================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________to _______
Commission file number 001-14237
FINANCIAL FEDERAL CORPORATION
(Exact name of Registrant as specified in its charter)
Nevada 88-0244792
(State of incorporation) (I.R.S. Employer Identification No.)
733 Third Avenue, New York, New York 10017
(Address of principal executive offices)
Registrant's telephone number, including area code (212) 599-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock on March 2,
2009 was 25,836,708.
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FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
Quarterly Report on Form 10-Q
for the quarter ended January 31, 2009
TABLE OF CONTENTS
Part I - Financial Information Page No.
---------------------------------------------------------------------- --------
Item 1. Financial Statements:
Consolidated Balance Sheets at January 31, 2009 (unaudited)
and July 31, 2008 (audited) 1
Consolidated Income Statements for the three and six months
ended January 31, 2009 and 2008 (unaudited) 2
Consolidated Statements of Changes in Stockholders' Equity for
the six months ended January 31, 2009 and 2008 (unaudited) 3
Consolidated Statements of Cash Flows for the six months ended
January 31, 2009 and 2008 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
Part II - Other Information
------------------------------------------------------------------------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
Signatures 25
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
===========================================================================================
January 31, 2009* July 31, 2008
===========================================================================================
ASSETS
Finance receivables $ 1,804,035 $ 1,940,792
Allowance for credit losses (24,846) (24,769)
-------------------------------------------------------------------------------------------
Finance receivables - net 1,779,189 1,916,023
Cash 9,279 8,232
Other assets 17,847 18,613
-------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,806,315 $ 1,942,868
===========================================================================================
LIABILITIES
Debt:
Long-term ($4,800 at January 31, 2009 and $1,400 at
July 31, 2008 owed to related parties) $ 1,130,000 $ 1,189,000
Short-term 187,000 278,000
Accrued interest, taxes and other liabilities 53,477 60,996
-------------------------------------------------------------------------------------------
Total liabilities 1,370,477 1,527,996
-------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock - $1 par value, authorized 5,000 shares -- --
Common stock - $.50 par value, authorized 100,000 shares,
shares issued and outstanding (net of 1,696 treasury
shares): 25,838 at January 31, 2009 and 25,673 at
July 31, 2008 12,919 12,836
Additional paid-in capital 143,900 139,490
Retained earnings 281,258 265,026
Accumulated other comprehensive loss (2,239) (2,480)
-------------------------------------------------------------------------------------------
Total stockholders' equity 435,838 414,872
-------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,806,315 $ 1,942,868
===========================================================================================
* Unaudited
See accompanying notes to consolidated financial statements
1
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS *
(In thousands, except per share amounts)
============================================================================================
Three Months Ended Six Months Ended
January 31, January 31,
-----------------------------------------
2009 2008 2009 2008
============================================================================================
Finance income $40,613 $48,708 $83,606 $98,304
Interest expense 12,932 20,527 28,318 42,608
--------------------------------------------------------------------------------------------
Net finance income before provision for credit
losses on finance receivables 27,681 28,181 55,288 55,696
Provision for credit losses on finance receivables 2,100 800 3,500 1,200
--------------------------------------------------------------------------------------------
Net finance income 25,581 27,381 51,788 54,496
Gain on debt retirement 1,588 -- 1,588 --
Salaries and other expenses (7,237) (6,852) (14,406) (13,361)
--------------------------------------------------------------------------------------------
Income before provision for income taxes 19,932 20,529 38,970 41,135
Provision for income taxes 7,634 7,945 14,993 15,885
--------------------------------------------------------------------------------------------
NET INCOME $12,298 $12,584 $23,977 $25,250
============================================================================================
EARNINGS PER COMMON SHARE:
Diluted $ 0.49 $ 0.51 $ 0.96 $ 1.01
============================================================================================
Basic $ 0.50 $ 0.52 $ 0.98 $ 1.03
============================================================================================
* Unaudited
See accompanying notes to consolidated financial statements
2
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY *
(In thousands)
=======================================================================================================
Accumulated
Common Stock Additional Other
----------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Loss Total
=======================================================================================================
BALANCE - JULY 31, 2007 25,760 $12,880 $129,167 $244,646 $ 1,060 $387,753
Net income -- -- -- 25,250 -- 25,250
Unrealized loss on cash flow
hedge, after $(2,291) of tax -- -- -- -- (3,624) (3,624)
Reclassification of realized
gain in net income, after
$(80) of tax -- -- -- -- (124) (124)
--------
Comprehensive income 21,502
--------
Stock repurchased (retired) (633) (316) (3,290) (13,141) -- (16,747)
Stock plan activity:
Shares issued 337 168 1,968 -- -- 2,136
Compensation recognized -- -- 3,961 -- -- 3,961
Excess tax benefits -- -- 275 -- -- 275
Common stock cash dividends -- -- -- (7,714) -- (7,714)
-------------------------------------------------------------------------------------------------------
BALANCE - JANUARY 31, 2008 25,464 $12,732 $132,081 $249,041 $(2,688) $391,166
=======================================================================================================
=======================================================================================================
Accumulated
Common Stock Additional Other
----------------- Paid-In Retained Comprehensive
Shares Amount Capital Earnings Loss Total
=======================================================================================================
BALANCE - JULY 31, 2008 25,673 $12,836 $139,490 $265,026 $(2,480) $414,872
Net income -- -- -- 23,977 -- 23,977
Reclassification of realized
net loss in net income,
after $152 of tax -- -- -- -- 241 241
--------
Comprehensive income 24,218
--------
Stock repurchased (retired) (7) (3) (155) -- -- (158)
Stock plan activity:
Shares issued 172 86 413 -- -- 499
Compensation recognized -- -- 4,167 -- -- 4,167
Tax shortfall -- -- (15) -- -- (15)
Common stock cash dividends -- -- -- (7,745) -- (7,745)
-------------------------------------------------------------------------------------------------------
BALANCE - JANUARY 31, 2009 25,838 $12,919 $143,900 $281,258 $(2,239) $435,838
=======================================================================================================
* Unaudited
See accompanying notes to consolidated financial statements
3
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS *
(In thousands)
============================================================================================
Six Months Ended January 31, 2009 2008
============================================================================================
Cash flows from operating activities:
Net income $ 23,977 $ 25,250
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of deferred origination costs and fees 8,453 8,584
Stock-based compensation 2,469 2,440
Provision for credit losses on finance receivables 3,500 1,200
Depreciation and amortization 764 249
Gain on debt retirement (1,588) --
Decrease (increase) in other assets 719 (2,431)
Decrease in accrued interest, taxes and other
liabilities (7,685) (280)
Tax shortfall (excess tax benefits) from stock-based
awards 15 (275)
--------------------------------------------------------------------------------------------
Net cash provided by operating activities 30,624 34,737
--------------------------------------------------------------------------------------------
Cash flows from investing activities:
Finance receivables originated (351,324) (483,550)
Finance receivables collected and repossessed assets
sales proceeds 477,509 530,990
--------------------------------------------------------------------------------------------
Net cash provided by investing activities 126,185 47,440
--------------------------------------------------------------------------------------------
Cash flows from financing activities:
Bank borrowings, net (decrease) increase (48,200) 445,084
Commercial paper, net decrease (24,100) (173,834)
Asset securitization borrowings - revolving, net decrease -- (289,000)
Repayments of term asset securitization borrowings (35,400) --
Repurchases of convertible debentures (40,643) --
Repayments of term notes -- (36,250)
Payments for settlement of interest rate locks -- (5,915)
Proceeds from stock option exercises 454 2,091
Common stock issued 45 45
Common stock cash dividends (7,745) (7,714)
Common stock repurchased (158) (16,747)
(Tax shortfall) excess tax benefits from stock-based awards (15) 275
--------------------------------------------------------------------------------------------
Net cash used in financing activities (155,762) (81,965)
--------------------------------------------------------------------------------------------
NET INCREASE IN CASH 1,047 212
Cash - beginning of period 8,232 5,861
--------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 9,279 $ 6,073
============================================================================================
* Unaudited
See accompanying notes to consolidated financial statements
4
FINANCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Financial Federal Corporation and subsidiaries (the "Company") provide
collateralized lending, financing and leasing services nationwide to small and
medium sized businesses in the general construction, road and infrastructure
construction and repair, road transportation and refuse industries. We lend
against, finance and lease a wide range of new and used revenue-producing,
essential-use equipment including cranes, earthmovers, personnel lifts, trailers
and trucks.
Basis of Presentation and Principles of Consolidation
We prepared the accompanying unaudited Consolidated Financial Statements
according to the Securities and Exchange Commission's rules and regulations.
These rules and regulations permit condensing or omitting certain information
and note disclosures normally included in financial statements prepared
according to accounting principles generally accepted in the United States of
America (GAAP). The July 31, 2008 Consolidated Balance Sheet was derived from
audited financial statements but does not include all disclosures required by
GAAP. However, we believe the disclosures are sufficient to make the information
presented not misleading. These Consolidated Financial Statements and
accompanying notes should be read with the Consolidated Financial Statements and
accompanying notes included in our Annual Report on Form 10-K for the fiscal
year ended July 31, 2008.
In our opinion, the Consolidated Financial Statements include all
adjustments (consisting of only normal recurring items) necessary to present
fairly our financial position and results of operations for the periods
presented. The results of operations for the three and six months ended January
31, 2009 may not be indicative of full year results.
