World Acceptance Corporation 10-Q Summary
Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company operating primarily in the United States and Mexico through 1,331 offices. This unaudited Form 10-Q covers the three months ended June 30, 2015, the first quarter of fiscal 2016. Fiscal 2015 comparative amounts are for the three months ended June 30, 2014.
Financial Performance and Position
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total revenue | $137.2 million | $145.9 million | Down 6.0% |
| Provision for loan losses | $26.2 million | $30.9 million | Down 15.1% |
| General and administrative expense | $67.6 million | $73.3 million | Down 7.9% |
| Income before taxes | $38.0 million | $36.1 million | Up 5.0% |
| Net income | $23.6 million | $22.6 million | Up 4.8% |
| Basic EPS | $2.75 | $2.36 | Up 16.5% |
| Diluted EPS | $2.71 | $2.32 | Up 16.8% |
| Net cash from operating activities | $43.7 million | $66.8 million | Down 34.6% |
Net margin was approximately 17.2%, compared with approximately 15.5% in the prior-year quarter. Operating income, defined by management as revenue less loan-loss provision and general and administrative expense, was 31.6% of revenue versus 28.6%. The effective income tax rate was 37.7%, compared with 37.6%.
- Gross loans receivable were $1.151 billion at June 30, 2015, up from $1.110 billion at March 31, 2015, but down from $1.164 billion at June 30, 2014.
- Loans receivable, net, were $764.5 million, compared with $742.3 million at March 31, 2015 and $781.0 million at June 30, 2014.
- The allowance for loan losses was $72.0 million, or approximately 6.3% of gross loans, compared with $67.9 million at June 30, 2014.
- Past-due receivables totaled $115.5 million, or 10.0% of gross loans, compared with $107.7 million, or 9.3%, a year earlier.
- Cash and cash equivalents declined to $17.2 million from $38.3 million at March 31, 2015.
- Senior notes payable were $489.0 million, down from $501.2 million at March 31, 2015. Shareholders’ equity was $336.3 million, producing a debt-to-equity ratio of approximately 1.5 to 1.
- Unused borrowing availability under the revolving credit facility was $110.3 million at June 30, 2015.
Cash Flow, Debt, and Liquidity
Operating cash flow of $43.7 million was more than offset by $49.4 million of investing outflows, primarily the $49.8 million increase in loans receivable, and $15.1 million of financing outflows. Cash decreased by $21.1 million during the quarter.
The company amended its $600.0 million revolving credit facility in June 2015, extending maturity to June 15, 2017. Commitments decline to $500.0 million on March 31, 2016 and $400.0 million on March 31, 2017. Borrowings bear interest at LIBOR plus 4.0%, subject to a 5.0% minimum; the effective rate, including commitment fees, was 4.4%. Management stated that the company was in compliance with its financial covenants and expects operating cash flow and available borrowings to fund operations, loan growth, and planned expansion for at least the next 12 months.
Material Changes and Unusual Items
- Revenue declined primarily because of lower loan volumes, increased loans 60 days or more past due, a $2.0 million unfavorable foreign-exchange impact on Mexican revenue, and lower insurance, World Class Buying Club, and motor club revenue.
- Loan-loss provision benefited from lower net charge-offs and approximately $1.8 million of recoveries from sales of previously charged-off accounts. The buyer subsequently reported weaker-than-projected early performance, which could affect future payment timing and amounts.
- General and administrative expense benefited from a $3.4 million reversal of restricted-stock compensation because management no longer believed a $16.00 EPS performance target was probable. Additional reversals related to executive compensation accruals were partly offset by approximately $400,000 of severance expense and $1.2 million of bond-offering expense.
- Prior-year EPS was revised for errors in the treatment of restricted stock. Q1 FY2015 basic EPS was revised from $2.26 to $2.36 and diluted EPS from $2.19 to $2.32; net income and shareholders’ equity were unaffected.
- There were no acquisitions during the quarter. The company opened or acquired 11 offices during the period and had 1,331 offices at quarter-end.
- Net foreign-currency translation loss was $1.8 million, compared with a $0.6 million gain in the prior-year quarter.
Outlook, Risks, and Contingencies
- Management planned to open or acquire at least 30 U.S. branches and 10 Mexican branches during fiscal 2016.
- Loan demand is seasonal, generally strongest from October through December and weakest from January through March.
- The CFPB’s ongoing Civil Investigative Demand remains unresolved. The company cannot predict the timing or outcome, and potential enforcement, penalties, restitution, litigation, or required business-practice changes could materially affect results.
- A shareholder securities class action survived the company’s motion to dismiss; the company denied liability and sought permission for an interlocutory appeal. A derivative lawsuit was filed on July 15, 2015, based on similar underlying allegations.
- Proposed CFPB rules for certain longer-term, higher-APR loans and expanded CFPB supervision could increase underwriting, compliance, and refinancing requirements.
- New Military Lending Act regulations issued July 22, 2015 may require revised disclosures, borrower-status checks, and changes to products offered to covered borrowers beginning with transactions consummated or established on or after October 3, 2016.
- The company faces foreign-exchange, credit-loss, interest-rate, regulatory, litigation, tax, and funding risks. A one-percentage-point change in interest rates would affect annual interest expense by approximately $0.9 million based on the June 30 debt balance.
Investor Verification Priorities
- Verify trends in delinquency, charge-offs, recoveries, and the allowance for loan losses, including the sustainability of the $1.8 million recovery benefit.
- Assess whether lower loan volumes and revenue reflect a persistent deterioration in demand or credit quality.
- Review the amended credit facility’s declining commitments, borrowing-base provisions, covenant requirements, and restrictions on share repurchases.
- Monitor the CFPB investigation, related shareholder litigation, and the subsequent derivative complaint for potential financial or operational consequences.
- Separate recurring expense performance from the one-time or unusual compensation reversals and bond-offering costs.
- Evaluate the effect of the Military Lending Act and potential CFPB rulemaking on product availability, compliance costs, and profitability.