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DLLR > SEC Filings for DLLR > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for DFC GLOBAL CORP. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for DFC GLOBAL CORP.


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q and the documents incorporated herein contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements are therefore entitled to the protection of the safe harbor provisions of these laws. These forward-looking statements, which are usually accompanied by words such as "may," "might," "will," "should," "could," "intends," "estimates," "predicts," "potential," "continue," "believes," "anticipates," "plans," "expects" and similar expressions, involve risks and uncertainties, and relate to, without limitation, statements about our market opportunities, anticipated improvements or challenges in operations, regulatory developments, our plans, earnings, cash flow and expense estimates, strategies and prospects, both business and financial. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or forecasted in, or implied by, such forward-looking statements, particularly those factors discussed in "Item 1A - Risk Factors" in our Annual Report on Form 10-K for our fiscal year ended June 30, 2012, as amended by the risk factors included under "Part II - Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q.

Although we believe that the expectations reflected in these forward-looking statements are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and our actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. These forward-looking statements speak only as of the date on which they are made, and, except as otherwise required by law, we disclaim any obligation or undertaking to disseminate any update or revision to any forward-looking statement contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. If we do update or modify one or more forward-looking statements, you should not conclude that we will make additional updates or modifications with respect thereto or with respect to other forward-looking statements, except as required by law.

Unless the context otherwise requires, as used in this Quarterly Report on Form 10-Q, (i) the terms "fiscal year" and "fiscal" refer to the twelve-month period ended on June 30 of the specified year, (ii) references to "$," "dollars," "United States dollars" or "U.S. dollars" refer to the lawful currency of the United States of America, (iii) references to "CAD" refer to the Canadian dollar, the lawful currency of Canada, (iv) references to "GBP" refer to the British Pound Sterling, the lawful currency of the United Kingdom of Great Britain and Northern Ireland, (v) references to "SEK" refer to the Swedish Krona, the lawful currency of Sweden and (vi) references to "EUR" refer to the Euro, the lawful currency of the European Union.

Executive Summary

Overview

We are a leading international non-bank provider of alternative financial services, principally unsecured short-term consumer loans, secured pawn loans, check cashing, money transfers and reloadable prepaid debit cards, serving primarily unbanked and under-banked consumers through our over 1,450 current retail storefront locations and our multiple Internet platforms in nine countries across Europe and North America: the United Kingdom, Canada, the United States, Sweden, Finland, Poland, Spain, the Czech Republic and the Republic of Ireland. Our networks of retail locations in the United Kingdom and Canada are the largest of their kind by revenue in each of those countries. We believe we operate one of the largest online unsecured short-term consumer lending businesses by revenue in the United Kingdom. We also believe that, by virtue of our secured pawn lending operations in the United Kingdom, Scandinavia, Poland and Spain, we are the largest pawn lender in Europe measured by loan portfolio.

At March 31, 2013, our global retail operations consisted of 1,457 retail storefront locations, of which 1,420 are company-owned financial services stores, conducting business primarily under the names The Money Shop®, Money Mart®, InstaCheques®, Suttons & Robertsons®, The Check Cashing Store®, Sefina®, Helsingin PanttiSM, MoneyNow! ® and Super Efectivo®. We also offer Internet-based short-term consumer loans in the United Kingdom primarily under the brand names Payday UK ® and Payday Express®, in Canada under the Money Mart and paydayloan.caSM brand names, and in Finland, Sweden, Poland, the Czech Republic and Spain primarily under the Risicum ®, OK Money® and MoneyNow! brand names. We offer longer term unsecured loans in Poland through in-home servicing under the trade name Optima ®. In addition, our DFS subsidiary provides fee-based services to enlisted military personnel applying for loans to purchase new and used vehicles that are funded and serviced primarily under an agreement with a major third-party national bank through our branded Military Installment Loan and Education Services, or MILES ®, program.

