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FCFS > SEC Filings for FCFS > Form 10-Q on 26-Oct-2012All Recent SEC Filings

Show all filings for FIRST CASH FINANCIAL SERVICES INC

Form 10-Q for FIRST CASH FINANCIAL SERVICES INC


26-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Pawn operations accounted for approximately 91% of the Company's revenue from continuing operations during the first nine months of 2012. The Company's pawn revenue is derived primarily from service fees on pawn loans and merchandise sales of forfeited pawn collateral and used goods purchased directly from the general public. The Company accrues pawn loan fee revenue on a constant-yield basis over the life of the pawn loan for all pawns that the Company deems collection to be probable based on historical pawn redemption statistics. If a pawn loan is not repaid prior to the expiration of the automatic extension period, if applicable, the property is forfeited to the Company and transferred to inventory at a value equal to the principal amount of the loan, exclusive of accrued interest.

The Company's consumer loan and credit services revenue, which is approximately 9% of consolidated year-to-date revenue from continuing operations, is derived primarily from credit services fees. The Company recognizes service fee income on consumer loans and credit services transactions on a constant-yield basis over the life of the loan or credit extension, which is generally 180 days or less. The net defaults on consumer loans and credit services transactions and changes in the valuation reserve are charged to the consumer loan credit loss provision. The credit loss provision associated with the CSO Program and consumer loans are based primarily upon historical credit loss experience, with consideration given to recent credit loss trends, delinquency rates, economic conditions and management's expectations of future credit losses. See additional discussion of the credit loss provision and related allowances and accruals in the section titled "Results of Continuing Operations."

The business is subject to seasonal variations, and operating results for the current quarter and year-to-date periods are not necessarily indicative of the results of operations for the full year. Typically, the Company experiences seasonal growth of service fees in the third and fourth quarter of each year due to loan balance growth that occurs after the heavy repayment period of pawn loans in late December in Mexico, which is associated with statutory Christmas bonuses received by customers, and in the first quarter in the United States, which is associated with tax refund proceeds received by customers. Retail sales are seasonally higher in the fourth quarter associated with holiday shopping.

OPERATIONS AND LOCATIONS

The Company has operations in the United States and Mexico. For the three and nine months ended September 30, 2012, approximately 54% of total revenue was generated in Mexico and 46% from the United States.

As of September 30, 2012, the Company had 810 locations in twelve U.S. states and 24 states in Mexico, which represents a net store-count increase of 23% over the trailing twelve months. A total of 36 new store locations were added during the third quarter of 2012 and 139 have been added year-to-date.


The following table details store openings for the three months ended September 30, 2012:

                                                  Pawn Locations
                                               Large             Small         Consumer Loan
                                            Format (1)         Format (2)      Locations (3)       Total Locations
United States:
Total locations, beginning of period           164                    27             72                    263
New locations opened                             2                     -              -                      2
Locations acquired                              16                     -              -                     16
Discontinued consumer loan operations            -                     -             (7 )                   (7 )
Total locations, end of period                 182                    27             65                    274

Mexico:
Total locations, beginning of period           465                    19             34                    518
New locations opened                            18                     -              -                     18
Total locations, end of period                 483                    19             34                    536

Total:
Total locations, beginning of period           629                    46            106                    781
New locations opened                            20                     -              -                     20
Locations acquired                              16                     -              -                     16
Discontinued consumer loan operations            -                     -             (7 )                   (7 )
Total locations, end of period                 665                    46             99                    810

(1) The large format locations include retail showrooms and accept a broad array of pawn collateral including jewelry, electronics, appliances, tools and other consumer hard goods. At September 30, 2012, 111 of the U.S. large format pawn stores also offered consumer loans or credit services products, which includes the 24 locations acquired from Mister Money.

(2) The small format locations typically have limited retail operations and primarily accept jewelry and small electronic items as pawn collateral. At September 30, 2012, all of the Texas and Mexico small format pawn stores also offered consumer loans or credit services products.