Use of Estimates
GAAP requires us to make significant estimates and assumptions to record
the amounts reported in the Consolidated Financial Statements and accompanying
notes for the allowance for credit losses, non-performing assets, residual
values, income taxes and stock-based compensation. Actual results could differ
from these estimates significantly.
New Accounting Standards
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements" ("SFAS No. 157") and SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" became effective for us on August 1, 2008. SFAS No. 157
defines fair value (replacing all prior definitions) and creates a framework to
measure fair value, but does not create any new fair value measurements. SFAS
No. 159 permits companies to choose to measure many financial instruments and
certain other items at fair value at specified election dates and to report
unrealized gains and losses on these items in earnings at each subsequent
reporting date. We did not choose to measure any financial instruments or other
items at fair value. The only items we measure at fair value are impaired
finance receivables and assets received to satisfy finance receivables
(repossessed equipment, included in other assets). We were required to measure
these items at fair value before these statements took effect and these
statements did not change how we determine their fair value materially.
Therefore, these statements did not have a material impact on our consolidated
financial statements.
The FASB issued Staff Position ("FSP") EITF 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities", in June 2008. Securities participating in dividends with common
stock according to a formula are participating securities. This FSP determined
unvested shares of restricted stock and stock units with nonforfeitable rights
to dividends are participating securities. Participating securities require the
"two-class" method to calculate basic earnings per share. This method lowers
basic earnings per common share. This FSP takes effect in the first quarter of
fiscal years beginning after December 15, 2008 and will be applied
retrospectively for all periods presented. It will take effect for us on August
1, 2009. We have 1,307,000 unvested shares of restricted stock and stock units
with nonforfeitable rights to dividends. Based on this amount, our current
dividend rate and number of shares of common stock outstanding, we estimate
applying this FSP would reduce annual basic earnings per common share by $0.10.
This FSP will not affect diluted earnings per share or net income.
5
The FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments
That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlements)", in May 2008. This FSP requires a portion of this type of
convertible debt to be recorded as equity and interest expense to be recorded on
the debt portion at a rate that would have been charged on non-convertible debt
with the same terms. This FSP takes effect in the first quarter of fiscal years
beginning after December 15, 2008 and will be applied retrospectively for all
periods presented. It will take effect for us on August 1, 2009. This FSP will
apply to our 2.0% convertible debentures and we are evaluating how it may affect
our consolidated financial statements.
NOTE 2 - FINANCE RECEIVABLES
Finance receivables comprise installment sale agreements and secured loans
(including line of credit arrangements), collectively referred to as loans, with
fixed or floating (indexed to the prime rate) interest rates, and direct
financing leases as follows:
=========================================================================
January 31, 2009 July 31, 2008
=========================================================================
Loans:
Fixed rate $ 1,489,612 $ 1,592,839
Floating rate 154,976 168,793
-------------------------------------------------------------------------
Total loans 1,644,588 1,761,632
Direct financing leases * 159,447 179,160
-------------------------------------------------------------------------
Finance receivables $ 1,804,035 $ 1,940,792
=========================================================================
* includes residual values of $37,600 at January 31, 2009 and $42,300 at
July 31, 2008
Line of credit arrangements contain off-balance sheet risk and are subject
to the same credit policies and procedures as other finance receivables. The
unused portion of these commitments was $23,900 at January 31, 2009 and $21,600
at July 31, 2008.
Allowance for credit losses activity is summarized below:
=========================================================================
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------------------
2009 2008 2009 2008
=========================================================================
Allowance - beginning of period $ 24,789 $ 24,020 $ 24,769 $ 23,992
Provision 2,100 800 3,500 1,200
Write-downs (2,480) (1,351) (4,602) (2,324)
Recoveries 437 664 1,179 1,265
-------------------------------------------------------------------------
Allowance - end of period $ 24,846 $ 24,133 $ 24,846 $ 24,133
=========================================================================
Percentage of finance receivables 1.38% 1.16% 1.38% 1.16%
=========================================================================
Net charge-offs (recoveries) * $ 2,043 $ 687 $ 3,423 $ 1,059
=========================================================================
Loss ratio ** 0.44% 0.13% 0.36% 0.10%
=========================================================================
* write-downs less recoveries
** net charge-offs over average finance receivables, annualized
Non-performing assets comprise impaired finance receivables and assets
received to satisfy finance receivables as follows:
=========================================================================
January 31, 2009 July 31, 2008
=========================================================================
Impaired finance receivables $ 40,034 $ 33,542
Assets received to satisfy finance
receivables 13,576 13,182
-------------------------------------------------------------------------
Non-performing assets $ 53,610 $ 46,724
=========================================================================
6
The allowance for credit losses included $1,100 at January 31, 2009 and
$900 at July 31, 2008 specifically allocated to $10,500 and $9,400 of impaired
finance receivables, respectively. We did not recognize any income in the six
months ended January 31, 2009 or 2008 on impaired receivables before collecting
our net investment. We repossessed assets to satisfy $24,700 and $10,400 of
finance receivables in the six months ended January 31, 2009 and 2008,
respectively.
We recorded $16,000 of impaired finance receivables based on the fair
value of the collateral and $6,000 of assets received to satisfy finance
receivables at fair value at January 31, 2009. We measured fair value using
significant other observable inputs (Level 2); primarily quoted prices in active
markets for identical or similar assets adjusted for their condition.
NOTE 3 - DEBT
Debt is summarized below:
=========================================================================
January 31, 2009 July 31, 2008
=========================================================================
Fixed rate term notes:
4.31% - 4.60% due 2013 $ 75,000 $ 75,000
4.96% - 5.00% due 2010 - 2011 275,000 275,000
5.45% - 5.57% due 2011 - 2014 325,000 325,000
-------------------------------------------------------------------------
Total fixed rate term notes 675,000 675,000
2.0% convertible debentures due 2034 132,700 175,000
Asset securitization borrowings - term 133,600 169,000
-------------------------------------------------------------------------
Total term debt 941,300 1,019,000
Bank borrowings 320,800 369,000
Commercial paper 54,900 79,000
-------------------------------------------------------------------------
Total debt $1,317,000 $1,467,000
=========================================================================
Convertible Debentures
We purchased $42,300 of the debentures in the open market under our common
stock and convertible debt repurchase program in the three months ended January
31, 2009 for $40,643 resulting in a $1,588 debt retirement gain (net of $69 of
unamortized deferred debt issuance costs). We increased the amount authorized
for repurchases under the program by $35,282 in January 2009 and by $23,251 in
September 2008 and $44,480 remained authorized for future repurchases at January
31, 2009. We established the program in fiscal 2007 and it does not have a set
expiration.
The debentures are due at maturity in April 2034, but we can redeem them
anytime starting in April 2009 and debenture holders can require us to
repurchase them on each five-year anniversary of issuance or when a specified
corporate transaction occurs by paying the principal amount in cash. The first
five-year anniversary is in April 2009. Debenture holders can also convert the
debentures before maturity into cash and common stock as discussed below.
Holders can convert the debentures under the following conditions: (i) in
a fiscal quarter when the closing price of our common stock is at least 30%
higher than the adjusted conversion price for at least 20 of the last 30 trading
days of the prior fiscal quarter (the "market price condition") (ii) the
debentures are rated 'BB' or lower by Fitch Ratings, Inc. (four levels lower
than the current rating) (iii) we call the debentures or (iv) a specified
corporate transaction occurs. No condition allowing holders to convert the
debentures has occurred through January 31, 2009. The market price condition
would have been met at January 31, 2009 if the price of our common stock closed
above $35.26 for the required period. The closing price of our common stock was
$21.72 on January 31, 2009.
We irrevocably elected (under the debentures' original terms and without
modifying the debentures) in fiscal 2005 to pay the value of converted
debentures, not exceeding their principal amount, in cash instead of issuing
shares of common stock. The value of converted debentures equals the number of
convertible shares multiplied by the market value of our common stock. We would
only issue shares if the value of converted debentures exceeded their principal
amount. Shares of common stock needed to pay any value over principal would
equal the difference between the conversion date closing price of our common
stock and the conversion price, divided by the conversion date closing price and
multiplied by the number of
7
convertible shares. There were 4,893,000 convertible (but not issuable) shares,
the adjusted conversion price was $27.12 per share and the adjusted conversion
rate was 36.87 shares for each $1 (one thousand) of principal at January 31,
2009.
The conversion rate and number of convertible shares increased and the
conversion price decreased in the three months ended January 31, 2009 because we
paid cash dividends on our common stock, and the number of convertible shares
decreased because we purchased $42,300 of debentures. The conversion rate,
conversion price and number of convertible shares were 36.35, $27.51 and
6,361,000, respectively at July 31, 2008. Future cash dividends will cause
additional increases in the conversion rate and number of convertible shares and
decreases in the conversion price.
Asset Securitization Borrowings
Our asset securitization facility was partially renewed and partially
converted into amortizing term debt in April 2008. The facility decreased to
$325,000 from $425,000 and we converted $200,000 of borrowings into term debt.
The two renewing banks increased their commitments $50,000 each and we converted
the amounts borrowed from the two non-renewing banks into term debt.
The $325,000 facility provides for committed revolving financing through
April 2009 and we can then convert borrowings outstanding into amortizing term
debt if it is not renewed. The full amount of the facility was available for us
to borrow at January 31, 2009. We are repaying the remaining $133,600 of
amortizing term debt monthly from collections of securitized receivables. The
repayment amounts vary based on the amount of securitized receivables collected
and the amount borrowed under the facility, and would increase if we borrow
under the facility or convert the facility into amortizing term debt upon
nonrenewal. The term debt would be repaid substantially in three years based on
the amount of securitized receivables at January 31, 2009 and no borrowings
outstanding under the facility.