Our products and services, principally our unsecured short-term consumer loans, secured pawn loans, and check cashing and gold buying services, provide customers with immediate access to cash for living expenses or other needs. In addition to those core offerings, we strive to offer our customers additional high-value ancillary services, including Western Union® money order and money transfer products, electronic tax filing, reloadable prepaid VISA® debit cards and foreign currency exchange. Most of these ancillary services are provided through third-party vendors.


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For our unsecured short-term consumer loans, we receive fees on the loans we provide. For our secured pawn loans, we receive interest and fees on the loans we provide. For our check cashing services, we charge our customers fees that are usually equal to a percentage of the amount of the check being cashed and are deducted from the cash provided to the customer.

Our expenses primarily relate to the operations of our retail store network and Internet lending operations, including the provision for loan losses, salaries and benefits for our employees, occupancy expense for our leased real estate, depreciation of our assets and corporate and other expenses, including costs related to opening and closing stores.

In each foreign country in which we operate, local currency is used for both revenues and expenses. Therefore, we record the impact of foreign currency exchange rate fluctuations related to our foreign net income.

We continue to seek opportunities to expand upon and diversify from our core financial services businesses. In the fiscal year ended June 30, 2011, we substantially increased our online presence in the United Kingdom by acquiring the largest online provider of unsecured short-term consumer loans by revenue in that country. We have continued to expand our Internet-based lending business, most recently acquiring Risicum Oyj in July 2011, which offers unsecured short-term consumer loans through the Internet and mobile phone technologies in Finland and Sweden. We leveraged the scalable technology and back-office support capabilities of Risicum to launch Internet lending businesses in Poland in February 2012, the Czech Republic in October 2012 and Spain in March 2013, and expect to further extend our Internet-based lending capabilities into other countries in Europe in future periods. We are also actively expanding our secured pawn lending businesses. We acquired Sefina Finance AB in December 2010, which we believe to be the largest pawn lender, measured by loan portfolio, in each of Sweden and Finland, and in March 2012 we acquired a chain of eight retail pawn and gold buying stores in Spain. We also offer secured pawn lending in a significant majority of our retail locations in the United Kingdom as well as through our high-end Suttons & Robertsons stores in Britain, and have begun implementing secured pawn lending in our Canadian retail stores beginning earlier this fiscal year. Internet-based and secured pawn lending generated $75.5 million and $21.4 million, respectively, of revenue for the three months ended March 31, 2013, representing 26.6% and 7.5% of our revenue, respectively, for the three months ended March 31, 2013.

We manage our business as three reportable segments - our financial services offerings in each of Europe, Canada and the United States. Dealers' Financial Services, LLC, or DFS, our subsidiary which operates independently of our other businesses, is included in Other.

Trends and Competition in Internet-based Business

Within the past two years, we have significantly expanded our online presence and obtained scalable technological platforms in several markets, most notably in the United Kingdom and Finland. We expect to continue to expand our online lending business in the future, both through acquisitions as well as by organic growth, such as the Internet-based businesses that we started in Poland in February 2012, the Czech Republic in October 2012 and Spain in March 2013. Although we have seen an increase in the number of competitors within the online markets in which we now operate (including a large increase in providers in the United Kingdom), we believe that competition in the online loan market continues to be largely fragmented with high barriers to entry, including the ability to raise sufficient capital to fund loans and growth in loan portfolios, the ability to implement effective underwriting, collections and fraud prevention processes, technology requirements, marketing costs, customer privacy issues and other regulatory and compliance requirements. Additionally, we believe that recent regulatory developments in the United Kingdom and Finland will result in some market consolidation and provide additional growth opportunities for companies with sufficient capital and sound operating platforms.

Recent Regulatory Developments

Set forth below is a brief discussion of recent legal and regulatory developments in markets in which we operate that potentially may have a material impact on us and our results of operations.

In the United Kingdom, consumer lending is governed by the Consumer Credit Act of 1974, and related rules and regulations. As required by the Consumer Credit Act of 1974, we have obtained licenses from the Office of Fair Trading, which we refer to as the OFT, which is responsible for setting policy and for consumer protection. The Consumer Credit Act of 1974 also contains rules regarding the presentation, form and content of loan agreements, including statutory warnings and the layout of financial information. In 2009, The Money Laundering Regulations 2007 were enhanced to include consumer credit lenders, and all consumer credit lenders not authorized by the Financial Services Authority or HM Revenue and Customs as a Money Service Business are now required to register with the Office of Fair Trading. We believe that we have complied with these regulations where we were not already registered by HM Revenue and Customs.


