ENOVA INTERNATIONAL, INC. RECENT REGULATORY DEVELOPMENTS
OnOctober 10, 2019 , the Governor ofCalifornia signed into law Assembly Bill 539 ("AB 539"), which amends several aspects of the California Finance Lenders Law. Specifically, on loans of$2,500 or more but less than$10,000 , AB 539 caps interest rates at 36% plus the federal funds rate and requires loan terms to be at least 12 months. On loans of at least$3,000 but less than$10,000 , AB 539 prohibits loan terms from exceeding 60 months and 15 days. The law became effective onJanuary 1, 2020 .
Brazil General Data Privacy Law
OnAugust 14, 2018 ,Brazil adopted the General Data Privacy Law (Lei Geral de Proteção de Dados Pessoais or "LGPD"). The key provisions of LGPD are quite similar to theEuropean Union's General Data Protection Regulation in that it grants certain rights to data subjects, imposes obligations on companies with regard to the processing of data, and allows authorities to impose substantial fines on companies that violate the law. LGPD was originally anticipated to go into effect onFebruary 15, 2020 ; however, several amendments to LGPD have been proposed, one of which could delay the effective date of the legislation toAugust 2020 . Compliance with LGPD may increase the cost of conducting business inBrazil , and we could see regulatory compliance costs and enforcement activity once the law goes into effect.
RESULTS OF OPERATIONS
Our financial results for the year ended
• Revenue increased
compared to
• Gross Profit increased
compared to
• Income from Operations increased
2019, compared to
• Net Income was
Diluted earnings per share were
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The following tables reflect our results of operations for the periods indicated, both in dollars and as a percentage of total revenue (dollars in thousands, except per share data):
Year Ended December 31,
2019 2018 2017
Revenue
Loans and finance receivables revenue $ 1,171,857 $ 971,252 $ 728,014
Other 2,900 1,369 889
Total Revenue 1,174,757 972,621 728,903
Cost of Revenue 602,894 503,405 353,488
Gross Profit 571,863 469,216 375,415
Expenses
Marketing 115,132 95,960 76,558
Operations and technology 84,262 78,367 69,631
General and administrative 109,204 105,143 99,754
Depreciation and amortization 15,055 14,200 13,282
Total Expenses 323,653 293,670 259,225
Income from Operations 248,210 175,546 116,190
Interest expense, net (75,604 ) (79,364 ) (74,005 )
Foreign currency transaction (loss) gain, net (216 ) (2,318 ) 381
Loss on early extinguishment of debt (2,321 ) (24,991 ) (22,895 )
Income before Income Taxes 170,069 68,873 19,671
Provision for income taxes 42,053 5,301 2,057
Net income from continuing operations 128,016 63,572 17,614
Net (loss) income from discontinued operations (91,404 ) 6,526
11,626
Net Income$ 36,612 $ 70,098 $ 29,240 Diluted earnings per share - continuing operations$ 3.72 $ 1.81 $ 0.52 Diluted earnings per share - discontinued operations (2.66 ) 0.18
0.34
Diluted earnings per share$ 1.06 $ 1.99 $ 0.86 Revenue Loans and finance receivables revenue 99.8 % 99.9 % 99.9 % Other 0.2 0.1 0.1 Total Revenue 100.0 100.0 100.0 Cost of Revenue 51.3 51.8 48.5 Gross Profit 48.7 48.2 51.5 Expenses Marketing 9.8 9.9 10.5 Operations and technology 7.2 8.0 9.6 General and administrative 9.3 10.8 13.7 Depreciation and amortization 1.3 1.5 1.8 Total Expenses 27.6 30.2 35.6 Income from Operations 21.1 18.0 15.9 Interest expense, net (6.4 ) (8.1 ) (10.2 ) Foreign currency transaction (loss) gain, net 0.0 (0.2 ) 0.1 Loss on early extinguishment of debt (0.2 ) (2.6 ) (3.1 ) Income before Income Taxes 14.5 7.1 2.7 Provision for income taxes 3.6 0.6 0.3 Net income from continuing operations 10.9 6.5
2.4
Net (loss) income from discontinued
operations (7.8 ) 0.7 1.6
Net Income 3.1 % 7.2 % 4.0 %
NON-GAAP FINANACIAL MEASURES
In addition to the financial information prepared in conformity with generally
accepted accounting principles ("GAAP"), we provide historical non-GAAP
financial information. We believe that presentation of non-GAAP financial
information is meaningful and useful in understanding the activities and
business metrics of our operations. We believe that these non-GAAP financial
measures reflect an additional way of viewing aspects of our business that, when
viewed with our GAAP results, provide a more complete understanding of factors
and trends affecting our business.
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We provide non-GAAP financial information for informational purposes and to
enhance understanding of our GAAP consolidated financial statements. Readers
should consider the information in addition to, but not instead of or superior
to, our consolidated financial statements prepared in accordance with GAAP. This
non-GAAP financial information may be determined or calculated differently by
other companies, limiting the usefulness of those measures for comparative
purposes.
Adjusted Earnings Measures
In addition to reporting financial results in accordance with GAAP, we have provided adjusted earnings and adjusted earnings per share, or, collectively, the Adjusted Earnings Measures, which are non-GAAP measures. We believe that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments and amortization methods, which provides a more complete understanding of our financial performance, competitive position and prospects for the future. We also believe that investors regularly rely on non-GAAP financial measures, such as the Adjusted Earnings Measures, to assess operating performance and that such measures may highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. In addition, we believe that the adjustments shown below are useful to investors in order to allow them to compare our financial results during the periods shown without the effect of each of these income or expense items.
The following table provides reconciliations between net income and diluted earnings per share calculated in accordance with GAAP to the Adjusted Earnings Measures, which are shown net of tax (in thousands, except per share data):
Year Ended December 31,
2019 2018 2017
Net income from continuing operations $ 128,016 $ 63,572 $ 17,614
Adjustments:
Loss on early extinguishment of debt(a) 2,321 24,991 22,895
Acquisition-related costs(b) - - (2,358 ) Lease termination and cease use costs 726 - - Intangible asset amortization 1,070 1,070
1,080
Stock-based compensation expense 11,967 11,660
11,307
Foreign currency transaction loss (gain), net 216 2,318
(381 )
Cumulative tax effect of adjustments (3,907 ) (8,885 ) (7,435 )
Discrete tax adjustments(c) (141 ) (11,237 ) (7,452 )
Regulatory settlement(d) - 633 -
Adjusted earnings $ 140,268 $ 84,122 $ 35,270
Diluted earnings per share from continuing
operations $ 3.72 $ 1.81 $ 0.52
Adjustments:
Loss on early extinguishment of debt(a) 0.07 0.71 0.67
Acquisition related costs(b) - - (0.07 ) Lease termination and cease use costs 0.02 - - Intangible asset amortization 0.03 0.03
0.03
Stock-based compensation expense 0.35 0.33
0.33
Foreign currency transaction loss (gain), net - 0.06 (0.01 ) Cumulative tax effect of adjustments (0.11 ) (0.25 ) (0.22 ) Discrete tax adjustments(c) - (0.32 ) (0.22 ) Regulatory settlement(d) - 0.02 - Adjusted earnings per share$ 4.08 $ 2.39 $ 1.03
(a) For the years ended
million. (
and
of debt, respectively, related to the redemption of
securitization notes in 2019, the repurchase of
amount of senior notes in 2018 and the repurchase of
amount of senior notes and the redemption of
notes in 2017.
(b) For the year ended
net of tax) fair value adjustment to contingent consideration, respectively,
related to a prior year acquisition.
(c) For the years ended
benefits of
Cuts and Jobs Act.
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(d) For the year ended
Consent Order by the
denying any of the facts or conclusions made by the
of us, to pay a civil money penalty of
for tax purposes.
Adjusted EBITDA
The table below shows Adjusted EBITDA, which is a non-GAAP measure that we
define as earnings excluding depreciation, amortization, interest, foreign
currency transaction gains or losses, taxes and stock-based compensation
expense. We believe Adjusted EBITDA is used by investors to analyze operating
performance and evaluate our ability to incur and service debt and our capacity
for making capital expenditures. Adjusted EBITDA is also useful to investors to
help assess our estimated enterprise value. In addition, we believe that the
adjustments for loss on early extinguishment of debt, acquisition-related costs
and the regulatory settlement shown below are useful to investors in order to
allow them to compare our financial results during the periods shown without the
effect of the income or expense items. The computation of Adjusted EBITDA as
presented below may differ from the computation of similarly-titled measures
provided by other companies (dollars in thousands):
Year Ended December 31,
2019 2018 2017
Net income from continuing operations $ 128,016 $ 63,572 $ 17,614
Depreciation and amortization expenses 15,055 14,200 13,282
Interest expense, net 75,604 79,364 74,005
Foreign currency transaction loss (gain), net 216 2,318 (381 )
Provision for income taxes 42,053 5,301 2,057
Stock-based compensation expense 11,967 11,660 11,307
Adjustments:
Lease termination and cease use costs 370 - -
Loss on early extinguishment of debt(a) 2,321 24,991 22,895
Acquisition-related costs(b) - - (2,358 )
Regulatory settlement(d) - 633 -
Adjusted EBITDA $ 275,602 $ 202,039 $ 138,421
Adjusted EBITDA margin calculated as follows:
Total Revenue $ 1,174,757 $ 972,621 $ 728,903
Adjusted EBITDA $ 275,602 $
202,039
Refer to footnotes in previous table for explanation of (a), (b), and (d)
Constant Currency Basis
In addition to reporting financial results in accordance with GAAP, we have provided certain other non-GAAP financial information on a constant currency basis. Outside ofthe United States , we currently operate inBrazil . During 2019, 2018 and 2017, 1.8%, 2.7% and 2.7% of our revenue, respectively, originated in currencies other than theU.S. Dollar, principally the Brazilian Real. As a result, changes in our reported revenue and profits include the impacts of changes in foreign currency exchange rates. We provide constant currency assessments in the following discussion and analysis to isolate the impact of the fluctuation in foreign exchange rates and utilize constant currency results in our analysis of performance. Our constant currency assessment assumes foreign exchange rates in the current fiscal periods remained the same as in the prior fiscal year periods. All conversion rates below are based on theU.S. Dollar equivalent to the applicable foreign currency: Year Ended December 31, 2019 2018 % Change Brazilian Real 0.2548 0.2753 (7.5 )% Year Ended December 31, 2018 2017 % Change
Brazilian Real 0.2753 0.3134 (12.2 )%
We believe that our non-GAAP constant currency assessments are a useful measure, indicating the actual growth and profitability of our operations.
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Combined Loans and Finance Receivables
Combined loans and finance receivables is a non-GAAP measure that includes both loans and RPAs we own and loans we guarantee, which are either GAAP items or disclosures required by GAAP. We believe this non-GAAP measure provides investors with important information needed to evaluate the magnitude of potential receivable losses and the opportunity for revenue performance of the loans and finance receivables portfolio on an aggregate basis. We also believe that the comparison of the aggregate amounts from period to period is more meaningful than comparing only the amounts reflected on our consolidated balance sheets since both revenue and cost of revenue are impacted by the aggregate amount of receivables we own and those we guarantee as reflected in our consolidated financial statements.
YEAR ENDED 2019 COMPARED TO YEAR ENDED 2018
Revenue and Gross Profit
Revenue increased$202.2 million , or 20.8%, to$1,174.8 million for 2019 as compared to$972.6 million for 2018. On a constant currency basis, revenue increased by$204.0 million , or 21.0%, for 2019 compared to 2018. The change in revenue was driven primarily by a 47.4% increase in line of credit accounts revenue and an 11.9% increase in installment loan and RPA revenue, partially offset by a 19.2% decline in short-term loan revenue. Our gross profit increased by$102.7 million or 21.9% to$571.9 million for 2019 from$469.2 million for 2018. On a constant currency basis, gross profit increased by$103.6 million for 2019 compared to 2018. Our gross profit as a percentage of revenue ("gross profit margin") increased slightly to 48.7% in 2019 from 48.2% in 2018.