Finance receivables included $270,000 of securitized receivables at
January 31, 2009 and $410,000 at July 31, 2008. We can only securitize 40% of
our major operating subsidiary's receivables because of restrictions in its debt
agreements. Therefore, we could only securitize an additional $450,000 of
receivables at January 31, 2009.
Borrowings under the facility and the term debt combined are limited to
94% of eligible securitized receivables and are without recourse. Securitized
receivables classified as impaired or with terms outside of defined limits are
ineligible to be borrowed against. The facility also restricts the amount of net
charge-offs of securitized receivables and the amount of delinquent securitized
receivables. The facility would terminate if these restrictions are exceeded,
and borrowings outstanding would then be repaid monthly from collections of
securitized receivables.
Bank Borrowings
We have $480,000 of committed unsecured revolving credit facilities from
ten banks with $40,000 expiring within one year and $440,000 expiring between
February 2010 and February 2013, and $159,200 of these facilities was available
for us to borrow at January 31, 2009. Borrowings under these facilities can
mature between 1 and 270 days and their interest rates are based on domestic
money market rates or LIBOR. Borrowings outstanding at January 31, 2009 matured
in February 2009, were reborrowed and remain outstanding. We incur a fee on the
unused portion of the facilities. We renewed a $30,000 two-year facility for
another two years in September 2008.
Other
Our major operating subsidiary's agreements for the term notes, asset
securitization facility and bank credit facilities discussed above have
restrictive covenants including limits on its indebtedness, encumbrances,
investments, dividends and other distributions to us, sales of assets, mergers
and other business combinations, capital expenditures, interest coverage and net
worth. We complied with all debt covenants and restrictions at January 31, 2009.
None of the agreements has a material adverse change clause and all of our debt
is senior.
Long-term debt comprised the following:
=========================================================================
January 31, 2009 July 31, 2008
=========================================================================
Term notes $ 675,000 $ 675,000
Bank borrowings and commercial paper
supported by bank credit facilities
expiring after one year 375,700 410,000
Asset securitization borrowings - term 79,300 104,000
-------------------------------------------------------------------------
Total long-term debt $ 1,130,000 $ 1,189,000
=========================================================================
8
NOTE 4 - STOCK PLANS
We have two stockholder approved stock plans; the 2006 Stock Incentive
Plan (the "2006 Plan") and the Amended and Restated 2001 Management Incentive
Plan (the "Amended MIP"). The 2006 Plan provides for the issuance of 2,500,000
shares of restricted stock, non-qualified or incentive stock options, stock
appreciation rights, stock units and common stock to officers, other employees
and directors with annual participant limits, and expires in December 2016.
Awards may be performance-based. The exercise price of stock options cannot be
less than the fair market value of our common stock when granted and their term
is limited to ten years. There were 1,776,000 shares available for future grants
under the 2006 Plan at January 31, 2009. The Amended MIP provides for the
issuance of 1,000,000 shares of restricted stock, with an annual participant
limit of 200,000 shares, and performance-based cash or stock bonuses to be
awarded to our CEO and other selected officers. The Amended MIP expires in
December 2011. There were 625,000 shares available for future grants under the
Amended MIP at January 31, 2009.
We also have a Supplemental Retirement Benefit ("SERP") for our CEO. We
awarded 150,000 stock units in fiscal 2002 vesting annually in equal amounts
over eight years. Subject to forfeiture, our CEO will receive shares of common
stock equal to the number of stock units vested when our CEO retires after
attaining age 62. There were 131,000 units vested at January 31, 2009.
In October 2008, we awarded 100,000 shares of performance-based restricted
stock to executive officers under the 2006 Plan vesting 25% after two, three,
four and five years, and 50,000 shares of performance-based restricted stock to
our CEO under the Amended MIP vesting in October 2013. These shares would be
forfeited if the performance condition, based on diluted earnings per share for
fiscal 2009, is not met. We also granted 5,000 non-qualified stock options to
employees with a five-year term vesting 25% after one, two, three and four
years.
We awarded 10,000 restricted stock units under the 2006 Plan to
non-employee directors in the three months ended January 31, 2009. The units
vest in one year or earlier upon the sale of the Company or the director's death
or disability. Unvested units are subject to forfeiture. Each unit represents
the right to receive one share of common stock. Vested units will convert into
shares of common stock when the director's service terminates. The directors
also held 30,000 vested restricted stock units at January 31, 2009. We issued
2,000 shares of common stock under the 2006 Plan as payment of annual director
retainer fees at a director's election. The price of our common stock on the
date we issued these shares was $22.38.
Shares of restricted stock, stock options and stock units are the only
incentive compensation we provide (other than a cash bonus for the CEO) and we
believe these stock-based awards further align employees' and directors'
interests with those of our stockholders. We do not have a policy to repurchase
shares in the open market, and we issue new shares when we award shares of
restricted stock or when options are exercised.
Restricted stock activity for the six months ended January 31, 2009 is
summarized below (shares in thousands):
====================================================================
Weighted-Average
Shares Grant-Date Fair Value
====================================================================
Unvested - August 1, 2008 1,176 $ 26.20
Granted 150 19.64
Vested (19) 26.08
--------------------------------------
Unvested - January 31, 2009 1,307 $ 25.45
====================================================================
Information on shares of restricted stock that vested follows (in
thousands, except intrinsic value per share):
====================================================================
Six Months Ended January 31, 2009 2008
====================================================================
Number of shares vested 19 19
Total intrinsic value * $ 437 $ 500
Intrinsic value per share 23.00 26.32
(Tax shortfall) excess tax benefits realized (9) 22
====================================================================
* shares vested multiplied by the closing prices of our common stock
on the dates vested
9
Stock option activity and related information for the six months ended
January 31, 2009 are summarized below (options and intrinsic value in
thousands):
=========================================================================
Weighted-Average
----------------------
Exercise Remaining Intrinsic
Options Price Term (years) Value*
=========================================================================
Outstanding - August 1, 2008 892 $ 24.31
Granted 5 23.77
Forfeitures (5) 24.14
Exercised (20) 22.63
-------------------------------------
Outstanding - January 31, 2009 872 $ 24.35 1.8 $ 100
=========================================================================
Exercisable - January 31, 2009 500 $ 24.01 1.3 $ 100
=========================================================================
* number of in-the-money options multiplied by the difference between
their average exercise price and the $21.72 closing price of our common
stock on January 31, 2009
Information on stock option exercises follows (in thousands, except
intrinsic value per option):
====================================================================
Six Months Ended January 31, 2009 2008
====================================================================
Number of options exercised 20 110
Total intrinsic value * $ 49 $ 1,070
Intrinsic value per option 2.45 9.73
(Tax shortfall) excess tax benefits realized (6) 253
====================================================================
* options exercised multiplied by the difference between their
exercise prices and the closing prices of our common stock on the
exercise dates
Future compensation expense (before deferral) for stock-based awards
unvested at January 31, 2009 and expected to vest, and the average expense
recognition periods follow:
====================================================================
Expense Weighted-Average Years
====================================================================
Restricted stock $ 18,500 5.1
Stock options 800 2.1
Stock units 600 0.9
--------------------------------------
Total $ 19,900 4.9
====================================================================
Compensation recorded, deferred, included in salaries and other expenses,
and tax benefits recorded for stock-based awards follow:
=========================================================================
Three Months Ended Six Months Ended
January 31, January 31,
-------------------------------------
2009 2008 2009 2008
=========================================================================
Total stock-based compensation $2,163 $2,048 $4,167 $3,961
Deferred stock-based compensation 880 798 1,698 1,521
-------------------------------------------------------------------------
Net stock-based compensation in
salaries and other expenses $1,283 $1,250 $2,469 $2,440
=========================================================================
Tax benefits $ 484 $ 461 $ 929 $ 897
=========================================================================
10
NOTE 5 - EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") was calculated as follows (in thousands,
except per share amounts):
=========================================================================
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------------------
2009 2008 2009 2008
=========================================================================
Net income $12,298 $12,584 $23,977 $25,250
=========================================================================
Weighted-average common shares
outstanding (used for basic EPS) 24,587 24,338 24,575 24,510
Effect of dilutive securities:
Shares of restricted stock and
stock units 457 330 434 360
Stock options 3 50 8 117
Shares issuable from convertible
debt -- -- -- 87
-------------------------------------------------------------------------
Adjusted weighted-average common
shares outstanding (used for
diluted EPS) 25,047 24,718 25,017 25,074
=========================================================================
Net income per common share:
Diluted $ 0.49 $ 0.51 $ 0.96 $ 1.01
=========================================================================
Basic $ 0.50 $ 0.52 $ 0.98 $ 1.03
=========================================================================
Antidilutive shares of restricted
stock, stock units and stock
options * 917 1,292 733 775
=========================================================================
* excluded from the calculation because they would have increased diluted
EPS
The convertible debentures lower diluted EPS when the quarterly average
price of our common stock exceeds the adjusted conversion price. When this
occurs, shares of common stock needed to deliver the value of the debentures
over their principal amount based on the average stock price would be included
as shares outstanding in calculating diluted EPS. Shares to be included would
equal the difference between the average stock price and the adjusted conversion
price, divided by the average stock price and multiplied by the number of
convertible shares, currently 4,893,000 (referred to as the treasury stock
method). The average price of our common stock exceeded the adjusted conversion
price in the three months ended October 31, 2007 resulting in 87,000 dilutive
shares in the six months ended January 31, 2008.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Financial Federal Corporation is an independent financial services company
operating in the United States through three wholly owned subsidiaries. We do
not have any unconsolidated subsidiaries, partnerships or joint ventures. We
also do not have any off-balance sheet assets or liabilities (other than
commitments to extend credit), goodwill, other intangible assets or pension
obligations, and we are not involved in income tax shelters. We have one fully
consolidated special purpose entity we established for our on-balance-sheet
asset securitization facility.
