FCFS 06.30.2013 10-Q
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR
[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________

Commission file number 0-19133
FIRST CASH FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware
75-2237318
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
690 East Lamar Blvd., Suite 400
76011
Arlington, Texas
(Zip Code)
(Address of principal executive offices)
 
(817) 460-3947
(Registrant’s telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     xYes   o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     xYes   o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
x  Large accelerated filer
o  Accelerated filer
o  Non-accelerated filer (Do not check if a smaller reporting company)
o  Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     oYes   x No
As of July 23, 2013, there were 28,903,475 shares of common stock outstanding.


 
 

FIRST CASH FINANCIAL SERVICES, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013

INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

 
 

CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS

Forward-Looking Information

This quarterly report may contain forward-looking statements about the business, financial condition and prospects of the Company. Forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, can be identified by the use of forward-looking terminology such as “believes,” “projects,” “expects,” “may,” “estimates,” “should,” “plans,” “targets,” “intends,” “could,” or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy or objectives. Forward-looking statements can also be identified by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Forward-looking statements in this quarterly report include, without limitation, the Company’s expectations of earnings per share, earnings growth, expansion strategies, regulatory exposures, store openings, liquidity (including the availability of capital under existing credit facilities), cash flow, consumer demand for the Company’s products and services, currency exchange rates and the price of gold and the impacts thereof, earnings from acquisitions, the ability to successfully integrate acquisitions and other performance results. These statements are made to provide the public with management’s current assessment of the Company’s business. Although the Company believes that the expectations reflected in forward-looking statements are reasonable, there can be no assurances that such expectations will prove to be accurate. Security holders are cautioned that such forward-looking statements involve risks and uncertainties. The forward-looking statements contained in this quarterly report speak only as of the date of this statement, and the Company expressly disclaims any obligation or undertaking to report any updates or revisions to any such statement to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which any such statement is based. Certain factors may cause results to differ materially from those anticipated by some of the statements made in this quarterly report. Such factors are difficult to predict and many are beyond the control of the Company and may include changes in regional, national or international economic conditions, changes in the inflation rate, changes in the unemployment rate, changes in consumer purchasing, borrowing and repayment behaviors, changes in credit markets, the ability to renew and/or extend the Company’s existing bank line of credit, the ability to maintain banking relationships for treasury services, credit losses, changes in the market value of pawn collateral and merchandise inventories, changes or increases in competition, the ability to locate, open and staff new stores, the availability or access to sources of inventory, inclement weather, the ability to successfully integrate acquisitions, the ability to hire and retain key management personnel, the ability to operate with limited regulation as a credit services organization, new federal, state or local legislative initiatives or governmental regulations (or changes to existing laws and regulations) affecting consumer loan businesses, credit services organizations and pawn businesses (in both the United States and Mexico), changes in import/export regulations and tariffs or duties, changes in anti-money laundering and gun control regulations, unforeseen litigation, changes in interest rates, monetary inflation, changes in tax rates or policies, changes in gold prices, changes in energy prices, cost of funds, changes in foreign currency exchange rates, future business decisions, public health issues, changes in demand for the Company’s services and products, changes in the Company’s ability to satisfy its debt obligations or to obtain new capital to finance growth, a prolonged interruption in the Company’s operations of its facilities, systems, and business functions, including its information technology and other business systems, the implementation of new, or changes in the interpretation of existing accounting principles or financial reporting requirements, and other uncertainties. These and other risks, uncertainties and regulatory developments are further and more completely described in the Company’s 2012 annual report on Form 10-K. These risks and uncertainties are beyond the ability of the Company to control, nor can the Company predict, in many cases, all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements.


