First Cash Financial Services, Inc. — FY2012 Form 10-K Summary
Business context and reporting period
Filed February 22, 2013, for the fiscal year ended December 31, 2012. The company operated pawn and consumer-finance stores in the United States and Mexico under the First Cash Financial Services name. At year-end, it had 715 pawn stores and 99 consumer-loan stores, or 814 locations, compared with 671 locations in 2011. Mexico generated 54% of revenue and the United States 46%.
- Pawn operations generated approximately 91% of continuing-operations revenue.
- Revenue mix: merchandise sales 65.6%, pawn-loan fees 25.5%, and consumer-loan and credit-services fees 8.7%.
- The company added 68 new pawn stores and acquired 75 stores during 2012, primarily to expand its pawn platform.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $595.9 million | $518.3 million | 15% |
| Net revenue | $338.7 million | $292.8 million | 16% |
| Income from continuing operations | $81.1 million | $70.5 million | 15% |
| Net income | $80.4 million | $77.8 million | 3% |
| Diluted EPS from continuing operations | $2.73 | $2.24 | 22% |
| Diluted EPS | $2.70 | $2.47 | 9% |
| Cash flow from operating activities | $88.8 million | $80.4 million | 10% |
| Free cash flow, company-defined | $49.6 million | $46.2 million | 7% |
- Margins: Net-revenue margin was 56.8%; income from continuing operations was 13.6% of revenue; pretax margin was 20.6%; and store-level operating margin was approximately 30%.
- Merchandise gross margin was 38%, unchanged overall. Retail merchandise margin improved to 42% from 40%, while scrap-jewelry margin declined to 26% from 34%.
- Pawn-loan receivables increased 41% to $103.2 million, and pawn inventories increased 47% to $65.3 million. Inventory turnover remained 4.2 times.
- Cash and equivalents were $50.3 million. Working capital was $210.3 million and the current ratio was 7.75 times.
- Total assets were $507.7 million and stockholders’ equity was $352.4 million.
- Debt included $102.5 million drawn on the revolving unsecured credit facility and $11.6 million of acquisition-related notes payable. The credit facility totaled $175 million, matured in February 2015, carried a 2.25% rate at year-end, and had $72.5 million available.
Material changes versus the prior comparable period
- Revenue growth reflected store additions and acquisitions, higher pawn receivables, and stronger retail merchandise sales. Constant-currency revenue growth was 18%, while reported growth was 15% because of Mexican peso translation.
- Same-store revenue increased 1% on a constant-currency basis, including 1% in the United States and 2% in Mexico. Excluding wholesale scrap jewelry, same-store revenue increased 6%.
- Pawn-loan-fee revenue increased 24% reported and 29% on a constant-currency basis, supported by a 168% annualized pawn yield versus 164% in 2011.
- Consumer-loan and credit-services fees increased only 3%; the loss provision rose to 26% of related fee revenue from 24%.
- Store operating expenses increased 18% to $151.7 million, broadly matching store-count growth. Administrative expenses increased 11% but declined to 8% of revenue from 9%.
- Interest expense increased to $1.5 million from $0.1 million because of new borrowings.
- Operating cash flow increased, but investing cash use rose sharply to $159.9 million, including $120.7 million for acquisitions and $21.8 million of capital expenditures. Financing cash flow was $49.5 million, primarily reflecting $102.5 million of credit-facility borrowings less $61.3 million of share repurchases.
- Net income growth was limited by the absence of the $6.0 million after-tax gain from the 2011 sale of Illinois consumer-loan stores and a $0.6 million after-tax loss on 2012 store closures.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected to open approximately 75 to 85 additional pawnshops in 2013, primarily in Mexico, excluding acquisitions. It expected operating cash flow and available credit capacity to fund current operations and planned expansion.
- The company closed seven consumer-loan stores in Austin and Dallas after local ordinances restricted credit-services activity. New ordinances in San Antonio and El Paso were scheduled to take effect in 2013; the company had not determined their impact on profitability.
- Regulatory risk is significant. The CFPB had supervisory and enforcement authority over certain non-bank consumer-credit activities, while U.S. state and local authorities and Mexican regulators continued to consider restrictions on pawn, payday, consumer-loan, and credit-services products.
- The CSO program exposed the company to letters of credit with a maximum outstanding exposure of $17.5 million at year-end. The recorded estimated loss liability was $0.7 million, and active third-party lender extensions totaled approximately $16.0 million.
- Gold-price risk is material: 43% of pawn loans were collateralized by primarily gold jewelry, jewelry represented 39% of inventory, and scrap-jewelry sales were $103.7 million.
- Mexico created substantial currency, political, regulatory, economic, security, and operational exposure. Peso depreciation reduced reported 2012 revenue growth by approximately three percentage points, although the effect on profitability was limited.
- The company had forward sales commitments through June 2013 for 6,000 gold ounces at $1,713 to $1,714 per ounce and 36,000 silver ounces at $27 per ounce.
- Goodwill increased to $166.4 million, including $95.1 million from 2012 acquisitions. No goodwill impairment was recorded, but acquisition valuations were preliminary at year-end.
- The company repurchased 1.5 million shares for $61.3 million during 2012 and authorized another 1.5 million-share repurchase program in January 2013. No cash dividends had been paid.
- Management reported effective disclosure controls and internal control over financial reporting, and the independent auditor issued unqualified opinions.
- The chief operating officer resigned effective February 19, 2013, under a separation agreement.
Facts an investor should verify
- Whether 2013 regulatory changes in San Antonio, El Paso, Texas generally, Mexico, and CFPB oversight materially reduce credit-services revenue or require product closures.
- Whether the high acquisition and expansion pace produces sustainable same-store growth and acceptable returns on the increased goodwill and debt.
- Whether pawn-loan growth and inventory expansion remain supported by collateral values, retail demand, and gold prices.
- Whether credit-loss provisions and the $17.5 million CSO guarantee exposure adequately reflect future defaults and collection recoveries.
- Whether the $102.5 million variable-rate credit-facility balance can be refinanced or repaid before its February 2015 maturity while funding expansion and repurchases.
- The filing provides annual and quarterly financial data, but the requested period is a full fiscal-year 2012 Form 10-K rather than a standalone fourth-quarter filing.