We have one line of business. We lend money under installment sale
agreements, secured loans and leases (collectively referred to as "finance
receivables") to small and medium sized businesses for their equipment financing
needs. Finance receivable transactions generally range between $50,000 and $1.5
million, have terms between two and five years and require monthly payments. The
average transaction size is approximately $250,000. We earn revenue solely from
interest and other fees and amounts earned on our finance receivables. We need
to borrow most of the money we lend. Therefore, liquidity (money currently
available for us to borrow) is very important. We borrow from banks and
insurance companies and we issue commercial paper to other investors.
Approximately 75% of our finance receivables were funded with debt at January
31, 2009.
Our main areas of focus are (i) asset quality (ii) liquidity (iii) net
interest spread (the difference between the rates we earn on our receivables and
the rates we incur on our debt) and (iv) interest rate risk. Changes in the
asset quality of our finance receivables can affect our profitability
significantly. Finance income, provisions for credit losses and operating
expenses can be affected by reclassifying receivables to or from impaired
status, incurring write-downs and incurring costs associated with non-performing
assets. Changes in market interest rates can also affect our profitability
significantly because interest rates on our finance receivables were 91% fixed
and 9% floating, and interest rates on our debt were 61% fixed and 39% floating
at January 31, 2009. We use various strategies to manage our credit risk and
interest rate risk. Each of these four areas is integral to our long-term
profitability and we discuss them in detail in separate sections of this
discussion.
Our key operating statistics are net charge-offs, loss ratio,
non-performing assets, delinquencies, leverage, available liquidity, receivables
growth, return on equity, net interest margin and net interest spread, and
expense and efficiency ratios.
Significant events
The crisis in credit markets that began over one year ago worsened
considerably during the first half of fiscal 2009 causing credit markets to
nearly collapse. It is now even more difficult and expensive for finance
companies to obtain or renew financing. Banks and other lenders, including all
of our funding sources, are either reluctant or unable to provide, or are
charging prohibitively high credit spreads, on new financing. Credit spread is
the percentage amount lenders charge above a base market interest rate. Our cost
of debt will increase considerably as we obtain or renew financing if credit
spreads persist at these levels.
The Federal Reserve, United States Treasury Department and FDIC have taken
unprecedented, drastic steps to address the crisis including lowering the target
Federal Funds Rate ten times since September 2007 to between zero and 0.25%; the
lowest level in history. This includes three decreases totaling 175 basis points
during the first half of fiscal 2009. They injected over $1.0 trillion into the
financial system through several programs to prevent it from failing and to
encourage lending. We are not eligible to participate in these programs because
we are not a bank holding company and our commercial paper is rated F2.
Our available liquidity has increased by $189.3 million during the crisis
to $429.3 million at January 31, 2009 from $240.0 million at July 31, 2007. The
increase resulted from significantly lower receivable originations, strong
operating cash flows and the following transactions. We partially renewed our
$425.0 million asset securitization facility for another year in April 2008. Two
of the four banks in the facility increased their $225.0 million combined
commitment by $100.0 million and we converted the $200.0 million borrowed from
the other two banks into amortizing term debt. We renewed a $25.0 million bank
credit facility in March 2008 and a $30.0 million bank credit facility in
September 2008. We also converted $75.0 million of bank credit facilities into
five-year fixed rate term loans with a 4.43% average rate and we extended the
term of a $15.0 million bank credit facility with no change in credit spread in
February 2008. Based on our amount of available liquidity, the maturity and
expiration dates of our debt and credit facilities (including the expected
repayment of our $132.7 million of convertible debentures in April 2009) and
receivable originations continuing at recent
12
levels, we do not anticipate a need for any financing until the third quarter of
fiscal 2010. We discuss our liquidity and debt in the Liquidity and Capital
resources section.
In addition, our cost of debt has decreased during the crisis because (i)
short-term market interest rates decreased significantly (ii) the relatively
small amount of expiring credit facilities and maturing debt limited the impact
of higher credit spreads and (iii) we have $480.0 million of low-cost committed
bank credit facilities with no borrowing restrictions. Our cost of debt was
3.78% in the second quarter of fiscal 2009 compared to 5.35% in the fourth
quarter of fiscal 2007 (the quarter before the crisis started). We expect our
cost of debt to increase because short-term market interest rates are at
historic lows and we will be charged higher credit spreads as we renew or obtain
financing. We discuss our cost of debt in the Market Interest Rate Risk and
Sensitivity section.
Maintaining conservative leverage and ample liquidity, having multi-year
committed bank credit facilities and term debt with staggered maturities, and
our approach to managing credit risk on our finance receivables (as discussed in
the Finance Receivables and Asset Quality section) have been integral to our
success during this difficult period.
Critical Accounting Policies and Estimates
Applying accounting principles generally accepted in the United States
requires judgment, assumptions and estimates to record the amounts in the
Consolidated Financial Statements and accompanying notes. We describe the
significant accounting policies and methods we use to prepare the Consolidated
Financial Statements in Note 1 to the Consolidated Financial Statements in our
Annual Report on Form 10-K for the fiscal year ended July 31, 2008. Accounting
policies involving significant judgment, assumptions and estimates are
considered critical accounting policies and are discussed below.
Allowance for Credit Losses
The allowance for credit losses on finance receivables is our estimate of
losses inherent in our finance receivables at the balance sheet date. The
allowance is difficult to determine and requires significant judgment. The
allowance is based on total finance receivables, net charge-off experience,
impaired and delinquent finance receivables and our current assessment of the
risks inherent in our finance receivables from national and regional economic
conditions, industry conditions, concentrations, the financial condition of
customers and guarantors, collateral values and other factors. We may need to
change the allowance level significantly if unexpected changes in these
conditions or factors occur. Increases in the allowance would reduce net income
through higher provisions for credit losses. We would need to record a $1.8
million provision for each 0.10% required increase in the allowance. The
allowance was $24.8 million (1.38% of finance receivables) at January 31, 2009
including $1.1 million specifically allocated to impaired receivables.
The allowance includes amounts specifically allocated to impaired
receivables and an amount to provide for losses inherent in finance receivables
that are not impaired (the "general allowance"). We evaluate the fair values of
impaired receivables and compare them to the carrying amounts. The carrying
amount is the amount receivables are recorded at when we evaluate them and may
include prior write-downs or a specific allowance. If our fair value estimate is
lower than the carrying amount, we record a write-down or establish a specific
allowance depending on (i) how we determined fair value (ii) how certain we are
of our estimate and (iii) the level and type of factors and items other than the
primary collateral supporting our fair value estimate, such as guarantees and
secondary collateral.
To estimate the general allowance, we analyze historical write-down
activity to develop percentage loss ranges by risk profile. Risk profiles are
assigned to receivables based on past due status and the customers' industry. We
do not use a loan grading system. We then adjust the calculated range of losses
for expected recoveries and differences between current and historical loss
trends and other factors to arrive at the estimated allowance. We record a
provision for credit losses if the recorded allowance differs from our current
estimate. The adjusted calculated range of losses may differ from actual losses
significantly because we use significant estimates.
Non-Performing Assets
We record impaired finance receivables and repossessed equipment (assets
received to satisfy receivables) at their current estimated fair value (if less
than their carrying amount). We estimate fair value of these non-performing
assets by evaluating the market value and condition of the collateral or assets
and the expected cash flows of impaired receivables. We evaluate market value
based on recent sales of similar equipment, used equipment publications, our
market knowledge and information from equipment vendors. Unexpected adverse
changes in or incorrect estimates of expected cash flows, market value or the
condition of collateral or assets, or time needed to sell equipment would
require us to record a write-down. This would lower net income. Non-performing
assets totaled $53.6 million (3.0% of finance receivables) at January 31, 2009.
13
Residual Values
We record residual values on direct financing leases at the lowest of (i)
any stated purchase option (ii) the present value at the end of the initial
lease term of rentals due under any renewal options or (iii) our projection of
the equipment's fair value at the end of the lease. We may not fully realize
recorded residual values because of unexpected adverse changes in or incorrect
projections of future equipment values. This would lower net income. Residual
values totaled $37.6 million (2.1% of finance receivables) at January 31, 2009.
Historically, we have realized the recorded residual value on disposition.
Income Taxes
We record a liability for uncertain income tax positions by (i)
identifying the uncertain tax positions we take on our income tax returns (ii)
determining if these positions would more likely than not be allowed by a taxing
authority and (iii) estimating the amount of tax benefit to record if these tax
positions pass the more-likely-than-not test. Therefore, we record a liability
for tax benefits from positions failing the test and from positions where the
full amount of the tax benefits are not expected to be realized. Identifying
uncertain tax positions, determining if they pass the test and determining the
liability to record requires significant judgment because tax laws are
complicated and subject to interpretation, and because we have to assess the
likely outcome of hypothetical challenges to these positions by taxing
authorities. Actual outcomes of these uncertain tax positions differing from our
assessments significantly and taxing authorities examining positions we did not
consider uncertain could require us to record additional income tax expense
including interest and penalties on any underpayment of tax. This would lower
net income. The gross liability recorded for uncertain tax positions was $1.2
million at July 31, 2008 and we do not expect this amount to change in fiscal
2009 significantly.