(3) The Company's U.S. free-standing, small format consumer loan locations offer a credit services product and are all located in Texas. The Mexico locations offer small, short-term consumer loans. In addition to stores shown on this chart, First Cash is also an equal partner in Cash & Go, Ltd., a joint venture, which owns and operates 38 check cashing and financial services kiosks located inside convenience stores in the state of Texas. The Company's credit services operations also include an internet distribution channel for customers in the state of Texas.


The following table details store openings for the nine months ended September 30, 2012:

                                                  Pawn Locations
                                               Large             Small         Consumer Loan
                                            Format (1)         Format (2)      Locations (3)       Total Locations
United States:
Total locations, beginning of period           132                    25             74                    231
New locations opened                             6                     -              -                      6
Locations acquired                              44                     -              -                     44
Store format conversions                         -                     2             (2 )                    -
Discontinued consumer loan operations            -                     -             (7 )                   (7 )
Total locations, end of period                 182                    27             65                    274

Mexico:
Total locations, beginning of period           394                    19             34                    447
New locations opened                            60                     -              -                     60
Locations acquired                              29                     -              -                     29
Total locations, end of period                 483                    19             34                    536

Total:
Total locations, beginning of period           526                    44            108                    678
New locations opened                            66                     -              -                     66
Locations acquired                              73                     -              -                     73
Store format conversions                         -                     2             (2 )                    -
Discontinued consumer loan operations            -                     -             (7 )                   (7 )
Total locations, end of period                 665                    46             99                    810

(1) The large format locations include retail showrooms and accept a broad array of pawn collateral including jewelry, electronics, appliances, tools and other consumer hard goods. At September 30, 2012, 111 of the U.S. large format pawn stores also offered consumer loans or credit services products, which includes the 24 locations acquired from Mister Money.

(2) The small format locations typically have limited retail operations and primarily accept jewelry and small electronic items as pawn collateral. At September 30, 2012, all of the Texas and Mexico small format pawn stores also offered consumer loans or credit services products.

(3) The Company's U.S. free-standing, small format consumer loan locations offer a credit services product and are all located in Texas. The Mexico locations offer small, short-term consumer loans. In addition to stores shown on this chart, First Cash is also an equal partner in Cash & Go, Ltd., a joint venture, which owns and operates 38 check cashing and financial services kiosks located inside convenience stores in the state of Texas. The Company's credit services operations also include an internet distribution channel for customers in the state of Texas.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, related revenue and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. Such estimates and assumptions are subject to a number of risks and uncertainties, which may cause actual results to differ materially from the Company's estimates. The significant accounting policies that management believes are the most critical to aid in fully understanding and evaluating the reported financial results and the effects of recent accounting pronouncements have been reported in the Company's 2011 Annual Report on Form 10-K.

The Company has significant operations in Mexico, where the functional currency for the Company's Mexican subsidiaries is the Mexican peso. The assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each balance sheet date, and the resulting adjustments are accumulated in other comprehensive income (loss) as a separate component of stockholders' equity. Revenue and expenses are translated at the monthly average exchange rates occurring during each month.


The Company's management reviews and analyzes certain operating results, in Mexico, on a constant currency basis because the Company believes this better represents the Company's underlying business trends. Amounts presented on a constant currency basis will be denoted as such. See additional discussion of constant currency operating results provided in the section titled "Non-GAAP Financial Information."

Stores included in the same-store revenue calculations are those stores that were opened prior to the beginning of the prior-year comparative period and are still open. Also included are stores that were relocated during the year within a specified distance serving the same market, where there is not a significant change in store size and where there is not a significant overlap or gap in timing between the opening of the new store and the closing of the existing store. Non-retail sales of scrap jewelry are included in same-store revenue calculations.

