World Acceptance Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2016, the first quarter of fiscal 2017. Financial statements are unaudited. The Company is a small-loan consumer finance company serving consumers with limited access to traditional credit in the United States and Mexico.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $127.1 million | $137.2 million | Down 7.4% |
| Income before taxes | $26.5 million | $38.0 million | Down 30.1% |
| Net income | $16.6 million | $23.6 million | Down 29.7% |
| Diluted EPS | $1.89 | $2.71 | Down 30.3% |
| Operating income margin | 25.3% | 31.6% | Down 630 basis points |
| Net income margin | 13.1% | 17.2% | Down approximately 410 basis points |
| Net cash from operations | $55.7 million | $43.7 million | Up $12.1 million |
| Net cash used in investing | $43.4 million | $49.4 million | Improved by $6.0 million |
| Net change in cash | $(2.3) million | $(21.1) million | Improved by $18.9 million |
Gross loans receivable were $1.088 billion at June 30, 2016, compared with $1.067 billion at March 31, 2016 and $1.151 billion at June 30, 2015. Net loans receivable were $713.4 million, compared with $706.7 million at March 31, 2016. Cash and cash equivalents were $10.1 million.
The allowance for loan losses was $72.0 million, or approximately 9.2% of net loans before the allowance, compared with 8.6% at June 30, 2015. Provision for loan losses increased 22.1% to $32.0 million. Annualized net charge-offs as a percentage of average net loans increased to 14.9% from 11.9%.
Senior notes payable were $360.4 million, down from $374.7 million at March 31, 2016. The Company reported $138.1 million of unused borrowing availability under its revolving credit facility. Debt-to-equity was approximately 0.9 to 1.0. The facility carried an effective interest rate of 6.0% during the quarter, and a 1.0 percentage-point change in interest rates would affect annual interest expense by approximately $1.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower average earning loans and unfavorable foreign-exchange movements. Interest and fee income decreased 7.2% to $114.0 million.
- Insurance and other income declined 9.4% to $13.0 million, including lower insurance commissions and ParaData sales revenue.
- Credit costs increased materially. Consolidated accounts at least 61 days past due rose to 4.8% on a recency basis and 7.0% on a contractual basis, compared with 4.4% and 6.5%, respectively, a year earlier.
- General and administrative expenses decreased 6.8% to $62.9 million, primarily due to lower personnel costs and reduced U.S. field staffing.
- Interest expense increased 2.1% despite a 24.5% decrease in average debt, because the effective borrowing rate increased to 6.0% from 4.4%.
- Foreign currency translation produced a $4.3 million comprehensive loss, compared with a $1.8 million loss in the prior-year quarter.
- The Company opened two branches and merged 17 branches during the quarter. Total offices declined to 1,324 from 1,331 a year earlier.
Liquidity, Capital Allocation and Outlook
Operating cash flow funded loan growth, with $42.2 million invested in the net increase in loans receivable. The Company stated that operating cash flow and available borrowing capacity are expected to fund loan growth, planned branch expansion and other needs for at least the next 12 months.
Management planned to open or acquire 15 U.S. branches and 10 Mexican branches during fiscal 2017. No acquisitions were completed during the quarter. Stock repurchases remained subject to lender consent; no shares were repurchased during the quarter, and $11.5 million remained under board-approved authorization.
On July 12, 2016, the revolving credit facility was amended to extend its maturity to June 15, 2018, reduce commitments to $460 million, and reduce commitments to $370 million on March 31, 2017. An accordion feature permits requested commitments up to $500 million, subject to conditions. The Company reported compliance with its debt covenants at June 30, 2016.
Regulatory, Legal and Other Risks
- The CFPB investigation initiated by a March 2014 Civil Investigative Demand remained unresolved. The Company received an August 2015 Notice and Opportunity to Respond and Advise letter and cannot predict the timing or outcome. Potential enforcement could result in damages, penalties, restitution, operational changes or other material effects.
- Putative shareholder class and derivative actions concerning alleged disclosure, lending, accounting and internal-control issues remained pending. The Company believes the claims lack merit and stated that losses cannot reasonably be estimated.
- Proposed CFPB rules concerning ability-to-repay requirements for certain longer-term, vehicle-secured loans and arbitration agreements could increase compliance and legal costs or affect refinancing and loan profitability.
- The revised Military Lending Act regulations become applicable to covered transactions originated on or after October 3, 2016 and may require additional disclosures, borrower-status checks and product changes.
- Potential state rate caps, including proposed New Mexico legislation, broader federal regulation, economic conditions, loan delinquencies, charge-offs, interest rates and Mexican peso fluctuations are material business risks.
- The Company had approximately $11.0 million of gross unrecognized tax benefits at June 30, 2016; approximately $5.7 million was expected to be resolved within the following 12 months. Certain Mexican earnings were designated as permanently reinvested.
Accounting and Controls
The Company adopted the debt issuance cost presentation guidance effective April 1, 2016 with no financial statement impact. It was evaluating the future effects of revenue recognition, leases, financial instruments, stock compensation and expected-credit-loss standards. Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting during the quarter.
Investor Verification Priorities
- Verify whether elevated delinquencies, charge-offs and the higher loan-loss provision represent a continuing credit-quality trend.
- Review CFPB investigation developments, potential enforcement exposure and the status of the shareholder litigation.
- Confirm the terms, borrowing-base availability and covenant compliance under the amended credit facility, including the March 2017 commitment reduction.
- Assess the effect of Military Lending Act implementation and CFPB rulemaking on covered loans, refinancing activity and compliance costs.
- Monitor Mexican peso movements and their effect on revenue, comprehensive income, loan balances and equity.
- Reconcile future earnings comparisons against the prior period’s unusual restricted-stock compensation reversals and other personnel-cost adjustments.