WRLD

World Acceptance Corp. 10-Q Summary: Period Ended September 30, 2010

Business Context and Reporting Period

World Acceptance Corporation (WAC) operates as a consumer finance company providing short-term loans and insurance products through a network of retail offices. This Form 10-Q covers the quarterly period ended September 30, 2010 (the second quarter of fiscal 2011). As of the reporting date, the Company operated 1,034 offices in the United States and Mexico.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 13.3% year-over-year for the quarter and 11.8% for the six-month period, driven by a 14.2% increase in average net loans receivable and the addition of 44 new offices.
• Profitability: Net income rose 38.5% for the quarter and 33.2% for the six-month period compared to the prior year. Operating margins improved to 29.4% (quarter) and 29.8% (six months) from 26.2% and 26.3%, respectively.
• Credit Quality: Delinquency rates improved. Accounts 61+ days past due decreased to 2.9% (recency basis) from 3.3% in the prior year quarter. Net charge-offs as a percentage of average net loans declined to 14.8% (annualized) for the quarter.
• Debt Structure: On September 17, 2010, the Company amended its revolving credit facility to $225 million and established a new $75 million Junior Subordinated Note Payable. The Company borrowed $30 million under the new note to repay senior debt.
• Tax Impact: The effective tax rate decreased to 33.9% for the quarter (from 38.3%) due to a $919,000 tax benefit from settling a South Carolina tax examination covering years 1997–2006.

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. Estimated costs are $25,000 per office for setup plus $100,000–$400,000 for initial loan funding.
• Capital Allocation: The Company continues its stock repurchase program. As of October 29, 2010, $19.6 million in repurchase capacity remained under outstanding authorizations.
• Regulatory Risk: The Company noted the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, stating it is impossible to predict the impact of the new law and associated regulations on future operations.
• Litigation: The Company is involved in routine litigation, including a class action suit in Georgia regarding the sale of non-file insurance products. One case was dismissed without prejudice; the Company intends to vigorously defend the remaining matter.
• Market Risk: The Company utilizes interest rate swaps to hedge floating-rate debt. A 1.0% change in interest rates would impact annual interest expense by approximately $0.5 million. Foreign exchange exposure from Mexican operations is monitored but deemed immaterial to consolidated results.

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: Monitor the $77 million in 3% Convertible Senior Subordinated Notes due October 2011 and the associated hedge strategy (call options and warrants) which effectively raises the conversion price to $73.97.
• Loan Portfolio Quality: Track the trend of 61+ days past due loans and net charge-off ratios to ensure they remain within historical ranges despite economic conditions.
• Regulatory Impact: Assess the potential operational and financial impact of the Dodd-Frank Act and the creation of the Consumer Financial Protection Bureau.
• Acquisition Integration: Review the performance of the 44 new offices opened or acquired in the first six months of fiscal 2011 to ensure they meet revenue and profitability targets.