While the Company has had significant increases in revenue due to new store openings and acquisitions, the Company has also incurred increases in operating expenses attributable to the additional locations. Operating expenses consist of all items directly related to the operation of the Company's stores, including salaries and related payroll costs, rent, utilities, equipment, advertising, property taxes, licenses, supplies and security. Administrative expenses consist of items relating to the operation of the corporate offices, including the compensation and benefit costs of corporate management, area supervisors and other operations management personnel, collections operations and personnel, accounting and administrative costs, information technology costs, liability and casualty insurance, outside legal and accounting fees and stockholder-related expenses.

Recent Accounting Pronouncements

There were no recent accounting pronouncements that had a material effect on the Company's financial position, results of operations or financial statement disclosures.

RESULTS OF CONTINUING OPERATIONS

Three Months Ended September 30, 2012, Compared To The Three Months Ended September 30, 2011

The following table details the components of revenue for the three months ended September 30, 2012, as compared to the three months ended September 30, 2011 (unaudited, in thousands). Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. The average value of the Mexican peso to the U.S. dollar decreased from 12.3 to 1 in the third quarter of 2011 to 13.2 to 1 in the third quarter of 2012. The end-of-period value of the Mexican peso to the U.S. dollar increased from 13.5 to 1 at September 30, 2011, to 12.9 to 1 at September 30, 2012. As a result of these currency exchange movements, revenue from Mexican operations translated into fewer U.S. dollars relative to the prior-year period, and net assets from Mexican operations translated into more U.S. dollars relative to the prior-year period. While the weakening of the Mexican peso negatively affected the translated dollar-value of revenue, the cost of sales and operating expenses were reduced as well. The scrap jewelry generated in Mexico is exported and sold in U.S. dollars, which reduces the Company's net peso-denominated earnings stream. The Company's management reviews and analyzes business results in a constant currency because the Company believes this is a meaningful indicator of the Company's underlying business trends.


                               Three Months Ended                                           Increase/(Decrease)
                                 September 30,                                               Constant Currency
                              2012            2011             Increase/(Decrease)                 Basis
United States revenue:
Retail merchandise
sales                    $     25,801     $    20,000     $      5,801            29  %              29  %
Scrap jewelry sales            13,822          15,653           (1,831 )         (12 )%             (12 )%
Pawn loan fees                 16,747          13,452            3,295            24  %              24  %
Consumer loan and
credit services fees           12,785          11,887              898             8  %               8  %
Other revenue                     204             239              (35 )         (15 )%             (15 )%
                               69,359          61,231            8,128            13  %              13  %
Mexico revenue:
Retail merchandise
sales                          44,137          38,157            5,980            16  %              24  %
Scrap jewelry sales            12,246          13,984           (1,738 )         (12 )%             (12 )%
Pawn loan fees                 23,021          18,289            4,732            26  %              35  %
Consumer loan and
credit services fees              932           1,191             (259 )         (22 )%             (16 )%
                               80,336          71,621            8,715            12  %              19  %
Total revenue:
Retail merchandise
sales                          69,938          58,157           11,781            20  %              26  %
Scrap jewelry sales            26,068          29,637           (3,569 )         (12 )%             (12 )%
Pawn loan fees                 39,768          31,741            8,027            25  %              31  %
Consumer loan and
credit services fees           13,717          13,078              639             5  %               5  %
Other revenue                     204             239              (35 )         (15 )%             (15 )%
                         $    149,695     $   132,852     $     16,843            13  %              16  %

Domestic revenue accounted for approximately 46% of the total revenue for the current quarter, while foreign revenue from Mexico accounted for 54% of total revenue.

The following table details customer loans and inventories held by the Company and active CSO credit extensions from an independent third-party lender as of September 30, 2012, as compared to September 30, 2011 (unaudited, in thousands). Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year balances at the prior year end-of-period exchange rate.


