Business Context and Reporting Period
Company: World Acceptance Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2008 (Third Quarter of Fiscal 2009)
Business Overview: World Acceptance operates a network of retail installment loan offices, primarily in the United States and Mexico. As of December 31, 2008, the company operated 923 offices. The company finances its operations through cash flows from operations and borrowings from a syndicate of banks.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2008 | Nine Months Ended Dec 31, 2008 |
|---|---|---|
| Total Revenues | $99.7 million | $279.8 million |
| Net Income | $10.0 million | $32.7 million |
| Diluted EPS | $0.61 | $1.98 |
| Operating Margin | 18.5% | 21.5% |
| Provision for Loan Losses | $29.5 million | $70.7 million |
| Net Cash Provided by Operating Activities | N/A (Quarterly) | $98.4 million |
| Cash and Cash Equivalents (End of Period) | $7.1 million | |
| Total Assets | $574.4 million | |
| Total Liabilities | $313.1 million | |
| Shareholders' Equity | $261.3 million | |
| Senior Notes Payable | $185.4 million | |
| Convertible Senior Subordinated Notes | $105.0 million |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Total revenues increased 13.2% for the quarter and 14.4% for the nine-month period compared to the prior year. This was driven by an increase in average gross loans receivable (up 13.2% for the quarter) and the addition of new offices (85 net new offices since March 31, 2008).
- Profitability: Net income increased 37.3% for the quarter and 14.4% for the nine-month period. Operating income increased 6.3% for the quarter.
- Loan Losses: The provision for loan losses increased significantly, up 27.0% for the quarter and 26.5% for the nine-month period. Net charge-offs as a percentage of average net loans increased to 19.6% (annualized) for the quarter and 17.1% (annualized) for the nine months, reflecting a deteriorating economic environment.
- Unusual Items: Other income included a $1.5 million gain on the sale of a foreign currency option and a $2.0 million gain on the extinguishment of debt (repurchase of $5 million of convertible notes at a discount).
- Debt Structure: The company repurchased $5 million of its convertible senior subordinated notes in December 2008, reducing the outstanding balance to $105 million.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management does not expect loss ratios to improve for the remainder of the fiscal year due to the softening economy. The company plans to open or acquire at least 70 branches in the U.S. and 25 in Mexico during fiscal 2009.
- Liquidity: The company maintains a $187.0 million base revolving credit facility with $31.7 million of unused availability as of December 31, 2008. Management believes current liquidity is adequate but notes that continued turmoil in credit markets could impair access to funding or increase costs.
- Stock Repurchases: As of February 2, 2009, the company had $13.1 million remaining repurchase capacity under outstanding authorizations.
- Risk Factors:
- Credit Market Turmoil: Adverse conditions in capital and credit markets could affect the company's ability to meet liquidity needs or increase the cost of capital.
- Regulatory Changes: Potential federal legislative or regulatory changes regarding consumer lending could force the company to modify or cease operations.
- Delinquencies: Accounts 61 days or more past due increased to 3.3% (recency basis) and 4.6% (contractual basis).
- Tax Contingencies: The company is subject to U.S. and Mexican income tax examinations. A state authority has issued a proposed assessment for tax years 2001-2006, increasing the gross unrecognized tax benefit by $2.3 million. The final outcome is currently unpredictable.
Investor Verification Checklist
- Loan Portfolio Quality: Verify the trend in delinquency rates (61+ days past due) and net charge-off ratios against historical averages and industry peers.
- Liquidity Position: Confirm the status of the $187 million revolving credit facility and the company's ability to secure additional funding given the credit market environment.
- Debt Extinguishment: Review the details of the $5 million convertible note repurchase and the associated $2 million gain to ensure proper accounting treatment.
- Tax Exposure: Monitor the resolution of the state tax examination (2001-2006) and the potential impact of the $2.3 million proposed assessment on future earnings.
- Derivative Instruments: Assess the impact of the interest rate swaps (notional amount $50 million) and the unrealized losses recorded in other income.