World Acceptance Corporation — Fiscal 2016 Form 10-K Summary
Business context and reporting period
World Acceptance Corporation operates a small-loan consumer finance business serving borrowers with limited access to traditional credit. At March 31, 2016, it operated 1,186 U.S. branches across 15 states and 153 branches in Mexico, for 1,339 total branches. Products include small and large installment loans, credit insurance, automobile-club memberships, tax preparation, and limited ancillary services. The filing covers the fiscal year ended March 31, 2016; the provided request labels the period “2015 Q4,” but the filing is an annual report rather than a quarterly filing.
Key financial metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Total revenues | $557.5 million | $610.2 million | Down 8.6% |
| Interest and fee income | $495.1 million | $524.3 million | Down 5.6% |
| Insurance commissions and other income | $62.3 million | $85.9 million | Down 27.5% |
| Provision for loan losses | $123.6 million | $118.8 million | Up 4.0% |
| General and administrative expense | $269.1 million | $292.1 million | Down 7.8% |
| Interest expense | $26.8 million | $23.3 million | Up 15.2% |
| Net income | $87.4 million | $110.8 million | Down 21.1% |
| Diluted EPS | $10.05 | $11.90 | Down 15.5% |
| Operating margin | 29.6% | 32.7% | Down 3.1 percentage points |
| Return on average assets | 10.1% | 12.5% | Down 2.4 percentage points |
Gross loans receivable declined to $1.067 billion from $1.110 billion. Net loans receivable declined to $706.7 million from $742.3 million. Net charge-offs increased to $123.6 million, or 14.8% of average net loans, from $110.6 million, or 12.9%. Contractual loans at least 60 days past due represented 7.1% of gross loans at March 31, 2016, compared with 7.0% a year earlier. The allowance for loan losses was $69.6 million, or 9.0% of loans receivable net of unearned and deferred amounts.
Net cash provided by operating activities was $206.1 million, compared with $241.9 million in fiscal 2015. Net cash used in investing activities was $101.9 million, primarily reflecting increases in loans receivable and capital expenditures. Net cash used in financing activities was $128.6 million. Cash and cash equivalents declined to $12.4 million from $38.3 million.
Total debt was $374.7 million at March 31, 2016, compared with $501.2 million a year earlier. Shareholders’ equity was $391.9 million, producing debt-to-equity of approximately 1.0 to 1.0. The revolving credit facility had $123.8 million of borrowing availability, subject to borrowing-base restrictions and covenants. Borrowings bear interest at LIBOR plus 4.0%, subject to a 5.0% minimum; the fiscal 2016 effective rate, including commitment fees, was 5.6%.
Material changes versus the prior comparable period
- Revenue and earnings declined despite a net increase of 19 branches, reflecting lower loan volumes, increased competition, improved customer household finances, and unfavorable Mexican peso translation.
- Mexico revenue fell to $42.2 million from $52.4 million; management estimated that exchange-rate changes reduced fiscal 2016 revenue by approximately $8.9 million.
- The fiscal 2015 results included an approximately $10.0 million after-tax gain from selling previously charged-off accounts. That gain did not recur; fiscal 2016 included a $1.6 million loss from repurchasing some previously sold accounts.
- Credit performance weakened: net charge-offs rose 11.7%, and management attributed part of the increase to ceasing in-person visits to delinquent borrowers in December 2015.
- General and administrative expense benefited from lower share-based compensation, including a net approximately $7.7 million personnel-expense reduction from modifying Group B performance awards. Fiscal 2016 also included approximately $1.2 million of costs for an uncompleted bond offering and a $1.3 million loss on sale of the corporate jet.
- Tax-preparation revenue increased 20.5% to approximately $11.9 million, with approximately 63,000 returns prepared versus 56,000 in fiscal 2015.
- The Company opened 37 branches and merged 18 unprofitable branches into existing locations. The World Class Buying Club was wound down and was no longer financing product purchases after March 31, 2015.
- The Company disclosed an immaterial error correction revising fiscal 2016 net insurance income and total revenue upward by $1.9 million and net income upward by $1.2 million relative to previously furnished financial information.
Guidance, outlook, commentary, risks and contingencies
Management planned to open or acquire at least 15 U.S. branches and approximately 10 Mexico branches during fiscal 2017, while evaluating acquisitions. Management stated that operating cash flow and available borrowings should fund expected expansion and ongoing loan demand for the next 12 months and foreseeable future, subject to the risks described in the filing.
- CFPB investigation: The Company received a 2014 Civil Investigative Demand and an August 2015 NORA letter indicating that CFPB enforcement staff was considering recommending legal action. The Company submitted responses but could not predict the timing, outcome, or potential financial impact. Possible outcomes include damages, fines, penalties, restitution, sanctions, settlements, business-practice changes, or restrictions on operations.
- Regulatory risk: Proposed CFPB rules could affect certain vehicle-secured loans. The Company estimated that potentially covered loans represented approximately 13% of loan accounts and 20% of gross portfolio balance at March 31, 2016. The amended Military Lending Act imposed a 36% Military Annual Percentage Rate limit and additional compliance requirements.
- Litigation: A putative securities class action and consolidated shareholder derivative litigation alleged misleading disclosures, weaknesses in controls and accounting for loan refinancings, and related fiduciary-duty violations. Motions to dismiss were pending. The Company could not reasonably estimate potential losses, although it did not believe reasonably possible losses from pending matters were material based on available information.
- Funding and liquidity: The revolving facility matures June 15, 2017, with commitments scheduled to reduce from $500 million to $400 million on March 31, 2017. The facility is secured by substantially all domestic assets and contains financial and operational covenants. A 1% change in LIBOR would affect annual interest expense by approximately $1.6 million based on the March 31, 2016 balance.
- Credit risk: The business is concentrated in consumer installment lending, with limited diversification. Loan-loss estimates depend on delinquency, charge-offs, economic conditions, and refinancing behavior. Collateral generally is not perfected for smaller loans.
- Geographic and currency risk: Mexico accounted for 7.6% of fiscal 2016 revenue and approximately 9.6% of gross loans receivable. Fiscal 2016 included an approximately $8.0 million foreign-currency translation loss.
- Regulatory and reputational exposure: State or federal rate caps, licensing changes, consumer-protection rules, adverse litigation, or negative public perception could materially reduce profitability or require suspension of lending operations.
Most important facts for investors to verify
- Current status, scope, and potential resolution or financial exposure of the CFPB investigation and NORA process.
- Progress of the securities class action and derivative litigation, including any developments after the filing date.
- Refinancing or replacement plans for the $374.7 million revolving debt due in 2017 and compliance with all borrowing-base and financial covenants.
- Trends in delinquency, net charge-offs, allowance adequacy, and the effects of changed collection practices.
- Whether lower loan volumes and increased competition persist, and whether planned U.S. and Mexico branch expansion generates acceptable returns.
- Potential effects of CFPB rulemaking, the Military Lending Act, state rate-cap initiatives, and other changes to consumer-lending regulation.
- The impact of Mexican peso movements, Mexico labor and regulatory conditions, and the growth of payroll-deduct loans.
- The reconciliation of revised fiscal 2016 insurance income and net income to previously furnished financial information.