The following table sets forth the components of revenue and gross profit, separated by product for 2019 and 2018 (dollars in thousands):
Year Ended December 31,
2019 2018 $ Change % Change
Revenue by product:
Short-term loans $ 113,826 $ 140,903 $ (27,077 ) (19.2 )%
Line of credit accounts 535,742 363,495 172,247 47.4 %
Installment loans and RPAs 522,289 466,854 55,435 11.9 %
Total loan and finance receivable revenue 1,171,857 971,252
200,605 20.7 % Other 2,900 1,369 1,531 111.8 % Total revenue 1,174,757 972,621 202,136 20.8 % Cost of revenue 602,894 503,405 99,489 19.8 % Gross profit$ 571,863 $ 469,216 $ 102,647 21.9 % Revenue by product (% to total): Short-term loans 9.7 % 14.5 % Line of credit accounts 45.6 % 37.4 % Installment loans and RPAs 44.5 % 48.0 % Total loan and finance receivable revenue 99.8 % 99.9 % Other 0.2 % 0.1 % Total revenue 100.0 % 100.0 % Cost of revenue 51.3 % 51.8 % Gross profit 48.7 % 48.2 %
Loan and Finance Receivable Balances
The outstanding Company-owned portfolio balance of loans and finance receivables, net of allowance, increased$282.6 million , or 36.2%, to$1,062.7 million as ofDecember 31, 2019 from$780.1 million as ofDecember 31, 2018 , and the combined portfolio balance of loans and finance receivables, net of allowance and liability for estimated losses, increased$281.0 million , or 34.8%, to$1,088.7 million as ofDecember 31, 2019 from$807.7 million as ofDecember 31, 2018 , due primarily to increased demand for our near-prime installment product and our line of credit products. The outstanding loan balance for our near-prime product increased 29.7% as ofDecember 31, 2019 compared toDecember 31, 2018 , resulting in a near-prime portfolio balance that comprises approximately 48.1% of our total loan and finance receivables portfolio balance while short-term loans comprise approximately 3.5%. We expect this trend to continue as we expand our near-prime installment product offering in 2020. We expect the loan balances for our near-prime installment loan product will continue to comprise a larger percentage of the total loan and finance receivable 43 -------------------------------------------------------------------------------- portfolio, due to consumer demand for the product and its longer loan term. See "-Non-GAAP Financial Measures-Combined Loans and Finance Receivables" above for additional information related to combined loans and finance receivables. The combined loan and finance receivable balance includes$1,239.6 million and$924.3 million as ofDecember 31, 2019 and 2018, respectively, of our Company-owned receivables balances before the allowance for losses of$176.9 million and$144.2 million provided in the consolidated financial statements forDecember 31, 2019 and 2018, respectively. The combined loan and finance receivable balance also includes$27.6 million and$29.7 million as ofDecember 31, 2019 and 2018, respectively, of loan and finance receivable balances that are guaranteed by us, which are not included in our consolidated balance sheets, with the exception of the liability for estimated losses of$1.5 million and$2.2 million , which is included in "Accounts payable and accrued expenses" as ofDecember 31, 2019 and 2018, respectively.
The following table summarizes loan and finance receivable balances outstanding
as of
As of December 31,
2019 2018
Guaranteed Guaranteed
Company by the Company by the
Owned(a) Company(a) Combined(b) Owned(a) Company(a) Combined(b)
Ending loans and finance
receivables:
Short-term loans $ 29,764 $ 14,857 $ 44,621 $ 37,768 $ 25,388 $ 63,156
Line of credit accounts 392,837 - 392,837 227,563 - 227,563
Installment loans and RPAs 816,988 12,703 829,691 658,995 4,316 663,311
Total ending loans and finance
receivables, gross 1,239,589 27,560 1,267,149 924,326 29,704 954,030
Less: Allowance and liabilities for
losses(a) (176,939 ) (1,511 ) (178,450 ) (144,214 ) (2,166 ) (146,380 ) Total ending loans and finance receivables, net
$ 1,062,650 $ 26,049 $ 1,088,699 $ 780,112 $ 27,538 $ 807,650 Allowance and liability for losses as a % of loans and finance receivables, gross 14.3 % 5.5 % 14.1 % 15.6 % 7.3 % 15.3 %
(a) GAAP measure. The loan and finance receivable balances guaranteed by us
relate to loans originated by third-party lenders through the CSO programs
and are not included in our consolidated balance sheets.
(b) Except for allowance and liability for estimated losses, amounts represent
non-GAAP measures.
Average Amount Outstanding per Loan
The average amount outstanding per loan is calculated as the total combined loans, gross balance at the end of the period divided by the total number of combined loans outstanding at the end of the period. The following table shows the average amount outstanding per loan by product atDecember 31, 2019 and 2018: As of December 31, 2019 2018 Average amount outstanding per loan (in ones)(a) Short-term loans(b)$ 494 $ 540 Line of credit accounts 1,800 1,582 Installment loans(b)(c) 2,640 2,389 Total loans(b)(c)$ 2,002 $ 1,753
(a) The disclosure regarding the average amount per loan is statistical data that
is not included in our consolidated financial statements.
(b) Includes loans guaranteed by us, which represent loans originated by
third-party lenders through the CSO programs and are not included in our
consolidated balance sheets.
(c) Excludes RPAs.
The average amount outstanding per loan increased to$2,002 as ofDecember 31, 2019 compared to$1,753 from prior year, mainly due to increases in the average balances of installment loans, driven by a greater mix of larger near-prime loans, and line of credit accounts. Additionally, the mix of lower dollar short-term loans continued to decrease, resulting in a greater mix of line of credit accounts with higher average amounts outstanding per loan relative to short-term loans, as ofDecember 31, 2019 compared to prior year. 44
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Average Loan Origination
The average loan origination amount is calculated as the total amount of
combined loans originated, renewed and purchased for the period divided by the
total number of combined loans originated, renewed and purchased for the period.
The following table shows the average loan origination amount by product for
2019 compared to 2018:
Year Ended
December 31,
2019 2018
Average loan origination amount (in ones)(a)
Short-term loans(b) $ 475 $ 493
Line of credit accounts(c) 405 342
Installment loans(b)(d) 2,192 1,824
Total loans(b)(d) $ 632 $ 603 (a) The disclosure regarding the average loan origination amount is statistical
data that is not included in our consolidated financial statements.
(b) Includes loans guaranteed by us, which represent loans originated by
third-party lenders through the CSO programs and are not included in our
consolidated balance sheets.
(c) Represents the average amount of each incremental draw on line of credit
accounts.
(d) Excludes RPAs.
The average loan origination amount increased to $632 from $603 during 2019
compared to 2018, mainly due to an increase in the average size of installment
loan originations, driven by a greater mix of near-prime installment loans,
which have a higher origination amount than other installment loans, partially
offset by a shift away from short-term loans to lower dollar line of credit
draws.
Loans and Finance Receivables Loss Experience
The allowance and liability for estimated losses as a percentage of loans and RPAs decreased to 14.3% as ofDecember 31, 2019 compared to 15.6% as ofDecember 31, 2018 on a Company-owned basis and 14.1% as ofDecember 31, 2019 compared to 15.3% as ofDecember 31, 2018 on a combined basis, due primarily to stabilizing credit performance in our installment and short-term loan products, partially offset by a greater concentration of loans to new customers in the line of credit account portfolio. New customers require a greater reserve as these loans default at a higher rate than returning customers with a successful history of loan performance. The cost of revenue in 2019 was$602.9 million , which was composed of$603.6 million related to our Company-owned loans and finance receivables partially offset by a$0.7 million decrease in the liability for estimated losses related to loans we guaranteed through the CSO programs. The cost of revenue in 2018 was$503.4 million , which was composed of$503.5 million related to our Company-owned loans and finance receivables partially offset by a$0.1 million decrease in the liability for estimated losses related to loans we guaranteed through the CSO programs. Total charge-offs, net of recoveries, were$570.7 million and$466.4 million in 2019 and 2018, respectively. The following tables show loan and finance receivable balances and fees receivable and the relationship of the allowance and liability for losses to the combined balances of loans and finance receivables for each of the last eight quarters (dollars in thousands): 2019 First Second Third Fourth Quarter Quarter Quarter Quarter Loans and finance receivables: Gross - Company owned$ 875,049 $ 966,723 $ 1,109,923 $ 1,239,589 Gross - Guaranteed by the Company(a) 22,296 21,463 23,648 27,560 Combined loans and finance receivables, gross(b) 897,345 988,186 1,133,571 1,267,149 Allowance and liability for losses on loans and finance receivables 123,753 138,991 161,440 178,450 Combined loans and finance receivables, net(b)$ 728,260 $ 776,720 $ 866,645 $ 1,088,699 Allowance and liability for losses as a % of loans and finance receivables, gross(b) 13.8 % 14.1 % 14.2 % 14.1 % 45
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2018
First Second Third Fourth
Quarter Quarter Quarter Quarter
Loans and finance receivables:
Gross - Company owned $ 721,289 $ 780,642 $ 887,998 $ 924,326
Gross - Guaranteed by the Company(a) 26,594 28,681 30,106 29,704
Combined loans and finance receivables,
gross(b) 747,883 809,323 918,104 954,030
Allowance and liability for losses on
loans and finance receivables 97,574 108,081 136,788 146,380
Combined loans and finance receivables,
net(b) $ 650,309 $ 701,242 $ 781,316 $ 807,650
Allowance and liability for losses as a
% of loans and finance receivables,
gross(b) 13.0 % 13.4 % 14.9 % 15.3 %
(a) Represents loans originated by third-party lenders through the CSO programs,
which are not included in our consolidated financial statements.
(b) Non-GAAP measure.
Loans and Finance Receivables Loss Experience by Product
We evaluate loss rates for all financing products in our portfolio to determine credit quality and evaluate trends. For our products, we evaluate loans and finance receivables losses as a percentage of the average loan and finance receivable balance outstanding or the average combined loan and finance receivable balance outstanding, whichever is applicable, for each portfolio.
Short-term Loans
Demand for our short-term loan product has historically been highest in the
third and fourth quarters of each year, and lowest in the first quarter of each
year, corresponding to our customers' receipt of income tax refunds. The
combined short-term loan balance has decreased year-over-year due in part to the
shift of customers to line of credit accounts. This resulted in fewer loans
written to new customers and a lower allowance and liability for losses as a
percentage of combined loan balance.
Our gross profit margin for short-term loans is typically highest in the first
quarter of each year, corresponding to the seasonal decline in consumer loan
balances outstanding. The cost of revenue as a percentage of the average
combined loan balance for short-term loans outstanding is typically lower in the
first quarter and generally peaks in the second half of the year with higher
loan demand.