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The OFT has issued Irresponsible Lending Guidance, or the ILG, which outlines the overarching principles of consumer protection and fair business practice which apply to all regulated consumer credit lending. In February 2012, the OFT announced that it had launched an extensive review of the short-term lending sector in the United Kingdom to assess the sector's compliance with the Consumer Credit Act of 1974, the ILG and other relevant guidance and legal obligations. As part of this review, we are among approximately 50 companies offering unsecured short-term consumer loans for which the OFT has conducted on-site inspections that could be used to assess fitness to hold a consumer credit license and could result in formal enforcement action where appropriate. The OFT commenced its on-site review of our businesses in the United Kingdom in late fiscal 2012. Furthermore, we have provided the OFT with responses to comprehensive survey requests with respect to several of our businesses in the United Kingdom to assess compliance with applicable regulations and guidance. The OFT issued its final report on the outcome of its sector review in March 2013. In that report, the OFT indicated that it would be writing to all of the approximately 50 lenders in a staggered timeframe with its findings following the on-site inspections of these lenders. Our operating subsidiary which holds the consumer credit license for our Payday UK® business received its letter from the OFT and is required to submit a report confirming its compliance with the OFT letter by May 28, 2013. Our operating subsidiaries holding the consumer credit licenses for our Payday Express® and The Money Shop businesses businesses also received their letters and are required to submit reports confirming compliance with those letters by July 17, 2013. While each of these letters have different requirements specific to the particular business, overall, the letters both specifically and generally advise on required actions in the following categories: advertising and marketing; pre-contact information and explanations; affordability assessments; rollovers (including deferred refinance and extended loans); forbearance and debt collection; and regulatory and other compliance issues. All relevant business units in the United Kingdom are also evaluating the contents of the final OFT report as they relate to our lending operations in the United Kingdom.

The OFT also updated its Debt Collection Guidance in October 2011, and, in November 2012, issued guidance regarding the use of continuous payment authority. Under that guidance, we will be required to more specifically disclose to customers the use of continuous payment authority, including the amount(s) that may be deducted, the frequency of use, and the basis for taking partial payments. Additionally, the OFT's guidance will require us to suspend the use of continuous payment authority to collect defaulted debt from a customer who we believe to be experiencing financial hardship, based in part on our reasonable attempts to discuss the defaulted debt with the customer. As we continue to evaluate all of these regulatory developments in the United Kingdom, we may consider making changes, or may be required to make additional changes, to our lending and collection practices, but it is too soon to estimate the impact of any such changes.

In Finland, our consumer lending operations are regulated pursuant to the Finnish Consumer Protection Law, under the oversight of the Ministry of Justice. In 2011, following a parliamentary change and the submission to the Finnish Parliament of proposed legislation seeking to impose more stringent rules for the micro-lending market, including interest rate caps or other limitations on the availability of micro-loans online, the Ministry of Justice nominated a working group to review the existing regulatory framework in Finland. Our Finland-based Risicum subsidiary is a member of the Finnish Association for Micro Loans, which presented information to the Ministry of Justice working group. On September 11, 2012, after a consultation period which resulted in several potential modifications to the working group's proposals, a bill was introduced in the Finnish Parliament to restrict the interest rate on loans less than €2,000 to an annual percentage rate that cannot exceed the European Central Bank rate by more than 50%. This amendment to the Finnish Consumer Protection law, including the interest rate limit and enhanced obligations for lenders to evaluate consumer creditworthiness, was ratified by the Finnish Parliament and the President of Finland and will come into force on June 1, 2013. As a result of this law, we will be required to significantly modify the terms of our present Internet-based short-term loan product in Finland or replace it with another product, and we are currently evaluating alternatives to comply with the amended law.