Stock-Based Compensation
We record compensation expense only for stock-based awards expected to
vest. Therefore, we must estimate expected forfeitures of stock awards. This
requires significant judgment and an analysis of historical data. We would need
to record more compensation expense for stock awards if expected forfeitures
exceed actual forfeitures. Our average expected annual rate of forfeitures on
all stock-based awards was 7.0% at January 31, 2009.
Results of Operations
Comparison of three months ended January 31, 2009 to three months ended January
31, 2008
========================================================================
Three Months Ended
January 31,
($ in millions, except per ------------------
share amounts) 2009 2008 $ Change % Change
========================================================================
Finance income $ 40.6 $ 48.7 $ (8.1) (17)%
Interest expense 12.9 20.5 (7.6) (37)
Net finance income before
provision for credit losses 27.7 28.2 (0.5) (2)
Provision for credit losses 2.1 0.8 1.3 163
Gain on debt retirement 1.6 -- 1.6 100
Salaries and other expenses 7.3 6.9 0.4 6
Provision for income taxes 7.6 7.9 (0.3) (4)
Net income 12.3 12.6 (0.3) (2)
Diluted earnings per share 0.49 0.51 (0.02) (4)
Basic earnings per share 0.50 0.52 (0.02) (4)
Return on equity 11.3% 12.9%
Excluding the debt retirement gain:
-----------------------------------
Net income $ 11.3 $ 12.6 $ (1.3) (10)%
Diluted earnings per share 0.45 0.51 (0.06) (12)
Basic earnings per share 0.46 0.52 (0.06) (12)
Return on equity 10.4% 12.9%
========================================================================
14
Net income decreased by 2% to $12.3 million in the second quarter of
fiscal 2009 from $12.6 million in the second quarter of fiscal 2008. Without the
$1.0 million after-tax debt retirement gain, net income decreased by 10%. Net
income without the after-tax debt gain decreased because the effects of the 12%
decrease in average receivables and higher non-performing assets exceeded the
effects of lower short-term market interest rates. We discuss the debt
retirement gain in the Liquidity and Capital Resources Section.
Finance income decreased by 17% to $40.6 million in the second quarter of
fiscal 2009 from $48.7 million in the second quarter of fiscal 2008 because (i)
average finance receivables decreased 12% ($250.0 million) to $1.85 billion from
$2.10 billion (ii) the yield on finance receivables decreased to 8.72% from
9.23% mostly due to the prime rate averaging 360 basis points (3.60%) lower and,
to a lesser extent, (iii) non-accrual (impaired) receivables were higher.
Changes in the prime rate affect the yield on receivables because 9% of our
receivables are floating rate and indexed to prime.
Interest expense (incurred on debt used to fund finance receivables)
decreased by 37% to $12.9 million in the second quarter of fiscal 2009 from
$20.5 million in the second quarter of fiscal 2008 because our cost of debt
decreased to 3.78% from 5.00% and our average debt decreased 17% ($274.0
million). Lower short-term market interest rates caused the decrease in our cost
of debt because the interest rates on 40% of our debt were indexed to short-term
market interest rates. This is discussed in the Market Interest Rate Risk and
Sensitivity section.
Net finance income before provision for credit losses on finance
receivables decreased to $27.7 million in the second quarter of fiscal 2009 from
$28.2 million in the second quarter of fiscal 2008. Net interest margin (net
finance income before provision for credit losses expressed as an annualized
percentage of average finance receivables) increased to 5.94% from 5.34% because
of lower short-term market interest rates.
The provision for credit losses on finance receivables was $2.1 million in
the second quarter of fiscal 2009 and $0.8 million in the second quarter of
fiscal 2008. The provision for credit losses is the amount needed to change the
allowance for credit losses to our estimate of losses inherent in finance
receivables. Net charge-offs (write-downs of finance receivables less
recoveries) increased to $2.0 million in the second quarter of fiscal 2009 from
$0.7 million in the second quarter of fiscal 2008, and the loss ratio (net
charge-offs expressed as an annualized percentage of average finance
receivables) increased to 0.44% from 0.13%. Net charge-offs have been increasing
because of higher non-performing assets, worsening economic conditions and
declining collateral values. The allowance and net charge-offs are discussed
further in the Finance Receivables and Asset Quality section.
Salaries and other expenses increased by 6% to $7.3 million in the second
quarter of fiscal 2009 from $6.9 million in the second quarter of fiscal 2008
because of higher non-performing asset costs and salary increases. The expense
ratio (salaries and other expenses expressed as an annualized percentage of
average finance receivables) worsened to 1.55% from 1.30% because expenses
increased and receivables decreased. The efficiency ratio (expense ratio
expressed as a percentage of net interest margin) worsened to 26.1% from 24.3%
because expenses increased and net finance income before provision for credit
losses decreased.
Diluted earnings per share decreased by 4% to $0.49 per share in the
second quarter of fiscal 2009 from $0.51 per share in the second quarter of
fiscal 2008, and basic earnings per share decreased by 4% to $0.50 per share
from $0.52 per share. The percentage decreases in diluted and basic earnings per
share were higher than the percentage decrease in net income because of prior
stock option exercises. The $1.0 million after-tax debt retirement gain
increased diluted and basic earnings per share by $0.04 in the second quarter of
fiscal 2009. Without this gain, diluted and basic earnings per share each
decreased by 12%.
The amounts of net income, diluted and basic earnings per share and
return-on-equity excluding the $1.0 million after-tax debt retirement gain are
non-GAAP financial measures. We believe presenting these financial measures is
useful to investors because they provide consistency and comparability with our
operating results for the prior period and a better understanding of the changes
and trends in our operating results.
15
Comparison of six months ended January 31, 2009 to six months ended January 31,
2008
========================================================================
Six Months Ended
January 31,
($ in millions, except per -----------------
share amounts) 2009 2008 $ Change % Change
========================================================================
Finance income $ 83.6 $ 98.3 $ (14.7) (15)%
Interest expense 28.3 42.6 (14.3) (34)
Net finance income before
provision for credit losses 55.3 55.7 (0.4) (1)
Provision for credit losses 3.5 1.2 2.3 192
Gain on debt retirement 1.6 -- 1.6 100
Salaries and other expenses 14.4 13.3 1.1 8
Provision for income taxes 15.0 15.9 (0.9) (6)
Net income 24.0 25.3 (1.3) (5)
Diluted earnings per share 0.96 1.01 (0.05) (5)
Basic earnings per share 0.98 1.03 (0.05) (5)
Return on equity 11.2% 12.9%
Excluding the debt retirement gain:
-----------------------------------
Net income $ 23.0 $ 25.3 $ (2.3) (9)%
Diluted earnings per share 0.92 1.01 (0.09) (9)
Basic earnings per share 0.94 1.03 (0.09) (9)
Return on equity 10.7% 12.9%
========================================================================
Net income decreased by 5% to $24.0 million in the first half of fiscal
2009 from $25.3 million in the first half of fiscal 2008. Without the $1.0
million after-tax debt retirement gain, net income decreased by 9%. Net income
without the after-tax debt gain decreased because the effects of the 11%
decrease in average receivables and higher non-performing assets exceeded the
effects of lower short-term market interest rates.
Finance income decreased by 15% to $83.6 million in the first half of
fiscal 2009 from $98.3 million in the first half of fiscal 2008 because (i)
average finance receivables decreased 11% ($230.0 million) to $1.88 billion from
$2.11 billion (ii) the yield on finance receivables decreased to 8.81% from
9.25% mostly due to the prime rate averaging 330 basis points (3.30%) lower and,
to a lesser extent, (iii) non-accrual receivables were higher.
Interest expense decreased by 34% to $28.3 million in the first half of
fiscal 2009 from $42.6 million in the first half of fiscal 2008 because our cost
of debt decreased to 4.03% from 5.17% and our average debt decreased 15% ($245.0
million). Lower short-term market interest rates caused the decrease in our cost
of debt because the interest rates on 40% of our debt were indexed to short-term
market interest rates.
Net finance income before provision for credit losses on finance
receivables decreased to $55.3 million in the first half of fiscal 2009 from
$55.7 million in the first half of fiscal 2008. Net interest margin increased to
5.82% from 5.24% because of lower short-term market interest rates.
The provision for credit losses on finance receivables was $3.5 million in
the first half of fiscal 2009 and $1.2 million in the first half of fiscal 2008.
Net charge-offs increased to $3.4 million in the first half of fiscal 2009 from
$1.1 million in the first half of fiscal 2008, and the loss ratio increased to
0.36% from 0.10%. Net charge-offs have been increasing because of higher
non-performing assets, worsening economic conditions and declining collateral
values.
Salaries and other expenses increased by 8% to $14.4 million in the first
half of fiscal 2009 from $13.3 million in the first half of fiscal 2008 because
of higher non-performing asset costs and, to a lesser extent, salary increases.
The expense ratio worsened to 1.52% from 1.26% because expenses increased and
receivables decreased. The efficiency ratio worsened to 26.1% from 24.0% because
expenses increased and net finance income before provision for credit losses
decreased.