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The following table includes information related only to short-term loans and
shows our loss experience trends for short-term loans for each of the last eight
quarters (dollars in thousands):
2019
First Second Third Fourth
Quarter Quarter Quarter Quarter
Short-term loans:
Cost of revenue $ 10,914 $ 10,068 $ 11,297 $ 11,554
Charge-offs (net of recoveries) 16,731 9,585 11,783 12,260
Average short-term combined loan
balance, gross:
Company owned(a) 34,769 30,795 30,451 29,198
Guaranteed by the Company(a)(b) 22,628 15,484 13,877 13,951
Average short-term combined loan
balance, gross(a)(c) $ 57,397 $ 46,279 $ 44,328 $ 43,149
Ending short-term combined loan balance,
gross:
Company owned $ 28,669 $ 31,584 $ 29,988 $ 29,764
Guaranteed by the Company(b) 18,339 13,304 13,922 14,857
Ending short-term combined loan balance,
gross(c) $ 47,008 $ 44,888 $ 43,910 $ 44,621
Ending allowance and liability for
losses $ 10,639 $ 11,122 $
10,636
Short-term loan ratios:
Cost of revenue as a % of average
short-term combined loan balance,
gross(a)(c) 19.0 % 21.8 % 25.5 % 26.8 %
Charge-offs (net of recoveries) as a %
of average short-term combined loan
balance, gross(a)(c) 29.1 % 20.7 % 26.6 % 28.4 %
Gross profit margin 68.5 % 63.2 % 56.8 % 55.1 %
Allowance and liability for losses as a
% of combined loan balance, gross(c)(d) 22.6 % 24.8 % 24.2 % 22.3 %
2018
First Second Third Fourth
Quarter Quarter Quarter Quarter
Short-term loans:
Cost of revenue $ 11,486 $ 12,706 $ 18,264 $ 18,355
Charge-offs (net of recoveries) 15,128 10,859 14,568 18,776
Average short-term combined loan
balance, gross:
Company owned(a) 32,292 29,620 35,399 38,084
Guaranteed by the Company(a)(b) 26,383 23,638 25,913 25,286
Average short-term combined loan
balance, gross(a)(c) $ 58,675 $ 53,258 $ 61,312 $ 63,370
Ending short-term combined loan balance,
gross:
Company owned $ 27,245 $ 31,575 $ 38,299 $ 37,768
Guaranteed by the Company(b) 21,409 24,764 25,533 25,388
Ending short-term combined loan balance,
gross(c) $ 48,654 $ 56,339 $ 63,832 $ 63,156
Ending allowance and liability for
losses $ 11,334 $ 13,181 $ 16,877 $ 16,456
Short-term loan ratios:
Cost of revenue as a % of average
short-term combined loan balance,
gross(a)(c) 19.6 % 23.9 % 29.8 % 29.0 %
Charge-offs (net of recoveries) as a %
of average short-term combined loan
balance, gross(a)(c) 25.8 % 20.4 % 23.8 % 29.6 %
Gross profit margin 65.1 % 59.2 % 51.2 % 53.5 %
Allowance and liability for losses as a
% of combined loan balance, gross(c)(d) 23.3 % 23.4 % 26.4 % 26.1 %
(a) The average short-term combined loan balance is the average of the month-end
balances during the period.
(b) Represents loans originated by third-party lenders through the CSO programs,
which are not included in our consolidated balance sheets.
(c) Non-GAAP measure.
(d) Allowance and liability for losses as a % of combined loan balance, gross, is
determined using period-end balances.
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Line of Credit Accounts
The cost of revenue as a percentage of average loan balance for line of credit
accounts exhibits a similar quarterly seasonal trend to short-term loan loss
rates as the ratio is typically lower in the first quarter and increases
throughout the remainder of the year, peaking in the second half of the year
with higher loan demand.
The gross profit margin is generally lower for line of credit accounts during
periods of growth because the highest levels of default are exhibited in the
early stages of the account, while the revenue is recognized over the term of
the account. During 2019, we generally experienced lower gross profit margin and
higher cost of revenue as a percentage of the average combined loan balance for
line of credit accounts outstanding than we experienced in the prior year
quarters as a result of the strong growth in the line of credit account
portfolios.
The following table includes information related only to line of credit accounts
and shows our loss experience trends for line of credit accounts for each of the
last eight quarters (dollars in thousands):
2019
First Second Third Fourth
Quarter Quarter Quarter Quarter
Line of credit accounts:
Cost of revenue $ 37,900 $ 48,549 $ 83,922 $ 107,940
Charge-offs (net of recoveries) 47,546 38,493 59,928 92,351
Average loan balance(a) 224,416 237,571 300,849 360,062
Ending loan balance 218,979 263,825 336,847 392,837
Ending allowance for losses balance $ 41,363 $ 51,419 $ 75,413 $ 91,002
Line of credit account ratios:
Cost of revenue as a % of average loan
balance(a) 16.9 % 20.4 % 27.9 % 30.0 %
Charge-offs (net of recoveries) as a %
of average loan balance(a) 21.2 % 16.2 % 19.9 % 25.6 %
Gross profit margin 63.7 % 56.1 % 42.7 % 38.0 %
Allowance for losses as a % of loan
balance(b) 18.9 % 19.5 % 22.4 % 23.2 %
2018
First Second Third Fourth
Quarter Quarter Quarter Quarter
Line of credit accounts:
Cost of revenue $ 25,779 $ 31,519 $ 46,934 $ 59,820
Charge-offs (net of recoveries) 29,807 27,589 36,506 50,290
Average loan balance(a) 168,118 168,881 200,710 221,721
Ending loan balance 160,923 181,134 216,624 227,563
Ending allowance for losses balance $ 27,120 $ 31,050 $ 41,478 $ 51,009
Line of credit account ratios:
Cost of revenue as a % of average loan
balance(a) 15.3 % 18.7 % 23.4 % 27.0 %
Charge-offs (net of recoveries) as a %
of average loan balance(a) 17.7 % 16.3 % 18.2 % 22.7 %
Gross profit margin 67.1 % 60.4 % 52.4 % 44.0 %
Allowance for losses as a % of loan
balance(b) 16.9 % 17.1 % 19.1 % 22.4 %
(a) The average loan balance for line of credit accounts is the average of the
month-end balances during the period.
(b) Allowance for losses as a % of loan balance is determined using period-end
balances.
Installment Loans and RPAs
For installment loans and RPAs, the cost of revenue as a percentage of average
loan and finance receivable balance is typically more consistent throughout the
year as compared to short-term loans and line of credit accounts. Due to the
scheduled regular payments that are inherent with installment loans and RPAs, we
do not experience the higher level of repayments in the first quarter for these
receivables as we experience with short-term loans and, to a lesser extent, line
of credit accounts.
Similar to line of credit accounts, the gross profit margin is generally lower
for the installment loan and RPA products during periods of growth, primarily
because the highest levels of default are exhibited in the early stages of the
loan or RPA, while revenue is recognized over the term of the loan or estimated
delivery term. In addition, installment loans and RPAs typically have higher
average amounts per receivable. Another factor contributing to the lower gross
profit margin is that the yield for installment loans and RPAs is
48
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typically lower than the yield for the other products we offer. As a result,
particularly in periods of higher growth for the installment loan and RPA
portfolios, which has been the case in recent years, the gross profit margin is
typically lower for this product than for other products, particularly our
short-term loan products. Our installment loan and RPA portfolio balance
outstanding at December 31, 2019 increased $166.4 million , or 25.1%, compared to
December 31, 2018 . During 2019, we generally experienced higher gross profit
margin than we experienced in the prior year quarters as a result of better
credit performance in the installment and RPA portfolios.
The following table includes information related only to our installment loans
and RPAs and shows our loss experience trends for installment loans for each of
the last eight quarters (dollars in thousands):
2019
First Second Third Fourth
Quarter Quarter Quarter Quarter
Installment loans and RPAs:
Cost of revenue $ 70,044 $ 64,816 $ 66,967 $ 78,923
Charge-offs (net of recoveries) 77,182 60,176 67,794 76,854
Average installment and RPA combined
loan and finance receivable balance,
gross:
Company owned(a) 648,407 644,140 710,484 779,165
Guaranteed by the Company(a)(b) 4,228 6,002 9,154 10,772
Average installment and RPA combined
loan and finance receivable balance,
gross (a)(c) $ 652,635 $ 650,142 $ 719,638 $ 789,937
Ending installment and RPA combined loan
and finance receivable balance, gross:
Company owned $ 627,401 $ 671,314 $ 743,088 $ 816,988
Guaranteed by the Company(b) 3,957 8,159 9,726 12,703
Ending installment and RPA combined loan
and finance receivable balance, gross
(c) $ 631,358 $ 679,473 $ 752,814 $ 829,691
Ending allowance and liability for
losses $ 71,751 $ 76,450 $ 75,391 $ 77,518
Installment and RPA loan ratios:
Cost of revenue as a % of average
installment and RPA combined loan and
finance receivable balance, gross(a)(c) 10.7 % 10.0 % 9.3 % 10.0 %
Charge-offs (net of recoveries) as a %
of average installment and RPA combined
loan and finance receivable balance,
gross (a)(c) 11.8 % 9.3 % 9.4 % 9.7 %
Gross profit margin 44.0 % 46.5 % 49.6 % 44.9 %
Allowance and liability for losses as a
% of combined loan and finance
receivable balance, gross(c)(d) 11.4 % 11.3 % 10.0 % 9.3 %
49
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2018
First Second Third Fourth
Quarter Quarter Quarter Quarter
Installment loans and RPAs:
Cost of revenue $ 55,528 $ 62,136 $ 81,605 $ 79,273
Charge-offs (net of recoveries) 60,364 56,752 66,845 78,957
Average installment and RPA combined
loan and finance receivable balance,
gross:
Company owned(a) 535,177 548,751 603,965 648,481
Guaranteed by the Company(a)(b) 5,760 4,500 4,326 4,279
Average installment and RPA combined
loan and finance receivable balance,
gross (a)(c) $ 540,937 $ 553,251 $ 608,291 $ 652,760
Ending installment and RPA combined loan
and finance receivable balance, gross:
Company owned $ 533,121 $ 567,933 $ 633,075 $ 658,995
Guaranteed by the Company(b) 5,185 3,917 4,573 4,316
Ending installment and RPA combined loan
and finance receivable balance, gross
(c) $ 538,306 $ 571,850 $ 637,648 $ 663,311
Ending allowance and liability for
losses $ 59,120 $ 63,850 $ 78,433 $ 78,915
Installment and RPA loan ratios:
Cost of revenue as a % of average
installment and RPA combined loan and
finance receivable balance, gross(a)(c) 10.3 % 11.2 % 13.4 % 12.1 %
Charge-offs (net of recoveries) as a %
of average installment and RPA combined
loan and finance receivable balance,
gross (a)(c) 11.2 % 10.3 % 11.0 % 12.1 %
Gross profit margin 48.4 % 42.6 % 32.5 % 39.0 %
Allowance and liability for losses as a
% of combined loan and finance
receivable balance, gross(c)(d) 11.0 % 11.2 % 12.3 % 11.9 %
(a) The average loan and finance receivable balance for installment loans is the
average of the month-end balances during the period.
(b) Represents loans originated by third-party lenders through the CSO programs,
which are not included in our consolidated balance sheets.
(c) Non-GAAP measure.
(d) Allowance and liability for losses as a % of combined loan and finance
receivable balance, gross, is determined using period-end balances.
Total Expenses
Total expenses increased$30.0 million , or 10.2%, to$323.7 million in 2019, compared to$293.7 million in 2018. On a constant currency basis, total expenses increased$30.8 million , or 10.5%, to$30.8 million for 2019 compared to 2018.
Marketing expense increased
Operations and technology expense increased to$84.3 million in 2019 from$78.4 million in 2018, due primarily to higher underwriting costs primarily related to growth in loan originations and higher selling expense.
General and administrative expense increased
Depreciation and amortization expense increased to
50--------------------------------------------------------------------------------
Interest Expense, Net
Interest expense, net decreased$3.7 million , or 4.7%, to$75.6 million in 2019 compared to$79.3 million in 2018. The decrease was due to a decrease in the weighted average interest rate on our outstanding debt to 8.61% in 2019 from 9.78% in 2018, partially offset by an increase in the average amount of debt outstanding of$76.4 million to$887.1 million during 2019 from$810.7 million during 2018.The increase in average debt outstanding was due primarily to additional principal amounts outstanding under our securitization facilities and a higher balance of senior note debt resulting from the issuance of$375.0 million in senior notes inSeptember 2018 , partially offset by the early pay down of our 9.75% senior notes due 2021. See "-Liquidity and Capital Resources-Consumer Loan Securitizations" below for further information.
