WRLD

Business Context and Reporting Period

Company: World Acceptance Corporation (WAC)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Nine months ended December 31, 2010 (Fiscal Year 2011)
Business Overview: WAC is a consumer finance company licensed to originate direct cash consumer loans in 12 U.S. states and Mexico. The company operates 1,054 offices as of December 31, 2010, offering short-term loans (generally up to $4,000 with terms of 36 months or less) and credit insurance products.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 11.9% to $354.5 million compared to $316.7 million in the prior year period. This was driven by a 12.8% increase in interest and fee income and a 14.7% increase in insurance commissions.
• Profitability: Net income rose 29.6% to $57.0 million from $44.0 million in the prior year. Operating income increased by approximately $19.9 million (24.6%).
• Loan Portfolio: Gross loans receivable grew 25.3% from $770.3 million to $965.4 million. Average net loans receivable increased 14.4%.
• Expense Management: General and administrative expenses increased 8.8% to $174.8 million, but as a percentage of total revenue, they decreased from 50.7% to 49.3%.
• Credit Quality: Net charge-offs as a percentage of average net loans decreased from 18.0% (annualized) in the prior year to 16.3% (annualized). Accounts 61+ days past due decreased from 3.0% to 2.8% on a recency basis.
• Debt Structure: The company entered into a new $75.0 million Junior Subordinated Note Payable in September 2010, borrowing $30.0 million to repay a portion of its revolving credit facility. The revolving credit facility was amended to increase the commitment to $225.0 million.

Guidance, Outlook, and Risks

• Expansion Plans: Management plans to open or acquire at least 55 branches in the U.S. and 15 in Mexico during fiscal 2011. As of December 31, 2010, 52 U.S. and 7 Mexican branches had been opened.
• Liquidity: The company maintains a $225.0 million revolving credit facility (expiring August 2012) with $46.4 million of unused availability. It also has $45.0 million of unused availability under the Junior Subordinated Note. Management believes cash flow from operations and borrowings will be adequate to fund expansion and debt obligations.
• Stock Repurchases: The company has $17.6 million in remaining repurchase capacity under outstanding authorizations. During the quarter ended December 31, 2010, the company repurchased 45,836 shares at an average price of $42.33.
• Risk Factors:
  • Regulatory: The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act creates uncertainty regarding future regulations and their impact on operations.
  • Legal: The company is a defendant in a class action lawsuit (Rita Hopkins vs. World Acceptance Corporation) alleging violations of state laws regarding non-file insurance products. Management intends to defend vigorously.
  • Market Risk: Exposure to interest rate fluctuations on variable-rate debt and foreign exchange rate volatility related to Mexican operations (approx. 5.5% of total revenues).

Investor Verification Checklist

• Debt Covenants: Verify compliance with the new financial covenants in the amended Revolving Credit Agreement and the Junior Subordinated Note, specifically the minimum net worth and fixed charge coverage ratios.
• Convertible Notes Maturity: Confirm the status of the $77.0 million Convertible Senior Subordinated Notes due October 1, 2011, and the company's strategy for refinancing or conversion.
• Legal Proceedings: Monitor the status of the Rita Hopkins class action lawsuit for potential financial impact or settlement terms.
• Regulatory Impact: Assess the specific implications of the Dodd-Frank Act on the company's lending practices and insurance product sales.
• Loan Quality Trends: Continue to track the ratio of loans 61+ days past due and net charge-off rates to ensure they remain within historical norms despite economic conditions.