World Acceptance Corporation — Form 10-Q Summary
Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company operating through U.S. and Mexican offices. This unaudited Form 10-Q covers the three and six months ended September 30, 2014, the second quarter and first six months of fiscal 2015. The company had 1,293 offices at period-end, compared with 1,230 a year earlier.
Financial Performance and Position
| Metric | Three months ended Sept. 30, 2014 | Prior year | Six months ended Sept. 30, 2014 | Prior year |
|---|---|---|---|---|
| Total revenue | $152.6 million | $150.0 million | $302.9 million | $295.2 million |
| Net income | $21.3 million | $21.6 million | $43.8 million | $44.7 million |
| Diluted EPS | $2.30 | $1.91 | $4.62 | $3.88 |
| Operating income margin | 26.4% | 26.5% | 27.1% | 27.5% |
| Net margin | 13.9% | 14.4% | 14.5% | 15.1% |
| Net cash from operating activities | — | — | $117.2 million | $106.0 million |
- Interest and fee income increased 2.6% in the quarter and 3.8% year to date, primarily from higher average net loans. Insurance commissions and other income declined 5.2% in the quarter and 6.6% year to date.
- Gross loans receivable were $1.194 billion at September 30, 2014, versus $1.112 billion at March 31, 2014 and $1.163 billion at September 30, 2013. Net loans receivable were $790.4 million, up from $750.7 million at March 31.
- The allowance for loan losses increased to $81.8 million from $63.3 million at March 31, 2014 and $67.6 million at September 30, 2013.
- Total past-due receivables were $135.6 million, or 11.4% of gross loans, compared with $97.0 million, or 8.7%, at March 31, 2014 and $107.6 million, or 9.3%, a year earlier.
- Net charge-offs as a percentage of average net loans declined to 10.1% annualized for the quarter and 11.4% for the six months, versus 15.4% and 14.5%, respectively, in the comparable periods.
- Cash and cash equivalents were $14.6 million at September 30, 2014, compared with $19.6 million at March 31, 2014.
- Senior notes payable were $559.7 million, compared with $505.5 million at March 31, 2014. Debt-to-equity was 1.9:1, with shareholders’ equity of $293.6 million.
- The $680.0 million revolving facility had $60.4 million of unused borrowing availability under borrowing-base limits, plus an additional $59.5 million potentially available as eligible receivables grow. Borrowings mature November 19, 2015 and carried a 4.3% effective rate.
Material Changes Versus Prior Comparable Period
- Quarterly revenue increased 1.7%, but net income declined 1.4% because higher general and administrative and interest expenses offset revenue growth.
- Six-month revenue increased 2.6%, while net income declined 1.9%. Average net loans increased approximately 4.0% year over year.
- General and administrative expense rose 5.8% in the quarter and 4.4% year to date. The quarter included a $1.2 million loss from fraud at a branch.
- Interest expense increased 14.1% in the quarter and 16.4% year to date, reflecting higher average debt balances.
- The company repurchased 800,291 shares for $63.4 million during the first six months and 164,292 shares for $13.5 million during the quarter. Remaining repurchase capacity was $13.4 million as of November 6, 2014.
- Operating cash flow improved to $117.2 million, but investing activities used $113.2 million, primarily for loan growth. Financing activities used $8.9 million, and cash declined $4.9 million during the six months.
- The company revised previously reported comparative EPS to correct immaterial share-count errors. The corrections did not affect net income, balance sheets, comprehensive income, shareholders’ equity, or cash flows.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management planned to open or acquire at least 50 U.S. branches and 20 Mexican branches during fiscal 2015. It expected operating cash flow and available borrowing capacity to fund expansion, loan growth, and other needs for at least the next 12 months.
- Management noted seasonal loan demand, with the highest demand generally occurring from October through December and the lowest demand from January through March.
- The World Class Buying Club product is being wound down. The company will service existing receivables and originate new loans only while remaining inventory is available. Inventory was approximately $1.7 million at September 30, 2014.
- A change to branch incentive plans effective July 1, 2014 permitted continued collection efforts on accounts more than 90 days past due. Management said this increased reported delinquencies and reduced current-period charge-offs; the policy requiring charge-off after 180 days without a full contractual payment was unchanged.
- The Consumer Financial Protection Bureau is investigating potential violations involving marketing, offering, or extension of credit. The company supplied requested information, but the investigation remained under review and could result in enforcement, penalties, restitution, litigation, operational changes, or other material consequences.
- A shareholder securities class action alleges misleading disclosures concerning the CFPB investigation, loan growth, volume, and internal controls relating to certain refinancings. The company believes the claims are without merit and is seeking dismissal; potential losses could not be reasonably estimated.
- Foreign currency translation produced a $2.2 million comprehensive loss for the six months. Approximately 9.0% of six-month revenue came from international operations.
- A 1% change in interest rates was estimated to change annual interest expense by approximately $0.9 million based on the September 30 debt balance.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the period. The company stated that no material risk-factor changes had occurred since its 2014 Form 10-K.
Investor Verification Checklist
- Verify trends in 61-plus-day delinquencies, 91-plus-day delinquencies, allowance coverage, and charge-offs after the incentive-plan change.
- Monitor the CFPB investigation and related securities litigation for findings, settlements, penalties, or required changes in lending practices.
- Assess refinancing and liquidity risk before the November 2015 revolving-facility maturity, including borrowing-base availability and covenant compliance.
- Evaluate whether loan growth and share repurchases are increasing leverage faster than operating cash flow and equity.
- Confirm the financial effect of winding down the World Class Buying Club and the potential for additional losses on its receivables.
- Review the revised EPS disclosures and future effects of unrecognized stock-based compensation, including approximately $6.7 million of awards not currently expected to vest.