First Cash Financial Services, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2015. The company operated 1,045 locations in 14 U.S. states and 29 Mexican states, including pawn stores, consumer loan locations and related credit-services operations. Pawn operations generated approximately 96% of year-to-date revenue. The financial statements are unaudited and reported in U.S. dollars, with significant Mexican peso exposure.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|
| Total revenue | $169.5 million | $175.0 million | $513.2 million | $510.1 million |
| Net revenue | $95.4 million | $98.9 million | $288.3 million | $289.2 million |
| Net income | $11.2 million | $19.5 million | $41.3 million | $58.2 million |
| Diluted EPS | $0.40 | $0.68 | $1.45 | $2.00 |
| Operating cash flow | Not separately reported | Not separately reported | $65.1 million | $69.3 million |
| Adjusted EBITDA | $33.0 million | $36.5 million | $94.6 million | $102.3 million |
- Q3 revenue declined 3%, while constant-currency revenue increased 9%. Year-to-date revenue increased 1%, or 10% on a constant-currency basis.
- Net income margin was approximately 6.6% in Q3 and 8.0% year to date, compared with approximately 11.2% and 11.4%, respectively, in the comparable 2014 periods.
- Retail merchandise sales increased 3% in Q3 and 8% year to date; retail gross margin was 38% in both periods in Q3 and 38% year to date versus 39% in the prior-year period.
- Pawn loan fees decreased 4% in Q3 and 1% year to date on a reported basis, but increased 9% in both periods on a constant-currency basis.
- Consumer loan and credit-services fees fell 26% in Q3 and 23% year to date. The related loss provision was $2.4 million in Q3 and $5.1 million year to date.
- Wholesale scrap jewelry revenue declined 35% in Q3 and 34% year to date, reflecting lower gold volumes and prices.
- Store-level operating margin was 24% in both Q3 and the first nine months, compared with 26% in the respective 2014 periods.
Balance sheet, debt and liquidity
| September 30, 2015 balance | Amount |
|---|
| Cash and cash equivalents | $72.5 million |
| Pawn loans | $128.4 million |
| Consumer loans, net | $1.1 million |
| Inventories | $98.2 million |
| Total assets | $755.2 million |
| Revolving credit facilities outstanding | $68.5 million |
| Senior unsecured notes | $200.0 million |
| Total liabilities | $315.5 million |
| Stockholders’ equity | $439.7 million |
- The $200 million senior unsecured notes bear interest at 6.75% and mature April 1, 2021.
- The U.S. revolving facility had $91.5 million available under its $160 million commitment and matures in February 2019. The reported interest rate on borrowings was 2.75%.
- The Mexico facility provided an additional $10.0 million of availability, with no borrowings outstanding, and matures in December 2017.
- Total debt was $268.5 million, compared with $217.5 million at September 30, 2014. Management reported compliance with applicable debt covenants.
- Management identified $101.5 million of available unused credit, $72.5 million of cash, $147.6 million of customer loans and $98.2 million of inventories as primary liquidity sources. Working capital was $283.8 million and the current ratio was 7.04:1.
- Year-to-date investing cash outflows were $70.8 million, including $33.0 million for acquisitions, $22.3 million for net loan funding and $15.5 million for property and equipment. Financing activities provided $18.6 million, including net revolving-facility borrowings of $46.1 million and $32.0 million of share repurchases.
Material changes versus the prior comparable period
- Profitability weakened despite core pawn growth. Q3 net income fell 43% and nine-month net income fell 29%.
- The company recorded a $7.9 million goodwill impairment charge for U.S. consumer loan operations. No goodwill or other intangible assets remained for that reporting unit at September 30, 2015.
- The company recorded $8.4 million of pretax restructuring expenses in Q3 and $8.9 million year to date related primarily to U.S. consumer loan store closures and restructuring.
- Thirty U.S. pawn stores were acquired for $33.2 million during the first nine months, and 32 new pawn stores were opened in Mexico. The company ended the period with 6% more locations than a year earlier.
- The Mexican peso weakened 25% on average in Q3 and 18% on average year to date against the U.S. dollar. Management estimated that, absent the Q3 currency change, revenue would have been approximately $21.2 million higher and net income approximately $3.3 million higher; corresponding year-to-date estimates were $47.4 million and $6.6 million.
- Comprehensive income was a loss of $2.8 million in Q3 and income of $18.4 million year to date, materially affected by foreign-currency translation losses.
- The company repurchased 661,000 shares for $32.0 million at an average price of $48.37, leaving approximately 1.34 million shares authorized for repurchase.
Guidance, outlook, commentary and risks
- Management expected to add approximately 80 stores during fiscal 2015 and anticipated capital expenditures at a similar annualized rate during the remainder of the year.
- Management expected an effective tax rate of approximately 31% for the remainder of 2015 and believed available cash, operating cash flow and credit capacity would fund operations and planned expansion for at least the next twelve months.
- The company planned to close at least eight additional stand-alone consumer loan stores in the fourth quarter. It had already closed 14 such stores year to date, primarily because of Texas municipal restrictions and deteriorating payday-lending conditions.
- Consumer-lending results remain exposed to increased competition, enacted and proposed federal, state and municipal regulations, CFPB proposed rules, and Military Lending Act rules scheduled to take effect in October 2016.
- Other significant risks include Mexican peso volatility, changes in gold prices, pawn forfeiture and credit-loss rates, merchandise values, access to financing and banking services, competition, acquisition integration, cybersecurity, litigation and regulatory investigations.
- The filing reported no material changes in previously disclosed legal proceedings, and management concluded that disclosure controls were effective as of September 30, 2015.
Important facts for investors to verify
- Whether core pawn same-store growth and retail margins can offset continued declines in consumer lending and scrap jewelry.
- The sustainability of the company’s acquisition and store-opening strategy given higher debt and lower operating cash flow.
- The impact of further payday, title-loan, pawn and military-lending regulation on revenue, store closures and remaining goodwill.
- The sensitivity of reported results, equity and liquidity to further Mexican peso depreciation and gold-price changes.
- The amount and timing of future share repurchases, capital expenditures, acquisitions and revolving-credit borrowings.
- The filing’s adjusted earnings and constant-currency measures, which are non-GAAP metrics and should be reconciled to GAAP results.
