World Acceptance Corporation — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2017, representing the second quarter and first six months of fiscal 2018. The company provides small- and medium-term consumer loans, credit insurance, ancillary products and, in the U.S., tax preparation services. Operations are reported in U.S. and Mexico segments.
Key Financial Metrics
| Metric | Three months ended Sept. 30, 2017 | Three months ended Sept. 30, 2016 | Six months ended Sept. 30, 2017 | Six months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Total revenue | $131.0 million | $129.3 million | $259.9 million | $256.3 million |
| Net income | $9.8 million | $15.5 million | $22.9 million | $32.1 million |
| Diluted EPS | $1.10 | $1.76 | $2.58 | $3.65 |
| Operating income margin | 16.1% | 23.2% | 17.8% | 24.2% |
| Net margin | 7.5% | 12.0% | 8.8% | 12.5% |
| Provision for loan losses | $39.0 million | $35.9 million | $69.8 million | $67.9 million |
| General and administrative expense | $70.9 million | $63.5 million | $143.8 million | $126.4 million |
| Interest expense | $4.8 million | $5.5 million | $9.0 million | $11.1 million |
- Balance sheet: Total assets were $857.1 million at September 30, 2017, compared with $800.6 million at March 31, 2017. Net loans receivable increased to $739.5 million from $695.7 million, while gross loans increased to $1.148 billion from $1.060 billion.
- Credit quality: The allowance for loan losses was $86.7 million, up from $72.2 million at March 31, 2017. Loans 60 or more days delinquent totaled $97.0 million, or 8.5% of gross loans; total contractual past-due receivables were $144.1 million, or 12.6% of gross loans, versus 11.1% at March 31, 2017.
- Cash flow: Operating cash flow for the six months was $94.0 million, down from $102.7 million in the prior-year period. Investing cash use was $117.8 million, including $103.6 million for loan growth and $8.6 million for acquired loan portfolios and branches. Financing activities provided $27.3 million.
- Liquidity and debt: Cash and cash equivalents were $18.8 million. Senior notes payable were $320.8 million, with $158.7 million of unused borrowing availability under the $480.0 million revolving facility. The facility matures June 15, 2019 and had an effective interest rate of 5.8% during the six-month period.
- Capital allocation: The company repurchased 58,728 shares for $4.6 million during the six months. Approximately $1.9 million remained under the applicable repurchase authorization at September 30, 2017.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue rose 1.3%, but net income declined 36.7% and diluted EPS declined 37.5%.
- Six-month revenue increased 1.4%, while net income fell 28.8% and diluted EPS fell 29.3%.
- Provision expense increased 8.7% in the quarter and 2.8% for the six months, primarily because of higher Mexico delinquency and charge-off trends, despite lower consolidated net charge-offs as a percentage of average net loans.
- G&A expense increased 11.7% in the quarter and 13.8% for the six months. Drivers included additional part-time branch personnel, higher equity-award expense, increased branch bonuses, expanded direct marketing and higher legal and professional fees related to the Mexico investigation.
- Interest expense declined because average debt outstanding decreased approximately 14.0% in the quarter and 17.2% for the six months.
- U.S. segment six-month net income was $25.6 million, compared with $29.0 million in the prior-year period. Mexico reported a six-month net loss of $2.7 million, compared with net income of $3.1 million.
- The company acquired three branches and 24 loan portfolios during the six months and reported 1,331 offices at September 30, 2017, compared with 1,322 a year earlier.
Guidance, Outlook, Risks and Unusual Items
- Management planned to open or acquire 25 U.S. branches during fiscal 2018. It stated that operating cash flow and available borrowings should fund expected branch expansion, acquisitions and loan growth for at least the next 12 months.
- The company expects significant seasonal fluctuations: loan demand is generally highest from October through December and repayment is generally highest from January through March.
- The company’s investigation of potential improper payments and related books-and-records and compensation matters in Mexico remains ongoing. The SEC has issued a formal order of investigation, and the company is cooperating with the SEC and DOJ. Potential consequences include fines, penalties, disgorgement, business restrictions, restructuring, a compliance monitor, reputational damage and possible default under the credit agreement. The company cannot reasonably estimate any additional liability.
- The CFPB investigation and prior Notice and Opportunity to Respond and Advise process remain unresolved. Potential outcomes include enforcement actions, monetary remedies, sanctions or changes to lending practices.
- Management reported that disclosure controls were not effective and that material weaknesses in internal control over financial reporting related to Mexico vendor payments, legal and regulatory compliance, and corporate governance had not been fully remediated.
- A shareholder class-action settlement provided for a $16 million payment funded by D&O insurers. A related derivative-action settlement required specified governance practices and up to $475,000 of attorneys’ fees and expenses, also funded by D&O insurers; the derivative settlement received final court approval on November 7, 2017.
- The company adopted ASU 2016-09 for share-based payments, resulting in a $2.4 million reclassification between retained earnings and additional paid-in capital, with no significant overall financial statement impact.
- Future credit-loss accounting under ASU 2016-13 could materially affect loan-loss provisions and the allowance, although the standard had not yet been adopted.
- A 1.0 percentage-point change in borrowing rates would change annual interest expense by approximately $2.5 million based on the September 30 debt balance.
Most Important Facts for Investors to Verify
- Progress, findings, settlement exposure and potential credit-agreement consequences of the Mexico FCPA investigation.
- Status and potential financial impact of the CFPB investigation and any related enforcement action.
- Remediation of the reported material weaknesses and whether disclosure controls become effective.
- Trends in delinquency, charge-offs, allowance coverage and Mexico segment profitability.
- Compliance with revolving-credit covenants, borrowing-base availability and the effect of interest-rate changes.
- Whether branch expansion and loan growth generate adequate returns after increased personnel, marketing, legal and credit costs.
- Effects of seasonality on the typically weaker third fiscal quarter and stronger fourth fiscal quarter.