First Cash Financial Services, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2011, with quarterly information for the fourth quarter ended December 31, 2011. The company operates retail pawn and consumer finance stores in the United States and Mexico. At year-end, it operated 570 pawn stores and 108 consumer loan/credit services locations; Mexico generated 54% of fiscal 2011 revenue.
- Core activities: pawn lending, retail merchandise sales, scrap-gold sales, Texas credit services, and consumer lending in Mexico.
- Pawn operations represented approximately 90% of continuing-operations revenue.
- At February 28, 2012, the company reported more than 720 locations, including subsequent expansion and acquisition activity.
Financial performance and key metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Total revenue | $521.3 million | $423.3 million | +23% |
| Net revenue | $294.8 million | $247.3 million | +19% |
| Income from continuing operations | $70.9 million | $51.4 million | +38% |
| Net income | $77.8 million | $57.7 million | +35% |
| Diluted EPS | $2.47 | $1.86 | +33% |
| Operating cash flow | $80.4 million | $73.6 million | +9% |
| Free cash flow | $46.2 million | $31.6 million | +46% |
- Continuing-operations margin was approximately 13.6%, compared with 12.1% in FY2010; net income margin was approximately 14.9%.
- Store operating expenses declined to 25.0% of revenue from 27.4%, and store-level operating margin increased to approximately 30% from 29%.
- Merchandise sales were $344.9 million, or approximately 66% of revenue. Pawn loan fees were $122.3 million, and consumer loan and credit services fees were $53.0 million.
- Total merchandise gross margin declined to 38.1% from 40.0%, primarily because of a greater mix of lower-margin scrap-jewelry sales and lower retail margins in Mexico.
- Consumer loan and credit services loss provision was $12.9 million, or 24% of related fee revenue, compared with 27% in FY2010.
- Year-end pawn loans were $73.3 million, CSO extensions held by a third-party lender were $15.1 million, and inventories were $44.4 million.
Fourth-quarter results
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Revenue | $146.5 million | $127.5 million |
| Income from continuing operations | $21.5 million | $17.8 million |
| Net income | $21.5 million | $19.6 million |
| Diluted EPS | $0.70 | $0.62 |
Q4 revenue increased approximately 15%, while continuing-operations income increased approximately 21%. Discontinued operations produced a small Q4 loss of $17,000, compared with $1.8 million of income in Q4 2010.
Liquidity, capital resources, and debt
- Cash and cash equivalents were $70.3 million at December 31, 2011.
- Working capital was $175.1 million; the current ratio was 5.94x; liabilities-to-equity was 13%.
- The company reported no outstanding debt at year-end after repaying the remaining $1.4 million of acquisition notes during Q4.
- An unsecured credit facility had $25.0 million available at year-end, with an additional $25.0 million subject to lender approval, and was scheduled to mature in April 2012.
- On February 28, 2012, the facility was amended and extended through February 2015, increased to $50.0 million, and made expandable to $100.0 million subject to lender approval.
- Capital expenditures were $29.0 million in FY2011; management expected a similar level in FY2012.
- The company repurchased approximately 1.36 million shares for $55.3 million during 2011 and authorized a new 1.5 million-share repurchase program.
Material changes versus the prior comparable period
- Revenue growth reflected 12% U.S. same-store growth, 14% Mexico same-store growth, 82 new or acquired locations, and continued store maturation.
- Mexico revenue increased 27% to $281.1 million, while U.S. revenue increased 19% to $240.2 million.
- Pawn loan balances increased 4% in reported dollars and 10% on a constant-currency basis; U.S. pawn loans increased 16%, while Mexico reported balances declined 9% because of peso translation effects.
- U.S. pawn inventories increased 20%, while Mexico inventories declined 25%, resulting in a 6% consolidated inventory decrease.
- The company sold ten Illinois consumer loan stores in March 2011, recognizing a $6.0 million after-tax gain and further reducing its U.S. payday/consumer loan exposure.
- The company acquired eleven U.S. pawn stores for $7.8 million and completed 61 Mexico pawn-store openings.
- Net cash used in financing increased to $52.6 million, principally because of share repurchases; investing cash use declined to $22.1 million, partly due to $19.9 million of proceeds from the Illinois sale.
- Currency translation reduced comprehensive income by approximately $10.4 million after tax, although management stated that currency effects had limited impact on net income because of natural hedges.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected continued pawn revenue growth in FY2012 from acquisitions, new stores, and maturation of existing locations.
- The company planned approximately 80 to 90 additional pawn-store openings in FY2012, primarily in Mexico, in addition to the 29-store Mexico acquisition completed in January 2012.
- The January 2012 acquisition added 29 western Mexico stores for approximately $46.7 million, funded with $41.8 million of cash and a $4.9 million seller note.
- Key risks include increased regulation of pawn, payday, consumer-loan, and credit-services products in the United States and Mexico; the Texas CAB framework became effective January 1, 2012.
- Mexico accounted for a substantial portion of revenue and assets, exposing results to currency movements, economic conditions, political and security issues, and regulatory changes.
- Gold-price declines could reduce collateral values, loan balances, inventory values, merchandise margins, and scrap-gold revenue.
- The Texas CSO program carried maximum letter-of-credit exposure of $17.6 million at year-end; the recorded estimated liability was $831,000.
- The company had forward commitments through January 2012 for 4,000 gold ounces and 13,000 silver ounces. U.S. Customs and Border Protection had assessed approximately $620,000 of duties and interest on certain 2008–2009 Mexico-to-U.S. scrap-jewelry transactions; the company was appealing and could not estimate the likelihood of additional assessments or a successful appeal.
- Operating lease commitments totaled $83.5 million, including $25.8 million due within one year.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Most important facts for investors to verify
- Reconcile the company identity in the source filing, which is titled First Cash Financial Services, Inc., with the requested Firstcash Holdings, Inc. reference.
- Verify that reported growth remains strong after separating same-store performance, acquisitions, new-store contributions, gold-price effects, and Mexican-peso translation.
- Review the decline in merchandise margins and the company’s exposure to gold prices and scrap-jewelry volume.
- Confirm the amended credit facility terms, post-year-end borrowing, acquisition funding, and compliance with financial covenants.
- Assess the potential impact of U.S. and Mexican regulatory changes on credit-services and pawn products, particularly in Texas and Mexico.
- Monitor CSO letter-of-credit exposure, credit-loss assumptions, recoveries, and the adequacy of the $831,000 recorded liability.
- Follow the Customs and Border Protection duty dispute and any additional assessments related to cross-border scrap-jewelry shipments.
- Evaluate the integration, purchase-price allocation, and operating contribution of the 29-store Mexico acquisition.