World Acceptance Corporation — Form 10-Q Summary
Business context and reporting period
World Acceptance Corporation is a consumer finance company operating through 1,108 offices in the United States and Mexico. This unaudited Form 10-Q covers the three and six months ended September 30, 2011, the second quarter and first six months of fiscal 2012. Comparable periods are the three and six months ended September 30, 2010.
Key financial metrics
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenues | $132.1 million, up 11.9% | $255.3 million, up 11.7% |
| Net income | $23.3 million, up 15.2% | $43.5 million, up 11.6% |
| Diluted EPS | $1.52, versus $1.26 | $2.78, versus $2.40 |
| Operating margin | 30.7%, versus 29.4% | 29.9%, versus 29.8% |
| Provision for loan losses | $30.1 million, up 10.2% | $52.9 million, up 12.6% |
| Interest expense | $3.9 million, down 3.6% | $7.3 million, down 1.6% |
| Net cash from operating activities | Not separately reported | $97.9 million, versus $78.5 million |
- Gross loans receivable were $965.0 million at September 30, 2011, versus $875.0 million at March 31, 2011. Net loans receivable were $652.3 million, versus $597.7 million.
- The allowance for loan losses increased to $54.2 million from $48.4 million at March 31, 2011.
- Cash and cash equivalents were $13.1 million. Restricted cash of $77.0 million was held to repay the convertible notes at maturity.
- Total assets increased to $804.4 million from $666.4 million, while shareholders’ equity decreased to $412.6 million from $442.6 million, primarily reflecting common-stock repurchases and foreign-currency translation losses.
- Total debt was $359.6 million at September 30, 2011, consisting of $232.6 million of senior revolving debt, $77.0 million of convertible notes, and $50.0 million of junior subordinated debt.
Material changes versus the prior comparable period
- Revenue growth was driven by loan growth, new offices, and higher revenue from offices open in both periods. Same-office revenue increased approximately 9.0%.
- Average net loans increased 12.0% in the quarter and 12.5% for the six-month period.
- General and administrative expense increased 9.6% for the quarter and 11.1% for the six months, but declined as a percentage of revenue to 46.5% and 49.3%, respectively.
- Net charge-offs as a percentage of average net loans remained 14.8% annualized for the quarter and 13.7% for the six months.
- Contractual delinquency increased to 7.9% of gross loans from 6.5% at March 31, 2011; recency-basis delinquency increased to 6.3% from 4.9%.
- The company opened or acquired 41 offices during the first six months, compared with 44 in the prior-year period. It completed 12 office or portfolio acquisitions for aggregate purchase consideration of approximately $2.2 million.
- Common-stock repurchases totaled 1.15 million shares and $73.1 million during the first six months. Approximately $2.2 million remained available under repurchase authorizations as of November 1, 2011.
Debt, liquidity, outlook, and risks
- On August 31, 2011, the revolving credit facility was amended to extend its maturity to August 31, 2013 and increase commitments to $300.0 million. Borrowings were $232.6 million, with $67.4 million of unused borrowing availability at September 30, 2011.
- The $75.0 million junior subordinated facility matures September 17, 2015. Borrowings were $50.0 million, with $20.0 million of availability under borrowing-base limitations.
- The company repaid the $77.0 million of 3.0% convertible senior subordinated notes at their October 1, 2011 maturity using restricted cash funded on September 30, 2011.
- Management stated that operating cash flow and available borrowings should fund office expansion, loan growth, acquisitions, and scheduled debt repayments for the next 12 months and foreseeable future. The company planned to open or acquire at least 63 U.S. branches and 10 Mexican branches during fiscal 2012.
- Management identified credit losses, delinquency trends, interest rates, foreign-currency movements, regulatory changes, expansion and foreign operations, litigation, and general economic conditions as key risks. The filing states that no material changes occurred to the risk factors previously disclosed in the 2011 Form 10-K.
- The company was in compliance with its debt covenants at September 30, 2011, according to management. Substantially all assets secure the revolving credit facility.
- Pending litigation arises primarily from normal business activities. Management does not believe expected losses will materially affect consolidated results or financial condition, but outcomes and amounts cannot be predicted.
- The company’s business is seasonal: demand is historically highest from October through December, while the fourth fiscal quarter generally has lower loan volume and higher repayments.
Investor verification items
- Verify post-quarter repayment of the $77.0 million convertible notes and the resulting effect on debt, restricted cash, and liquidity.
- Monitor delinquency, charge-offs, provision expense, and allowance coverage as the loan portfolio continues to expand.
- Assess availability under the revolving and junior subordinated facilities against planned branch openings, acquisitions, loan growth, and stock repurchases.
- Review the sustainability of revenue growth and operating-margin improvement in light of seasonal third-quarter performance.
- Evaluate exposure to variable interest rates; management estimated that a 1.0 percentage-point rate change would affect annual interest expense by approximately $1.1 million.
- Consider foreign-exchange exposure from Mexican operations and the $4.9 million accumulated other comprehensive loss at September 30, 2011.
- Review the company’s remaining stock-repurchase authorization, tax contingencies, litigation developments, and future regulatory changes affecting consumer lending.