3

 
 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 
 
 
 
 
 
 
June 30,
 
December 31,
 
 
2013
 
2012
 
2012
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
32,706

 
$
29,793

 
$
50,285

Pawn loan fees and service charges receivable
 
16,511

 
13,159

 
15,367

Pawn loans
 
112,212

 
88,298

 
103,181

Consumer loans, net
 
1,504

 
2,035

 
1,879

Inventories
 
82,005

 
52,978

 
65,345

Prepaid expenses and other current assets
 
2,566

 
1,763

 
4,225

Deferred tax assets
 
1,148

 
1,078

 
1,148

Total current assets
 
248,652

 
189,104

 
241,430

 
 
 
 
 
 
 
Property and equipment, net
 
97,734

 
83,577

 
93,304

Goodwill, net
 
220,461

 
126,903

 
166,429

Other non-current assets
 
8,596

 
5,648

 
6,529

Total assets
 
$
575,443

 
$
405,232

 
$
507,692

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Current portion of notes payable
 
$
3,268

 
$
1,605

 
$
3,212

Accounts payable and accrued liabilities
 
31,759

 
30,126

 
27,938

Income taxes payable
 
506

 
440

 

Total current liabilities
 
35,533

 
32,171

 
31,150

 
 
 
 
 
 
 
Revolving unsecured credit facility
 
153,000

 
71,600

 
102,500

Notes payable, net of current portion
 
6,704

 
2,641

 
8,351

Deferred income tax liabilities
 
14,404

 
8,362

 
13,275

Total liabilities
 
209,641

 
114,774

 
155,276

 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
393

 
383

 
388

Additional paid-in capital
 
175,555

 
148,474

 
159,081

Retained earnings
 
449,809

 
367,384

 
413,882

Accumulated other comprehensive income (loss) from
 
 
 
 
 
 
cumulative foreign currency translation adjustments
 
(7,268
)
 
(11,788
)
 
(6,940
)
Common stock held in treasury, at cost
 
(252,687
)
 
(213,995
)
 
(213,995
)
Total stockholders' equity
 
365,802

 
290,458

 
352,416

Total liabilities and stockholders' equity
 
$
575,443

 
$
405,232

 
$
507,692

 
 
 
 
 
 
 
The accompanying notes are an integral part
of these condensed consolidated financial statements.

4

 
 

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except per share amounts)
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Revenue:
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
83,900

 
$
62,261

 
$
165,670

 
$
124,905

Pawn loan fees
 
43,052

 
33,932

 
86,203

 
68,844

Consumer loan and credit services fees
 
10,866

 
12,151

 
23,560

 
24,969

Wholesale scrap jewelry revenue
 
5,317

 
24,041

 
28,541

 
48,293

Total revenue
 
143,135

 
132,385

 
303,974

 
267,011

 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
51,092

 
35,933

 
99,131

 
72,708

Consumer loan and credit services loss provision
 
2,693

 
2,982

 
4,907

 
5,238

Cost of wholesale scrap jewelry sold
 
4,600

 
18,642

 
23,104

 
36,176

Total cost of revenue
 
58,385

 
57,557

 
127,142

 
114,122

 
 
 
 
 
 
 
 
 
Net revenue
 
84,750

 
74,828

 
176,832

 
152,889

 
 
 
 
 
 
 
 
 
Expenses and other income:
 
 
 
 
 
 
 
 
Store operating expenses
 
44,000

 
35,025

 
87,476

 
71,114

Administrative expenses
 
12,662

 
11,612

 
25,775

 
23,918

Depreciation and amortization
 
3,733

 
3,113

 
7,358

 
6,139

Interest expense
 
633

 
176

 
1,352

 
253

Interest income
 
(51
)
 
(36
)
 
(198
)
 
(117
)
Total expenses and other income
 
60,977

 
49,890

 
121,763

 
101,307

 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
23,773

 
24,938

 
55,069

 
51,582

 
 
 
 
 
 
 
 
 
Provision for income taxes
 
8,110

 
8,605

 
19,142

 
17,797

 
 
 
 
 
 
 
 
 
Income from continuing operations
 
15,663

 
16,333

 
35,927

 
33,785

 
 
 
 
 
 
 
 
 
Income from discontinued operations, net of tax
 

 
16

 

 
76

Net income
 
$
15,663

 
$
16,349

 
$
35,927

 
$
33,861

 
 
 
 
 
 
 
 
 
Basic income per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.54

 
$
0.57

 
$
1.23

 
$
1.16

Income from discontinued operations
 

 

 

 

Net income per basic share
 
$
0.54

 
$
0.57

 
$
1.23

 
$
1.16

 
 
 
 
 
 
 
 
 
Diluted income per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.53

 
$
0.56

 
$
1.21

 
$
1.13

Income from discontinued operations
 

 

 

 

Net income per diluted share
 
$
0.53

 
$
0.56

 
$
1.21

 
$
1.13

 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part
of these condensed consolidated financial statements.

