On the World Acceptance Corporation January 25, 2012 press release that covered the company's third quarter 2012 earnings, CEO Sandy McLean stated the following:
The company's growth in earnings per share has also benefited from our ongoing share repurchase program during the current fiscal year. We continue to use our excellent cash flow and strong financial position to fund our growth while repurchasing shares.
Press release: Let's examine WRLD's cash flow vis a vis the share repurchase program. Although WRLD has been buying back shares for awhile, the majority of the repurchases have been during the FYE 03/31/2011 period and the FYE 03/31/2012 period. Thus, we will use the cash flows as presented by the FASB 95 statement of cash flows in WRLD's SEC 10-Qs and 10-Ks. Shown below are the 9 month YTD period ending December 31, 2011 and the FYE 03/31/2011 period.
When examining the FASB 95 cash flow statement to see if a company is generating positive cash flow, the net cash provided by operating activities should exceed the net cash used in investing activities. Any excess would be used to pay down debt, buy back shares, etc. These activities are in captured in the third section, net cash provided (used) by financing activities.
From a global appearance, the FYE 03/31/2011 figures appear to hold true. However, I will tell you they don't once you peel back the layers of the onion. For the sake of time, we are going to examine the 9 month YTD 12/31/2011 period because as can been seen in the above schedule WRLD needed approximately $68MM in external financing. But the net cash provided by financing activities was $75MM. Why borrow more than you need to? Time to peel back the layers.
Shown below is the detail behind the net cash provided by financing activities for the 9 month YTD period ending 12/31/2011.
Source: Edgar Online
The numbers are the same, but I have taken the liberty to rearrange them.
Cash Flow Needed from Financing Activities:
Proceeds from senior revolving notes payable, net
Proceeds from junior subordinated note payable
Repayment of the convertible senior subordinated notes payable
REPURCHASE OF COMMON STOCK
Note: I have deleted the line items that reflect the tax effect of the company's stock options as they are truly non-cash items. But don't forget about them.
WRLD only needed to borrow the aforementioned $68MM. However, they borrowed $197MM from their senior revolving line. Why?
Because $73.983MM of these borrowings are being used to finance WRLD's stock buyback program, not the "excellent cash flow" as noted by WRLD's CEO. The "excellent cash flow" noted by WRLD's CEO simply does not exist. And their $300 million senior revolving credit facility balance rests at a staggering $278.9 million.
If the revolving credit facility was used to finance the February stock repurchase programs, what is WRLD using to finance their core business?
You need to ask yourself, if WRLD is so positive about their business model, why they are buying back their stock with bank debt instead of utilizing the bank debt to finance their growth? There are a couple of very evident reasons.
Answer #1 - The answer lies in the stock options noted earlier and the activity of WRLD Insiders.
Since June 2010, as published by Yahoo! Finance, WRLD officers and director have been exercising their in the money options. In order to not dilute their EPS figures, which WRLD so dearly cherishes - and bases some of their senior executive compensation off of - the repurchase program is necessary. For more on the dilution effect go to this article by Marc A. Siegel which provides great insight, as Mark so aptly notes, to the stock option/buyback accounting shenanigans.
According to Yahoo! Finance, WRLD insiders have exercised and sold approximately 289,000 shares of stock since June 2010. Yet from April 1st 2010 to December 31, 2011 WRLD has repurchased over 2,000,000 shares of stock. That doesn't include the recent February 2012 purchases. Again, why?
Answer #2 - Squeeze the Shorts and manipulate the stock price?
As of 3/15/2011 the short interest in WRLD was 3,592,860 shares or approximately 22.6% of the outstanding shares at that time. As of 2/29/2012 the short interest has decreased to 2,337,619.
The recent bi-weekly repurchase announcements during the week of February are a great example of the manipulation. On average the $20MM to $25MM repurchases represent approximately 300,000 shares of stock, an average repurchase of 30,000 shares per day over a ten day period - on a stock with an average daily volume of 117,000 shares (nasdaq.com).
If you watch closely, in the last half hour of trading, when a company is unable to repurchase shares (SEC 10b-18), most days WRLD sells off dramatically.
That is because I am not the only one who believes the WRLD business model (and other short term lenders) is going to be challenged by the Consumer Finance Protection Bureau.
Disclosure: I have bearish option positions in WRLD.