Firstcash Holdings, Inc. quarterly report, Q3 FY2013

First Cash Financial Services, Inc. — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2013; filed October 25, 2013. The unaudited results cover U.S. and Mexico pawn, consumer loan and credit services operations. Pawn operations represented approximately 93% of year-to-date continuing-operations revenue. The company operated 888 stores at quarter-end, up 10% from the prior year.

Financial performance and position

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Total revenue	$174.2 million	$149.7 million	$478.2 million	$416.7 million
Net revenue	$94.6 million	$85.9 million	$271.4 million	$238.8 million
Income from continuing operations	$23.1 million	$19.6 million	$59.1 million	$53.4 million
Net income	$23.1 million	$18.9 million	$59.1 million	$52.8 million
Diluted EPS	$0.79	$0.64	$1.99	$1.77
Operating cash flow	Not provided for quarter	Not provided for quarter	$74.0 million	$54.5 million

Revenue increased 16% in the quarter and 15% year to date. On a constant-currency basis, growth was 15% and 12%, respectively.
Retail merchandise sales increased 28% in the quarter and 31% year to date; pawn loan fees increased 19% and 23%, respectively.
Consumer loan and credit services fees declined 16% in the quarter and 9% year to date. Wholesale scrap jewelry revenue declined 3% and 28%, respectively.
Approximate net-income margins were 13.3% in Q3 2013 versus 12.6% in Q3 2012, and 12.4% for the first nine months versus 12.7% in the prior-year period.
Store-level operating margin declined to 25% in Q3 and 27% year to date, from 29% in each comparable prior-year period.
Cash and cash equivalents were $30.5 million at September 30, 2013, compared with $50.3 million at December 31, 2012. Working capital was $213.0 million and the current ratio was 5.4x.
Pawn loans were $121.2 million, up 13% from September 30, 2012; inventories were $82.6 million, up 26%.
Total assets were $602.7 million, including $230.5 million of goodwill. Total liabilities were $215.1 million and stockholders’ equity was $387.5 million.
Trailing-twelve-month EBITDA from continuing operations was $143.4 million, compared with $126.1 million in the prior-year period. Management-defined trailing-twelve-month free cash flow was $76.5 million versus $42.4 million.

Material changes versus the prior comparable period

The company acquired 30 pawn stores during the first nine months: 19 Texas stores for $70.0 million, eight Mexico stores for $12.4 million, and three additional U.S. stores for $2.8 million. The acquisitions generated approximately $64.0 million of goodwill and $12.97 million of post-acquisition revenue during the period.
Acquisition and integration costs were approximately $1.6 million; post-acquisition net earnings, including those costs, were approximately $0.8 million.
The store network expanded to 888 locations, with 53 new pawn stores opened and 30 pawn stores acquired year to date.
Gold-price weakness materially reduced scrap jewelry economics. The Q3 scrap gross margin fell to 11% from 27%, and the nine-month margin fell to 15% from 26%. Retail merchandise margin declined to 40% from 43% in Q3 and to 40% from 42% year to date.
Interest expense increased to $1.1 million in Q3 and $2.5 million year to date, reflecting higher borrowings.
The company repurchased 729,000 shares for $38.7 million during the first nine months, compared with $61.3 million of repurchases in the prior-year period.
The company terminated its election to include foreign subsidiaries in its consolidated U.S. federal tax return and intends to indefinitely reinvest their earnings outside the United States.

Liquidity, debt and cash flow

Operating cash flow increased 36% to $74.0 million. Investing cash flow used $118.9 million, including $84.4 million for acquisitions, $17.9 million for property and equipment, and $16.6 million for net loan receivables. Financing cash flow provided $24.6 million.
The revolving unsecured credit facility was amended and increased from $175.0 million to $205.0 million. At September 30, $152.5 million was outstanding and $52.5 million was available.
The facility bears interest at 30-day LIBOR plus 2.0%, had an interest rate of 2.19% at quarter-end, and matures in February 2015. The company was in compliance with its financial covenants.
Other notes payable totaled approximately $6.9 million and $2.2 million, bearing interest at 4.0% and 3.0%, respectively.
Management stated that operating cash flow, cash balances and available credit were expected to fund current operations and planned expansion.

Guidance, outlook, risks and unusual items

Management expected to add approximately 95 to 100 pawnshops through openings and acquisitions during 2013 and expected capital expenditures to continue at a similar annualized rate for the remainder of the year.
Management expected the effective tax rate going forward to be approximately 32% to 33%. Q3 included a non-recurring estimated tax benefit of approximately $3.3 million; excluding that benefit, the Q3 tax rate was 32.6%.
Consumer loan and credit services products are considered non-core and non-growth. Management cited increased competition in Texas as a factor in declining revenue.
The company had maximum exposure of $14.8 million under outstanding CSO letters of credit; the recorded fair-value liability was $0.6 million. The company may seek recovery from customers for amounts paid under guarantees.
Key risks include regulation of pawn and consumer lending products, changes in gold prices, foreign currency movements, consumer demand and repayment behavior, credit losses, competition, acquisition integration, financing availability, cybersecurity, litigation and operating risks in Mexico.
There were no material changes in previously reported legal proceedings, no material changes in market-risk exposure since December 31, 2012, and management concluded that disclosure controls were effective.

Important facts for investors to verify

Assess underlying earnings excluding the approximately $3.3 million non-recurring tax benefit and approximately $1.6 million of acquisition and integration costs.
Separate organic performance from acquisition-driven growth, particularly given the 30 stores acquired year to date and the significant increase in goodwill.
Monitor gold prices, scrap volumes and retail merchandise mix because weaker gold economics reduced gross and store-level margins.
Review the $152.5 million credit-facility balance, February 2015 maturity, covenant compliance and available borrowing capacity.
Evaluate regulatory developments affecting Texas credit services and consumer lending, as well as the $14.8 million CSO guarantee exposure.
Reconcile reported cash generation with substantial acquisition spending, capital expenditures, debt borrowings and share repurchases.