First Cash Financial Services, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012; filed October 26, 2012. The filing identifies the registrant as First Cash Financial Services, Inc. Operations comprised U.S. pawn, U.S. consumer loan and credit services, and Mexico operations, aggregated into one reportable segment. Mexico generated approximately 54% of revenue and the United States 46%.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $149.7 million | $132.9 million | $416.7 million | $373.4 million |
| Net revenue | $85.9 million | $75.7 million | $238.8 million | $214.4 million |
| Income from continuing operations | $19.6 million | $18.3 million | $53.4 million | $49.3 million |
| Net income | $18.9 million | $18.4 million | $52.8 million | $56.3 million |
| Diluted EPS from continuing operations | $0.67 | $0.58 | $1.80 | $1.55 |
| Diluted EPS | $0.64 | $0.59 | $1.77 | $1.78 |
- Q3 revenue increased 13% on a reported basis and 16% on a constant-currency basis. Nine-month revenue increased 12% reported and 17% constant currency.
- Q3 income from continuing operations increased 8%; nine-month continuing-operations income increased 8%.
- Net income declined 6% for the nine-month period because 2011 included a $5.979 million after-tax gain from the sale of Illinois consumer loan stores. Q3 2012 included a $0.747 million after-tax loss from discontinued operations.
- Q3 merchandise gross margin was 38%, compared with 39% in the prior-year quarter. Retail merchandise margin was 43% and scrap-jewelry margin was 27%, versus 41% and 37%, respectively, in Q3 2011.
- Store-level operating margin was 29% in both Q3 and the nine-month period, compared with 30% in the respective 2011 periods. Store operating expenses rose to 27% of revenue from 25% in Q3 and from 26% to 27% for the nine-month period.
- Cash flow from operating activities was $54.5 million for the first nine months, essentially unchanged from $54.6 million in 2011. Capital expenditures were $16.2 million and acquisition spending was $108.0 million.
- At September 30, cash and cash equivalents were $25.7 million; pawn loans were $107.7 million; consumer loans, net, were $2.0 million; and inventories were $65.7 million.
- Working capital was $190.6 million, the current ratio was 5.90x, and liabilities-to-equity was 54%, compared with 15% at September 30, 2011.
- Trailing-twelve-month EBITDA was $126.4 million and free cash flow, as defined by the Company, was $42.4 million. These are non-GAAP measures.
Material changes versus the prior comparable period
- The store base increased 23% year over year to 810 locations at September 30, 2012. The Company added 139 locations year to date, including 66 new pawn stores and 73 acquired stores.
- Pawn loan fees increased 25% in Q3 and 19% for the nine-month period on a reported basis; constant-currency growth was 31% and 26%, respectively. Pawn loans increased 38% year over year to $107.7 million.
- Same-store revenue was flat in Q3 and increased 2% for the nine-month period on a constant-currency basis. Excluding scrap jewelry, same-store revenue increased 6% in Q3 and 5% year to date.
- Scrap-jewelry revenue declined 12% in Q3 and 1% year to date on a constant-currency basis. Lower scrap volumes and higher gold acquisition costs reduced scrap margins.
- Interest expense increased to $444,000 in Q3 and $697,000 for the first nine months, versus $39,000 and $105,000, respectively, in the prior-year periods.
- The Company repurchased $61.3 million of common stock during the first nine months, compared with $55.3 million in 2011.
- Goodwill increased to $162.7 million at September 30, 2012, from $69.7 million at December 31, 2011, primarily because of acquisitions. Total assets increased to $488.2 million from $357.1 million at year-end 2011.
Acquisitions, debt and liquidity
- The Company acquired 29 pawn stores in western Mexico for $46.9 million, 24 U.S. pawn stores from Mister Money for $25.6 million, and 16 Fast Cash Pawn stores in Colorado for $45.9 million. Total 2012 acquisition purchase prices were $121.8 million, producing approximately $91.1 million of goodwill. Acquisition valuations remained preliminary.
- On September 11, 2012, the unsecured revolving credit facility was increased from $100 million to $175 million, with interest at LIBOR plus 2.0% and maturity in February 2015. Borrowings outstanding at September 30 were $111.0 million, leaving $64.0 million available and unused.
- Additional notes payable totaled approximately $12.3 million at September 30, including $8.5 million related to Fast Cash and $3.8 million related to the Mexico acquisition. The notes bear interest at 4.0% and 3.0%, respectively.
- Management stated that operating cash flow, available cash, and the credit facility should fund current operations and planned 2012 expansion. The Company expected to open or acquire approximately 140 to 145 locations during 2012 and expected capital expenditures to continue at a similar quarterly rate.
Outlook, risks, contingencies and unusual items
- The Company planned continued expansion through new store openings and acquisitions, but reported no definitive commitments for materially significant future acquisitions.
- Seasonality affects results: pawn service fees typically grow in the third and fourth quarters, while retail sales are seasonally stronger in the fourth quarter.
- Consumer lending operations face significant regulatory risk. Austin and Dallas ordinances reduced credit-services volumes and led to the closure of seven Texas stores in September 2012. A San Antonio ordinance was scheduled to become effective January 1, 2013; nine Company stores in San Antonio generated approximately $2.8 million of trailing-twelve-month revenue at September 30, 2012, and management had not determined their future viability.
- The Company guaranteed third-party CSO credit extensions. Maximum exposure under outstanding letters of credit was $16.2 million at September 30, 2012; the estimated net liability was $735,000.
- U.S. Customs and Border Protection assessed approximately $634,000, including interest, for duties on certain 2008 and 2009 cross-border scrap-jewelry transactions. The Company was appealing and could not assess the likelihood of success or additional assessments.
- Forward sales commitments covered 54,000 silver ounces through June 2013 and 4,000 gold ounces through November 2012. These commitments were not recorded on the balance sheet under the normal-sales exemption.
- Key risks include regulatory changes, consumer credit losses, gold-price volatility, Mexican peso fluctuations, acquisition integration, store expansion execution, interest rates, access to credit, competition, and changes in consumer demand.
- Management reported that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether regulatory restrictions in Texas, particularly San Antonio, materially reduce consumer-loan revenue or require additional store closures.
- Whether acquisition-related goodwill and preliminary purchase-price allocations remain supportable after final valuation and impairment testing.
- The Company’s ability to fund expansion, share repurchases, pawn-loan growth, and acquisition activity while carrying $111.0 million of revolving debt.
- Trends in same-store revenue, pawn-loan balances, scrap-jewelry volumes, gold margins, and consumer-loan loss provisions.
- The outcome of the Customs and Border Protection duty assessments and any related additional exposure.
- The comparability of reported results, given substantial acquisitions, discontinued operations, share repurchases, and foreign-currency effects.