Provision for Income Taxes
The effective tax rate of 24.7% in 2019 was higher than the effective tax rate of 7.7% in 2018 due primarily to the acceleration of tax deductions in 2018 for prior year loan and fixed asset related deferred tax items, coupled with the overall decrease in the federal tax rate from 35% to 21% resulting from the Tax Cuts and Jobs Act which was enacted into law onDecember 22, 2017 . The balance of unrecognized tax benefits recorded in our Consolidated Balance Sheet as ofDecember 31, 2019 was$53.6 million , of which$13.9 million , if recognized, would favorably affect the effective tax rate in the period of recognition. We believe it is reasonably possible that, within the next twelve months, unrecognized domestic tax benefits will change by a significant amount. The principal uncertainties are related to the timing of recognition of income and losses related to our loan and finance receivable portfolio. We are currently under aJoint Committee on Taxation review of certain tax returns that were filed during 2018 in conjunction with the refunds claimed on those returns. Depending upon the outcome of the review and any related agreements or settlements with the relevant taxing authorities, the amount of the uncertainty, including amounts that would be recognized as a component of the effective tax rate, could change significantly. While the total amount of uncertainty to be resolved is not clear, it is reasonably possible that the uncertainties pertaining to this matter will be resolved in the next twelve months.
YEAR ENDED 2018 COMPARED TO YEAR ENDED 2017
Revenue and Gross Profit
Revenue increased$243.7 million , or 33.4%, to$972.6 million for 2018 as compared to$728.9 million for 2017. On a constant currency basis, revenue increased by$247.5 million , or 34.0%, for 2018 compared to 2017. The change in revenue was driven by an increase in revenue of$237.0 million from our domestic operations, primarily resulting from a 38.4% increase in domestic line of credit accounts revenue in 2018 and a 38.2% increase in domestic installment loan and RPA revenue compared to 2017 driven by growth in these products. Additionally, revenue from international operations increased$6.7 million (or an increase of$10.6 million on a constant currency basis), due to a 30.3% increase in international installment loan revenue in 2018 compared to 2017. Our gross profit increased by$93.8 million or 25.0% to$469.2 million for 2018 from$375.4 million for 2017. On a constant currency basis, gross profit increased by$95.1 million for 2018 compared to 2017. Our gross profit margin decreased to 48.2% in 2018 from 51.5% in 2017. The decrease in gross profit margin was primarily driven by the strong new customer growth of our installment portfolio resulting in a higher mix of new customers overall, which require higher loss provisions as new customers default at a higher rate than returning customers with a successful history of loan performance. Growth in our near-prime installment portfolio also contributed to the lower gross profit margin, as these products typically have a lower margin than our short-term products. 51
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The following table sets forth the components of revenue, separated by product for 2018 and 2017 (dollars in thousands):
Year Ended December 31,
2018 2017 $ Change % Change
Revenue by product:
Short-term loans $ 140,903 $ 126,602 $ 14,301 11.3 %
Line of credit accounts 363,495 262,574 100,921 38.4 %
Installment loans and RPAs 466,854 338,838 128,016 37.8 %Total loan and finance receivable revenue 971,252 728,014
243,238 33.4 % Other 1,369 889 480 54.0 % Total revenue 972,621 728,903 243,718 33.4 % Cost of revenue 503,405 353,488 149,917 42.4 % Gross profit$ 469,216 $ 375,415 $ 93,801 25.0 % Revenue by product (% to total): Short-term loans 14.5 % 17.4 % Line of credit accounts 37.4 % 36.0 % Installment loans and RPAs 48.0 % 46.5 % Total loan and finance receivable revenue 99.9 % 99.9 % Other 0.1 % 0.1 % Total revenue 100.0 % 100.0 % Cost of revenue 51.8 % 48.5 % Gross profit 48.2 % 51.5 %
Loan and Finance Receivable Balances
The outstanding Company-owned portfolio balance of loans and finance receivables, net of allowance and liability for estimated losses, increased$154.7 million , or 24.7%, to$780.1 million as ofDecember 31, 2018 from$625.4 million as ofDecember 31, 2017 , and the outstanding combined portfolio balance of loans and finance receivables, net of allowance and liability for estimated losses, increased$150.4 million , or 22.9%, to$807.7 million as ofDecember 31, 2018 from$657.3 million as ofDecember 31, 2017 , due primarily to increased demand for our near-prime installment product. The outstanding loan balance for our near-prime product increased 26.7% as ofDecember 31, 2018 compared toDecember 31, 2017 , resulting in a near-prime portfolio balance that comprises approximately 49% of our total loan and finance receivables portfolio balance while short-term loans comprise approximately 7%. See "-Non-GAAP Financial Measures-Combined Loans and Finance Receivables" above for additional information related to combined loans and finance receivables. 52 -------------------------------------------------------------------------------- The combined loan and finance receivable balance includes$924.3 million and$733.2 million as ofDecember 31, 2018 and 2017, respectively, of our Company-owned receivables balances before the allowance for losses of$144.2 million and$107.8 million provided in the consolidated financial statements forDecember 31, 2018 and 2017, respectively. The combined loan and finance receivable balance also includes$29.7 million and$34.1 million as ofDecember 31, 2018 and 2017, respectively, of loan and finance receivable balances that are guaranteed by us, which are not included in our consolidated balance sheets, with the exception of the liability for estimated losses of$2.2 million and$2.3 million , which is included in "Accounts payable and accrued expenses" as ofDecember 31, 2018 and 2017, respectively.
The following table summarizes loan and finance receivable balances outstanding
as of
As of December 31,
2018 2017
Guaranteed Guaranteed
Company by the Company by the
Owned(a) Company(a) Combined(b) Owned(a) Company(a) Combined(b)
Ending loans and finance
receivables:
Short-term loans $ 37,768 $ 25,388 $ 63,156 $ 34,131 $ 28,875 $ 63,006
Line of credit accounts 227,563 - 227,563 170,068 - 170,068
Installment loans and RPAs 658,995 4,316 663,311 529,045 5,259 534,304
Total ending loans and finance
receivables, gross 924,326 29,704 954,030 733,244 34,134 767,378
Less: Allowance and liabilities for
losses(a) (144,214 ) (2,166 ) (146,380 ) (107,837 ) (2,258 ) (110,095 ) Total ending loans and finance receivables, net
$ 780,112 $ 27,538 $ 807,650 $ 625,407 $ 31,876 $ 657,283 Allowance and liability for losses as a % of loans and finance receivables, gross 15.6 % 7.3 % 15.3 % 14.7 % 6.6 % 14.3 %
(a) GAAP measure. The loan and finance receivable balances guaranteed by us
relate to loans originated by third-party lenders through the CSO programs
and are not included in our consolidated balance sheets.
(b) Except for allowance and liability for estimated losses, amounts represent
non-GAAP measures.
Average Amount Outstanding per Loan
The average amount outstanding per loan is calculated as the total combined loans, gross balance at the end of the period divided by the total number of combined loans outstanding at the end of the period. The following table shows the average amount outstanding per loan by product atDecember 31, 2018 and 2017: As of December 31, 2018 2017 Average amount outstanding per loan (in ones)(a) Short-term loans(b)$ 540 $ 536 Line of credit accounts 1,582 1,389 Installment loans(b)(c) 2,389 2,245 Total loans(b)(c)$ 1,753 $ 1,581
(a) The disclosure regarding the average amount per loan is statistical data that
is not included in our consolidated financial statements.
(b) Includes loans guaranteed by us, which represent loans originated by
third-party lenders through the CSO programs and are not included in our
consolidated balance sheets.
(c) Excludes RPAs.
The average amount outstanding per loan increased to$1,753 from$1,581 during 2018 compared to 2017, mainly due to a greater mix of installment loans and line of credit accounts, which have higher average amounts outstanding per loan relative to short-term loans, in 2018 compared to 2017. 53
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Average Loan Origination
The average loan origination amount is calculated as the total amount of
combined loans originated, renewed and purchased for the period divided by the
total number of combined loans originated, renewed and purchased for the period.
The following table shows the average loan origination amount by product for
2018 compared to 2017:
Year Ended
December 31,
2018 2017
Average loan origination amount (in ones)(a)
Short-term loans(b) $ 493 $ 496
Line of credit accounts(c) 342 297
Installment loans(b)(d) 1,824 1,896
Total loans(b)(d) $ 603 $ 571 (a) The disclosure regarding the average loan origination amount is statistical
data that is not included in our consolidated financial statements.
(b) Includes loans guaranteed by us, which represent loans originated by
third-party lenders through the CSO programs and are not included in our
consolidated balance sheets.
(c) Represents the average amount of each incremental draw on line of credit
accounts.
(d) Excludes RPAs.
The average loan origination amount increased to
Loans and Finance Receivables Loss Experience
The allowance and liability for estimated losses as a percentage of loans and RPAs increased to 15.6% as ofDecember 31, 2018 compared to 14.7% as ofDecember 31, 2017 , on a Company-owned basis, and 15.3% as ofDecember 31, 2018 compared to 14.3% as ofDecember 31, 2017 , on a combined basis, due primarily to a greater concentration of loans to new customers in the installment loan and line of credit account portfolios. New customers require a greater reserve as these loans default at a higher rate than returning customers with a successful history of loan performance. The cost of revenue in 2018 was$503.4 million , which was composed of$503.5 million related to our Company-owned loans and finance receivables partially offset by a$0.1 million decrease in the liability for estimated losses related to loans we guaranteed through the CSO programs. The cost of revenue in 2017 was$353.5 million , which was composed of$353.2 million related to our Company-owned loans and finance receivables, and a$0.3 million increase in the liability for estimated losses related to loans we guaranteed through the CSO programs. Total charge-offs, net of recoveries, were$466.4 million and$334.2 million in 2018 and 2017, respectively. The following tables show loan and finance receivable balances and fees receivable and the relationship of the allowance and liability for losses to the combined balances of loans and finance receivables for each of the last eight quarters (dollars in thousands): 2018 First Second Third Fourth Quarter Quarter Quarter Quarter Loans and finance receivables: Gross - Company owned$ 721,289 $ 780,642 $ 887,998 $ 924,326 Gross - Guaranteed by the Company(a) 26,594 28,681 30,106 29,704 Combined loans and finance receivables, gross(b) 747,883 809,323 918,104 954,030 Allowance and liability for losses on loans and finance receivables 97,574 108,081 136,788 146,380 Combined loans and finance receivables, net(b)$ 650,309 $ 701,242 $ 781,316 $ 807,650 Allowance and liability for losses as a % of loans and finance receivables, gross(b) 13.0 % 13.4 % 14.9 % 15.3 % 54
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2017
First Second Third Fourth
Quarter Quarter Quarter Quarter
Loans and finance receivables:
Gross - Company owned $ 531,032 $ 571,685 $ 658,008 $ 733,244
Gross - Guaranteed by the Company(a) 22,546 28,013 28,943 34,134
Combined loans and finance receivables,
gross(b) 553,578 599,698 686,951 767,378
Allowance and liability for losses on
loans and finance receivables 74,323 76,269 93,826 110,095
Combined loans and finance receivables,
net(b) $ 479,255 $ 523,429 $ 593,125 $ 657,283
Allowance and liability for losses as a
% of loans and finance receivables,
gross(b) 13.4 % 12.7 % 13.7 % 14.3 %
(a) Represents loans originated by third-party lenders through the CSO programs,
which are not included in our consolidated financial statements.
(b) Non-GAAP measure.
Loans and Finance Receivables Loss Experience by Product
We evaluate loss rates for all financing products in our portfolio to determine credit quality and evaluate trends. For our products, we evaluate loans and finance receivables losses as a percentage of the average loan and finance receivable balance outstanding or the average combined loan and finance receivable balance outstanding, whichever is applicable, for each portfolio.
Short-term Loans
The allowance and liability for losses as a percentage of combined loan balance in 2018 was fairly consistent with 2017.
