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Tuesday, June 21, 2011

NICK 10-K (continued again)

Going back to the income statement, let's take a quick look at the expenses. In the past 2 years, revenues have gone up about 18%. Salaries and employee benefits were up 23%, with an increase of about $3 million. Worth noting.

The real story on expenses during the past two years has been a steady drop in provision for credit losses as things stabilize. And the fair value of interest rate swaps swung wildly; in theory it should have cancelled out interest expenses that would have also swung wildly, although I'm not sure about the timing. Haven't thought about it.

Equity statement. Stock options issued have been reasonable.

Cash flows. As I noted before, the last three years had $21 million in cash flows from operations. It's about exactly $21 million per year after subtracting off capex. Let's assume about 12.5 million totally diluted shares and the business is producing about something like $1.68 per share per year in free cash flow during a bad economic downturn. Now the reality is that they invested $24 million in 2009, $27 million in 2010, and $32 million in 2011 above the received principal payments, so we would actually expect increasing cash flows over time. The difference was made up in normal financing.

Interesting observation: My MacBook Air weighs less than my Wiley GAAP reference book.  The rules grew while computers shrank.


It's fairly mind boggling the amount of finance receivables that are unearned interest, discounts, and allowance for credit losses: $142 million vs $230 million net receivables.  The interest rates people pay is around 24%, which could be like a lightning rod for some politician looking to score points.  Page 37 shows the details better.

I've been reading the note about how they account for dealer discounts, which I've known about for many years.  Ok, so the entire discount is part of the credit loss reserve.  Contracts go into static pools (see previous posts).  As conditions change, they alter the level of provisioning and/or allowance.

Let me look at 2011 in detail back on page 23.  The year started with $30.4 million allowance for credit losses.  They bought new contracts with a total discount of $12.9 million.  They provisioned an additional $4.5 million.  They absorbed $14.0 million in net losses, but repo men got back $2.3 million in action packed recoveries.  $0.1 million of the discount accreted during the year (brain overload).  My understanding was that when the loan matured or was paid off, the discount dumped back into earnings, but I guess it must accrete in order to match it with the correct time period.  So the year ended with $35,9 million allowance.  This is only for purchased loans; a much smaller (and less ugly) version exists for direct loans.

Back to the notes.

NICK is being audited by the IRS for 2010.

Interest accrual ends when a contract is deliquent for 60 days or repo.

Diluted earnings per share numbers include 286K shares but don't include 331K antidilutive shares.  12 million is a good number for diluted shares in my opinion, 12.5 is even better.

Black-Scholes pricing for options.  risk-free rate is US Treasury bond/note/bill with the same duration.  Etc.

Charge-offs occur after 120 days delinquent or repo.

I analyze the delinquency rates routinely, I won't write anything here.

Jan 2010, NICK executed a new LOC agreement with a consortium of lenders.  LOC expanded to $140 million from $115 million (which says something given the time period).  30-day LIBOR plus 3%, currently it's 4% (the floor value).  All NICK assets are collateral.  LOC expires Nov 2011.  Various covenants, dividends require written permission.  Currently in compliance with all covenants.

Interest rate swaps convert floating debt to fixed rate to match the receivables.  All swaps have matured at this point.

continue on page 41
in the good old days, I would have blasted through the whole 10-K in one sitting.

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