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FCFS > SEC Filings for FCFS > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for FIRST CASH FINANCIAL SERVICES INC

Form 10-K for FIRST CASH FINANCIAL SERVICES INC


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

The Company is a leading operator of retail-based pawn and consumer finance stores in the United States and Mexico. The Company's primary business is the operation of pawn stores, which engage in retail sales, the purchase of secondhand goods as well as offer consumer finance services products. The Company's pawn stores generate significant retail sales from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers. The Company's pawn stores are also a convenient source for small consumer loans to help customers meet their short-term cash needs. Personal property such as consumer electronics, jewelry, power tools, sporting goods and musical instruments are pledged as collateral for the loans. In addition, some of the Company's pawn stores offer consumer loans or credit services products. The Company's strategy is to focus on growing its retail-based pawn operations in the United States and Mexico through new store openings and acquisition opportunities as they arise.

The Company operates a small number of stand-alone consumer finance stores in Texas and Mexico. These stores provide consumer financial services products including credit services, consumer loans and check cashing. The product mix in these stores varies by market. The Company considers the consumer loan and credit services products generated through these locations to be non-core, non-growth revenue streams.

Pawn operations accounted for approximately 93% of the Company's consolidated revenue from continuing operations during fiscal 2013. The Company's pawn revenue is derived primarily from 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 loan term, including any 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.

Consumer loan and credit services revenue, which was approximately 7% of consolidated revenue from continuing operations for fiscal 2013, 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. For an additional discussion of the credit loss provision and related allowances and accruals, see "-Results of Continuing Operations."

Stores included in the same-store revenue calculations are those stores that were opened prior to the beginning of the prior-year comparative fiscal period and remained open through the end of the measurement period. 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. Unless otherwise stated, non-retail sales of scrap jewelry are included in same-store revenue calculations.

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,


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area supervisors and other operations management personnel, collection operations and personnel, accounting and administrative costs, information technology costs, liability and casualty insurance, outside legal and accounting fees and stockholder-related expenses.

The following table details selected operating metrics regarding the Company's loan products, inventories and store locations (1):

                                                          Year Ended December 31,
                                                     2013           2012           2011
Pawn loans at end of period, in thousands:
Large format pawn stores - U.S.                  $   65,471     $   54,765     $   40,877
Large format pawn stores - Mexico                    48,963         47,512         31,748
Small format pawn stores - Mexico                       555            629            418
Small format pawn stores - U.S.                         245            275            244

Average pawn loans per location at end of
period, in thousands:
Large format pawn stores - U.S.                  $      288     $      298     $      310
Large format pawn stores - Mexico                        89             98             81

Pawn store inventories at end of period, in
thousands:
U.S. stores                                      $   40,910     $   32,664     $   23,745
Mexico stores                                        36,883         32,681         20,667

Average inventories per location at end of
period, in thousands:
Large format pawn stores - U.S.                  $      178     $      176     $      178
Large format pawn stores - Mexico                        66             66             52

Pawn store annualized inventory turnover               3.6x           4.2x           4.2x

Consumer loan balances and CSO extensions of
credit at end of period, in thousands (2):
Consumer loan stores - U.S.                      $    5,472     $    7,170     $    7,065
Pawn stores - U.S.                                    7,666          8,378          6,371
Internet operations - U.S.                              566            477            431
Consumer loan stores - Mexico                           572            654            708

Average outstanding customer loan amount at end
of period:
Pawn loan receivables - U.S.                     $      171     $      185     $      178
Pawn loan receivables - Mexico                           71             75             66
CSO extensions of credit held by independent
third-party lender - U.S. (3)                           507            523            520
Consumer loan receivables - Mexico                       91             86             78

(1) Inventory and loan amounts for stores in Mexico are based on translating the Mexican peso to the U.S. dollar at the exchange rate as of each year end. The exchange rates used for December 31, 2013, 2012, and 2011 were 13.1 to 1, 13.0 to 1, and 14.0 to 1, respectively. See "-Non-GAAP Financial Information-Constant Currency Results" below.

(2) Amounts shown represent the gross amount owed by customers before allowances. Active CSO Program extensions of credit outstanding from the independent third-party lender are not included on the Company's balance sheet.

(3) Amounts shown represent the gross amount owed by customers before allowances. Excludes title loan amounts.


