World Acceptance Corporation — Form 10-Q Summary
Business context and reporting period
World Acceptance Corporation is a consumer finance company operating loan offices in the United States and Mexico. Its revenues principally comprise interest and fee income, insurance commissions, and other income. This unaudited filing covers the three and nine months ended December 31, 2011, the company’s fiscal 2012 third quarter, with comparisons to the corresponding periods ended December 31, 2010.
Financial performance and position
| Metric | Three months ended Dec. 31, 2011 | Prior comparable period | Change |
|---|
| Total revenue | $135.9 million | $126.0 million | +7.9% |
| Net income | $19.6 million | $18.1 million | +8.4% |
| Diluted EPS | $1.30 | $1.12 | +16.1% |
| Operating margin | 24.7% | 25.9% | Down 1.2 points |
| Interest expense | $3.3 million | $3.8 million | Down 12.2% |
| Metric | Nine months ended Dec. 31, 2011 | Prior comparable period | Change |
|---|
| Total revenue | $391.2 million | $354.5 million | +10.4% |
| Net income | $63.1 million | $57.0 million | +10.6% |
| Diluted EPS | $4.08 | $3.52 | +15.9% |
| Operating margin | 28.1% | 28.4% | Down 0.3 points |
| Operating cash flow | $150.3 million | $138.3 million | +8.7% |
- Gross loans receivable increased to $1.066 billion at December 31, 2011 from $875.0 million at March 31, 2011. Net loans receivable increased to $717.1 million from $597.7 million.
- The allowance for loan losses increased to $61.1 million from $48.4 million. Provision expense was $89.0 million for the first nine months, versus $78.9 million in the prior-year period.
- Contractual delinquent loans increased to $79.2 million, or 7.4% of gross loans, from $70.0 million, or 7.3%, at December 31, 2010. Recency-basis delinquencies were 5.9%, versus 5.8%.
- Net charge-offs as a percentage of average net loans improved modestly to 14.4% annualized for the first nine months from 14.6%.
- Cash and cash equivalents were $14.3 million at December 31, 2011, compared with $8.0 million at March 31, 2011.
- Net cash used in investing activities was $218.6 million, primarily reflecting a $210.8 million increase in loans receivable. Financing activities provided $75.1 million, including $196.7 million of net revolving debt proceeds and $74.0 million of share repurchases.
- Total debt was $328.9 million at December 31, 2011, compared with $187.4 million at March 31, 2011. Shareholders’ equity was $439.5 million, versus $442.6 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher average net loans, new offices, and stronger insurance commissions. Average net loans increased 11.9% for the first nine months and 10.6% for the quarter.
- The company had 1,120 offices at December 31, 2011, up from 1,054 a year earlier and up 53 from March 31, 2011.
- Provision for loan losses rose 13.0% in the quarter and 12.8% for the first nine months, outpacing revenue growth in the quarter and contributing to lower operating margins.
- General and administrative expenses increased 7.9% for the quarter and 10.0% for the first nine months, although the nine-month expense ratio improved slightly to 49.1% from 49.3%.
- Interest expense declined as the average borrowing rate fell and the 3% convertible senior subordinated notes matured on October 1, 2011. The $20 million interest-rate swap also expired on December 8, 2011.
- The company repurchased 1,167,245 common shares for $74.0 million during the first nine months. Remaining authorized repurchase capacity was $12.6 million as of February 2, 2012.
- Accumulated other comprehensive income changed to a loss of $6.3 million, primarily because of foreign-currency translation losses.
Guidance, outlook, risks and unusual items
- Management planned to open or acquire at least 63 U.S. branches and 10 Mexican branches during fiscal 2012; by December 31, 2011, 48 U.S. and six Mexican branches had been opened.
- The company stated that operating cash flow and available borrowings should be adequate for expected expansion, loan growth, scheduled debt repayment, and other needs for the next 12 months and beyond. This assessment depends on continued access to borrowing capacity.
- The revolving credit facility was amended to increase commitments to $300.0 million and extend maturity to August 31, 2013. Borrowings were $278.9 million, leaving $21.1 million of borrowing-base availability. The $75.0 million junior subordinated facility had $50.0 million outstanding and $20.0 million available, subject to borrowing-base limits.
- Credit agreements include financial and other covenants, including minimum net worth and fixed-charge coverage requirements. Management reported compliance at December 31, 2011.
- A 1% change in interest rates would affect annual interest expense by approximately $1.4 million based on period-end debt. Mexican operations represented approximately 6.8% of nine-month revenue, exposing results to foreign-exchange movements.
- Management identified regulatory risk, particularly potential actions by the Consumer Financial Protection Bureau, as a significant uncertainty. Other risks include loan losses, delinquency trends, economic conditions, expansion execution, interest rates, foreign currency, tax matters, and litigation.
- The company was involved in routine litigation and stated that pending matters were not expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
- The third fiscal quarter is seasonally important for loan demand, while the fourth quarter typically has lower loan volume and higher repayments; quarterly results therefore may not indicate full-year performance.
Investor verification points
- Verify whether delinquency and charge-off trends continue to improve or deteriorate as the loan portfolio expands.
- Assess whether the allowance for loan losses remains adequate relative to gross loans and contractual delinquencies.
- Monitor revolving-facility availability, covenant compliance, borrowing-base limits, and refinancing needs before the August 2013 maturity.
- Evaluate the sustainability of revenue growth and branch expansion after considering higher loan-loss provisions and operating expenses.
- Track CFPB and other regulatory developments affecting consumer lending, insurance products, pricing, and operating requirements.
- Reconcile the effect of share repurchases and lower diluted share counts on EPS growth versus underlying net-income growth.
- Review tax contingencies, including approximately $2.3 million of gross unrecognized tax benefits and pending legal matters.
