World Acceptance Corporation — Fiscal 2018 First Quarter 10-Q
Reporting period: Three months ended June 30, 2017, compared with the three months ended June 30, 2016. World Acceptance is a consumer finance company providing small and larger loans, credit insurance and ancillary services in the U.S. and Mexico. Results are seasonal, with generally higher loan demand in October–December and stronger repayments in January–March.
Key Financial Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $128.9 million | $127.1 million | +1.4% |
| Interest and fee income | $115.6 million | $114.0 million | +1.4% |
| Provision for loan losses | $30.8 million | $32.0 million | -3.7% |
| General and administrative expense | $72.9 million | $62.9 million | +15.8% |
| Operating income | $25.2 million | $32.2 million | -21.7% |
| Net income | $13.1 million | $16.6 million | -21.4% |
| Diluted EPS | $1.48 | $1.89 | -21.7% |
| Operating margin | 19.5% | 25.3% | -5.8 percentage points |
| Net margin | 10.1% | 13.1% | -3.0 percentage points |
| Return on average assets, trailing 12 months | 8.3% | 9.3% | Down 1.0 point |
Balance sheet and credit: At June 30, 2017, gross loans receivable were $1.110 billion, up from $1.060 billion at March 31, 2017 and $1.088 billion at June 30, 2016. Net loans receivable were $721.1 million. The allowance for loan losses was $76.5 million, or approximately 6.9% of gross loans. Loans 60 or more days delinquent were $83.6 million, compared with $76.4 million a year earlier; total contractual past-due receivables were $122.1 million, or 11.0% of gross loans, versus 10.9% a year earlier. Annualized net charge-offs as a percentage of average net loans declined to 13.9% from 14.9%.
Liquidity and debt: Cash and cash equivalents were $14.5 million. Senior notes payable were $300.6 million, and shareholders’ equity was $478.5 million, producing a debt-to-equity ratio of approximately 0.6:1. The $480.0 million revolving credit facility had $178.9 million of unused availability, a 5.6% effective borrowing rate for the quarter and a June 15, 2019 maturity. The Company was in compliance with its debt covenants.
Cash flow: Operating cash flow was $50.1 million, compared with $55.7 million in the prior-year quarter. Investing cash flow was negative $56.6 million, principally reflecting a $51.8 million increase in loans receivable, $2.3 million for acquired loan portfolios and $2.0 million of capital expenditures. Financing cash flow was positive $5.7 million, including net debt borrowings of $5.4 million, $5.3 million of option-exercise proceeds and $4.6 million of share repurchases. Ending cash declined by $0.7 million to $14.5 million.
Material Changes Versus Prior Comparable Period
- Revenue increased modestly as average gross loans rose 0.9%, but profitability declined materially.
- G&A expense increased $10.0 million, including higher personnel expense, $2.6 million of additional advertising expense and $2.5 million of legal and professional costs related to the Mexico investigation.
- Interest expense fell $1.3 million, or 24.0%, primarily because average debt declined from $366.0 million to $292.0 million.
- Provision expense declined $1.2 million, reflecting lower net charge-offs, partly offset by provision associated with loan growth.
- Mexico revenue increased to $12.3 million from $10.0 million, and Mexico net income increased to $1.9 million from $0.6 million. Mexico represented approximately 9.5% of consolidated revenue.
- The Company opened six U.S. branches, merged four branches, acquired two Texas branches and eight Texas loan portfolios, and ended the quarter with 1,331 offices.
- Common stock repurchases totaled 58,728 shares for $4.6 million; $1.9 million remained under the applicable authorization.
Outlook, Risks and Unusual Items
Management planned to open or acquire 25 U.S. branches during fiscal 2018 and expected operating cash flow and available revolver capacity to fund loan growth, acquisitions and expansion for at least the next 12 months. The Company also stated that it intends to continue repurchases when excess capital is available, subject to credit agreement restrictions.
The Company’s internal investigation into possible improper payments and related books-and-records, compliance 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 outcomes include fines, penalties, disgorgement, injunctive relief, operational changes, a compliance monitor, restrictions or curtailment of Mexican operations, and possible default or covenant consequences under the credit facility. The Company could not reasonably estimate any potential additional liability.
The CFPB investigation remains unresolved. The Company received a Civil Investigative Demand and a 2015 Notice and Opportunity to Respond and Advise letter; management cannot predict the timing or outcome or any potential monetary, operational or regulatory effects. Proposed and final CFPB rules could increase compliance costs or affect loan origination, refinancing and arbitration practices.
Disclosure controls were not effective because material weaknesses relating to Mexico vendor-payment controls, adherence to U.S. and foreign laws, FCPA compliance and corporate governance had not been fully remediated. Management’s remediation plan includes personnel changes, a new accounts-payable and vendor-management system, enhanced compliance training and controls, and organizational changes.
In June 2017, the parties reached agreements in principle to settle shareholder litigation. A proposed $16 million class-action settlement and up to $475,000 of derivative-action fees were expected to be funded by directors’ and officers’ liability insurers, subject to documentation and court approval. No wrongdoing was admitted.
The Company adopted ASU 2016-09 for share-based payments, resulting primarily in a $2.4 million reclassification between retained earnings and additional paid-in capital. The Company was evaluating several future accounting standards, including expected credit losses, leases and revenue-related guidance.
Investor Verification Checklist
- Confirm the status, scope and estimated financial impact of the Mexico internal investigation and SEC/DOJ proceedings.
- Monitor the CFPB investigation, potential enforcement actions and the effect of CFPB rulemaking on loan underwriting, refinancing and arbitration.
- Assess whether the material weaknesses in internal control have been remediated and whether additional weaknesses or reporting delays arise.
- Track delinquency, charge-off, allowance and loan-growth trends, particularly the increase in 60-plus-day delinquent loans.
- Verify compliance with the revolving credit facility’s borrowing-base and financial covenants, including the $178.9 million reported availability.
- Review the final terms and insurance funding of the proposed shareholder settlements.
- Consider the effect of higher operating costs, legal expenses, foreign-exchange movements and seasonal loan demand on future margins and liquidity.