World Acceptance Corporation — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2017. The filing includes quarterly information for fiscal fourth quarter ended March 31, 2017; it is not a fiscal 2016 Q4 filing. World Acceptance operates a small-loan consumer finance business through 1,327 branches in 15 U.S. states and Mexico.
Business Context
- Primary products are small and larger installment loans, related credit insurance, automobile club memberships, and tax preparation services.
- Gross loans receivable totaled $1.060 billion at March 31, 2017, comprising 909,930 loans with an average gross balance of $1,165.
- U.S. operations generated 92.3% of revenue; Mexico generated 7.7% and represented 11.0% of gross loans receivable.
- Approximately 79.7% of fiscal 2017 loan volume involved refinancings or loans to previous customers; 66.8% of originations were refinancings.
Financial and Operating Metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $531.7 million | $557.5 million | Down 4.6% |
| Interest and fee income | $468.8 million | $495.1 million | Down 5.3% |
| Provision for loan losses | $128.6 million | $123.6 million | Up 4.0% |
| General and administrative expense | $267.7 million | $269.1 million | Down 0.5% |
| Interest expense | $21.5 million | $26.8 million | Down 19.9% |
| Net income | $73.6 million | $87.4 million | Down 15.8% |
| Diluted EPS | $8.38 | $10.05 | Down 16.6% |
| Operating margin | 25.5% | 29.6% | Down 4.1 points |
| Net margin | 13.8% | 15.7% | Down approximately 1.9 points |
- Net charge-offs were $125.4 million, or 15.7% of average net loans, versus 14.8% in fiscal 2016. Contractual loans at least 61 days past due were 7.8% of gross loans, compared with 7.1% at March 31, 2016.
- The allowance for loan losses increased to $72.2 million from $69.6 million, equal to 9.4% of loans receivable net of unearned interest and fees.
- Net cash provided by operating activities was $219.4 million, compared with $206.1 million in fiscal 2016.
- Investing activities used $131.6 million, primarily for loan growth, branch acquisitions, intangible assets, and capital expenditures. Financing activities used $84.2 million.
- Cash and cash equivalents increased to $15.2 million from $12.4 million.
- Total debt was $295.1 million, down from $374.7 million. Shareholders’ equity increased to $461.1 million, producing a debt-to-equity ratio of approximately 0.6:1.
- The company had $74.3 million of unused borrowing availability under its revolving credit facility at March 31, 2017, subject to borrowing-base restrictions.
Material Changes Versus the Prior Comparable Period
- Revenue and average net loans declined, reflecting lower loan volumes, increased competition, and improved household finances among customers. Mexican revenue was also reduced by approximately $6.4 million from foreign-exchange effects.
- Credit performance weakened: provision expense increased, net charge-offs rose, and delinquency ratios increased. Management attributed part of the charge-off increase to ceasing in-person visits to delinquent borrowers in December 2015.
- Tax preparation revenue increased 23.3% to approximately $14.7 million, with approximately 72,000 returns prepared versus 63,000 in fiscal 2016.
- Branch count declined by 12 year over year to 1,327 after 18 openings and 14 acquisitions were offset by 44 branch mergers.
- The company acquired 14 Georgia branches for approximately $20.8 million; purchase accounting remained preliminary at year-end.
- Debt declined substantially, while interest expense benefited from lower average debt and a lower effective borrowing rate.
Guidance, Outlook, Risks, and Unusual Items
- Management planned to open or acquire approximately 25 U.S. branches during fiscal 2018 and expected operating cash flow and borrowing capacity to fund planned expansion and loan originations.
- In May 2017, the revolving credit facility was amended to extend its maturity to June 15, 2019 and increase commitments from $370 million to $480 million. The amendment also tightened the maximum total-debt-to-adjusted-net-worth covenant from 2.75:1 to 2.0:1 and imposed additional restrictions.
- The company remained dependent on variable-rate borrowings; a 1% change in LIBOR would have affected annual interest expense by approximately $2.9 million based on the March 31, 2017 balance.
- The company was under an ongoing CFPB investigation arising from a 2014 Civil Investigative Demand and a 2015 NORA letter. The ultimate timing, outcome, and financial impact were not estimable.
- The company initiated an internal investigation into possible improper payments and books-and-records issues in Mexico potentially implicating the FCPA. The SEC and DOJ were notified, and potential fines, disgorgement, penalties, business restrictions, or credit-facility default consequences remained uncertain and were not reasonably estimable.
- Management and the auditor identified material weaknesses in internal control over financial reporting involving Mexico vendor-management and payment processes, compliance with laws and regulations including the FCPA, and corporate governance. Disclosure controls were also deemed ineffective.
- Subsequent to year-end, the company reached agreements in principle to settle shareholder litigation: a $16 million class-action settlement and a derivative-action settlement with fees and expenses capped at $475,000, both expected to be funded by D&O insurers and subject to court approval.
- The company has not paid cash dividends since 1989. Its credit agreement restricts dividends and share repurchases.
Most Important Facts to Verify
- Whether delinquency and net charge-off rates stabilized or worsened after fiscal 2017, and whether the $72.2 million allowance remains adequate.
- The status and potential monetary exposure of the CFPB investigation and the Mexico FCPA investigation, including any accruals or settlements.
- Progress in remediating the material weaknesses and whether subsequent filings report effective internal controls.
- Compliance with the amended revolving-credit covenants, available borrowing-base capacity, and refinancing needs before the facility maturity.
- Whether planned branch expansion produces sustainable loan growth without further margin deterioration.
- The final purchase accounting for the 14-branch Georgia acquisition and any resulting goodwill or intangible-asset adjustments.