Diluted earnings per share decreased by 5% to $0.96 per share in the first
half of fiscal 2009 from $1.01 per share in the first half of fiscal 2008, and
basic earnings per share decreased by 5% to $0.98 per share from $1.03 per
share. The $1.0 million after-tax debt retirement gain increased diluted and
basic earnings per share by $0.04 in the first half of fiscal 2009. Without this
gain, diluted and basic earnings per share each decreased by 9%.
16
Finance Receivables and Asset Quality
We discuss trends and characteristics of our finance receivables and our
approach to managing credit risk in this section. The key aspect is asset
quality. Asset quality statistics measure our underwriting standards, skills and
policies and procedures and can indicate the direction of future net charge-offs
and non-performing assets.
========================================================================
January 31, July 31,
($ in millions) 2009 * 2008 * $ Change % Change
========================================================================
Finance receivables $1,804.0 $1,940.8 $(136.8) (7)%
Allowance for credit losses 24.8 24.8 -- --
Non-performing assets 53.6 46.7 6.9 15
Delinquent finance receivables 26.6 22.9 3.7 16
Net charge-offs 3.4 2.2 1.2 58
As a percentage of receivables:
-------------------------------
Allowance for credit losses 1.38% 1.28%
Non-performing assets 2.97 2.41
Delinquent finance receivables 1.47 1.18
Net charge-offs (loss ratio) 0.36 0.22
========================================================================
* as of and for the six months ended
Finance receivables comprise installment sale agreements and secured loans
(collectively referred to as loans) and direct financing leases. Loans were 91%
($1.64 billion) of finance receivables and leases were 9% ($159 million) at
January 31, 2009. Finance receivables decreased $136.8 million or 7% in the
first half of fiscal 2009 because of lower originations.
We originated $126.0 million of finance receivables in the second quarter
of fiscal 2009 compared to $225.0 million in the second quarter of fiscal 2008,
and $351.0 million in the first half of fiscal 2009 compared to $484.0 million
in the first half of fiscal 2008. Originations have been decreasing because
recessionary economic conditions have reduced demand for equipment financing
significantly and, to a lesser extent, because we are approving transactions
selectively to preserve asset quality. We collected $205.0 million of finance
receivables and repossessions in the second quarter of fiscal 2009 compared to
$273.0 million in the second quarter of fiscal 2008, and $478.0 million in the
first half of fiscal 2009 compared to $531.0 million in the first half of fiscal
2008. Collections decreased because of fewer prepayments and the decrease in
receivables.
Our primary focus is the credit quality of our receivables. We manage our
credit risk by adhering to disciplined and sound underwriting policies and
procedures, by monitoring our receivables closely, by handling non-performing
accounts effectively and by managing the size of our receivables portfolio. Our
underwriting policies and procedures require a first lien on equipment financed.
We focus on financing equipment with a remaining useful life longer than the
term financed, historically low levels of technological obsolescence, use in
more than one type of business, ease of access and transporting, and broad,
established resale markets. Securing our receivables with equipment possessing
these characteristics can mitigate potential net charge-offs. We may also obtain
additional equipment or other collateral, third-party guarantees, advance
payments or hold back a portion of the amount financed. We do not finance or
lease aircraft or railcars, computer related equipment, telecommunications
equipment or equipment located outside the United States, and we do not lend to
consumers.
Our underwriting policies also limit our credit exposure with any
customer. The limit was $48.0 million at January 31, 2009. Our ten largest
customers accounted for 7.0% ($126.0 million) of total finance receivables at
January 31, 2009 compared to 6.4% ($125.0 million) at July 31, 2008.
Our allowance for credit losses was $24.8 million at January 31, 2009 and
July 31, 2008, and the allowance level increased to 1.38% of finance receivables
from 1.28%. The allowance is our estimate of losses inherent in our finance
receivables. We determine the allowance quarterly based on our analysis of
historical losses and the past due status of receivables adjusted for expected
recoveries and any differences between current and historical loss trends and
other factors.
Net charge-offs of finance receivables (write-downs less recoveries) were
$3.4 million in the first half of fiscal 2009 compared to $2.2 million in the
second half of fiscal 2008 (the prior six month period) and the annualized loss
ratios were 0.36% and 0.22%. Net charge-offs were $2.0 million in the second
quarter of fiscal 2009 compared to $1.4 million in the first quarter of fiscal
2009 and the annualized loss ratios were 0.44% and 0.29%. Net charge-offs have
been increasing because the slowing economy and construction and transportation
industries are reducing our customers' cash flows and collateral values.
17
The net investments in impaired finance receivables, repossessed equipment
(assets received to satisfy receivables), total non-performing assets and
delinquent finance receivables (transactions with more than a nominal portion of
a contractual payment 60 or more days past due) follow ($ in millions):
=========================================================================
January 31, July 31, January 31,
2009 2008 2008
=========================================================================
Impaired finance receivables * $40.0 $33.5 $32.1
Repossessed equipment 13.6 13.2 5.6
-------------------------------------------------------------------------
Total non-performing assets $53.6 $46.7 $37.7
=========================================================================
Delinquent finance receivables $26.6 $22.9 $25.2
=========================================================================
Impaired finance receivables
not delinquent 58% 52% 45%
=========================================================================
* before specifically allocated allowance of $1.1 million at January 31,
2009, $0.9 million at July 31, 2008 and $0.5 million at January 31,
2008
We expect the trend of increases in net charge-offs, impaired and
delinquent receivables and repossessed equipment to continue because of
deteriorating economic and credit market conditions. This could require us to
record higher provisions for credit losses.
Liquidity and Capital Resources
We describe our need for raising capital (debt and equity), our need to
maintain a substantial amount of liquidity (money currently available for us to
borrow), our approach to managing liquidity and our current funding sources in
this section. Key indicators are leverage (the number of times debt exceeds
equity), available liquidity, credit ratings and debt diversification. Our
leverage is low for a finance company, we have ample liquidity available, we
have been successful in issuing debt and our debt is diversified with maturities
staggered over five years. We believe our liquidity sources are diversified, and
we are not dependent on any funding source or provider.
Liquidity and access to capital are vital to our operations and growth. We
need continued availability of funds to originate or acquire finance receivables
and to repay debt. To ensure we have enough liquidity, we project our financing
needs based on estimated receivables growth and maturing debt, we monitor
capital markets closely, we diversify our funding sources and we stagger our
debt maturities. Funding sources usually available to us include operating cash
flow, private and public issuances of term debt, committed unsecured revolving
bank credit facilities, conduit and term securitizations of finance receivables,
secured term financings, dealer placed and direct issued commercial paper and
sales of common and preferred equity. The external funding sources may not be
available to us currently or may only be available at unfavorable terms because
of conditions in credit markets. However, we have $429.3 million available to
borrow under our committed revolving bank and asset securitization facilities
(after subtracting commercial paper outstanding) at January 31, 2009. Therefore,
we do not have a current need for additional financing. We are also considering
applying for a bank holding company charter. This could add FDIC insured
deposits as a liquidity source.
Our term notes are rated 'BBB+' by Fitch Ratings, Inc. ("Fitch", a
Nationally Recognized Statistical Ratings Organization) and our commercial paper
is rated 'F2' by Fitch. Fitch affirmed these investment grade ratings in March
2009 and maintained its stable outlook. As a condition of our 'F2' credit
rating, commercial paper outstanding is limited to the unused amount of our
committed credit facilities. Our ability to obtain or renew financing and our
credit spreads can be dependent on these investment grade credit ratings.
Our major operating subsidiary's agreements for the term notes, asset
securitization facility and bank credit facilities discussed below have
restrictive covenants including limits on its indebtedness, encumbrances,
investments, dividends and other distributions to us, sales of assets, mergers
and other business combinations, capital expenditures,
interest coverage and net worth. We have always complied with all debt covenants
and restrictions. None of the agreements has a material adverse change clause.
Debt decreased by 10% ($150.0 million) to $1.32 billion from $1.47 billion
during the first half of fiscal 2009 and stockholders' equity increased by 5%
($20.9 million) to $435.8 million from $414.9 million. Therefore, leverage
(debt-to-equity ratio) decreased to 3.0 at January 31, 2009 from 3.5 at July 31,
2008. Our leverage is low for a finance company allowing for substantial asset
growth and equity repurchases.
18
Debt comprised the following ($ in millions):
=========================================================================
January 31, 2009 July 31, 2008
------------------- -------------------
Amount Percent Amount Percent
=========================================================================
Term notes $ 675.0 51% $ 675.0 46%
Bank borrowings 320.8 25 369.0 25
Asset securitization
borrowings - term 133.6 10 169.0 12
Convertible debentures 132.7 10 175.0 12
Commercial paper 54.9 4 79.0 5
-------------------------------------------------------------------------
Total debt $ 1,317.0 100% $ 1,467.0 100%
=========================================================================
Term Notes
We issued the term notes between fiscal 2003 and 2008. They are five and
seven year fixed rate notes with principal due at maturity between April 2010
and April 2014. Their average maturity was 2.5 years at January 31, 2009.
Interest is payable semiannually.
Bank Credit Facilities
We have $480.0 million of committed unsecured revolving credit facilities
from ten banks and $159.2 million was unused and available to borrow at January
31, 2009. This includes $455.0 million of facilities with original terms ranging
from two to five years and a $25.0 million facility with a one-year original
term expiring in March 2009. The multi-year facilities have an average remaining
term of 2.5 years and expire between July 2009 and February 2013. These
facilities range from $15.0 million to $110.0 million. Borrowings under these
facilities can mature between 1 and 270 days. Borrowings outstanding at January
31, 2009 matured in February 2009, were reborrowed and remain outstanding. We
borrow amounts usually for one day, and also for one week or one month depending
on interest rates, and roll the borrowings over when they mature depending on
whether we issue or repay other debt.