In the United States, the Consumer Financial Protection Bureau ("CFPB") has regulatory, supervisory and enforcement powers over certain non-bank providers of consumer financial products and services, such as the Company. Under the CFPB's short-term lending supervision program, which aims to ensure that short-term lenders are following federal consumer financial laws in their U.S. operations, the CFPB gathers information from short-term lenders to evaluate their policies and procedures, assess whether lenders are in compliance with federal consumer financial laws, and identify risks to consumers throughout the lending process. The CFPB completed an on-site review of our U.S. retail operations in early fiscal 2013, and, based on preliminary discussions with the CFPB, we believe that no indications of significant deficiencies will be identified as a result of that review. Separately, the CFPB reviewed DFS' MILES program in fiscal 2013. As a result of this examination, DFS has been informed by the CFPB that it intends to initiate an administrative proceeding against DFS relating to its marketing of certain vehicle service and insurance products and to the requirement that MILES program loans be repaid via a military allotment. DFS has cooperated in the CFPB examination, and intends to seek to negotiate a consent order (without admitting or denying any violations) resolving the matter. It is expected that any consent order would provide for MILES program disclosure and other changes and would include a restitution fund for certain MILES program customers. There is no assurance that a consent order will be successfully negotiated, or as to its terms, and there is therefore no assurance that this matter will not materially and adversely affect the MILES program.


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Other Events

On December 14, 2011, our Board of Directors approved a stock repurchase plan, authorizing the repurchase of up to five million shares in the aggregate of our outstanding common stock. On September 20, 2012, our Board of Directors reconfirmed the plan through September 30, 2013. As of March 31, 2013, we had repurchased 2,779,108 shares of our common stock under the plan for an average price of $16.54 per share, including 230,000 shares repurchased during the three months ended March 31, 2013 for an average price of $17.26 per share. From April 1, 2013 to May 7, 2013, we repurchased an additional 1,228,333 shares for an average price of $13.86. As of May 7, 2013, an additional approximately 1.0 million shares may be repurchased under the stock repurchase plan.

During the three months ended March 31, 2013, we incurred approximately $7.0 million of one-time restructuring and other charges for employee severance and other costs related to the reorganization of our business operations between global retail and internet platforms.

Discussion of Critical Accounting Policies

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with U.S. generally accepted accounting principles. We evaluate these estimates on an ongoing basis, including those related to revenue recognition, loan loss reserves and impairment of goodwill and intangible assets. We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary from these estimates under different assumptions or conditions.

Other than the items noted below, management believes there have been no significant changes during the nine months ended March 31, 2013, to the items that we disclose as our critical accounting policies in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

During the three months ended September 30, 2012, we performed an interim impairment review of our goodwill, indefinite-lived intangible asset and certain other intangible assets related to our DFS business. We determined there was an interim indicator of impairment as a result of the September 2012 notification of the pending termination, effective September 13, 2014, of our contract with the third-party national bank that funds a majority of the loans for our Military Installment Loan and Education Services, or MILES®, program. We recorded an intangible asset impairment charge of approximately $5.5 million, related to the fair value assigned to the contract, for the three months ended September 30, 2012, as a result of the interim impairment review.

During the three months ended March 31, 2013, we identified interim impairment indicators at our DFS reporting unit and performed an interim impairment test of our goodwill, indefinite-lived intangible asset and certain other intangible assets. The impairment indicators resulted principally from the examination performed by the CFPB during the fiscal year ending June 30, 2013, which delayed our negotiations with potential lending partners, and other possible funding arrangements, to replace the current third-party national bank that funds a majority of the MILES program loans. We believe these alternatives will more competitively underwrite future MILES program loans. The discussions with these new potential lending partners have recently been restarted.

More specifically, DFS has been informed by the CFPB that it intends to initiate an administrative proceeding against DFS relating to its marketing of certain vehicle service and insurance products and to the requirement that MILES program loans be repaid via a military allotment. DFS has cooperated in the CFPB examination, which led to this intended proceeding, and intends to seek to negotiate a consent order (without admitting or denying any violations) resolving the matter. It is expected that any consent order would provide for MILES program disclosure and other changes and would include a restitution fund for certain MILES program customers. There is no assurance that a consent order will be successfully negotiated, or as to its terms, and there is therefore no assurance that this matter will not materially and adversely affect the MILES program.

