Business Context and Reporting Period
Company: First Cash Financial Services, Inc. (First Cash)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: First Cash operates pawn shops and short-term loan/credit services in the United States and Mexico. As of September 30, 2010, the company operated 594 locations (220 in the U.S. and 374 in Mexico). The company has been actively expanding its pawn store footprint while reducing exposure to short-term loan operations in certain jurisdictions due to regulatory changes.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenue | $108,182 | $301,508 |
| Net Income | $14,237 | $38,102 |
| Income from Continuing Operations | $13,956 | $35,680 |
| Diluted EPS (Continuing Ops) | $0.45 | $1.16 |
| Cash and Cash Equivalents | $32,694 | $32,694 (Balance Sheet) |
| Net Cash Flow from Operating Activities | N/A | $49,758 |
| Total Debt (Notes Payable) | $1,963 | $1,963 (Balance Sheet) |
| Working Capital | $134,315 | $134,315 |
Margin Analysis (Nine Months 2010):
- Net Revenue Margin: 59.2% ($178,557 / $301,508)
- Income from Continuing Operations Margin: 11.8% ($35,680 / $301,508)
- Pawn Merchandise Gross Margin: 40% (Retail: 42%, Scrap Jewelry: 34%)
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 18% year-over-year for the quarter and 19% for the nine-month period. This was driven by same-store revenue growth (12% in Mexico, 10% in the U.S.) and new store openings.
- Profitability: Net income increased 19% for the quarter ($14.2M vs $12.0M) and 10% for the nine-month period ($38.1M vs $34.8M). Income from continuing operations rose 39% for the quarter and 27% for the nine-month period.
- Discontinued Operations: The company discontinued its Maryland internet-based credit services product in September 2010 due to new state laws. Earnings from discontinued operations decreased significantly compared to the prior year due to the sale of West Coast stores in late 2009 and the winding down of the Auto Master automotive operation.
- Balance Sheet Strength: Cash and cash equivalents increased to $32.7M from $18.6M at the end of the prior year. The company paid down significant debt, reducing notes payable from $4.7M (current) + $5.9M (long-term) in 2009 to $0.5M (current) + $1.5M (long-term) in 2010.
- Acquisitions: The company acquired pawn stores in the U.S. in July 2010 for a total purchase price of $7.7M ($5.7M cash, $2.0M notes payable).
Guidance, Outlook, Risks, and Unusual Items
Outlook and Strategy:
- Management expects to continue expansion primarily through new store openings in Mexico and acquisitions in the U.S., funded by operating cash flows and an available $25M unsecured credit facility (expandable to $50M).
- The company anticipates a decline in cash collections from the discontinued Auto Master receivables for the remainder of 2010 as the portfolio is fully collected or written off.
Regulatory Risks:
- Illinois: New legislation reducing allowable rates for installment loans (effective March 2011) may make the company's product unfeasible in that state, potentially impacting $2.9M in annual operating income.
- Mexico: New federal laws restrict depositing U.S. dollars into Mexican bank accounts, which could impact operations in border stores. Proposed legislation also seeks to restrict interest rates and pawn operations.
- U.S. Federal: The Dodd-Frank Act established the Bureau of Consumer Financial Protection, which may propose rules affecting consumer credit products.
Unusual Items and Contingencies:
- Customs Duties: U.S. Customs and Border Protection (CBP) assessed duties of approximately $593,000 plus interest on cross-border gold remelting transactions from 2008-2009. The company is appealing these assessments but cannot estimate the likelihood of success or additional assessments.
- SEC Investigation: On October 18, 2010, the former Chairman of the Board, Mr. Phillip E. Powell, received a Wells notice from the SEC regarding a potential civil enforcement action related to a family limited partnership's stock purchase. The company is not named in the notice, and Mr. Powell resigned to minimize distraction.
Investor Verification Checklist
- Regulatory Impact in Illinois: Verify the final impact of the June 2010 Illinois legislation on installment loan revenue and the feasibility of continuing operations there post-March 2011.
- Customs Appeal Outcome: Monitor the status of the appeal regarding the $593,000 CBP duty assessment and the risk of additional assessments on cross-border gold transfers.
- Discontinued Operations Run-off: Confirm the timeline and remaining value of the Auto Master receivable portfolio, as future earnings from this segment are expected to decline sharply.
- Debt Covenant Compliance: Review the company's compliance with financial covenants under its $25M unsecured credit facility, particularly as it expands store count.
- Gold Price Sensitivity: Assess the impact of fluctuating gold prices on scrap jewelry margins, which contributed significantly to revenue growth in the period.