World Acceptance Corporation — Q3 Fiscal 2016 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 services, tax preparation, and financial-services software. The filing covers the unaudited three and nine months ended December 31, 2015, representing the third quarter and first nine months of fiscal 2016. Results are seasonally affected because loan demand is typically highest in the third quarter and repayments are highest in the fourth quarter.
Financial performance and position
| Metric | Three months ended December 31, 2015 | Prior-year period | Nine months ended December 31, 2015 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $139.7 million | $148.7 million | $413.3 million | $442.8 million |
| Income before taxes | $25.5 million | $28.7 million | $91.6 million | $99.2 million |
| Net income | $14.8 million | $18.5 million | $57.6 million | $62.3 million |
| Diluted EPS | $1.70 | $2.01 | $6.63 | $6.64 |
| Net cash from operations | Not separately provided | Not separately provided | $140.4 million | $173.1 million |
- Quarterly revenue declined 6.1% and net income declined 20.2%; nine-month revenue declined 6.7% and net income declined 7.6%.
- Approximate net margins were 10.6% for the quarter and 13.9% for the nine-month period, compared with approximately 12.4% and 14.1%, respectively, in the prior-year periods.
- Provision for loan losses was $35.4 million for the quarter and $99.2 million for the nine months, down 7.4% and 5.8%, respectively.
- General and administrative expense declined 5.4% for the quarter and 8.2% for the nine months. G&A represented 51.2% of quarterly revenue and 49.0% of nine-month revenue.
- Interest expense increased 18.4% for the quarter and 12.8% for the nine months, reflecting higher effective borrowing rates despite lower average debt.
- Gross loans receivable were $1.219 billion at December 31, 2015, compared with $1.263 billion at December 31, 2014 and $1.110 billion at March 31, 2015. Net loans receivable were $797.2 million at December 31, 2015.
- The allowance for loan losses was $84.5 million, compared with $85.0 million at December 31, 2014 and $70.4 million at March 31, 2015.
- Loans 60 or more days contractually delinquent were $87.9 million, or 7.2% of gross loans, versus 6.7% one year earlier. Total contractual past-due loans were 10.9% of gross loans, compared with 10.2% at December 31, 2014.
- Cash and cash equivalents were $20.9 million at December 31, 2015, down from $38.3 million at March 31, 2015.
- Senior notes payable were $511.9 million, with $86.6 million of unused borrowing availability. Debt-to-equity was 1.4 to 1.0, and shareholders’ equity was $362.9 million.
- Net cash used in investing activities was $164.9 million, primarily reflecting a $160.4 million increase in loans receivable. Net cash provided by financing activities was $8.1 million.
Material changes versus the prior comparable periods
- Revenue decreased principally because of lower average earning loans, reduced loan volumes, lower insurance commissions and discontinued World Class Buying Club sales. Mexican revenue was adversely affected by foreign-exchange movements, with an approximately $2.3 million quarterly and $7.0 million nine-month revenue impact.
- Average net loans receivable declined 3.4% for the quarter and 2.4% for the nine months. Average net loans excluding loans at least 60 days past due also declined.
- Net charge-offs as a percentage of average net loans decreased to 14.6% from 15.5% for the quarter but increased to 13.4% from 12.8% for the nine months. Recoveries included approximately $0.5 million of charged-off account sales in the quarter and $2.7 million for the nine months.
- Personnel expense benefited from lower share-based compensation, including a $6.0 million release of accrued expense related to performance-based restricted stock awards and approximately $3.7 million of releases associated with executive resignations and retirement.
- Other unusual nine-month items included approximately $1.2 million of expense related to an uncompleted bond offering and a $1.3 million loss on the sale of the corporate jet.
- The effective tax rate increased to 42.2% in the quarter from 35.7%, primarily due to increased reserves related to an adverse state court ruling. The nine-month effective tax rate remained 37.2%.
- The company opened 36 branches and merged six branches during the nine months, ending with 1,350 offices versus 1,314 one year earlier. One acquisition was completed during the period.
Guidance, outlook, risks and contingencies
- Management planned to open or acquire at least 30 U.S. branches and 10 Mexican branches during fiscal 2016. It expected operating cash flow and available revolver capacity to fund loan growth, expansion and other needs for at least the next 12 months.
- The $600.0 million revolving credit facility matures June 15, 2017, but commitments reduce 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 rate.
- The company was in compliance with its debt covenants at December 31, 2015. Share repurchases require lender consent under the amended credit facility; no shares were repurchased during the nine months.
- The CFPB investigation remains active. The company received a Civil Investigative Demand in 2014 and a Notice and Opportunity to Respond and Advise letter in August 2015. The ultimate timing and outcome are unknown, and potential enforcement could result in damages, penalties, restitution, operational changes or other material adverse effects.
- Putative securities class-action and derivative litigation related to alleged disclosure, internal-control, loan-renewal and accounting matters remains pending. The company cannot estimate possible losses; it states that an adverse outcome could materially affect a particular reporting period.
- Potential CFPB rules covering certain vehicle-secured longer-term loans, arbitration agreements and larger installment-lending participants could increase compliance costs or restrict lending and refinancing practices.
- The expanded Military Lending Act rules become applicable to covered transactions established on or after October 3, 2016 and may require additional disclosures, borrower-status checks and product changes.
- Foreign-currency translation produced an $8.5 million nine-month loss in accumulated other comprehensive income. International revenue represented approximately 7.9% of nine-month revenue.
- Accounting adoption impacts for revenue recognition and debt issuance costs were still under evaluation. Management reported effective disclosure controls and no material changes to internal control during the quarter.
Important facts for investors to verify
- Whether delinquency, charge-off and allowance trends stabilize or deteriorate as loan growth and refinancing volumes change.
- The timing, scope and potential financial or operating consequences of the CFPB investigation and related shareholder litigation.
- The company’s ability to refinance or reduce borrowings before the revolving facility commitments step down in March 2016 and March 2017.
- The effect of higher borrowing costs, Mexican peso fluctuations and any further decline in average earning loans.
- The final form and implementation of CFPB, Military Lending Act and state rate-cap initiatives, particularly for vehicle-secured loans.
- The sustainability of reported earnings after excluding the restricted-stock compensation releases and other unusual items.