During our fiscal third quarter ending March 31, 2013, we revised our forecasts of the DFS reporting unit as a result of the CFPB examination and the potential for changes in the way that DFS conducts its business. Furthermore, we concluded that due to changes in our capital allocation strategy, we would not fund a portion of the loans originations, which had been assumed in prior forecasts. These collective events addressed herein resulted in us concluding that it was more likely than not that the fair value of the DFS reporting unit was below its carrying amount.

In Step 1 of the goodwill impairment test, the fair value of the DFS reporting unit was determined based on two valuation techniques, a discounted cash flow model (income approach) and a market adjusted multiple of earnings and revenues (market approach). The DFS reporting unit failed the Step 1 test and a preliminary Step 2 of the goodwill impairment test was performed.


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We recognized a preliminary goodwill impairment charge of approximately $15.2 million during the three months ended March 31, 2013, which represents our best estimate of the impairment loss based on the latest information available and the results of the Step 1 and Step 2 tests. Additionally, we recognized an impairment charge of $15.9 million related to DFS' other intangible assets, including the MILES program indefinite-lived intangible asset. The MILES program indefinite-lived intangible valuation was calculated using a relief from royalty valuation method, while the other intangible assets were valued using an excess earnings valuation method.

We estimate that the final goodwill impairment charge will be in the range of $14.0 million to $18.0 million. In the fourth quarter of the fiscal year ending June 30, 2013, we will perform our annual impairment tests of goodwill, and will finalize the interim estimated impairment of the DFS goodwill. We were not able to finalize the Step 2 test for goodwill impairment due to the significant amount of work required to calculate the implied fair value of goodwill and due to the timing of the interim impairment indicator. The actual goodwill impairment charge could be significantly different from the estimated charge recognized.

While we believe the assumptions and forecasts used in calculating the implied fair value of goodwill and the fair value other intangible assets as of March 31, 2013 reflect the likely outcome of our negotiations with the CFPB and our strategy on funding loans, if we are unsuccessful in our negotiations, or if we are not successful in replacing the current lending bank for the majority of our loans under the MILES program, it is likely that the we would recognize additional impairments of goodwill and other intangible assets, which had a carrying value of approximately $33.4 million as of March 31, 2013, after giving effect to the recognition of impairments discussed above.


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Results of Operations

The percentages presented in the following table are based on each respective
fiscal year's total consolidated revenues:



                                                  Three Months Ended March 31,                           Nine Months Ended March 31,
                                                 2012                       2013                       2012                       2013
                                                                    (Dollars in millions, except per share amounts)
Total revenues:
Consumer lending                         $ 163.0         60.4 %     $ 181.7         64.1 %     $ 479.7         60.3 %     $ 549.8         64.4 %
Check cashing                               35.3         13.0 %        31.9         11.2 %       106.2         13.4 %        97.4         11.4 %
Pawn service fees and sales                 21.0          7.8 %        21.4          7.5 %        62.3          7.8 %        62.8          7.4 %
Money transfer fees                          9.4          3.5 %         8.4          3.0 %        28.8          3.6 %        27.9          3.3 %
Gold sales                                  18.6          6.9 %        17.8          6.3 %        52.5          6.6 %        51.0          6.0 %
Other                                       22.7          8.4 %        22.4          7.9 %        65.5          8.3 %        64.3          7.5 %

Total consolidated revenues                270.0        100.0 %       283.6        100.0 %       795.0        100.0 %       853.2        100.0 %

Operating expenses:
Salaries and benefits                       56.9         21.1 %        61.3         21.6 %       164.9         20.7 %       181.0         21.2 %
Provision for loan losses                   33.6         12.5 %        49.7         17.5 %        96.9         12.2 %       128.2         15.0 %
. . .
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