First Cash Financial Services, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The filing identifies the registrant as First Cash Financial Services, Inc. and presents unaudited consolidated results for U.S. and Mexican pawn and consumer finance operations.
Business Context
The company operates retail-based pawn stores, consumer loan and credit-services locations, and related check-cashing activities in the United States and Mexico. Pawn operations generated approximately 92% of year-to-date revenue. At June 30, 2013, the company operated 867 locations, including 724 large- or small-format pawn stores and 98 consumer loan locations.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $143.1 million, up 8% | $304.0 million, up 14% |
| Net revenue | $84.8 million | $176.8 million |
| Income from continuing operations | $15.7 million, down 4% | $35.9 million, up 6% |
| Net income | $15.7 million, compared with $16.3 million | $35.9 million, compared with $33.9 million |
| Diluted EPS | $0.53, compared with $0.56 | $1.21, compared with $1.13 |
| Operating cash flow | Not separately provided | $45.0 million, up 13% |
- Approximate net revenue margin was 59.2% for the quarter and 58.2% year-to-date; net income margin was approximately 10.9% and 11.8%, respectively.
- Retail merchandise sales increased 35% in the quarter and 33% year-to-date. Pawn loan fees increased 27% and 25%, respectively.
- Consumer loan and credit-services fees declined 11% in the quarter and 6% year-to-date.
- Wholesale scrap jewelry revenue declined 78% in the quarter and 41% year-to-date, primarily because of lower gold prices and the decision to hold scrap gold inventory rather than sell at prevailing prices.
- Retail merchandise gross margin declined to 39% in the quarter and 40% year-to-date, from 42% in both prior-year comparable periods. Scrap jewelry margin declined to 13% and 19%, respectively.
- Store-level operating margin was 26% for the quarter and 27% year-to-date, compared with 28% and 29% in the prior-year periods.
Balance Sheet, Debt and Liquidity
- Cash and equivalents were $32.7 million at June 30, 2013, compared with $50.3 million at December 31, 2012.
- Pawn loans were $112.2 million, up 27% from June 30, 2012; inventories were $82.0 million, up 55% reported and 51% on a constant-currency basis.
- Total assets were $575.4 million and stockholders’ equity was $365.8 million.
- The $175.0 million unsecured revolving credit facility had $153.0 million outstanding and $22.0 million available. The facility matures in February 2015, bears interest at 30-day LIBOR plus 2.0%, and carried a 2.25% rate at June 30, 2013.
- Other notes payable totaled $9.97 million, including current and long-term portions.
- Working capital was $213.1 million, the current ratio was 7.0x, and liabilities-to-equity was 57%.
- Investing cash outflows were $89.2 million, including $71.5 million for acquisitions and $10.4 million for property and equipment. Financing cash inflows were $25.9 million.
Material Changes Versus Prior Comparable Period
- The company acquired 22 pawn stores during the first six months, including 19 Texas stores acquired from Valu + Pawn on June 25, 2013, for $70.0 million. The transaction added approximately $52.1 million of goodwill and was only marginally reflected in reported second-quarter results because it closed near quarter-end.
- Total revenue growth was driven by store expansion, acquisitions, higher pawn receivables and retail sales, but earnings growth was constrained by lower scrap jewelry revenue, lower margins, higher operating expenses and increased interest expense.
- Interest expense increased to $0.6 million in the quarter and $1.4 million year-to-date, compared with $0.2 million and $0.3 million, respectively, because of higher borrowings.
- The company repurchased 729,000 shares for $38.7 million during the first six months, leaving approximately 771,000 shares authorized for repurchase.
- Comprehensive income was reduced by foreign-currency translation losses in the second quarter; the Mexican peso strengthened against the U.S. dollar, increasing translated revenue and expenses.
Outlook, Risks and Unusual Items
- Management expected to open approximately 85 to 95 pawnshops during 2013, primarily in Mexico, and believed operating cash flow, cash balances and available credit would fund current operations and planned expansion.
- Subsequent to quarter-end, the company sold 6,100 ounces of held melted scrap gold at an average price of $1,305 per ounce. Remaining melted scrap gold inventory could be impaired if gold prices fall below $1,200 per ounce; jewelry inventory and gold-collateralized pawn loans are also exposed to further gold-price declines.
- The company had no forward sales commitments for gold or silver at June 30, 2013.
- Outstanding Texas credit-services guarantees had maximum exposure of $13.6 million. The estimated fair value of the related liability was immaterial, while the net estimated liability included in accrued liabilities was $0.6 million.
- Management cited competition from online, installment and title lenders as a cause of declining Texas consumer-loan revenue.
- Material risks include changes in pawn and consumer-lending regulation, credit losses, gold prices, foreign-exchange rates, interest rates, access to credit, consumer demand, competition, acquisition integration and the ability to maintain banking relationships.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously reported legal proceedings were disclosed.
Investor Verification Checklist
- Verify the final valuation, goodwill and operating contribution of the 19-store Valu + Pawn acquisition.
- Monitor gold prices, the carrying value and subsequent sale of scrap gold, and potential impairment of gold-related inventory and loans.
- Assess whether pawn-loan growth and new-store expansion offset declining consumer-loan fees and lower retail and scrap margins.
- Review borrowing capacity, covenant compliance and the February 2015 maturity of the unsecured credit facility.
- Track regulatory developments affecting Texas credit-services products, payday lending, pawn operations and merchandise transactions.
- Evaluate foreign-currency effects from the Mexican peso and the sustainability of reported growth on a constant-currency basis.