World Acceptance Corporation Form 10-Q Summary
Business context and reporting period
World Acceptance Corporation is a consumer finance company operating through 1,230 offices in the United States and Mexico at September 30, 2013. The filing covers the unaudited three and six months ended September 30, 2013, the second quarter and first six months of fiscal 2014. Results are seasonal, with the highest loan demand generally occurring from October through December.
Key financial metrics
| Metric | Three months ended Sept. 30, 2013 | Six months ended Sept. 30, 2013 |
|---|---|---|
| Total revenue | $150.0 million | $295.2 million |
| Net income | $21.6 million | $44.7 million |
| Diluted EPS | $1.80 | $3.67 |
| Net margin | 14.4% | 15.1% |
| Operating income margin | 26.5% | 27.5% |
| Net cash from operating activities | $106.0 million for six months |
- Interest and fee income was $133.0 million for the quarter and $261.0 million for six months. Insurance commissions and other income were $17.0 million and $34.2 million, respectively.
- Provision for loan losses was $38.2 million for the quarter and $66.9 million for six months. Net charge-offs as a percentage of average net loans were 15.4% annualized for the quarter and 14.5% for six months.
- General and administrative expense was $72.0 million for the quarter and $147.2 million for six months. Share-based compensation totaled $4.6 million and $9.2 million, respectively.
- Cash and cash equivalents were $14.5 million at September 30, 2013. Net loans receivable were $774.6 million, compared with $722.1 million at March 31, 2013.
- Gross loans receivable increased to $1.163 billion from $1.067 billion at March 31, 2013. The allowance for loan losses was $67.6 million, or approximately 5.8% of gross loans.
- Contractual past-due receivables totaled $107.6 million, or 9.3% of gross loans, versus $84.4 million, or 7.9%, at March 31, 2013.
- Senior notes payable were $486.9 million, up from $400.3 million at March 31, 2013. Debt-to-equity was approximately 1.4:1.
- The $680.0 million revolving credit facility had $127.9 million of unused borrowing availability, plus an additional $65.2 million potentially available as eligible receivables grow. The facility matures November 19, 2015, and borrowings generally bear interest at LIBOR plus 3.0%, subject to a 4.0% minimum.
- Net cash used in investing activities was $126.3 million, primarily reflecting $121.9 million invested in loan growth. Net cash provided by financing activities was $23.5 million.
Material changes versus prior comparable periods
- Quarterly revenue increased 7.6% and six-month revenue increased 8.4%, primarily reflecting higher average net loans of 7.7% and 8.2%, respectively.
- Quarterly net income declined 5.8% to $21.6 million; six-month net income declined 1.8% to $44.7 million. Diluted EPS increased to $1.80 from $1.72 for the quarter and to $3.67 from $3.35 for six months, principally reflecting a lower share count.
- Quarterly provision for loan losses increased 17.9%, and the six-month provision increased 19.4%. Quarterly operating income margin declined to 26.5% from 29.3%; six-month operating income margin declined to 27.5% from 29.7%.
- Quarterly general and administrative expense increased 8.8%, with personnel expense accounting for most of the increase. Interest expense rose 29.9% for the quarter and 24.6% for six months due primarily to higher average debt.
- Average diluted shares declined approximately 9.8% for the quarter and 10.6% for six months. The company repurchased 733,299 shares for $65.1 million during the first six months.
- Foreign currency translation produced a $4.0 million loss for six months, compared with a $0.1 million loss in the prior-year period.
Guidance, outlook, risks, contingencies and unusual items
- Management planned to open or acquire at least 60 U.S. branches and 16 Mexican branches during fiscal 2014. It stated that operating cash flow and borrowing capacity should fund expected expansion and loan growth for at least the next 12 months.
- Texas and Georgia fee changes were expected by management to increase fiscal 2014 interest and fee revenue by approximately $4 million to $6 million.
- Credit quality deteriorated during the period. Management noted rising charge-offs and delinquencies, with trends resembling certain fiscal 2008 and 2009 periods. A Mexico hurricane caused missed payments by one union related to VYBA loans; management did not then expect additional losses from those loans.
- A proposed Missouri ballot initiative could limit consumer-loan annual interest rates to 36% if placed on the November 2014 ballot. The company is opposing the initiative, but its outcome is uncertain.
- The company disclosed 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 disclosure controls and procedures were not effective as of September 30, 2013, and that remediation may require evaluation over several quarters.
- Pending litigation arises primarily from ordinary business activities. Management could not predict outcomes but did not believe reasonably possible losses would be material.
- A 1 percentage-point change in interest rates would change annual interest expense by approximately $0.9 million based on the September 30 debt balance. A hypothetical 10% currency movement produced relatively limited modeled impacts on six-month net income, but foreign exchange volatility remains a risk.
- Approximately $11.3 million of cumulative undistributed Mexican earnings were treated as permanently reinvested. Gross unrecognized tax benefits, including interest, were $3.4 million.
Important facts for investors to verify
- Whether rising delinquencies, charge-offs and loan-loss provisions continued after September 30, 2013, and whether the allowance remained adequate.
- Progress in remediating the material weakness and whether disclosure controls and internal control over financial reporting were subsequently deemed effective.
- Availability and covenant compliance under the revolving credit facility, particularly as loan growth and share repurchases increase borrowings.
- The actual revenue benefit from Texas and Georgia fee changes and any adverse developments involving the Missouri ballot initiative or other state and federal regulation.
- The sustainability of earnings growth after adjusting for share repurchases, higher leverage, increased compensation costs and seasonal third-quarter performance.