Firstcash Holdings, Inc. quarterly report, Q2 FY2012

Business Context and Reporting Period

First Cash Financial Services, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company operates pawn stores and consumer lending or credit services businesses in the United States and Mexico. Pawn operations generated approximately 90% of continuing-operations revenue during the first six months. The company had 781 locations at June 30, 2012, up 21% from the prior-year period, with approximately 53% of year-to-date revenue generated in Mexico and 47% in the United States.

Financial Performance and Position

Metric	Three Months Ended June 30, 2012	Three Months Ended June 30, 2011	Six Months Ended June 30, 2012	Six Months Ended June 30, 2011
Total revenue	$132.8 million	$120.6 million	$267.9 million	$241.4 million
Net revenue	$75.1 million	$68.9 million	$153.5 million	$139.2 million
Income from continuing operations	$16.3 million	$15.2 million	$33.9 million	$31.1 million
Net income	$16.3 million	$15.3 million	$33.9 million	$37.9 million
Diluted earnings per share	$0.56	$0.48	$1.13	$1.18

Quarterly revenue increased 10% as reported and 18% on a constant-currency basis. Six-month revenue increased 11% as reported and 17% on a constant-currency basis.
Quarterly income from continuing operations increased 8%; six-month income from continuing operations increased 9%.
Approximate net income margins were 12.3% for the quarter and 12.6% year to date, compared with 12.7% and 15.7%, respectively, in the comparable periods. The year-to-date comparison was affected by $6.8 million of 2011 discontinued-operation income, including a gain on the sale of Illinois consumer loan stores.
Pawn loan fees increased 11% in the quarter and 16% year to date as reported. Constant-currency pawn loan fee growth was 21% and 24%, respectively.
Merchandise sales gross margin was 37% in both quarters and 37% for the first six months of 2012 versus 38% in the prior-year period. Scrap jewelry margin declined to 22% in the quarter and 25% year to date, from 30% and 32%, respectively.
Consumer loan and credit services loss provision represented 25% of related fee revenue in the quarter and 22% year to date, compared with 22% and 19% in the prior-year periods.
Cash flow from operating activities was $39.7 million for the first six months, up from $35.4 million. Investing cash flow was negative $90.9 million, principally due to $70.6 million of acquisitions and $9.8 million of capital expenditures.
Cash and cash equivalents were $29.8 million at June 30, 2012, versus $70.3 million at December 31, 2011. Working capital was $156.9 million and the current ratio was 5.88x.
Pawn loans were $88.3 million, up 11% from June 30, 2011; inventories were $53.0 million, down 3% as reported but up 5% on a constant-currency basis.
Total liabilities were $114.8 million and stockholders’ equity was $290.5 million. The company had $71.6 million outstanding under its revolving unsecured credit facility and $28.4 million available.

Material Changes Versus the Prior Comparable Period

The company acquired 29 pawn stores in western Mexico for $46.9 million, 24 pawn stores in the United States for $25.6 million, and four additional U.S. stores in smaller transactions. The 2012 acquisitions contributed $9.3 million of revenue and $1.2 million of after-tax earnings from their respective acquisition dates through June 30.
Goodwill increased substantially, including approximately $39.4 million from the Mexico acquisition and $15.7 million from the Mister Money acquisition. Acquisition purchase-price allocations remain preliminary for certain assets.
The company opened 46 pawn stores and acquired 57 stores during the first six months, while also converting two U.S. locations to a different format.
The revolving credit facility was amended and expanded from $50 million to $100 million in May 2012. Debt increased materially from the prior year because of $71.6 million of borrowings used to fund acquisitions, expansion and share repurchases.
The company repurchased 1.5 million shares for $61.3 million, at an average price of $40.85 per share, completing the authorized repurchase program.
Comprehensive income was $35.5 million for the first six months, compared with $42.2 million in the prior-year period, reflecting foreign-currency translation effects. The Mexican peso weakened materially against the U.S. dollar.

Guidance, Outlook, Commentary, Risks and Unusual Items

Management expected to open approximately 125 to 135 stores during 2012, including acquisitions, and expected capital expenditures to continue at a similar quarterly rate during the remainder of the year.
Management believed operating cash flow, cash balances and the available credit facility would fund current operations and planned expansion. The company was in compliance with credit-facility covenants as of August 2, 2012.
The business is seasonal, with pawn service-fee growth typically stronger in the second half and retail sales generally stronger in the fourth quarter.
Key risks include consumer credit losses, changes in pawn collateral and gold prices, Mexican peso fluctuations, interest rates, competition, integration of acquisitions, store-opening execution, and access to credit markets.
Regulatory restrictions on pawn loans, consumer loans and credit services remain a significant risk. New Austin and Dallas, Texas, ordinances became effective in May and June 2012; management stated that affected credit services revenue represented less than 1% of consolidated annualized revenue but could not estimate the long-term impact.
The company had a maximum exposure of $15.6 million under letters of credit guaranteeing Texas credit services transactions. The estimated fair value of the related liability, net of expected customer recoveries, was $0.7 million at June 30, 2012.
U.S. Customs and Border Protection assessed approximately $629,000 of duties and accrued interest related to certain 2008 and 2009 Mexico-to-U.S. scrap jewelry transactions. The company is appealing and cannot assess the likelihood of success or whether additional assessments will arise.
The company had forward sales commitments through June 2013 for 72,000 ounces of silver at prices ranging from $26 to $27 per ounce and no forward gold commitments. These commitments were not recorded on the balance sheet.
Management stated that disclosure controls and procedures were effective and that there were no material changes in internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Reconcile reported growth with constant-currency growth and assess the effect of the weaker Mexican peso on revenue, assets and margins.
Evaluate whether acquisition-driven growth, particularly the Mexico and Mister Money acquisitions, produces expected earnings and cash returns after integration costs.
Monitor leverage, credit-facility availability, covenant compliance and liquidity after acquisitions and the $61.3 million share repurchase.
Assess trends in scrap jewelry prices, acquisition costs, merchandise margins and gold-related inventory exposure.
Review consumer loan and credit services loss provisions, CSO guarantee exposure and the effect of evolving Texas and other regulatory requirements.
Follow the Customs and Border Protection duty assessment and any potential additional liabilities.
Separate recurring continuing-operations performance from the prior-year discontinued-operation income and Illinois sale gain.