5

 
 

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Net income
 
$
15,663

 
$
16,349

 
$
35,927

 
$
33,861

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Currency translation adjustment, gross
 
(10,047
)
 
(8,980
)
 
(636
)
 
2,557

Tax (expense) benefit
 
3,488

 
3,098

 
308

 
(882
)
Comprehensive income
 
$
9,104

 
$
10,467

 
$
35,599

 
$
35,536

 
 
 
 
 
 
 
 
 
 The accompanying notes are an integral part
of these condensed consolidated financial statements.

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited, in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accum-
ulated
Other
Compre-
hensive
Income
(Loss)
 
Common Stock
Held in Treasury
 
Total
Stock-
holders'
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
Shares
 
Amount
 
 
Balance at 12/31/2012
 

 
$

 
38,796

 
$
388

 
$
159,081

 
$
413,882

 
$
(6,940
)
 
9,700

 
$
(213,995
)
 
$
352,416

Shares issued under share-based com-pensation plan
 

 

 
4

 

 

 

 

 

 

 

Exercise of stock options
 

 

 
532

 
5

 
8,417

 

 

 

 

 
8,422

Income tax benefit from exercise of stock options
 

 

 

 

 
7,218

 

 

 

 

 
7,218

Share-based compensation expense
 

 

 

 

 
839

 

 

 

 

 
839

Net income
 

 

 

 

 

 
35,927

 

 

 

 
35,927

Currency translation adjustment, net of tax
 

 

 

 

 

 

 
(328
)
 

 

 
(328
)
Repurchases of treasury stock
 

 

 

 

 

 

 

 
729

 
(38,692
)
 
(38,692
)
Balance at 6/30/2013
 

 
$

 
39,332

 
$
393

 
$
175,555

 
$
449,809

 
$
(7,268
)
 
10,429

 
$
(252,687
)
 
$
365,802

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part
of these condensed consolidated financial statements.




6

 
 

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
CONTINUED
(unaudited, in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accum-
ulated
Other
Compre-
hensive
Income
(Loss)
 
Common Stock
Held in Treasury
 
Total
Stock-
holders'
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
Shares
 
Amount
 
 
Balance at 12/31/2011
 

 
$

 
38,291

 
$
383

 
$
147,649

 
$
333,523

 
$
(13,463
)
 
8,200

 
$
(152,720
)
 
$
315,372

Shares issued under share-based com-pensation plan
 

 

 
3

 

 

 

 

 

 

 

Exercise of stock options
 

 

 
15

 

 
48

 

 

 

 

 
48

Income tax benefit from exercise of stock options
 

 

 

 

 
127

 

 

 

 

 
127

Share-based compensation expense
 

 

 

 

 
650

 

 

 

 

 
650

Net income
 

 

 

 

 

 
33,861

 

 

 

 
33,861

Currency translation adjustment, net of tax
 

 

 

 

 

 

 
1,675

 

 

 
1,675

Repurchases of treasury stock
 

 

 

 

 

 

 

 
1,500

 
(61,275
)
 
(61,275
)
Balance at 6/30/2012
 

 
$

 
38,309

 
$
383

 
$
148,474

 
$
367,384

 
$
(11,788
)
 
9,700

 
$
(213,995
)
 
$
290,458

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part
of these condensed consolidated financial statements.

7

 
 

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Six Months Ended
 
 
June 30,
 
 
2013
 
2012
Cash flow from operating activities:
 
 
 
 
Net income
 
$
35,927

 
$
33,861

Adjustments to reconcile net income to net cash flow provided by operating activities:
 
 
 
 
Non-cash portion of credit loss provision
 
496

 
177

Share-based compensation expense
 
839

 
650

Depreciation and amortization expense
 
7,358

 
6,155

Deferred income taxes
 
1,437

 
1,160

Changes in operating assets and liabilities, net of business combinations:
 
 
 
 
Pawn fees and service charges receivable
 
(1,193
)
 
(1,726
)
Merchandise inventories
 
(3,945
)
 
(1,262
)
Prepaid expenses and other assets
 
2,150

 
8,093

Accounts payable and accrued expenses
 
1,699

 
2,310

Income taxes payable, current
 
279

 
(9,681
)
Net cash flow provided by operating activities
 
45,047

 
39,737

Cash flow from investing activities:
 
