World Acceptance Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended June 30, 2018, the first quarter of fiscal 2019. World Acceptance is a small-loan consumer finance company serving customers with limited access to other credit sources. Its U.S. operations provide small and larger installment loans, credit insurance, ancillary products and, in some branches, tax-return preparation services. The Mexico segment was classified as held for sale and reported as discontinued operations.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total continuing-operations revenue | $122.8 million | $116.6 million | 5.3% increase |
| Income from continuing operations | $15.6 million | $11.2 million | 39.5% increase |
| Continuing-operations diluted EPS | $1.69 | $1.27 | Increase |
| Net income (loss) | $(21.5) million | $13.1 million | Impacted by Mexico impairment |
| Net loss per diluted share | $(2.32) | $1.48 | Decline |
| Operating income margin | 19.9% | 19.5% | Improved |
| Continuing-operations effective tax rate | 22.6% | 39.3% | Lower |
| Net cash provided by operating activities | $55.5 million | $50.1 million | Increase |
Gross loans receivable were $1.063 billion at June 30, 2018, up 8.2% from $981.8 million at June 30, 2017. Net loans receivable, including the Mexico assets classified as held for sale, were $781.8 million. Loan volume increased to $672.2 million from $619.9 million. Net charge-offs were 15.1% of average net loans on an annualized basis, compared with 14.1% in the prior-year quarter. The allowance for loan losses was $68.0 million, or approximately 8.7% of net continuing-operation loans.
Total past-due receivables were $107.5 million, representing 10.1% of gross loans, compared with 10.0% at June 30, 2017. Accounts 61 days or more past due on a recency basis were 5.0%, versus 4.9% in the prior-year quarter.
Cash and cash equivalents excluding assets held for sale were $10.3 million at June 30, 2018. Operating cash flow was $55.5 million, while investing activities used $66.2 million, primarily from a $64.1 million increase in loans receivable. Financing activities used $3.9 million. The company paid down $5.1 million of senior notes during the quarter on a gross basis.
Senior notes payable were $239.8 million. The revolving facility had $480.0 million of aggregate commitments, $239.9 million of unused borrowing availability under borrowing-base limitations, and a maturity date of June 15, 2020. The effective borrowing cost was 6.8%. The debt-to-equity ratio was 0.5:1.0, compared with 0.6:1.0 at June 30, 2017. Management reported compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Continuing-operations revenue increased 5.3%, primarily from higher average net loans. Average net loans increased 7.1%, although portfolio yields declined modestly as customers moved into larger, lower-rate loans and competitive pressures reduced rates in certain markets.
- Provision for loan losses increased 10.4% to $30.6 million, driven primarily by higher net charge-offs and loan growth.
- General and administrative expenses increased 2.4% to $67.8 million, but declined to 55.2% of revenue from 56.8%. Legal expense related to the Mexico investigation decreased, while professional and information-technology costs increased.
- Interest expense was essentially unchanged at $4.2 million despite lower average debt, reflecting the company’s borrowing profile and higher financing costs.
- The company recorded a $39.0 million impairment loss on the Mexico operations. The loss included $31.3 million attributable to cumulative foreign-currency translation losses.
- Mexico generated a $37.1 million loss from discontinued operations in the quarter, compared with $1.9 million of income in the prior-year quarter. Excluding the impairment, Mexico produced $2.3 million of pre-tax income.
- The company opened eight branches and merged four branches, resulting in four net additional branches. Branches open at period end totaled 1,181, compared with 1,169 a year earlier.
- The company made no share repurchases during the quarter. Approximately $1.9 million remained available under the existing authorization.
Outlook, unusual items, risks and contingencies
After quarter-end, the company completed the sale of its Mexico subsidiaries for approximately $44.36 million, with an effective date of July 1, 2018. Management expects the sale to have no material liquidity effect other than the one-time increase in cash from the sale proceeds. The company will provide limited accounting assistance for 90 days after the effective date.
The SEC and Department of Justice are investigating potential Foreign Corrupt Practices Act and local-law violations involving certain payments and practices in Mexico. The company cannot estimate potential fines, disgorgement, penalties, litigation exposure or other remedies. Under the sale agreement, the company may be required to indemnify the purchasers for certain pre-July 1, 2018 investigation-related claims. Such liabilities could materially affect liquidity, results of operations and financial condition, and could potentially trigger credit-agreement consequences.
Management believes operating cash flow and available revolver capacity will fund loan growth, branch expansion and other expected needs for at least the next 12 months. Key risks include credit losses and delinquency trends, dependence on revolving debt, interest-rate increases, regulatory developments, litigation, the Mexico investigation and indemnification obligations. A 1-percentage-point change in borrowing rates would affect annual interest expense by approximately $2.4 million based on the June 30 debt balance.
The company stated that the CFPB’s existing small-loan rule is not expected to materially affect current lending procedures, although future CFPB supervision of the installment-lending market could increase reporting and examination requirements. The company also cautioned that interim results are seasonal and are not necessarily indicative of full-year performance.
The company adopted several accounting standards effective April 1, 2018, including revenue recognition guidance and updates concerning share-based payments and financial instruments. Management reported no material financial-statement impact from adoption. The company is evaluating the future impact of the expected-credit-loss and lease standards.
Important facts for investors to verify
- Confirm the final accounting for the Mexico sale, including proceeds, discontinued-operations treatment and any post-closing indemnification exposure.
- Monitor the SEC and DOJ investigation, potential FCPA-related remedies, and whether any liability becomes estimable or affects debt covenants.
- Track delinquency, charge-off and allowance trends as loan balances continue to grow.
- Assess the sustainability of the 22.6% tax rate and the impact of tax positions, unrecognized benefits and valuation allowances.
- Verify revolver availability, borrowing-base calculations, covenant compliance and sensitivity to LIBOR or other interest-rate changes.
- Reconcile continuing-operations growth with lower portfolio yields and higher credit-loss provisions.
- Consider the effect of seasonality, regulatory changes and the company’s decision on future share repurchases.