World Acceptance Corporation — Form 10-Q Summary
Business context and reporting period
World Acceptance Corporation is a consumer finance company offering small, short-term installment loans through offices in the United States and Mexico. This unaudited filing covers the quarter and six months ended September 30, 2012, the second quarter and first six months of fiscal 2013. Fiscal year-end is March 31.
The company operated 1,173 offices at September 30, 2012, compared with 1,108 a year earlier. Management planned to open or acquire at least 60 U.S. branches and 10 Mexican branches during fiscal 2013.
Financial performance and position
| Metric | Three months ended September 30, 2012 | Year-over-year change | Six months ended September 30, 2012 | Year-over-year change |
|---|---|---|---|---|
| Total revenues | $139.4 million | Up 5.5% | $272.2 million | Up 6.6% |
| Interest and fee income | $121.8 million | Up 4.8% | $237.1 million | Up 6.1% |
| Provision for loan losses | $32.4 million | Up 7.8% | $56.0 million | Up 5.9% |
| General and administrative expense | $66.2 million | Up 7.6% | $135.3 million | Up 7.4% |
| Income before taxes | $36.8 million | Up 0.3% | $72.9 million | Up 5.5% |
| Net income | $22.9 million | Down 1.7% | $45.5 million | Up 4.7% |
| Diluted EPS | $1.72 | Up from $1.52 | $3.35 | Up from $2.78 |
| Operating margin | 29.3% | Down from 30.7% | 29.7% | Down from 29.9% |
At September 30, 2012, gross loans receivable were $1.088 billion, up from $972.7 million at March 31, 2012. Net loans receivable increased to $729.2 million from $660.6 million, while the allowance for loan losses rose to $61.3 million from $54.5 million. Cash and cash equivalents were $12.7 million.
Net cash provided by operating activities was $94.2 million for the six months, compared with $97.9 million in the prior-year period. Investing activities used $128.9 million, principally for the $123.6 million increase in net loans receivable. Financing activities provided $36.7 million, including $157.4 million of net revolving borrowings, offset by $50.0 million of junior subordinated debt repayment and $75.1 million of common-stock repurchases.
Senior notes payable were $386.6 million at September 30, 2012, compared with $229.3 million at March 31, 2012. The $483.0 million revolving facility had $96.4 million of unused availability, bore interest at LIBOR plus 3.0% subject to a 4.0% floor, and matured August 31, 2014. The effective interest rate, including the commitment fee, was 4.4%.
Material changes versus comparable periods
- Revenue growth was driven by higher average net loans, new offices, and stronger insurance commissions.
- Average net loans increased 10.5% in the quarter and 10.4% for the six-month period.
- Quarterly net income declined despite revenue growth because loan-loss provision and general and administrative expenses grew faster than revenue; the six-month net income comparison remained favorable.
- Net charge-offs as a percentage of average net loans improved to 13.9% for the quarter from 14.8% and to 13.1% for the six months from 13.7%.
- Delinquencies increased in dollar terms with portfolio growth. Recency-basis receivables 61 or more days past due were 2.9% of gross loans, down from 3.0%; contractual-basis delinquency remained 4.2%.
- Share count declined materially because of repurchases: weighted-average basic shares were 13.0 million for the quarter versus 14.9 million in the prior year. The company repurchased 1.094 million shares for $75.1 million during the six months.
- Interest expense increased as average debt rose, although the effective borrowing rate declined from 6.0% to 4.4% in the quarter and from 6.2% to 4.7% for the six months.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected operating cash flow and revolving-credit borrowings to fund branch expansion, loan growth, acquisitions, and scheduled debt obligations. No formal earnings guidance was provided.
- Management estimated that $2.0 million to $2.5 million of interest and fee revenue shifted from the second fiscal quarter to the third quarter because September 30 fell on a weekend. The company also noted that loan demand is seasonally highest in the third fiscal quarter.
- The company planned continued branch expansion and stated that additional borrowing capacity may periodically be required, although future availability on reasonable terms is not assured.
- Credit risk remains central: the allowance for loan losses increased, and contractual past-due receivables were $91.1 million, or 8.4% of gross loans, at September 30, 2012.
- Interest-rate risk is material because debt is variable-rate; a 1.0 percentage-point rate change was estimated to affect annual interest expense by approximately $828,000.
- Regulatory changes affecting consumer-loan interest rates could materially affect operations. A proposed Missouri 36% rate-cap ballot initiative was not placed on the November 2012 ballot, but similar future initiatives remain possible.
- The company operates in Mexico and is exposed to foreign-exchange, economic, political, regulatory, and tax risks. Mexico represented approximately 7.0% of six-month revenue.
- Gross unrecognized tax benefits, including interest, were approximately $3.2 million. Approximately $141,000 was expected to be resolved within 12 months.
- Routine litigation was disclosed, but management did not believe reasonably possible losses from current matters would be material. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether loan growth can continue without a material deterioration in delinquencies, charge-offs, or allowance requirements.
- The sustainability of operating margins as personnel, health-insurance, and other branch-related costs rise.
- Availability and terms of additional revolving-credit capacity before the August 2014 facility maturity.
- The effect of seasonal revenue timing and the disclosed $2.0 million to $2.5 million revenue shift on the third fiscal quarter.
- Future regulatory actions affecting consumer-loan pricing, particularly in Missouri and other states.
- Foreign-exchange and operating performance trends in Mexico, including the effect of peso movements on reported results.
- Compliance with debt covenants and restrictions on stock repurchases, dividends, and additional indebtedness.