                                                                                             Increase/(Decrease)
                             Balance at September 30,                                         Constant Currency
                               2012             2011            Increase/(Decrease)                 Basis
United States:
Pawn loans               $       51,875     $    38,791     $    13,084           34  %                34  %
CSO credit extensions
held by independent
third-party (1)                  14,048          12,226           1,822           15  %                15  %
Other consumer loans              1,194              41           1,153        2,812  %             2,812  %
                                 67,117          51,058          16,059           31  %                31  %
Mexico:
Pawn loans                       55,839          39,182          16,657           43  %                36  %
Other consumer loans                833             888             (55 )         (6 )%               (10 )%
                                 56,672          40,070          16,602           41  %                35  %
Total:
Pawn loans                      107,714          77,973          29,741           38  %                35  %
CSO credit extensions
held by independent
third-party (1)                  14,048          12,226           1,822           15  %                15  %
Other consumer loans              2,027             929           1,098          118  %               114  %
                         $      123,789     $    91,128     $    32,661           36  %                33  %
Pawn inventories:
U.S. pawn inventories    $       29,649     $    23,149     $     6,500           28  %                28  %
Mexico pawn
inventories                      36,043          31,767           4,276           13  %                 8  %
                         $       65,692     $    54,916     $    10,776           20  %                17  %

(1) CSO amounts outstanding are composed of the principal portion of active CSO extensions of credit by an independent third-party lender, which are not included on the Company's balance sheet, net of the Company's estimated fair value of its liability under the letters of credit guaranteeing the extensions of credit.

Store Operations

The overall increase in quarter-over-quarter revenue of 16% (constant currency basis) was due primarily to revenue from new and acquired pawn stores. The 12% decrease in total scrap jewelry revenue caused consolidated same-store revenue to be flat, on a constant currency basis, in the third quarter. Excluding scrap jewelry sales, same-store revenue increased 9% in Mexico, 3% in the U.S. and 6% overall, on a constant currency basis. Same-store pawn service fees increased 12% on a consolidated basis, with 17% growth in Mexico and 7% growth in the U.S., on a constant currency basis. Same-store retail sales (constant currency basis) increased 7% in Mexico, were flat in the U.S. and increased 4% in total. Same-store scrap revenue (constant currency basis) decreased 22% in total, with a 23% decrease in the U.S. and a 21% decrease in Mexico. Third quarter revenue generated by the stores opened or acquired since July 1, 2011, increased by $10,550,000 in Mexico and $10,643,000 in the United States, compared to the same quarter last year.

Revenue from pawn loan fees increased 31% on a constant currency basis, which was composed of a 24% increase in the United States and a 35% increase in Mexico. The increase was primarily the result of an increase in the average outstanding pawn receivables.

On a constant currency basis, store-based retail sales increased by 26%, and scrap jewelry sales decreased 12% compared to the prior year, which reflected an 8% increase in the weighted-average selling price per ounce of scrap gold offset by an 18% decrease in the quantity of scrap gold sold. The decline in scrap quantity reflects an increased mix of non-jewelry loans in Mexico and less traffic from customers looking to sell gold. The total volume of gold scrap jewelry sold in the third quarter of 2012 was approximately 14,000 ounces at an average cost of $1,376 per ounce and an average selling price of $1,666 per ounce.

Service fees from consumer loans and credit services transactions increased 5%, on a constant currency basis, compared to the third quarter of 2011, primarily generated by revenues from the acquired Mister Money pawn stores.


The gross profit margin on total merchandise sales was 38% during the third quarter of 2012, compared to 39% in the same period in the prior year. The store-based retail merchandise margin, which excludes scrap jewelry sales, was 43% during the third quarter of 2012, while the margin on wholesale scrap jewelry was 27%, compared to prior-year margins of 41% and 37%, respectively. The overall increase in retail margins was primarily the result of improved retail margins in Mexico, including lower acquisition costs for retail merchandise. The decrease in scrap margins reflected higher acquisition costs for gold. Pawn inventories increased from the prior year by 17% on a constant currency basis. The increase reflected a higher store count and store acquisitions, partially offset by higher inventory turnover compared to the prior year. At September 30, 2012, the Company's pawn inventories, at cost, were composed of: 38% jewelry (primarily gold), 40% electronics and appliances, 7% tools and 15% other. At September 30, 2012, 97% of total inventories, at cost, had been held for one year or less, while 3% had been held for more than one year.