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                                                         Year Ended December 31,
                                                        2013         2012      2011
Income statement items as a percent of total revenue:
Revenue:
Retail merchandise sales                                55.6 %       48.6 %   46.1 %
Pawn loan fees                                          27.4         25.7     23.8
Consumer loan and credit services fees                   6.7          8.2      9.1
Wholesale scrap jewelry revenue                         10.3         17.5     21.0

Cost of revenue:
Cost of retail merchandise sold                         33.5         28.2     27.6
Consumer loan and credit services loss provision         1.7          2.1      2.2
Cost of wholesale scrap jewelry sold                     8.9         13.0     13.9

Net revenues                                            55.9         56.7     56.3

Expenses and other income:
Store operating expenses                                27.4         25.1     24.6
Administrative expenses                                  7.5          8.5      8.8
Depreciation and amortization                            2.3          2.2      2.1
Interest expense, net                                    0.5          0.2        -

Income from continuing operations before income taxes   18.2         20.7     20.8
Provision for income taxes                               5.4          7.0      7.2
Income from continuing operations                       12.8         13.7     13.6

Retail merchandise sales gross profit margin            39.7 %       41.9 %   40.0 %
Store operating profit margin                           26.6         29.7     30.0

Discontinued Operations

In December 2013, the Company initiated a plan to discontinue the Cash & Go, Ltd. joint venture operation, which owns and operates 37 check cashing and financial services kiosks located inside convenience stores in the state of Texas. Cash & Go, Ltd. is a joint venture in which the Company owns a 50% interest through its direct 49.5% ownership interest and its 50% ownership of Cash & Go Management, LLC, which in turns owns a 1% interest in the joint venture. In connection with this decision to terminate the joint venture, the Company recorded a charge of $844,000, net of tax, or $0.03 per share, for the quarter ended December 31, 2013, which was reported as a loss from discontinued operations. The after-tax earnings from operations for Cash & Go, Ltd. were $211,000, or $0.01 per share, in fiscal 2013. Comparable after-tax earnings were $243,000, or $0.01 per share, in fiscal 2012 and $386,000 or $0.01 per share in fiscal 2011. The Company expects to wind down operations and liquidate the assets of Cash & Go, Ltd. over the first six months of fiscal 2014.

In September 2012, the Company closed 7 of its consumer loan stores located in the Texas cities of Austin and Dallas due in part to city ordinances enacted during 2012, which significantly restricted the Company's ability to provide credit services products. The Company recorded a loss on disposal of $628,000, net of tax, or $0.03 per share, from these stores in fiscal 2012. The after-tax operating results from operations for these Texas stores were immaterial in fiscal 2012 and fiscal 2011.

The Company sold all 10 of its Illinois consumer loan stores in March 2011. The Company recorded a gain of $5,979,000, net of tax, or $0.19 per share, during fiscal 2011 from the sale of these stores. The after-tax earnings from operations for the Illinois stores were an additional $514,000, or $0.02 per share in fiscal 2011.


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All revenue, expenses and income reported in these consolidated financial statements have been adjusted to reflect reclassification of these discontinued operations. The carrying amounts of the assets and liabilities for discontinued operations as of December 31, 2013, were immaterial.

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, assumptions and judgments 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, assumptions and judgments 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 the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results include the following:

Customer loans and revenue recognition - Receivables on the balance sheet consist of pawn loans and consumer loans. Pawn loans are collateralized by pledged tangible personal property. The Company accrues pawn loan fee revenue on a constant-yield basis over the life of the pawn for all pawns for which the Company deems collection to be probable based on historical pawn redemption statistics. The typical pawn loan has an initial term of 30 days, which, depending on state law, can generally be extended from 30 to 60 days. If the pawn is not repaid, the principal amount loaned becomes the carrying value of the forfeited collateral, which is recovered through sales to other customers at prices above the carrying value.

The Company's pawn merchandise sales are primarily retail sales to the general public in its pawn stores. The Company acquires pawn merchandise inventory through forfeited pawns and through purchases of used goods directly from the general public. The Company records sales revenue at the time of the sale. The Company presents merchandise sales net of any sales or value-added taxes collected. The Company does not provide financing to customers for the purchase of its merchandise, but does permit its customers to purchase merchandise on an interest-free layaway plan. Should the customer fail to make a required payment, the previous payments are forfeited to the Company. Interim payments from customers on layaway sales are recorded as deferred revenue and subsequently recorded as income during the period in which final payment is received or when previous payments are forfeited to the Company. Some jewelry is melted at a third-party facility and the precious metal content is sold at either prevailing market commodity prices or a previously agreed upon price with a commodity buyer. The Company records revenue from these transactions when a price has been agreed upon and the Company ships the precious metals to the buyer.