These committed facilities are a low-cost source of funds and support our
commercial paper program. We can borrow the full amount under each facility
immediately. None of the facilities are for commercial paper back-up only and
the facilities do not have usage fees. These facilities may be renewed, extended
or increased before they expire. We renewed a $30.0 million two-year facility
for another two years in September 2008.
Convertible Debentures
We issued the convertible debentures in April 2004. They are due at
maturity in April 2034, but we can redeem (call) them anytime starting in April
2009 and debenture holders can require us to repurchase (put) them on each
five-year anniversary of issuance or when a specified corporate transaction
occurs by paying the principal amount in cash. Debenture holders can also
convert the debentures before maturity into cash and common stock as discussed
below.
We purchased $42.3 million of the debentures in the open market in the
second quarter of fiscal 2009 for $40.6 million resulting in a $1.6 million debt
retirement gain (net of $0.1 million of unamortized deferred debt issuance
costs).
Based on the recent price range of our common stock and conditions in the
credit and other markets, it is likely holders will exercise their put option in
April 2009 requiring us to repay the debentures with cash. The closing price of
our stock ranged from $15.00 to $24.00 in the second quarter of fiscal 2009
below the conversion price of $27.12. Repaying the debentures will reduce our
available liquidity by the amounts paid plus another $17.0 million for the
payment of related deferred income taxes.
Holders can convert the debentures under the following conditions: (i) in
a fiscal quarter when the closing price of our common stock is at least 30%
higher than the adjusted conversion price for at least 20 of the last 30 trading
days of the prior fiscal quarter (the "market price condition") (ii) the
debentures are rated 'BB' or lower by Fitch (four levels lower than the current
rating) (iii) we call the debentures or (iv) a specified corporate transaction
occurs. No condition allowing holders to convert the debentures has occurred
through January 31, 2009. The market price condition would have been met at
January 31, 2009 if the price of our common stock closed above $35.26 for the
required period. The closing price of our common stock was $21.72 on January 31,
2009. Therefore, it is unlikely holders will convert the debentures before the
April 2009 put date.
19
We irrevocably elected (under the debentures' original terms and without
modifying the debentures) in fiscal 2005 to pay the value of converted
debentures, not exceeding their principal amount, in cash instead of issuing
shares of common stock. The value of converted debentures equals the number of
convertible shares multiplied by the market value of our common stock. We would
only issue shares if the value of converted debentures exceeded their principal
amount. Shares of common stock needed to pay any value over principal would
equal the difference between the conversion date closing price of our common
stock and the conversion price, divided by the conversion date closing price and
multiplied by the number of convertible shares. There were 4.9 million
convertible (but not issuable) shares, the adjusted conversion price was $27.12
per share and the adjusted conversion rate was 36.87 shares for each $1,000 of
principal at January 31, 2009.
The conversion rate and number of convertible shares increase and the
conversion price decreases when we declare dividends on our common stock. The
additional number of convertible shares from paying dividends on our common
stock (0.4 million through January 31, 2009) will have no effect on the amount
we would pay in April 2009 if holders exercise their put option on the
debentures for their principal amount.
Asset Securitization Financings
Our asset securitization facility was partially renewed and partially
converted into amortizing term debt in April 2008. The facility decreased to
$325.0 million from $425.0 million and we converted $200.0 million of borrowings
into term debt. The two renewing banks increased their commitments $50.0 million
each and we converted the amounts borrowed from the two non-renewing banks into
term debt. We established the facility in July 2001 with one bank for $125.0
million and this was the seventh renewal.
The $325.0 million facility provides for committed revolving financing
through April 2009 and we can then convert borrowings outstanding into term debt
if it is not renewed. The full amount of the facility was available for us to
borrow at January 31, 2009. We are repaying the remaining $133.6 million of
amortizing term debt monthly from collections of securitized receivables. The
repayment amounts vary based on the amount of securitized receivables collected
and the amount borrowed under the facility, and would increase if we borrow
under the facility or convert the facility into amortizing term debt upon
nonrenewal. The term debt would be repaid substantially in three years based on
the amount of securitized receivables at January 31, 2009 and no borrowings
outstanding under the facility.
Finance receivables included $270.0 million of securitized receivables at
January 31, 2009 and $410.0 million at July 31, 2008. We can only securitize 40%
of our major operating subsidiary's receivables because of restrictions in its
debt agreements. Therefore, we could only securitize an additional $450.0
million of receivables at January 31, 2009.
Borrowings under the facility and the term debt combined are limited to
94% of eligible securitized receivables and are without recourse. Securitized
receivables classified as impaired or with terms outside of defined limits, are
ineligible to be borrowed against. The facility also restricts the amount of net
charge-offs of securitized receivables and the amount of delinquent securitized
receivables. The facility would terminate if these restrictions are exceeded,
and borrowings outstanding would then be repaid monthly from collections of
securitized receivables.
Commercial Paper
We issue commercial paper direct and through a $500.0 million dealer
program with maturities between 1 and 270 days. The amount of commercial paper
we could issue is limited to the unused amount of our committed credit
facilities ($484.2 million at January 31, 2009).
Deteriorating credit market conditions have further decreased demand for
and increased credit spreads on commercial paper. As a result, our commercial
paper decreased from $79.0 million to $54.9 million during the first half of
fiscal 2009.
Stockholders' Equity
We increased the amount authorized under our common stock and convertible
debt repurchase program by $58.5 million and we purchased $42.3 million of our
convertible debentures under the program for $40.6 million in the first half of
fiscal 2009, leaving $44.5 million authorized for future repurchases at January
31, 2009. We established the program in fiscal 2007 and it does not have a set
expiration. Repurchases are discretionary and contingent upon many conditions.
We paid $7.7 million of cash dividends and we received $0.5 million from
stock option exercises in the first half of fiscal 2009.
20
Market Interest Rate Risk and Sensitivity
We discuss how changes in market interest rates and credit spreads affect
our net interest spread and how we manage interest rate risk in this section.
Net interest spread (net yield of finance receivables less cost of debt) is an
integral part of a finance company's profitability and is calculated below:
=========================================================================
Three Months Ended Six Months Ended
January 31, January 31,
--------------------------------------
2009 2008 2009 2008
=========================================================================
Net yield of finance receivables 8.72% 9.23% 8.81% 9.25%
Cost of debt 3.78 5.00 4.03 5.17
-------------------------------------------------------------------------
Net interest spread 4.94% 4.23% 4.78% 4.08%
=========================================================================
Our net interest spread was 71 basis points (0.71%) higher in the second
quarter of fiscal 2009 compared to the second quarter of fiscal 2008, and was 70
basis points (0.70%) higher in the first half of fiscal 2009 compared to the
first half of fiscal 2008 because decreases in market interest rates lowered our
cost of debt more than they lowered the net yield on our finance receivables as
explained below. Short-term market interest rates decreased significantly
because the Federal Reserve has lowered its target Federal Funds Rate more than
500 basis points (5.00%) in response to credit market and economic conditions.
Short-term LIBOR rates have decreased on average 440 basis points (4.40%) with
overnight LIBOR decreasing more than 500 basis points to 0.31% at January 31,
2009. Interest rates on most of our floating rate debt are indexed to short-term
LIBOR rates. This is the primary reason our cost of debt decreased by more than
100 basis points (1.00%). Decreases in short-term market interest rates also
lowered the net yield because the rates on our floating rate receivables are
indexed to the prime rate. The prime rate also decreased 500 basis points.
Long-term market interest rates also decreased significantly. Lower long-term
market interest rates would normally decrease the cost of new fixed-rate term
debt and result in lower yields on finance receivable originations, but these
effects have been largely offset by significantly higher credit spreads.
Our net interest spread is sensitive to changes in short and long-term
market interest rates (includes LIBOR, rates on U.S. Treasury securities,
money-market rates, swap rates and the prime rate). Increases in short-term
rates reduce our net interest spread and decreases in short-term rates increase
it (this is occurring currently) because our floating rate debt (includes
short-term debt) exceeds our floating rate finance receivables by a significant
amount. Interest rates on our debt change faster than the yield on our
receivables because 39% of our debt is floating rate compared to floating rate
receivables of only 9%.
Credit spreads also affect our net interest spread. Changes in credit
spreads affect the yield on our receivables when originated and the cost of our
debt when issued. Credit spreads have increased significantly since the crisis
in credit markets began. Our cost of debt will increase considerably as we
obtain or renew financing while credit spreads remain high.
Our net interest spread is also affected when the differences between
short-term and long-term rates change. Long-term rates normally exceed
short-term rates. When this excess narrows (resulting in a "flattening yield
curve") or when short-term rates exceed long-term rates (an "inverted yield
curve"), our net interest spread should decrease and when the yield curve widens
our net interest spread should increase because the rates we charge our
customers are largely determined by long-term market interest rates and rates on
our floating rate debt are largely determined by short-term market interest
rates. We can mitigate the effects of an inverted yield curve by issuing
long-term fixed rate debt.
21
Our income is subject to the risk of rising short-term market interest
rates and a flat or inverted yield curve because floating rate debt exceeded
floating rate receivables by $354.3 million at January 31, 2009 (see the table
below). The terms and prepayment experience of fixed rate receivables mitigate
this risk. Receivables are collected monthly over short periods of two to five
years with $627.0 million (38%) of fixed rate receivables scheduled to be
collected in one year at January 31, 2009 and the average remaining life of
fixed rate receivables excluding prepayments is approximately twenty months.
