 2017. No acquisitions were completed during the period, compared with one asset purchase in the prior-year period.
Guidance, outlook, commentary, risks and unusual items
Management did not provide formal earnings guidance. It planned to open or acquire 15 U.S. branches and 10 Mexican branches during fiscal 2017 and stated that operating cash flow and available borrowings should fund expected branch expansion, loan growth and other needs for at least the next 12 months.
Management identified credit quality, loan losses, interest rates, foreign currency movements, economic conditions, regulatory changes and litigation as significant uncertainties. A 1% change in borrowing rates would affect annual interest expense by approximately $3.1 million based on the December 31, 2016 debt balance. Mexican operations represented approximately 8.0% of nine-month revenue, and the nine-month foreign-currency translation adjustment was a $11.2 million loss.
The Consumer Financial Protection Bureau investigation remains ongoing. The company received a Civil Investigative Demand in 2014 and a Notice and Opportunity to Respond and Advise letter in 2015. The ultimate timing and outcome are not predictable; potential outcomes could include enforcement actions, monetary penalties, restitution, settlements or changes to business practices.
The company is also defending a putative securities class action and consolidated derivative litigation involving alleged misstatements, loan-renewal and accounting practices, internal controls, corporate governance and related matters. The company believes the claims are without merit, but stated that it cannot reasonably estimate potential losses. An adverse outcome could materially affect a particular reporting period.
A proposed New Mexico bill would impose a 36% rate cap on credit contracts entered into after July 1, 2017. The company is opposing the proposal and warned that similar legislation or other regulatory changes could reduce or eliminate the profitability of lending in affected jurisdictions. The company also discussed proposed CFPB rules addressing ability-to-repay requirements, covered longer-term loans, arbitration agreements and potential supervision of larger installment lenders.
Unusual or nonrecurring items affecting comparability included prior-year recoveries from sales of charged-off loans, prior-year reversals of certain share-based compensation and executive-related accruals, and a prior-year loss on the sale of the corporate jet. The filing states that no significant subsequent events requiring disclosure occurred after the balance-sheet date.
Important facts for investors to verify
- Whether delinquency, charge-off and allowance trends continue to deteriorate, particularly as past-due receivables reached 11.3% of gross loans.
- The effect of the scheduled reduction in revolving-credit commitments from $460.0 million to $370.0 million on loan growth and liquidity.
- The status and potential financial impact of the CFPB investigation, proposed rules and related securities and derivative litigation.
- Whether the New Mexico rate-cap proposal or similar state initiatives are enacted and how they affect branch economics and loan pricing.
- The sustainability of operating cash flow after funding loan growth, debt service, branch expansion and potential share repurchases.
- Future Mexican peso movements and their effect on revenue, net income, loan balances and accumulated other comprehensive loss.
- The company’s ability to maintain compliance with debt covenants and obtain lender consent for additional share repurchases.