Our gross profit margin for short-term loans is typically highest in the first
quarter of each year, corresponding to the seasonal decline in consumer loan
balances outstanding. The cost of revenue as a percentage of the average
combined loan balance for short-term loans outstanding is typically lower in the
first quarter and generally peaks in the second half of the year with higher
loan demand.
The following table includes information related only to short-term loans and
shows our loss experience trends for short-term loans for each of the last eight
quarters (dollars in thousands):
2018
First Second Third Fourth
Quarter Quarter Quarter Quarter
Short-term loans:
Cost of revenue $ 11,486 $ 12,706 $ 18,264 $ 18,355
Charge-offs (net of recoveries) 15,128 10,859 14,568 18,776
Average short-term combined loan
balance, gross:
Company owned(a) 32,292 29,620 35,399 38,084
Guaranteed by the Company(a)(b) 26,383 23,638 25,913 25,286
Average short-term combined loan
balance, gross(a)(c) $ 58,675 $ 53,258 $ 61,312 $ 63,370
Ending short-term combined loan balance,
gross:
Company owned $ 27,245 $ 31,575 $ 38,299 $ 37,768
Guaranteed by the Company(b) 21,409 24,764 25,533 25,388
Ending short-term combined loan balance,
gross(c) $ 48,654 $ 56,339 $ 63,832 $ 63,156
Ending allowance and liability for
losses $ 11,334 $ 13,181 $ 16,877 $ 16,456
Short-term loan ratios:
Cost of revenue as a % of average
short-term combined loan balance,
gross(a)(c) 19.6 % 23.9 % 29.8 % 29.0 %
Charge-offs (net of recoveries) as a %
of average short-term combined loan
balance, gross(a)(c) 25.8 % 20.4 % 23.8 % 29.6 %
Gross profit margin 65.1 % 59.2 % 51.2 % 53.5 %
Allowance and liability for losses as a
% of combined loan balance, gross(c)(d) 23.3 % 23.4 % 26.4 % 26.1 %
55
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2017
First Second Third Fourth
Quarter Quarter Quarter Quarter
Short-term loans:
Cost of revenue $ 11,643 $ 11,782 $ 15,268 $ 16,075
Charge-offs (net of recoveries) 14,910 10,045 13,360 15,117
Average short-term combined loan
balance, gross:
Company owned(a) 30,990 26,994 31,550 33,729
Guaranteed by the Company(a)(b) 23,153 21,368 25,787 26,785
Average short-term combined loan
balance, gross(a)(c) $ 54,143 $ 48,362 $ 57,337 $ 60,514
Ending short-term combined loan balance,
gross:
Company owned $ 25,181 $ 28,880 $ 32,485 $ 34,131
Guaranteed by the Company(b) 18,854 24,123 24,248 28,875
Ending short-term combined loan balance,
gross(c) $ 44,035 $ 53,003 $ 56,733 $ 63,006
Ending allowance and liability for
losses $ 10,375 $ 12,112 $ 14,020 $ 14,977
Short-term loan ratios:
Cost of revenue as a % of average
short-term combined loan balance,
gross(a)(c) 21.5 % 24.4 % 26.6 % 26.6 %
Charge-offs (net of recoveries) as a %
of average short-term combined loan
balance, gross(a)(c) 27.5 % 20.8 % 23.3 % 25.0 %
Gross profit margin 64.0 % 60.2 % 50.4 % 52.6 %
Allowance and liability for losses as a
% of combined loan balance, gross(c)(d) 23.6 % 22.9 % 24.7 % 23.8 %
(a) The average short-term combined loan balance is the average of the month-end
balances during the period.
(b) Represents loans originated by third-party lenders through the CSO programs,
which are not included in our consolidated balance sheets.
(c) Non-GAAP measure.
(d) Allowance and liability for losses as a % of combined loan balance, gross, is
determined using period-end balances.
Line of Credit Accounts
The cost of revenue as a percentage of average loan balance for line of credit
accounts exhibits a similar quarterly seasonal trend to short-term loan loss
rates as the ratio is typically lower in the first quarter and increases
throughout the remainder of the year, peaking in the second half of the year
with higher loan demand. The gross profit margin is generally lower for line of
credit accounts during periods of growth because the highest levels of default
are exhibited in the early stages of the account, while the revenue is
recognized over the term of the account.
During 2018, we experienced lower gross profit margin and higher cost of revenue
as a percentage of the average combined loan balance for line of credit accounts
outstanding than we experienced in the prior year quarters as a result of the
strong growth in the line of credit account portfolios.
56
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The following table includes information related only to line of credit accounts
and shows our loss experience trends for line of credit accounts for each of the
last eight quarters (dollars in thousands):
2018
First Second Third Fourth
Quarter Quarter Quarter Quarter
Line of credit accounts:
Cost of revenue $ 25,779 $ 31,519 $ 46,934 $ 59,820
Charge-offs (net of recoveries) 29,807 27,589 36,506 50,290
Average loan balance(a) 168,118 168,881 200,710 221,721
Ending loan balance 160,923 181,134 216,624 227,563
Ending allowance for losses balance $ 27,120 $ 31,050 $ 41,478 $ 51,009
Line of credit account ratios:
Cost of revenue as a % of average loan
balance(a) 15.3 % 18.7 % 23.4 % 27.0 %
Charge-offs (net of recoveries) as a %
of average loan balance(a) 17.7 % 16.3 % 18.2 % 22.7 %
Gross profit margin 67.1 % 60.4 % 52.4 % 44.0 %
Allowance for losses as a % of loan
balance(b) 16.9 % 17.1 % 19.1 % 22.4 %
2017
First Second Third Fourth
Quarter Quarter Quarter Quarter
Line of credit accounts:
Cost of revenue $ 20,403 $ 20,382 $ 23,681 $ 30,831
Charge-offs (net of recoveries) 25,232 19,300 19,718 26,493
Average loan balance(a) 135,569 128,278 145,330 161,905
Ending loan balance 124,437 134,078 154,689 170,068
Ending allowance for losses balance $ 21,765 $ 22,847 $ 26,810 $ 31,148
Line of credit account ratios:
Cost of revenue as a % of average loan
balance(a) 15.0 % 15.9 % 16.3 % 19.0 %
Charge-offs (net of recoveries) as a %
of average loan balance(a) 18.6 % 15.0 % 13.6 % 16.4 %
Gross profit margin 65.6 % 65.3 % 65.6 % 59.2 %
Allowance for losses as a % of loan
balance(b) 17.5 % 17.0 % 17.3 % 18.3 %
(a) The average loan balance for line of credit accounts is the average of the
month-end balances during the period.
(b) Allowance for losses as a % of loan balance is determined using period-end
balances.
Installment Loans and RPAs
For installment loans and RPAs, the cost of revenue as a percentage of average loan and finance receivable balance is typically more consistent throughout the year as compared to short-term loans and line of credit accounts. Due to the scheduled regular payments that are inherent with installment loans and RPAs, we do not experience the higher level of repayments in the first quarter for these receivables as we experience with short-term loans and, to a lesser extent, line of credit accounts. Similar to line of credit accounts, the gross profit margin is generally lower for the installment loan and RPA products than for other products, primarily because the highest levels of default are exhibited in the early stages of the loan or RPA, while revenue is recognized over the term of the loan or estimated delivery term. In addition, installment loans and RPAs typically have higher average amounts per receivable. Another factor contributing to the lower gross profit margin is that the yield for installment loans and RPAs is typically lower than the yield for our other products, particularly short-term products.
During 2018, we generally experienced lower gross profit margin than we experienced in the prior year quarters as a result of the continued growth in our near-prime installment and RPA portfolios.
57
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The following table includes information related only to our installment loans
and RPAs and shows our loss experience trends for installment loans for each of
the last eight quarters (dollars in thousands):
2018
First Second Third Fourth
Quarter Quarter Quarter Quarter
Installment loans and RPAs:
Cost of revenue $ 55,528 $ 62,136 $ 81,605 $ 79,273
Charge-offs (net of recoveries) 60,364 56,752 66,845 78,957
Average installment and RPA combined
loan and finance receivable balance,
gross:
Company owned(a) 535,177 548,751 603,965 648,481
Guaranteed by the Company(a)(b) 5,760 4,500 4,326 4,279
Average installment and RPA combined
loan and finance receivable balance,
gross (a)(c) $ 540,937 $ 553,251 $ 608,291 $ 652,760
Ending installment and RPA combined loan
and finance receivable balance, gross:
Company owned $ 533,121 $ 567,933 $ 633,075 $ 658,995
Guaranteed by the Company(b) 5,185 3,917 4,573 4,316
Ending installment and RPA combined loan
and finance receivable balance, gross
(c) $ 538,306 $ 571,850 $ 637,648 $ 663,311
Ending allowance and liability for
losses $ 59,120 $ 63,850 $ 78,433 $ 78,915
Installment and RPA loan ratios:
Cost of revenue as a % of average
installment and RPA combined loan and
finance receivable balance, gross(a)(c) 10.3 % 11.2 % 13.4 % 12.1 %
Charge-offs (net of recoveries) as a %
of average installment and RPA combined
loan and finance receivable balance,
gross (a)(c) 11.2 % 10.3 % 11.0 % 12.1 %
Gross profit margin 48.4 % 42.6 % 32.5 % 39.0 %
Allowance and liability for losses as a
% of combined loan and finance
receivable balance, gross(c)(d) 11.0 % 11.2 % 12.3 % 11.9 %
58
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2017
First Second Third Fourth
Quarter Quarter Quarter Quarter
Installment loans and RPAs:
Cost of revenue $ 42,918 $ 38,515 $ 53,135 $ 68,857
Charge-offs (net of recoveries) 51,451 39,271 41,566 57,706
Average installment and RPA combined
loan and finance receivable balance,
gross:
Company owned(a) 401,706 392,319 440,892 500,252
Guaranteed by the Company(a)(b) 4,874 3,631 4,628 5,025
Average installment and RPA combined
loan and finance receivable balance,
gross (a)(c) $ 406,580 $ 395,950 $ 445,520 $ 505,277
Ending installment and RPA combined loan
and finance receivable balance, gross:
Company owned $ 381,414 $ 408,727 $ 470,834 $ 529,045
Guaranteed by the Company(b) 3,692 3,890 4,695 5,259
Ending installment and RPA combined loan
and finance receivable balance, gross
(c) $ 385,106 $ 412,617 $ 475,529 $ 534,304
Ending allowance and liability for
losses $ 42,183 $ 41,310 $ 52,996 $ 63,970
Installment and RPA loan ratios:
Cost of revenue as a % of average
installment and RPA combined loan and
finance receivable balance, gross(a)(c) 10.6 % 9.7 % 11.9 % 13.6 %
Charge-offs (net of recoveries) as a %
of average installment and RPA combined
loan and finance receivable balance,
gross (a)(c) 12.7 % 9.9 % 9.3 % 11.4 %
Gross profit margin 43.4 % 47.9 % 39.2 % 32.3 %
Allowance and liability for losses as a
% of combined loan and finance
receivable balance, gross(c)(d) 11.0 % 10.0 % 11.1 % 12.0 %
(a) The average loan and finance receivable balance for installment loans is the
average of the month-end balances during the period.
(b) Represents loans originated by third-party lenders through the CSO programs,
which are not included in our consolidated balance sheets.
(c) Non-GAAP measure.
(d) Allowance and liability for losses as a % of combined loan and finance
receivable balance, gross, is determined using period-end balances.
Total Expenses
Total expenses increased$34.5 million , or 13.3%, to$293.7 million in 2018, compared to$259.2 million in 2017. On a constant currency basis, total expenses increased$36.3 million , or 14.0%, to$295.5 million for 2018 compared to 2017.
Marketing expense increased
Operations and technology expense increased to$78.4 million in 2018 from$69.6 million in 2017, due primarily to higher contact center headcount to support our growth and higher underwriting costs primarily related to growth in loan originations.
