World Acceptance Corporation — Form 10-Q Summary
Business Context and Reporting Period
World Acceptance Corporation is a consumer finance company offering small and medium-term loans, credit insurance, ancillary products and tax-preparation services to customers with limited access to other credit. This report covers the three months ended June 30, 2019, the first quarter of fiscal 2020. The financial statements are unaudited.
The Company completed the sale of its Mexican subsidiaries effective July 1, 2018; Mexico is therefore reported as discontinued operations in the prior-year period and is excluded from current continuing operations.
Financial Results and Key Metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 |
|---|---|---|
| Total revenue | $138.4 million | $122.8 million |
| Income from continuing operations | $8.6 million | $15.6 million |
| Net income (loss) | $8.6 million | $(21.5) million |
| Diluted EPS from continuing operations | $0.97 | $1.69 |
| Provision for loan losses | $41.3 million | $30.6 million |
| General and administrative expense | $81.8 million | $67.8 million |
| Interest expense | $4.4 million | $4.2 million |
| Operating income as a percentage of revenue | 11.1% | 19.9% |
| Net cash provided by operating activities | $58.2 million | $55.5 million |
- Gross loans receivable were $1.223 billion at June 30, 2019, up 15.1% from $1.063 billion at June 30, 2018. Net loans receivable were $814.6 million at quarter-end, compared with $755.6 million at March 31, 2019.
- The allowance for loan losses was $87.4 million, or 9.7% of net loans, versus 8.7% at June 30, 2018.
- Net charge-offs were 16.3% of average net loans on an annualized basis, compared with 15.1% in the prior-year quarter.
- Contractual past-due receivables totaled $135.5 million, or 11.1% of gross loans, compared with 10.1% a year earlier. On a recency basis, past-due receivables were 9.4% of gross loans versus 8.3%.
- Cash and cash equivalents were $9.8 million at June 30, 2019.
- Senior notes payable were $326.4 million, compared with $251.9 million at March 31, 2019. The debt-to-equity ratio was 0.6 to 1.0.
- Return on average assets and return on average equity, both on a trailing 12-month basis, were 7.5% and 12.1%, respectively.
Material Changes Versus the Prior Comparable Period
- Revenue increased 12.7%, primarily from higher average net loans. Average net loans increased 14.4%, and loan volume increased to 752,148 from 672,242.
- Income from continuing operations declined 45.0% to $8.6 million. Higher loan-loss provisions and operating expenses more than offset revenue growth.
- Provision expense increased 35.0%, reflecting higher net charge-offs, portfolio growth and increased delinquency-related provisions.
- General and administrative expenses increased 20.7%. Personnel expense rose 28.6%, including approximately $6.5 million of additional share-based compensation associated with the long-term incentive program and director awards.
- New borrowers represented 17.2% of the portfolio, versus 13.7% a year earlier. Management identifies new borrowers as the riskiest customer category and expects their increased weighting to contribute to higher future delinquencies and charge-offs.
- The Company acquired 21 branches and 94 loan portfolios for total consideration of approximately $40.3 million, and opened seven branches. Branches open at period-end increased to 1,218 from 1,181.
- The Company adopted the new lease standard on April 1, 2019, recognizing a $117.3 million right-of-use asset and a $117.9 million lease liability at June 30, 2019. Management stated that adoption did not affect the income statement or debt-covenant compliance.
- Unlike the prior-year quarter, which included a $39.0 million loss on disposal of the Mexico operations, the current quarter had no discontinued-operations activity. This caused reported net income to change from a loss to positive income despite lower continuing-operations earnings.
Liquidity, Debt and Capital Resources
- Operating cash flow was $58.2 million. Investing cash use was $111.8 million, primarily for loan growth and acquisitions. Financing activities provided $54.1 million, including net borrowings and a $21.8 million share repurchase.
- In June 2019, the revolving credit facility was amended and restated. Commitments increased from $480.0 million to $685.0 million, maturity was extended to June 7, 2022, and the agreement permits specified equity repurchases and distributions.
- Borrowings were $326.4 million and unused availability was $351.5 million at June 30, 2019. The effective interest rate, including fees and debt-issuance-cost amortization, was 6.1% annualized for the quarter.
- The facility is subject to borrowing-base limitations, collateral-performance requirements and financial covenants. The Company reported compliance with all covenants at June 30, 2019.
- The Company authorized up to $200.0 million of common-stock repurchases and had approximately $178.2 million of capacity remaining at June 30, 2019. It repurchased 141,077 shares during June for $21.8 million.
Guidance, Outlook, Risks and Unusual Items
- Management believes operating cash flow and available borrowings will be adequate to fund loan growth, acquisitions, branch expansion and other expected needs for at least the next 12 months and beyond.
- The business is seasonal: loan demand is generally highest from October through December and repayment is generally highest from January through March. Interim results may not be indicative of full-year results.
- The Company continues to cooperate with an SEC and DOJ investigation concerning potential FCPA and local-law violations related to payments and other matters involving the former Mexico operations. The potential remedies, fines, disgorgement, penalties, indemnification claims and related financial impact cannot currently be reasonably estimated.
- The Mexico matter could also trigger a default under the revolving credit agreement if it results in a material adverse effect or causes covenant breaches. The Company has agreed to indemnify the purchasers of the Mexico subsidiaries for certain pre-sale investigation-related claims and liabilities.
- The CFPB’s rule governing certain consumer loans was amended to delay the ability-to-repay compliance date to November 19, 2020, while a proposal to rescind those requirements remained under consideration. Payment-related requirements could still require changes to loan-payment procedures and affect loan profitability.
- A 1.0 percentage-point change in interest rates would change annual interest expense by approximately $3.3 million based on the June 30, 2019 debt balance.
- The Company is evaluating the future effect of the expected-credit-loss accounting standard, which management states could materially affect loan-loss provision and the allowance for loan losses.
Most Important Facts for Investors to Verify
- Whether elevated delinquencies, charge-offs and the higher proportion of new borrowers continue to pressure earnings and the allowance for loan losses.
- The status and potential monetary, regulatory and covenant consequences of the SEC/DOJ Mexico investigation and related indemnification obligations.
- Compliance with the revolving-credit facility’s borrowing-base and financial covenants as loan growth and credit losses change.
- The sustainability of revenue growth after separating the effect of acquisitions from organic portfolio growth.
- The effect of share-based compensation, stock repurchases and acquisition spending on per-share results, liquidity and leverage.
- Future CFPB rulemaking and the timing and effect of expected-credit-loss accounting adoption.