The Company recognizes credit services fees ratably over the life of the extension of credit made by the Independent Lender. The extensions of credit made by the Independent Lender to credit services customers have terms of 7 to 180 days. The Company records a liability for any collected, but unearned, credit services fees received from its customers. The Company accrues consumer loan service fees on a constant-yield basis over the term of the consumer loan. Consumer loans have terms that range from 7 to 365 days.

Credit loss provisions - The Company has determined that no allowance related to credit losses on pawn loans is required, as the fair value of the collateral is significantly in excess of the pawn loan amount. Under the CSO Program, letters of credit issued by the Company to the Independent Lender constitute a guarantee for which the Company is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken by issuing the letters of credit. The Independent Lender may present the letter of credit to the Company for payment if the customer fails to repay the full amount of the extension of credit and accrued interest after the due date of the extension of credit. Each letter of credit expires approximately 30 days after the due date of the extension of credit. The Company's maximum loss exposure under all of the outstanding letters of credit issued on behalf of its customers to the Independent Lender as of December 31, 2013, was $13,992,000. According to the letter of credit, if the borrower defaults on the extension of credit, the Company will pay the Independent Lender the principal, accrued interest, insufficient funds fee, and late fees, all of which the Company records in the consumer loan and credit services loss provision. The Company is entitled to seek recovery directly from its customers for amounts it pays the Independent Lender in performing under the letters of credit. The Company records the estimated fair value of the liability under the letters of credit as a component of accrued liabilities.

An allowance is provided for losses on active consumer loans and service fees receivable based upon expected default rates, net of estimated future recoveries of previously defaulted consumer loans and service fees receivable. The Company considers consumer loans to be in default if they are not repaid on the due date and writes off the principal amount and service fees receivable as of the default date, leaving only active advances in the reported balance. Net defaults and changes in the consumer loan allowance are charged to the consumer loan loss provision.


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Inventories - Inventories represent merchandise acquired from forfeited pawns and merchandise purchased directly from the general public. Inventories from forfeited pawns are recorded at the amount of the pawn principal on the unredeemed goods, exclusive of accrued interest. Inventories purchased directly from customers are recorded at cost. The cost of inventories is determined on the specific identification method. Inventories are stated at the lower of cost or market; accordingly, inventory valuation allowances are established, if necessary, when inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. Management has evaluated inventories and determined that a valuation allowance is not necessary.

Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination. The Company performs its goodwill impairment assessment annually as of December 31, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's reporting units, which are tested for impairment, are U.S. Pawn Operations, U.S. Consumer Loan Operations and Mexico Operations. The Company assesses goodwill for impairment at a reporting unit level by first assessing a range of qualitative factors, including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company's products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company proceeds to the two-step impairment testing methodology.

Foreign Currency Transactions - The Company has significant operations in Mexico, where the functional currency for the Company's Mexican subsidiaries is the Mexican peso. Accordingly, 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 average exchange rates occurring during the year-to-date period. Prior to translation, any U.S. dollar-denominated transactions of the Mexican-based subsidiaries are remeasured into Mexican pesos using current rates of exchange for monetary assets and liabilities and historical rates of exchange for non-monetary assets and liabilities. Gains and losses from remeasurement of dollar-denominated monetary assets and liabilities in Mexico are included in store operating expenses.

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 are denoted as such. See "Non-GAAP Financial Information" for additional discussion of constant currency operating results.


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Results of Continuing Operations

Twelve Months Ended December 31, 2013, Compared to Twelve Months Ended December 31, 2012.