General and administrative expense increased
Depreciation and amortization expense increased to
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Interest Expense, Net
Interest expense, net increased$5.3 million , or 7.2%, to$79.3 million in 2018 compared to$74.0 million in 2017. The increase was due to an increase in the average amount of debt outstanding of$116.2 million to$810.7 million during 2018 from$694.5 million during 2017, partially offset by a decrease in the weighted average interest rate on our outstanding debt to 9.78% in 2018 from 10.63% in 2017.The increase in average debt outstanding was due primarily to additional principal amounts outstanding under our securitization facilities and the issuance of$375.0 million in senior notes inSeptember 2018 , partially offset by the early paydown of our 9.75% senior notes due 2021. See "-Liquidity and Capital Resources-Consumer Loan Securitizations" below for further information.
Provision for Income Taxes
The effective tax rate of 7.7% in 2018 was lower than the effective tax rate of 10.5% in 2017 due primarily to the estimated tax effects of optimizing the timing of certain income tax deductions in 2018 for prior year loan and fixed asset related deferred tax items, coupled with the overall decrease in the federal tax rate from 35% to 21% resulting from the Tax Cuts and Jobs Act, which was enacted into law onDecember 22, 2017 .
LIQUIDITY AND CAPITAL RESOURCES
Capital Funding Strategy
Historically, we have generated significant cash flow through normal operating activities for funding both long-term and short-term needs. Our near-term liquidity is managed to ensure that adequate resources are available to fund our seasonal working capital growth, which is driven by demand for our loan and financing products, and to meet the continued growth in the demand for our near-prime installment products. OnMay 30, 2014 , we issued and sold$500.0 million in aggregate principal amount of 9.75% senior notes due 2021 (the "2021 Senior Notes"). OnSeptember 1, 2017 , we issued and sold$250.0 million in aggregate principal amount of 8.50% Senior Notes due 2024 (the "2024 Senior Notes") and used the net proceeds, in part, to retire$155.0 million in 2021 Senior Notes. OnJanuary 21, 2018 , we redeemed an additional$50.0 million in principal amount of the outstanding 2021 Senior Notes. OnSeptember 19, 2018 , we issued and sold$375.0 million in aggregate principal amount of 8.50% Senior Notes due 2025 (the "2025 Senior Notes") and used the net proceeds, in part, to retire the remaining$295.0 million in principal amount of the outstanding 2021 Senior Notes. OnJune 30, 2017 , we entered into a secured revolving credit agreement (as amended, the "Credit Agreement") which replaced our previous credit agreement that was terminated onJune 30, 2017 . OnApril 13, 2018 ,October 5, 2018 andJuly 1, 2019 , we and certain of our operating subsidiaries entered into amendments to our Credit Agreement, as further described below. As ofFebruary 24, 2020 , our available borrowings under the Credit Agreement were$28.8 million . Since 2016, we have entered into several consumer loan securitization facilities and offered asset-backed notes to fund our growth, primarily in our near-prime consumer installment loan business, as further described below under "Consumer Loan Securitization." As ofFebruary 24, 2019 , the outstanding balance under our securitization facilities was$289.2 million . We expect that our operating needs, including satisfying our obligations under our debt agreements and funding our working capital growth, will be satisfied by a combination of cash flows from operations, borrowings under the Credit Agreement, or any refinancing, replacement thereof or increase in borrowings thereunder, and securitization or sale of loans and finance receivables under our consumer loan securitization facilities. As ofDecember 31, 2019 , we were in compliance with all financial ratios, covenants and other requirements set forth in our debt agreements. Unexpected changes in our financial condition or other unforeseen factors may result in our inability to obtain third-party financing or could increase our borrowing costs in the future. To the extent we experience short-term or long-term funding disruptions, we have the ability to adjust our volume of lending and financing to consumers and small businesses that would reduce cash outflow requirements while increasing cash inflows through repayments. Additional alternatives may include the securitization or sale of assets, increased borrowings under the Credit Agreement, or any refinancing or replacement thereof, and reductions in capital spending which could be expected to generate additional liquidity.
8.50% Senior Unsecured Notes Due 2025
OnSeptember 19, 2018 , we issued and sold the 2025 Senior Notes. The 2025 Senior Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the "Securities Act") and outsidethe United States pursuant to Regulation S under the Securities Act. The 2025 Senior Notes bear interest at a rate of 8.50% annually on the principal amount payable semi-annually in arrears onMarch 15 andSeptember 15 of each year, beginning onMarch 15, 2019 . The 2025 Senior Notes were sold at a price of 100%. The 2025 Senior Notes will mature onSeptember 15, 2025 . The 2025 Senior Notes are unsecured debt obligations of ours, and are unconditionally guaranteed by certain of our domestic subsidiaries. As ofDecember 31, 2019 , the total liabilities of our subsidiaries (other than the guarantors) were$451.6 million , including trade payables. The 2025 Senior Notes are redeemable at our option, in whole or in part, (i) at any time prior toSeptember 15, 2021 at 100% of the aggregate principal amount of 2025 Senior Notes redeemed plus the applicable "make whole" premium specified in the indenture that governs our 2025 Senior Notes (the "2025 Senior Notes Indenture"), plus accrued and unpaid interest, if any, to the redemption date 60 -------------------------------------------------------------------------------- and (ii) at any time on or afterSeptember 15, 2021 at the premium, if any, specified in the 2025 Senior Notes Indenture that will decrease over time, plus accrued and unpaid interest, if any, to the redemption date. In addition, prior toSeptember 15, 2021 , at our option, we may redeem up to 40% of the aggregate principal amount of the 2025 Senior Notes at a redemption price of 108.5% of the aggregate principal amount of 2025 Senior Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date, with the proceeds of certain equity offerings as described in the 2025 Senior Notes Indenture. The 2025 Senior Notes and the related guarantees have not been and will not be registered under the Securities Act, or the securities laws of any state or other jurisdiction, and may not be offered or sold inthe United States without registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities or blue sky laws and foreign securities laws.
We used a portion of the net proceeds of the 2025 Senior Notes offering to
retire the remaining outstanding 2021 Senior Notes balance of
8.50% Senior Unsecured Notes Due 2024
OnSeptember 1, 2017 , we issued and sold the 2024 Senior Notes. The 2024 Senior Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act and outsidethe United States pursuant to Regulation S under the Securities Act. The 2024 Senior Notes bear interest at a rate of 8.50% annually on the principal amount payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, beginning onMarch 1, 2018 . The 2024 Senior Notes were sold at a price of 100%. The 2024 Senior Notes will mature onSeptember 1, 2024 . The 2024 Senior Notes are unsecured debt obligations of ours, and are unconditionally guaranteed by certain of our domestic subsidiaries. As ofDecember 31, 2019 , the total liabilities of our subsidiaries (other than the guarantors) were$451.6 million , including trade payables. The 2024 Senior Notes are redeemable at our option, in whole or in part, (i) at any time prior toSeptember 1, 2020 at 100% of the aggregate principal amount of 2024 Senior Notes redeemed plus the applicable "make whole" premium specified in the indenture that governs our 2024 Senior Notes (the "2024 Senior Notes Indenture"), plus accrued and unpaid interest, if any, to the redemption date and (ii) at any time on or afterSeptember 1, 2020 at the premium, if any, specified in the 2024 Senior Notes Indenture that will decrease over time, plus accrued and unpaid interest, if any, to the redemption date. In addition, prior toSeptember 1, 2020 , at our option, we may redeem up to 40% of the aggregate principal amount of the 2024 Senior Notes at a redemption price of 108.5% of the aggregate principal amount of 2024 Senior Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date, with the proceeds of certain equity offerings as described in the 2024 Senior Notes Indenture. The 2024 Senior Notes and the related guarantees have not been and will not be registered under the Securities Act, or the securities laws of any state or other jurisdiction, and may not be offered or sold inthe United States without registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities or blue sky laws and foreign securities laws.
We used the net proceeds of the 2024 Senior Notes offering to retire a portion of our outstanding 2021 Senior Notes, to pay the related accrued interest, premiums, fees and expenses associated therewith and for general corporate purposes.
Consumer Loan Securitizations
We securitize consumer loan receivables originated by certain of our
subsidiaries, which are sold to bankruptcy remote special purpose subsidiaries.
Each of these securitizations provides that (i) the lenders to a securitization
subsidiaries have no recourse to seek repayment or recovery from our operating
entities for credit losses on the receivables; (ii) except for certain limited
indemnities, such lenders have recourse only to assets of the applicable
securitization subsidiary to which they have lent; (iii) such lenders maintain a
security interest in all assets of the applicable securitization subsidiary;
(iv) cash flows from the assets transferred to such securitization subsidiaries
represent the sole source of payment to such securitization subsidiaries. The
collections on assets sold to securitization subsidiaries are not available to
satisfy the debts or other obligations of the Company unless such amounts have
been released from the lien of the lenders.
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2019-A Notes
OnOctober 17, 2019 (the "2019-A Closing Date"), we issued$138,888,000 Class A Asset Backed Notes (the "2019-A Class A Notes"),$44,445,000 ClassB Asset Backed Notes (the "2019-A ClassB Notes "), and$16,667,000 ClassC Asset Backed Notes (the "2019-A ClassC Notes " and, collectively with the 2019-A Class A Notes and the 2019-A ClassB Notes , the "2019-A Notes") through an indirect subsidiary. The 2019-A Class A Notes bear interest at 3.96%, the 2019-A ClassB Notes bear interest at 6.17%, and the 2019-A ClassC Notes bear interest at 7.62%. The 2019-A Notes are backed by a pool of unsecured consumer installment loans ("Securitization Receivables") and represent obligations of the issuer only. The 2019-A Notes are not be guaranteed by us. The net proceeds of the offering of the 2019-A Notes on the 2019-A Closing Date were used to acquire the Securitization Receivables from us, fund a reserve account and pay fees and expenses incurred in connection with the transaction. The amount of Securitization Receivables sold to the issuer on the 2019-A Closing Date was approximately$200.0 million . Additional Securitization Receivables totaling approximately$22.2 million were sold to the issuer prior toDecember 31, 2019 . The 2019-A Notes were offered only to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain persons outside ofthe United States in compliance with Regulation S under the Securities Act. The 2019-A Notes have not been registered under the Securities Act, or the securities laws of any state or other jurisdiction, and may not be offered or sold inthe United States without registration or an applicable exemption from the Securities Act and applicable state securities or blue sky laws and foreign securities laws.
