First Cash Financial Services, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarterly and nine-month periods ended September 30, 2014; filed October 22, 2014. The unaudited filing covers U.S. and Mexico pawn operations, U.S. consumer lending and credit services, and Mexico operations. The company operated 988 locations in 12 U.S. states and 29 Mexican states, up 11% from the prior-year period.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $175.0 million | $173.4 million | $510.1 million | $475.6 million |
| Net revenue | $98.9 million | $94.0 million | $289.2 million | $269.4 million |
| Income from continuing operations | $19.5 million | $23.1 million | $58.5 million | $59.0 million |
| Net income | $19.5 million | $23.1 million | $58.2 million | $59.1 million |
| Diluted EPS | $0.68 | $0.79 | $2.00 | $1.99 |
| Operating cash flow | Not separately provided | Not separately provided | $69.3 million | $74.0 million |
Margins and operating indicators: Q3 EBITDA from continuing operations was $36.2 million, or 21% of revenue, versus 20% in the prior-year quarter. Nine-month EBITDA was $102.2 million, or 20% of revenue, versus 21%. Retail merchandise gross margin was 38% in Q3 and 39% year to date, compared with 40% in both prior comparable periods. Store-level operating margin was 26% in Q3 and for the nine-month period, versus 25% and 27%, respectively.
Balance sheet and liquidity: At September 30, 2014, cash and equivalents were $42.8 million, total assets were $704.7 million, working capital was $258.0 million and total equity was $429.5 million. Pawn loans were $137.0 million, inventories were $94.9 million and customer loans, including relevant disclosed balances, totaled $157.97 million. Total indebtedness was $217.5 million, consisting principally of $200.0 million of senior unsecured notes and $17.5 million drawn on the revolving facility. The company reported $142.5 million of unused revolver capacity, a trailing-twelve-month leverage ratio of 1.5:1 and a current ratio of 6.14:1.
Material changes versus prior comparable periods
- Q3 revenue increased 1% reported and 2% on a constant-currency basis; nine-month revenue increased 7% reported and 9% constant currency.
- Retail merchandise sales increased 14% in Q3 and 17% year to date, while pawn loan fees increased 9% and 10%, respectively. Pawn receivables increased 13% reported, or 14% constant currency, year over year.
- Consumer loan and credit services fees declined 13% in Q3 and 16% year to date, reflecting competition, regulatory restrictions and store closures.
- Wholesale scrap jewelry revenue declined 53% in Q3 and 30% year to date, driven by lower gold prices and reduced sales volumes.
- Q3 income from continuing operations declined 16%, principally because the prior-year period included a nonrecurring tax benefit and 2014 interest expense was higher. Excluding the prior-year tax benefit, the reported tax rate was 30.0% versus 32.6%.
- Nine-month operating cash flow declined 6% to $69.3 million, while investing cash outflow declined to $77.0 million from $118.9 million, primarily because acquisition spending was lower.
- Mexico acquisition activity expanded materially: the company acquired 47 Mexican pawn stores and 10 U.S. pawn stores during the first nine months. Total acquisition consideration was approximately $33.0 million.
Debt, capital allocation and outlook
In March 2014, the company issued $200.0 million of 6.75% senior unsecured notes due April 2021. Net proceeds were used primarily to repay the prior credit facility and acquisition-related notes. The new $160.0 million revolving credit facility matures in February 2019, bears interest at LIBOR plus 2.5% or the applicable base rate plus 1.5%, and includes a leverage covenant of no more than 2.5 times Consolidated EBITDA. Management stated that the company was in compliance with its covenants and expected liquidity to fund operations and planned expansion for at least the next 12 months.
Management expected to add approximately 100 to 105 stores during 2014, including the 93 locations added through September 30. Capital expenditures were expected to continue at a similar annualized rate during the remainder of 2014. Management expected an effective tax rate of approximately 31% for the remainder of 2014. The company completed its authorization to repurchase 1.5 million shares on August 21, 2014, having repurchased 770,867 shares during 2014 at an average price of $57.01 per share.
Risks, contingencies and unusual items
- Regulatory changes in the United States or Mexico could restrict pawn loans, payday lending, credit services, fees, collateral transactions or merchandise sales. The CFPB continued studying short-term lending and could adopt rules that make certain products less profitable or impractical.
- Foreign-currency exposure remains significant; the Mexican peso weakened against the U.S. dollar, reducing the translated value of Mexican revenue and net assets.
- Gold-price and used-merchandise values affect scrap jewelry revenue, inventory values and margins. The average gold price declined 12% year to date versus the prior-year period.
- Higher debt levels and the fixed 6.75% senior-note rate increased interest expense and could constrain cash available for acquisitions, capital expenditures and working capital.
- Operations remain exposed to consumer demand, pawn forfeiture rates, credit losses, competition, acquisition integration, liquidity and access to financing, litigation, cybersecurity, regulatory compliance and economic conditions.
- The 2014 acquisitions generated $4.9 million of post-acquisition revenue through September 30 and incurred approximately $375,000 of transaction and integration costs; their net earnings contribution was not material.
- Comprehensive income was reduced by foreign-currency translation losses of $4.9 million in Q3 and $4.6 million for the nine-month period.
Investor verification points
- Reconcile reported revenue growth with constant-currency growth and assess whether the decline in U.S. same-store core revenue persists.
- Review the sustainability of pawn receivable and inventory growth relative to store additions and credit-loss trends.
- Evaluate the effect of the $200 million note issuance on interest coverage, leverage and future acquisition capacity.
- Monitor CFPB, U.S. state and Mexican regulatory developments affecting consumer loans, credit services and pawn operations.
- Assess sensitivity to Mexican peso movements, gold prices and scrap jewelry volumes.
- Confirm integration performance and final purchase-price allocations for the 47-store Mexico acquisition and other 2014 acquisitions.
- Verify future store-growth spending, capital expenditures, share repurchases and compliance with revolving-credit covenants.