The Company's consumer loan and credit services loss provision was 32% of consumer loan and credit services fee revenue during the third quarter of 2012, compared to 30% in the third quarter of 2011. During the third quarter of 2012, the Company sold bad debt portfolios generated from consumer loan and credit services guarantees for proceeds of $83,000. The Company did not sell bad debt portfolios during the third quarter of 2011. The estimated fair value of liabilities under the CSO letters of credit, net of anticipated recoveries from customers, was $735,000, or 5.0% of the gross loan balance at September 30, 2012, compared to $877,000, or 6.7% of the gross loan balance at September 30, 2011, which is included as a component of the Company's accrued liabilities. The Company's loss reserve on consumer loans was $109,000, or 5.1% of the gross loan balance at September 30, 2012, compared to $49,000, or 5.0% of the gross loan balance at September 30, 2011.

Store operating expenses of $39,889,000 during the third quarter of 2012 increased by 20% compared to $33,313,000 during the third quarter of 2011, primarily as a result of a 22% increase in the weighted-average store count. As a percentage of revenue, store operating expenses increased from 25% in 2011 to 27% in 2012.

The net store profit contribution from continuing operations for the current-year quarter was $43,272,000, which equates to a store-level operating margin of 29%, compared to 30% in the prior-year quarter.

Administrative Expenses, Interest, Taxes & Income

Administrative expenses increased 7% to $12,330,000 during the third quarter of 2012, compared to $11,531,000 during the third quarter of 2011, primarily due to the 22% increase in the weighted-average store count and additional general management and supervisory compensation expenses and other support expenses required for such growth. As a percentage of revenue, administrative expenses decreased from 9% in 2011 to 8% in 2012.

Interest expense increased to $444,000 in the third quarter of 2012, compared to $39,000 for the third quarter of 2011, reflecting increased borrowing levels under the existing credit facilities.

For the third quarter of 2012 and 2011, the Company's effective federal income tax rates were 34.5% and 35.0%, respectively. The decrease in the overall rate for 2012 relates primarily to the increased percentage of income being generated in Mexico, where the Company is not subject to state income taxes.

Income from continuing operations increased 8% to $19,636,000 during the third quarter of 2012, compared to $18,252,000 during the third quarter of 2011. Net income was $18,889,000 during the third quarter of 2012, compared to $18,433,000 during the third quarter of 2011, which included the results of discontinued operations.

Nine Months Ended September 30, 2012, Compared To The Nine Months Ended September 30, 2011

The following table details the components of revenue for the nine months ended September 30, 2012, as compared to the nine months ended September 30, 2011 (unaudited, in thousands). Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. The average value of the Mexican peso to the U.S. dollar decreased from 12.0 to 1 in the first nine months of 2011 to 13.2 to 1 in the first nine months of 2012. The end-of-period value of the Mexican peso to the U.S. dollar increased from 13.5 to 1 at September 30, 2011, to 12.9 to 1 at September 30, 2012. As a result of these currency exchange movements, revenue from Mexican operations translated into fewer U.S. dollars relative to the prior-year period, and net assets from Mexican operations translated into more U.S. dollars relative to the prior-year period. While the weakening of the Mexican peso negatively affected the translated dollar-value of revenue, the cost of sales and operating expenses were reduced as well. The scrap jewelry generated in Mexico is exported and sold in U.S. dollars, which significantly reduces the Company's net peso-denominated earnings stream. As a result of these natural currency hedges, the impact of the currency rate fluctuation on year-to-date net income and earnings per share was not significant. The Company's management reviews and analyzes business results in a constant currency because the Company believes this is a meaningful indicator of the Company's underlying business trends.


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