Historically, annual collections have exceeded 50% of average receivables. We do
not match the maturities of our debt to our receivables.
We monitor and manage our exposure to potential adverse changes in market
interest rates with derivative financial instruments and by changing the
proportion of our fixed and floating rate debt. We may use derivatives to hedge
our exposure to interest rate risk on existing debt and debt expected to be
issued. We do not speculate with or trade derivatives. We had no derivatives
outstanding during the first half of fiscal 2009.
We quantify interest rate risk by calculating the effect on net income of
a hypothetical, immediate 100 basis point (1.0%) rise in market interest rates.
This hypothetical change in rates would reduce quarterly net income by
approximately $0.3 million at January 31, 2009 based on the scheduled repricing
of floating rate debt, fixed rate debt maturing within one year and the expected
effects on the yield of new receivables. This amount increases to $0.7 million
excluding the effects on the yield of new receivables. We believe these amounts
are acceptable considering the cost of floating rate debt is lower than fixed
rate debt. Actual future changes in market interest rates and the effect on net
income may differ from these amounts materially. Other factors that may
accompany an actual immediate 100 basis point rise in market interest rates were
not considered in the calculation. These hypothetical reductions of net income
at January 31, 2008 were $0.6 million and $1.0 million excluding the effects on
the yield of new receivables. The impact of this hypothetical increase in rates
was lower at January 31, 2009 because our floating rate debt decreased by 40% to
$509.3 million from $859.0 million at January 31, 2008.
The fixed and floating rate amounts and percentages of our receivables and
capital at January 31, 2009 follow ($ in millions):
==========================================================================
Fixed Rate Floating Rate
----------------- ---------------
Amount Percent Amount Percent Total
==========================================================================
Finance receivables $1,649.0 91% $155.0 9% $1,804.0
==========================================================================
Debt $ 807.7 61% $509.3 39% $1,317.0
Stockholders' equity 435.8 100 -- -- 435.8
--------------------------------------------------------------------------
Total debt and equity $1,243.5 71% $509.3 29% $1,752.8
==========================================================================
The fixed and floating rate amounts and percentages of our receivables and
capital at July 31, 2008 follow ($ in millions):
==========================================================================
Fixed Rate Floating Rate
----------------- ---------------
Amount Percent Amount Percent Total
==========================================================================
Finance receivables $1,772.0 91% $168.8 9% $1,940.8
==========================================================================
Debt $ 850.0 58% $617.0 42% $1,467.0
Stockholders' equity 414.9 100 -- -- 414.9
--------------------------------------------------------------------------
Total debt and equity $1,264.9 67% $617.0 33% $1,881.9
==========================================================================
Floating rate debt comprises bank borrowings, term asset securitization
borrowings and commercial paper, and reprices (interest rates change based on
current short-term market interest rates) after January 31, 2009 as follows:
$477.7 million (94%) in one month, $22.1 million (4%) in two to three months and
$9.5 million (2%) in four to nine months. Floating rate receivables only reprice
when the prime rate changes. The repricing frequencies of floating rate debt
follow ($ in millions):
=========================================================================
Balance Repricing Frequency
=========================================================================
Bank borrowings $ 320.8 1 to 30 days
Asset securitization
borrowings - term 133.6 1 to 30 days
Commercial paper 59.4 1 to 270 days (60 day average)
=========================================================================
New Accounting Standards
Refer to Note 1 (Summary of Significant Accounting Policies) to the
consolidated financial statements.
22
Forward-Looking Statements
Statements in this report containing the words or phrases "expect,"
"anticipate," "may," "believe," "appears," "intend," "estimate," "could,"
"should," "would," "will," "if," "outlook," "likely," "unlikely" and other words
and phrases expressing our expectations are "forward-looking statements." Actual
results could differ from those contained in the forward-looking statements
materially because they involve various assumptions and known and unknown risks
and uncertainties. Information about risk factors that could cause actual
results to differ materially is discussed in "Part I, Item 1A Risk Factors" in
our Annual Report on Form 10-K for the year ended July 31, 2008 and other
sections of this report. Risk factors include (i) an economic slowdown (ii) the
inability to collect finance receivables and the sufficiency of the allowance
for credit losses (iii) the inability to obtain capital or maintain liquidity
(iv) rising short-term market interest rates and adverse changes in the yield
curve (v) increased competition (vi) the inability to retain key employees and
(vii) adverse conditions in the construction and road transportation industries.
Forward-looking statements do not guarantee our future performance and apply
only as of the date made. We are not required to update or revise them for
future or unanticipated events or circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2, Market Interest Rate Risk and Sensitivity.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Our management (with our Chief Executive Officer's and Chief Financial
Officer's participation) evaluated our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934)
at the end of the period covered by this report. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded our disclosure
controls and procedures are effective to ensure information required to be
disclosed in reports we file or submit under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported timely.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting
during the second quarter of fiscal 2009 that materially affected or are
reasonably likely to materially affect our internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our common stock repurchase activity for the second quarter of fiscal 2009
is summarized below:
ISSUER PURCHASES OF EQUITY SECURITIES
For the Quarter Ended January 31, 2009
==========================================================================================
(c) Total Number of (d) Maximum Number
(a) Total Shares Purchased (or Approximate Dollar
Number (b) Average as Part of Publicly Value) of Shares that May
of Shares Price Paid Announced Plans or Yet Be Purchased Under
Month Purchased per Share Programs the Plans or Programs
==========================================================================================
November 2008 3,258 $ 23.15 3,258 $ 44,481,000
==========================================================================================
We established a $50.0 million common stock and convertible debt
repurchase program in June 2007. We increased the amount authorized by $23.2
million in September 2008 and by an additional $35.3 million in January 2009. We
purchased 0.9 million shares of common stock for $23.4 million and $42.3 million
of convertible debentures for $40.6 million through January 31, 2009. At January
31, 2009, $44.5 million remained authorized for future repurchases of any
combination of common stock and convertible debt.
We did not sell any unregistered shares of our common stock during the
second quarter of fiscal 2009.
23
Item 4. Submission of Matters To a Vote of Security Holders
Our stockholders voted on the following at our December 9, 2008 Annual
Meeting of Stockholders:
The following nominees were elected to the Board of Directors:
================================================
Number of Votes
----------------------
Nominee For Withheld
================================================
Lawrence B. Fisher 22,250,681 1,039,392
Michael C. Palitz 22,739,099 550,974
Paul R. Sinsheimer 22,864,225 425,848
Leopold Swergold 23,150,110 139,963
H. E. Timanus, Jr. 23,150,110 139,963
Michael J. Zimmerman 23,150,110 139,963
================================================
The appointment of KPMG LLP as our independent registered public
accounting firm for our fiscal year ending July 31, 2009 was ratified by a vote
of 23,164,807 shares for, 89,820 shares against and 35,448 shares abstained.
Item 5. Other Information
We issued a press release on March 3, 2009 reporting our results for the
quarter ended January 31, 2009. The press release is attached as Exhibit 99.1.
Exhibit 99.1 shall not be deemed "filed" for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to
the liabilities of that section, nor shall it be deemed incorporated by
reference in any filing under the Securities Act of 1933, as amended, or the
Exchange Act, except as shall be expressly set forth by specific reference.
We issued a press release on March 3, 2009 announcing our Board of
Directors declared a quarterly dividend of $0.15 per share on our common stock.
The press release is attached as Exhibit 99.2. The dividend is payable on April
10, 2009 to stockholders of record at the close of business on March 20, 2009.
The dividend rate is the same as the previous quarter.
Item 6. Exhibits
Exhibit No. Description of Exhibit
--------------------------------------------------------------------------------
3.1 (a) Articles of Incorporation
3.2 (b) Certificate of Amendment of Articles of Incorporation dated
December 9, 1998
3.3 (c) Amended and Restated By-laws dated March 5, 2007
*10.1 ** Amendment dated December 9, 2008 to Restricted Stock Agreements
dated March 1, 2002 and October 14, 2004, and to Agreements to
Defer Restricted Stock dated February 26, 2004 between the
Registrant and its CEO
*10.2 ** Form of Amendment dated December 9, 2008 to Restricted Stock
Agreement dated March 1, 2002 between the Registrant and certain
senior officers
*10.3 ** Form of Amendment dated December 9, 2008 to 2006 Stock Incentive
Plan - Stock Unit Agreement for Non-Employee Directors
*10.4 ** Form of Amendment dated December 9, 2008 to Excise Tax Restoration
Agreement between the Registrant and its directors and named
executive officers dated March 6, 2006
31.1 ** Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 ** Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 ** Section 1350 Certification of Chief Executive Officer
32.2 ** Section 1350 Certification of Chief Financial Officer
99.1 ** Press release dated March 3, 2009
99.2 ** Press release dated March 3, 2009
Previously filed with the Securities and Exchange Commission as an exhibit to
our:
--------------------------------------------------------------------------------
(a) Registration Statement on Form S-1 (Registration No. 33-46662) filed May
28, 1992
(b) Form 10-Q for the quarter ended January 31, 1999
(c) Form 10-Q for the quarter ended January 31, 2007
* management contract or compensatory plan
** filed with this report
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINANCIAL FEDERAL CORPORATION
-----------------------------
(Registrant)
By: /s/ Steven F. Groth
------------------------------
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By: /s/ David H. Hamm
------------------------------
Vice President and Controller
(Principal Accounting Officer)
March 4, 2009
-------------
(Date)
25