20191 Facility
OnFebruary 25, 2019 (the "2019-1 Closing Date"), we and several of our subsidiaries entered into a receivables securitization (the "2019-1 Facility") withPCAM Credit II, LLC , as lender (the "2019-1 Lender"). The 2019-1 Lender is an affiliate ofPark Cities Asset Management, LLC . The 2019-1 Facility finances Securitization Receivables that have been and will be originated or acquired under our NetCredit and CashNetUSA brands by several of our subsidiaries and that meet specified eligibility criteria. Under the 2019-1 Facility, eligible Securitization Receivables are sold to a wholly-owned subsidiary of our (the "2019-1 Debtor") and serviced by another subsidiary of us. The 2019-1 Debtor has issued a delayed draw term note with an initial maximum principal balance of$30.0 million and a revolving note with an initial maximum principal balance of$20.0 million for an aggregate initial maximum principal balance of$50.0 million , which is required to be secured by eligible Securitization Receivables. The 2019-1 Facility has an accordion feature that, with the consent of the 2019-1 Lender, allows for the maximum principal balance of the delayed draw term note to increase to$50.0 million and the maximum principal balance of the revolving note to increase to$25.0 million , for an aggregate maximum principal balance of$75.0 million . The 2019-1 Facility is non-recourse to us and matures three years after the 2019-1 Closing Date. The 2019-1 Facility is governed by a loan and security agreement, dated as of the 2019-1 Closing Date, between the 2019-1 Lender and the 2019-1 Debtor. The 2019-1 Facility bears interest at a rate per annum equal to LIBOR (subject to a floor) plus an applicable margin, which applicable margin is initially 9.75%. In addition, the 2019-1 Debtor is required to pay certain customary upfront closing fees to the 2019-1 Lender. Interest payments on the 2019-1 Facility will be made monthly. Subject to certain exceptions, the 2019-1 Debtor is not permitted to prepay the delayed draw term note prior to two years after the 2019-1 Closing Date. Following such date, the 2019-1 Debtor is permitted to voluntarily prepay the 2019-1 Facility without penalty. The revolving note may be paid in whole or in part at any time after the delayed draw term note has been fully drawn. All amounts due under the 2019-1 Facility are secured by all of the 2019-1 Debtor's assets, which include the eligible Securitization Receivables transferred to the 2019-1 Debtor, related rights under the eligible Securitization Receivables, a bank account and certain other related collateral. We have issued a limited indemnity to the 2019-1 Lender for certain "bad acts," and we have agreed for the benefit of the 2019-1 Lender to meet certain ongoing financial performance covenants. The 2019-1 Facility documents contain customary provisions for securitizations, including representations and warranties as to the eligibility of the eligible Securitization Receivables and other matters; indemnification for specified losses not including losses due to the inability of consumers to repay their loans; covenants regarding special purpose entity matters; and default and termination provisions which provide for the acceleration of the 2019-1 Facility in circumstances including, but not limited to, failure to make payments when due, certain insolvency events, breaches of representations, warranties or covenants, failure to maintain the security interest in the eligible Securitization Receivables, defaults under other material indebtedness of the 2019-1 Debtor and a default by us under our financial performance covenants.
2018-A Notes
OnOctober 31, 2018 (the "2018-A Closing Date"), we issued$95,000,000 Class A Asset Backed Notes (the "Class A Notes") and$30,400,000 Class B Asset Backed Notes (the "ClassB Notes " and, collectively with the Class A Notes, the "2018-A Notes"), through an indirect subsidiary. The Class A Notes bear interest at 4.20%, and the ClassB Notes bear interest at 7.37%. The 2018-A 62 -------------------------------------------------------------------------------- Notes are backed by a pool of unsecured consumer installment loans ("Securitization Receivables") and represent obligations of the issuer only. The 2018-A Notes are not guaranteed by us. Under the 2018-A Notes, Securitization Receivables are sold to a wholly-owned subsidiary of ours and serviced by another subsidiary of ours.
The net proceeds of the offering of the 2018-A Notes on the 2018-A Closing Date were used to acquire the Securitization Receivables from us, fund a reserve account and pay fees and expenses incurred in connection with the transaction.
The 2018-A Notes were offered only to "qualified institutional buyers" pursuant to Rule 144A under the Securities Act and to certain persons outside ofthe United States in compliance with Regulation S under the Securities Act. The 2018-A Notes have not been registered under the Securities Act, or the securities laws of any state or other jurisdiction, and may not be offered or sold inthe United States without registration or an applicable exemption from the Securities Act and applicable state securities or blue sky laws and foreign securities laws. 2018-2 Facility OnOctober 23, 2018 , we and several of our subsidiaries entered into a receivables funding agreement (the "2018-2 Facility") with Credit Suisse AG,New York Branch, as agent (the "2018-2 Agent"). The 2018-2 Facility collateralizes Securitization Receivables that have been and will be originated or acquired under our NetCredit brand by several of our subsidiaries and that meet specified eligibility criteria in exchange for a revolving note. Under the 2018-2 Facility, Securitization Receivables are sold to a wholly-owned subsidiary of ours (the "2018-2 Debtor") and serviced by another subsidiary of ours. The 2018-2 Debtor has issued a revolving note with an initial maximum principal balance of$150.0 million , which is required to be secured by 1.25 times the drawn amount in eligible Securitization Receivables. The 2018-2 Facility is non-recourse to us and matures onOctober 23, 2022 . The 2018-2 Facility is governed by a loan and security agreement, dated as ofOctober 23, 2018 , between the 2018-2 Agent, the 2018-2 Debtor and certain other lenders and agent parties thereto. The 2018-2 Facility bears interest at a rate per annum equal to one-month LIBOR (subject to a floor) plus an applicable margin, which rate per annum is 3.75%. In addition, the 2018-2 Debtor paid certain customary upfront closing fees to the 2018-2 Agent. Interest payments on the 2018-2 Facility will be made monthly. The 2018-2 Debtor shall be permitted to prepay the 2018-2 Facility, subject to certain fees and conditions. Any remaining amounts outstanding will be payable no later thanOctober 23, 2022 , the final maturity date.
All amounts due under the 2018-2 Facility are secured by all of the 2018-2 Debtor's assets, which include the Securitization Receivables transferred to the 2018-2 Debtor, related rights under the Securitization Receivables, a bank account and certain other related collateral.
The 2018-2 Facility documents contain customary provisions for securitizations, including: representations and warranties as to the eligibility of the Securitization Receivables and other matters; indemnification for specified losses not including losses due to the inability of consumers to repay their loans; covenants regarding special purpose entity matters; and default and termination provisions that provide for the acceleration of the 2018-2 Facility in circumstances including, but not limited to, failure to make payments when due, servicer defaults, certain insolvency events, breaches of representations, warranties or covenants, failure to maintain the security interest in the Securitization Receivables and defaults under other material indebtedness of the 2018-2 Debtor. 20181 Facility OnJuly 23, 2018 , we and several of our subsidiaries entered into a receivables funding agreement (the "20181 Facility") withPacific Western Bank , as lender (the "20181 Lender"). The 20181 Facility collateralizes Securitization Receivables that have been and will be originated or acquired under our NetCredit brand by several of our subsidiaries and that meet specified eligibility criteria in exchange for a revolving note. Under the 20181 Facility, Securitization Receivables are sold to a wholly-owned subsidiary of ours (the "20181 Debtor") and serviced by another subsidiary of ours. The 20181 Debtor has issued a revolving note with an initial maximum principal balance of$150.0 million , which is required to be secured by 1.25 times the drawn amount in eligible Securitization Receivables. The 20181 Facility is non-recourse to us and matures onJuly 22, 2023 . The 20181 Facility is governed by a loan and security agreement, dated as ofJuly 23, 2018 , between the 20181 Lender and the 20181 Debtor. The 2018-1 Facility bears interest at a rate per annum equal to LIBOR (subject to a floor) plus an applicable margin, which rate per annum is initially 4.00%. In addition, the 20181 Debtor paid certain customary upfront closing fees to the 20181 Lender. Interest payments on the 20181 Facility are made monthly. The 20181 Debtor is permitted to prepay the 20181 Facility, subject to certain fees and conditions. In the event of prepayment for the purposes of securitizations, no fees shall apply. Any remaining amounts outstanding will be payable no later thanJuly 22, 2023 , the final maturity date. 63 -------------------------------------------------------------------------------- All amounts due under the 20181 Facility are secured by all of the 20181 Debtor's assets, which include the Securitization Receivables transferred to the 20181 Debtor, related rights under the Securitization Receivables, a bank account and certain other related collateral. The 20181 Facility documents contain customary provisions for securitizations, including: representations and warranties as to the eligibility of the Securitization Receivables and other matters; indemnification for specified losses not including losses due to the inability of consumers to repay their loans; covenants regarding special purpose entity matters; and default and termination provisions which provide for the acceleration of the 20181 Facility in circumstances including, but not limited to, failure to make payments when due, servicer defaults, certain insolvency events, breaches of representations, warranties or covenants, failure to maintain the security interest in the receivables and defaults under other material indebtedness of the 20181 Debtor.
2016-1 Facility
OnJanuary 15, 2016 , we and certain of our subsidiaries entered into a receivables securitization (as amended, the "20161 Securitization Facility") with certain purchasers,Jefferies Funding LLC , as administrative agent (the "2016-1 Agent") andBankers Trust Company , as indenture trustee and securities intermediary (the "Indenture Trustee"). The 20161 Securitization Facility securitized Securitization Receivables that were originated or acquired under our NetCredit brand and that met specified eligibility criteria. Under the 20161 Securitization Facility, Securitization Receivables were sold to a wholly-owned special purpose subsidiary of ours (the "2016-1 Issuer") and serviced by another subsidiary of ours. The 2016-1 Securitization Facility, as amended onOctober 20, 2017 , provided for a maximum principal amount of$275 million , an initial term note with an with an initial principal amount of$181.1 million and the ability to subsequently issue term notes thereafter, variable funding notes with an aggregate committed availability of$75 million per quarter with an option to increase the commitment to$90 million and a revolving period of the facility ending inApril 2019 . OnOctober 31, 2018 , the 20161 Issuer resold a substantial portion of the Securitization Receivables it owned toEnova International, Inc. , and used the proceeds to redeem all of the outstanding 2017 Quarterly Term Notes and to repay all amounts owed on the 2017 Variable Funding Notes. Subject to certain exceptions, the 20161 Issuer was not permitted to prepay or redeem any of the 2016-1 Facility prior toApril 15, 2019 , but the 2016-1 Agent, the Indenture Trustee, and the holders of the notes agreed to permit an early repayment. OnMarch 29, 2019 , the 2016-1 Facility was repaid in full.
2016-2 Facility
OnDecember 1, 2016 , we and certain of our subsidiaries entered into a receivables securitization (the "20162 Facility") withRedpoint Capital Asset Funding, LLC , as lender. The 20162 Facility securitized Securitization Receivables that were originated or acquired under our NetCredit brand by several of our subsidiaries and that meet specified eligibility criteria, including that the annual percentage rate for each securitized consumer loan was greater than or equal to 90%. Under the 20162 Facility, Securitization Receivables were sold to a wholly-owned subsidiary of ours and serviced by another subsidiary of ours. InOctober 2018 , the 20162 Facility was repaid in full and there is no remaining amount available to be borrowed.
Revolving Credit Facility
OnJune 30, 2017 , we and certain of our operating subsidiaries entered into a secured revolving credit agreement with a syndicate of banks includingTBK Bank, SSB ("TBK"), as administrative agent and collateral agent,Jefferies Finance LLC and TBK as joint lead arrangers and joint lead bookrunners, andVeritex Community Bank (as successor in interest toGreen Bank, N.A. ), as lender. OnApril 13, 2018 andOctober 5, 2018 , the Credit Agreement was amended to includePacific Western Bank andAxos Bank , respectively, as lenders, in the syndicate of lenders. Additionally, onJuly 1, 2019 , the Credit Agreement was amended to, amongst other changes, extend the maturity date toJune 30, 2022 fromMay 1, 2020 and increase the advance rate to 65% from 53%. The Credit Agreement is secured by domestic receivables. The borrowing limit in the Credit Agreement, as amended, is$125 million , and its maturity date isJune 30, 2022 . We had$72.0 million of borrowings under the Credit Agreement as ofDecember 31, 2019 . The Credit Agreement provides for a revolving credit line with interest on borrowings under the facility at prime rate plus 1.00%. In addition, the Credit Agreement provides for payment of a commitment fee calculated with respect to the unused portion of the line, and ranges from 0.30% to 0.50% per annum depending on usage. A portion of the revolving credit facility, up to a maximum of$20 million , is available for the issuance of letters of credit. We had outstanding letters of credit under the Credit Agreement of$1.6 million as ofDecember 31, 2019 . The Credit Agreement contains certain limitations on the incurrence of additional indebtedness, investments, the attachment of liens to our property, the amount of dividends and other distributions, fundamental changes to us or our business and certain other of our activities. The Credit Agreement contains standard financial covenants for a facility of this type based on a leverage ratio and a fixed charge coverage ratio. The Credit Agreement also provides for customary affirmative covenants, including financial reporting requirements, and certain events of default, including payment defaults, covenant defaults and other customary defaults. 64
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Cash Flows
Our cash flows and other key indicators of liquidity are summarized as follows
(dollars in thousands):
Year Ended December 31,
2019 2018 2017
Cash flows provided by operating activities
Cash flows from operating activities -
continuing operations $ 804,608 $ 603,484 $ 393,949
Cash flows from operating activities -
discontinued operations 44,031 81,356 53,224
Cash flows provided by operating activities 848,639 684,840
447,173
Cash flows used in investing activities Loans and finance receivables (851,056 ) (633,944 ) (453,768 ) Purchases of property and equipment (20,062 ) (14,656 ) (15,227 ) Other investing activities 27 251
1,810
Cash flows from investing activities - continuing operations (871,091 ) (648,349 ) (467,185 ) Cash flows from investing activities - discontinued operations (70,306 ) (72,584 ) (57,383 ) Total cash flows used in investing activities (941,397 ) (720,933 ) (524,568 ) Cash flows provided by financing activities$ 95,484 $ 22,479 $ 104,582 Total debt to Adjusted EBITDA (a) 3.6 x 4.2 x 5.7 x
(a) Total debt to Adjusted EBITDA, a non-GAAP measure, is calculated using
Adjusted EBITDA for the twelve months ended for the respective period
indicated. See "-Non-GAAP Financial Measures-Adjusted EBITDA."
