World Acceptance Corporation — Form 10-Q Summary
Business context and reporting period
World Acceptance Corporation is a consumer finance company operating through offices in the United States and Mexico. This unaudited filing covers the three months ended June 30, 2011, the first quarter of fiscal 2012, with comparisons to the three months ended June 30, 2010. The company operated 1,087 offices at quarter-end, including 20 offices opened or acquired during the quarter.
Key financial metrics
| Metric | Three months ended June 30, 2011 | Comparable period |
|---|---|---|
| Total revenues | $123.2 million | $110.4 million |
| Interest and fee income | $107.3 million | $96.1 million |
| Provision for loan losses | $22.8 million | $19.7 million |
| General and administrative expenses | $64.5 million | $57.3 million |
| Income before taxes | $32.4 million | $30.0 million |
| Net income | $20.2 million | $18.7 million |
| Basic diluted EPS | $1.30 / $1.27 | $1.16 / $1.14 |
| Operating margin | 29.1% | 30.3% |
| Net cash from operating activities | $50.7 million | $42.3 million |
Average gross loans increased to $906.3 million from $796.4 million. Gross loans receivable were $939.1 million at June 30, 2011, while net loans receivable were $635.8 million after unearned interest and fees and the allowance for loan losses. The allowance for loan losses was $50.4 million, compared with $48.4 million at March 31, 2011.
Cash and cash equivalents were $9.8 million at quarter-end, up from $8.0 million at March 31, 2011. Net cash used in investing activities was $62.8 million, primarily reflecting a $59.2 million increase in net loans receivable. Net cash provided by financing activities was $13.8 million.
Total debt was approximately $247.2 million, consisting principally of $141.2 million outstanding under the revolving credit facility, $76.1 million of net convertible notes and $30.0 million of junior subordinated debt. The revolving facility had $83.8 million of unused availability, and the junior subordinated facility had $45.0 million of unused borrowing availability, subject to borrowing-base limitations.
Material changes versus the prior comparable period
- Total revenues increased 11.6%, driven by higher average loan balances, new offices and 9.0% growth from 987 offices open in both periods.
- Net income increased 7.8%, while diluted EPS increased to $1.27 from $1.14. Weighted-average diluted shares declined to 15.9 million from 16.4 million.
- The provision for loan losses increased 15.9% to $22.8 million. General and administrative expenses increased 12.6% to $64.5 million, causing the operating margin to decline from 30.3% to 29.1%.
- Interest expense increased only 0.9%, as higher average debt was substantially offset by lower average interest rates.
- Contractual past-due receivables increased to $67.1 million, or 7.2% of gross loans, from $56.9 million, or 6.5%, at March 31, 2011. Net charge-offs were 12.5% of average net loans on an annualized basis, unchanged from the prior-year quarter.
- The company repurchased 732,600 shares for $46.8 million during the quarter. As of August 3, 2011, approximately $3.4 million remained available under all repurchase authorizations.
- The company acquired three offices and four loan portfolios from five competitors; total purchase price was $1.75 million, including approximately $1.7 million of gross loans acquired.
Guidance, outlook, risks and unusual items
- Management planned to open or acquire at least 63 branches in the United States and 10 branches in Mexico during fiscal 2012.
- Management stated that operating cash flow and available borrowing capacity should fund office expansion, loan growth, acquisitions and scheduled debt repayments for the next 12 months and the foreseeable future.
- The revolving credit facility matures August 31, 2012. The $77.0 million convertible notes mature October 1, 2011; the remaining debt discount was expected to be amortized over three months.
- Credit agreements include minimum net worth and fixed-charge coverage requirements and restrictions on dividends, share repurchases, additional debt and major corporate transactions. Management represented that the company was in compliance at June 30, 2011.
- A 1.0% change in applicable interest rates would change annual interest expense by approximately $0.6 million based on period-end debt. A $20 million interest-rate swap, expiring December 8, 2011, partially hedged floating-rate borrowings.
- Management identified loan-loss allowance, share-based compensation and income taxes as significant judgment areas. Actual credit performance, economic conditions and estimates may differ materially from assumptions.
- The company faces risks from loan repayment and delinquencies, interest-rate changes, Mexican peso fluctuations, regulatory developments, expansion and foreign operations, litigation and general economic conditions.
- A putative consumer-related legal action involving non-file insurance products was ordered into individual arbitration and stayed by the court; the plaintiff filed a notice of intent to appeal. Management did not believe pending litigation would materially affect consolidated results or financial condition.
- The filing provided no quantitative full-year earnings guidance. The company noted seasonal loan demand, with the third fiscal quarter generally weaker and the fourth fiscal quarter generally stronger.
Most important facts for investors to verify
- Whether the October 1, 2011 convertible-note maturity was refinanced, repaid or converted after the filing date.
- Subsequent availability, renewal or replacement of the revolving credit facility before its August 31, 2012 maturity.
- Trends in contractual delinquencies, charge-offs, recoveries and the adequacy of the $50.4 million loan-loss allowance.
- Whether planned fiscal 2012 branch expansion and acquisitions generated expected loan growth and returns without disproportionate expense increases.
- The remaining capacity and subsequent activity under the share-repurchase authorizations.
- Developments in the insurance-related litigation, tax contingencies and other legal proceedings.
- The effect of interest-rate changes and Mexican peso movements on earnings, liquidity and capital.