World Acceptance Corporation — Fiscal 2023 First-Quarter 10-Q Summary
Reporting period: Three months ended June 30, 2022, compared with the three months ended June 30, 2021. The company is a consumer finance provider offering small and larger installment loans, credit insurance, ancillary products and tax-related services. Results are seasonally affected, with generally higher loan demand from October through December.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $157.6 million | $129.7 million | +21.5% |
| Provision for credit losses | $85.8 million | $30.3 million | +183.6% |
| General and administrative expense | $72.9 million | $73.4 million | -0.7% |
| Interest expense | $11.2 million | $5.5 million | +103.1% |
| Net income (loss) | $(8.8) million | $15.8 million | Declined $24.6 million |
| Diluted earnings (loss) per share | $(1.53) | $2.44 | Declined |
| Net cash from operating activities | $58.2 million | $49.0 million | +18.8% |
| Net charge-offs | $64.4 million | $24.1 million | +167.0% |
Balance Sheet, Liquidity and Debt
- Gross loans receivable were $1.642 billion at June 30, 2022, up 34.2% from $1.223 billion a year earlier and up from $1.523 billion at March 31, 2022.
- Net loans receivable were $1.039 billion on the balance sheet after unearned interest, insurance and fees and the $155.7 million allowance for credit losses.
- Cash and cash equivalents were $13.3 million, compared with $19.2 million at March 31, 2022.
- Total debt was approximately $777.0 million, consisting primarily of $481.4 million drawn on the revolving credit facility and $300.0 million of 7.0% senior unsecured notes due 2026, net of issuance costs.
- The revolving facility had $203.3 million of unused availability and matures June 7, 2024. Its effective annualized interest rate was 6.0% during the quarter, compared with 5.0% for fiscal 2022.
- Shareholders’ equity was $354.1 million, and the debt-to-equity ratio was approximately 2.2:1.0. Substantially all company assets secure the revolving facility.
- Operating cash flow was $58.2 million, while investing cash flow used $134.3 million, including $113.6 million for loan growth and $19.7 million for acquired loan portfolios. Financing activities provided $70.2 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected a 29.7% increase in average gross earning loans, a 35.8% increase in average net loans, and a larger mix of larger loans. Large loans represented 53.4% of the portfolio at June 30, 2022, versus 46.0% a year earlier.
- The company reported a net loss primarily because the CECL provision increased by $55.6 million. Management attributed the increase to portfolio growth, higher expected loss rates, normalization of credit performance and seasonality.
- The allowance for credit losses increased to $155.7 million from $97.9 million a year earlier. The allowance was 13.0% of net loans, versus 10.9% a year earlier.
- Annualized net charge-offs increased to 22.3% of average net loans from 11.4%. Loans 61 or more days past due on a recency basis represented 6.9% of the portfolio, compared with 4.0% a year earlier.
- Interest expense rose due to a 76.5% increase in average debt outstanding and higher borrowing costs.
- General and administrative expense declined modestly despite a 3.3% increase in headcount. Advertising expense fell 41.3% because of reduced spending on new-customer acquisition programs.
- The company acquired 35 loan portfolios for $19.7 million, compared with one portfolio acquired for $0.2 million in the prior-year quarter. These transactions produced a $3.1 million after-tax bargain-purchase gain.
- The company repurchased 73,643 shares for $14.3 million at an average price of $194.34 per share. Approximately $1.1 million remained under the current repurchase authorization at June 30, 2022.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or revenue guidance was provided. Management stated that operating cash flow and borrowing capacity should be adequate to fund loan growth, acquisitions and branch activities for the next 12 months and the foreseeable future.
- Management expects credit losses to remain sensitive to portfolio growth, borrower tenure, delinquency trends, actual loss performance and seasonal factors. The June 30 seasonality factor increased portfolio expected loss rates by approximately 14.5%, or $13.4 million.
- On July 27, 2022, the company amended its revolving credit agreement. The required fixed-charge coverage ratio increased to 2.25:1.0 for quarters through December 30, 2022, 2.50:1.0 for March 31 and June 30, 2023, and 2.75:1.0 thereafter. The company reported compliance with applicable covenants at June 30, 2022.
- Interest-rate risk is material: a 1.0 percentage-point change in the revolving facility rate would change annual interest expense by approximately $4.8 million based on the June 30 balance.
- Key risks include consumer credit deterioration, reliance on debt financing, higher interest rates, regulatory changes affecting consumer lending and payment practices, CFPB and state regulatory actions, litigation, cybersecurity threats, acquisitions, economic conditions and changes in accounting estimates.
- A shareholder derivative lawsuit relating to the previously disclosed Mexico investigation remains outstanding. The company does not expect monetary damages to be sought directly from it, but may be responsible for certain legal fees and costs of individual defendants. Potential litigation losses are inherently uncertain.
- The company is evaluating ASU 2022-02 regarding troubled debt restructurings and vintage disclosures; the filing does not provide a quantified expected effect.
Investor Verification Items
- Verify whether elevated delinquency, charge-off and expected-loss rates persist as the loan portfolio seasons and economic conditions change.
- Reconcile allowance coverage, CECL assumptions and the impact of the seasonality factor on future provisions.
- Monitor compliance with the amended fixed-charge coverage covenant and availability under the revolving credit facility.
- Assess the effect of SOFR-based borrowing costs and the 7.0% senior notes on future interest expense and liquidity.
- Review the sustainability of loan growth, acquisition activity and associated funding requirements.
- Track regulatory developments involving the CFPB payment provisions, state lending rules and the pending litigation.
- Confirm the timing and financial impact of the July 2022 credit agreement amendment and any subsequent changes in borrowing capacity or covenant headroom.