Cash Flows from Operating Activities
2019 comparison to 2018
Net cash provided by operating activities increased$201.1 million , or 33.3%, to$804.6 million for 2019 from$603.5 million for 2018. The increase was driven primarily by overall growth in the business with interest and fees paid by customers outpacing operating cash outflows.
2018 comparison to 2017
Net cash provided by operating activities increased$209.4 million , or 53.2%, to$603.5 million for 2018 from$393.9 million for 2017. The increase was driven primarily by overall growth in the business with interest and fees paid by customers outpacing operating cash outflows.
Cash Flows from Investing Activities
2019 comparison to 2018
Net cash used in investing activities increased$222.7 million , or 34.4%, for 2019 compared to 2018, due primarily to a$217.1 million increase in net cash invested in loans and finance receivables, due to a 34.2% increase in loans and finance receivables originated or purchased and a$5.4 million increase in purchases of property and equipment.
2018 comparison to 2017
Net cash used in investing activities increased$181.2 million , or 38.8%, for 2018 compared to 2017, due primarily to a$180.2 million increase in net cash invested in loans and finance receivables, due to a 39.7% increase in loans and finance receivables originated or purchased. 65
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Cash Flows from Financing Activities
2019 comparison to 2018
Net cash provided by financing activities in 2019 was$95.5 million compared to$22.5 million in 2018. Cash flows provided by financing activities for 2019 primarily reflects a net increase of$50.0 million in net borrowings under the Credit Agreement and$80.6 million in net borrowings under our securitization facilities, partially offset by$33.8 million in treasury shares purchased. OnSeptember 15, 2017 , we announced the Board of Directors had authorized a share repurchase program for the repurchase of up to$25.0 million of our common stock throughDecember 31, 2019 (the "2017 Authorization"). The$25.0 million limit was reached inJanuary 2019 , with all share repurchases having been through open market transactions. OnJanuary 31, 2019 , we announced the Board of Directors had authorized a share repurchase program for the repurchase of up to$50.0 million of our common stock throughDecember 31, 2020 . OnOctober 24, 2019 , we announced the Board of Directors had authorized a new share repurchase program totaling$75.0 million that expiresDecember 31, 2020 . The new program replaced the prior authorization of$50.0 million . During the current year, we paid$31.9 million to repurchase common stock under the share repurchase programs.
2018 comparison to 2017
Net cash provided by financing activities in 2018 was$22.5 million compared to$104.6 million in 2017. Cash flows provided by financing activities for 2018 primarily reflects a net increase of$30.0 million in our senior notes facilities,$22.0 million in net borrowings under the Credit Agreement and$15.9 million in net borrowings under our securitization facilities, partially offset by$18.8 million of early termination fees paid in connection with the early payment of our 2021 Senior Notes,$17.3 million in treasury shares purchased and$13.0 million of debt issuance costs paid in connection with the 2025 Senior Notes, the Credit Agreement and the 2018-1, 2018-2 and 2018-A Securitization Facilities.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table summarizes our contractual obligations atDecember 31, 2019 , and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands): 2020 2021 2022 2023 2024 Thereafter Securitizations Total Revolving credit agreement (a) $ - $ -$ 72,000 $ - $ - $ - $ -$ 72,000 Senior notes (b) - - - - 250,000 375,000 - 625,000 Interest on senior notes (c) 53,125 53,125 53,125 53,125 53,125 31,875 -
297,500
Securitization facilities (d) - - - - - - 307,885
307,885
Non-cancelable leases (e) 7,242 7,282 7,018 7,115 6,285 17,179 - 52,121 Total$ 60,367 $ 60,407 $ 60,143 $ 60,240 $ 309,410 $ 424,054 $ 307,885$ 1,282,506
(a) Revolving credit agreement may be repaid at any time prior to maturity in
(b) Represents obligations under the 2024 Senior Notes and 2025 Senior Notes.
(c) Represents cash payments for interest on the 2024 Senior Notes and 2025
Senior Notes.
(d) Securitizations and related interest are not included in maturities by period
due to their variable monthly payments.
(e) Represents obligations due under long-term operating leases.
The liability for uncertain tax positions has been excluded due to the high degree of uncertainty regarding the timing of potential future cash outflows. We are unable to make a reasonably reliable estimate of the period of cash settlement with the respective taxing authority.
OFF-BALANCE SHEET ARRANGEMENTS
In certain markets, we arrange for consumers to obtain consumer loan products from independent third-party lenders through our CSO programs. For consumer loan products originated by third-party lenders under the CSO programs, each lender is responsible for providing the criteria by which the customer's application is underwritten and, if approved, determining the amount of the consumer loan. We are responsible for assessing whether or not we will guarantee such loan. When a customer executes an agreement with us under our CSO programs, we agree, for a fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customer's obligation to repay the loan received by the customer from the third-party lender if the customer fails to do so. The guarantee represents an obligation to purchase specific loans if they go into default, which generally occurs after one payment is missed. As ofDecember 31, 2019 and 2018, the outstanding amount of active consumer loans originated by third-party lenders under the CSO programs was$27.6 million and$29.7 million , respectively, which were guaranteed by us. 66
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CRITICAL ACCOUNTING ESTIMATES
Allowance and Liability for Estimated Losses on Loans and Finance Receivables
We monitor the performance of our loan and finance receivable portfolios and maintain either an allowance or liability for estimated losses on loans and finance receivables (including revenue, fees and/or interest) at a level estimated to be adequate to absorb losses inherent in the portfolio. The allowance for losses on our Company-owned loans and finance receivables reduces the outstanding loans and finance receivables balance in the consolidated balance sheets. The liability for estimated losses related to loans guaranteed under the CSO programs is initially recorded at fair value and is included in "Accounts payable and accrued expenses" in the consolidated balance sheets. In determining the allowance or liability for estimated losses on loans and finance receivables, we apply a documented systematic methodology. In calculating the allowance or liability for receivable losses, outstanding loans and finance receivables are divided into discrete groups of short-term loans, line of credit accounts, installment loans and RPAs and are analyzed as current or delinquent. Increases in either the allowance or the liability, net of charge-offs and recoveries, are recorded as a "Cost of revenue" in the consolidated statements of income. The allowance or liability for short-term loans classified as current is based on historical loss rates adjusted for recent default trends for current loans. For delinquent short-term loans, the allowance or liability is based on a six-month rolling average of loss rates by stage of collection. For line of credit account, installment loan and RPA portfolios, we generally use either a migration analysis or roll-rate based methodology to estimate losses inherent in the portfolio. The allowance or liability calculation under the migration analysis and roll-rate methodology is based on historical charge-off experience and the loss emergence period, which represents the average amount of time between the first occurrence of a loss event and the charge-off of a loan or RPA. The factors we consider to assess the adequacy of the allowance or liability include past due performance, historical behavior of monthly vintages, underwriting changes and recent trends in delinquency in the migration analysis. The roll-rate methodology is based on delinquency status, payment history and recency factors to estimate future charge-offs. We fully reserve for loans and finance receivables once the receivable or a portion of the receivable has been classified as delinquent for 60 consecutive days and generally charge-off loans and finance receivables between 60 to 65 days delinquent. If a loan or finance receivable is deemed uncollectible before it is fully reserved, it is charged off at that point. Loans and finance receivables classified as delinquent generally have an age of one to 64 days from the date any portion of the receivable became delinquent, as defined above. Recoveries on loans and finance receivables previously charged to the allowance are credited to the allowance generally when collected.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. In accordance with Accounting Standards Codification ("ASC") 350,Goodwill , we test goodwill for potential impairment annually as ofJune 30 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. We first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. In assessing the qualitative factors, we consider relevant events and circumstances including but not limited to macroeconomic conditions, industry and market environment, our overall financial performance, cash flow from operating activities, market capitalization and stock price. If we determine that the two-step quantitative impairment test is required, we use the income approach to complete our annual goodwill assessment. The income approach uses future cash flows and estimated terminal values that are discounted using a market participant perspective to determine the fair value, which is then compared to the carrying value to determine if there is impairment. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar from an operational and economic standpoint. We completed our annual assessment of goodwill as ofJune 30, 2019 based on qualitative factors and determined that the fair value of our goodwill exceeded carrying value, and, as a result, no impairment existed at that date. A 10% decrease in the estimated fair value for theJune 2019 assessment would not have resulted in a goodwill impairment.
Income Taxes
We account for income taxes under ASC 740, Income Taxes. As part of the process
of preparing our consolidated financial statements, we are required to estimate
income taxes in each of the jurisdictions in which we operate. This process
involves estimating the actual current tax expense together with assessing
temporary differences in recognition of income for tax and accounting purposes.
These differences result in deferred tax assets and liabilities and are included
within the consolidated balance sheets. We must then assess the likelihood that
the deferred tax assets will be recovered from future taxable income and, to the
extent we believe that recovery is not
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likely, we must establish a valuation allowance. An expense or benefit is included within the tax provision in the consolidated statement of income for any increase or decrease in the valuation allowance for a given period.
We report our loans and finance receivables in the Company's tax returns at fair market value, which differs from how we report them in the consolidated financial statements. Changes in the fair market value of our loans and finance receivables as determined for tax purposes may have a significant impact on the timing and amount of how income taxes are recognized in the consolidated financial statements. The estimates of fair market value are dependent on multiple assumptions, including expected credit losses and discount rates. We perform an evaluation of the recoverability of our deferred tax assets on a quarterly basis. We establish a valuation allowance if it is more-likely-than-not (greater than 50 percent) that all or some portion of the deferred tax asset will not be realized. We analyze several factors, including the nature and frequency of operating losses, our carryforward period for any losses, the reversal of future taxable temporary differences, the expected occurrence of future income or loss and the feasibility of available tax planning strategies to protect against the loss of deferred tax assets. We account for uncertainty in income taxes in accordance with ASC 740, which requires that a more-likely-than-not threshold be met before the benefit of a tax position may be recognized in the consolidated financial statements and prescribes how such benefit should be measured. We must evaluate tax positions taken on our tax returns for all periods that are open to examination by taxing authorities and make a judgment as to whether and to what extent such positions are more likely than not to be sustained based on merit. We record interest and penalties related to tax matters as income tax expense in the consolidated statement of income. Our judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. Our judgment is also required in evaluating whether tax benefits meet the more-likely-than-not threshold for recognition under ASC 740.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 in the Notes to the Consolidated Financial Statements in Part II, Item 8 "Financial Statements and Supplementary Data" in this report for a discussion of recently issued accounting pronouncements.
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