The following table details the components of the Company's revenue for the fiscal year ended December 31, 2013, as compared to the fiscal year ended December 31, 2012 (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 increased 3%, from 13.2 to 1 during fiscal 2012 to 12.8 to 1 during fiscal 2013. The end-of-period value of the Mexican peso to the U.S. dollar decreased 1%, from 13.0 to 1 at December 31, 2012, to 13.1 to 1 at December 31, 2013. As a result of these currency exchange movements, revenue from Mexican operations translated into more U.S. dollars relative to the prior year, while net assets of Mexican operations as of year end translated into fewer U.S. dollars relative to the prior year end. While the strengthening of the Mexican peso positively increased the translated dollar-value of revenue, the cost of sales and operating expenses increased as well. The scrap jewelry generated in Mexico is exported and sold in U.S. dollars, which does not contribute to the Company's peso-denominated earnings stream. See "Non-GAAP Financial Information-Constant Currency Results" below.

                                                                                                     Increase/(Decrease)
                                       Year Ended December 31,                                        Constant Currency
                                         2013               2012          Increase/(Decrease)               Basis
Domestic revenue:
Retail merchandise sales         $     139,469          $  104,289     $     35,180        34  %              34  %
Pawn loan fees                          79,398              63,640           15,758        25  %              25  %
Consumer loan and credit
services fees                           40,378              44,862           (4,484 )     (10 )%             (10 )%
Wholesale scrap jewelry
revenue                                 38,617              57,551          (18,934 )     (33 )%             (33 )%
                                       297,862             270,342           27,520        10  %              10  %
International revenue:
Retail merchandise sales               227,718             183,167           44,551        24  %              21  %
Pawn loan fees                         102,157              88,597           13,560        15  %              12  %
Consumer loan and credit
services fees                            3,403               3,830             (427 )     (11 )%             (14 )%
Wholesale scrap jewelry
revenue                                 29,708              46,155          (16,447 )     (36 )%             (36 )%
                                       362,986             321,749           41,237        13  %              10  %
Total revenue:
Retail merchandise sales               367,187             287,456           79,731        28  %              25  %
Pawn loan fees                         181,555             152,237           29,318        19  %              17  %
Consumer loan and credit
services fees                           43,781              48,692           (4,911 )     (10 )%             (10 )%
Wholesale scrap jewelry
revenue                                 68,325             103,706          (35,381 )     (34 )%             (34 )%
                                 $     660,848          $  592,091     $     68,757        12  %              10  %

Domestic revenue accounted for approximately 45% of the total revenue for fiscal 2013, while international revenue (from Mexico) accounted for 55% of total revenue for the same period.


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The following table details customer loans and inventories held by the Company and active CSO Program credit extensions from the Independent Lender as of December 31, 2013, as compared to December 31, 2012 (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 December 31,                                         Constant Currency
                                     2013               2012           Increase/(Decrease)               Basis
Domestic:
Pawn loans                   $      65,716          $    55,040     $     10,676        19  %              19  %
CSO credit extensions held
by independent third-party
(1)                                 12,240               14,134           (1,894 )     (13 )%             (13 )%
Other consumer loans                   832                1,149             (317 )     (28 )%             (28 )%
                                    78,788               70,323            8,465        12  %              12  %
International:
Pawn loans                          49,518               48,141            1,377         3  %               3  %
Other consumer loans                   618                  730             (112 )     (15 )%             (15 )%
                                    50,136               48,871            1,265         3  %               3  %
Total:
Pawn loans                         115,234              103,181           12,053        12  %              12  %
CSO credit extensions held
by independent third-party
(1)                                 12,240               14,134           (1,894 )     (13 )%             (13 )%
Other consumer loans                 1,450                1,879             (429 )     (23 )%             (23 )%
                             $     128,924          $   119,194     $      9,730         8  %               8  %
Pawn inventories:
Domestic pawn inventories    $      40,910          $    32,664     $      8,246        25  %              25  %
International pawn
inventories                         36,883               32,681            4,202        13  %              14  %
                             $      77,793          $    65,345     $     12,448        19  %              19  %

(1) CSO Program amounts outstanding are composed of the principal portion of active CSO Program extensions of credit by the Independent 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.

Retail Merchandise Sales Operations

The increased retail merchandise sales in the Company's pawn stores reflected new store contributions, maturation of existing stores and an increased mix of retail consumer hard good inventories (primarily consumer electronics, appliances and power tools), especially in Mexico. The gross profit margin on retail merchandise sales, which excludes scrap jewelry sales, was 40% and the margin on wholesale scrap jewelry was 14% for fiscal 2013, compared to margins . . .

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