 
 
 
Loan receivables, net of cash repayments
 
(7,362
)
 
(10,578
)
Purchases of property and equipment
 
(10,374
)
 
(9,751
)
Acquisitions of pawn stores, net of cash acquired
 
(71,501
)
 
(70,603
)
Net cash flow used in investing activities
 
(89,237
)
 
(90,932
)
Cash flow from financing activities:
 
 
 
 
Proceeds from line of credit
 
116,600

 
137,600

Payments of line of credit
 
(66,100
)
 
(66,000
)
Payments of notes payable
 
(1,591
)
 
(654
)
Purchases of treasury stock
 
(38,692
)
 
(61,275
)
Proceeds from exercise of share-based compensation awards
 
8,422

 
48

Income tax benefit from exercise of stock options and warrants
 
7,218

 
127

Net cash flow provided by financing activities
 
25,857

 
9,846

Effect of exchange rates on cash
 
754

 
846

Change in cash and cash equivalents
 
(17,579
)
 
(40,503
)
Cash and cash equivalents at beginning of the period
 
50,285

 
70,296

Cash and cash equivalents at end of the period
 
$
32,706

 
$
29,793

 
 
 
 
 
The accompanying notes are an integral part
of these condensed consolidated financial statements.

8

 
 

FIRST CASH FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 - Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements, including the notes thereto, include the accounts of First Cash Financial Services, Inc. (the “Company”), and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

These unaudited consolidated financial statements are condensed and do not include all disclosures and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. These interim period financial statements should be read in conjunction with the Company's consolidated financial statements, which are included in the Company's December 31, 2012 annual report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2013. The condensed consolidated financial statements as of June 30, 2013, and for the three and six month periods ended June 30, 2013, and 2012 are unaudited, but in management's opinion, include all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flow for such interim periods. Operating results for the periods ended June 30, 2013, are not necessarily indicative of the results that may be expected for the full fiscal year.

The Company manages its pawn and consumer loan operations under three operating segments:  U.S. pawn operations, U.S. consumer loan operations and Mexico operations. The three operating segments have been aggregated into one reportable segment because they have similar economic characteristics and similar long-term financial performance metrics. Additionally, all three segments offer similar and overlapping products and services to a similar customer demographic, operate in similar regulatory environments, and are supported by a single, centralized administrative support platform.

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 monthly average exchange rates occurring during each month.

Certain amounts in prior year comparative presentations have been reclassified in order to conform to the 2013 presentation.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). The amendments in ASU 2013-02 require an entity to disclose the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments of ASU 2013-02 are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a material effect on the Company’s financial position, results of operations or financial statement disclosures.


9

 
 

Note 2- Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (unaudited, in thousands, except per share data):
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
 
Income from continuing operations for calculating basic and diluted earnings per share
 
$
15,663

 
$
16,333

 
$
35,927

 
$
33,785

Income from discontinued operations
 

 
16

 

 
76

Net income for calculating basic and diluted earnings per share
 
$
15,663

 
$
16,349

 
$
35,927

 
$
33,861

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares for calculating basic earnings per share
 
29,167

 
28,658

 
29,240

 
29,119

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options, warrants and nonvested awards
 
436

 
746

 
539

 
759

Weighted-average common shares for calculating diluted earnings per share
 
29,603

 
29,404

 
29,779

 
29,878

 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.54

 
$
0.57

 
$
1.23

 
$
1.16

Income from discontinued operations
 

 

 

 

Net income per basic share
 
$
0.54

 
$
0.57

 
$
1.23

 
$
1.16

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.53

 
$
0.56

 
$
1.21

 
$
1.13

Income from discontinued operations
 

 

 

 

Net income per diluted share
 
$
0.53

 
$
0.56

 
$
1.21

 
$
1.13


Note 3 - Acquisitions

Consistent with the Company’s strategy to continue its expansion of pawn stores in selected markets, in June 2013, the Company acquired from O'Pak Credit LP, Pro Pawn LP and Milar Credit LP (collectively "Valu + Pawn") the pawn loans, inventory, layaways and other operating assets and liabilities of 19 large format pawn stores located in Texas. The purchase price for the transaction was $69,967,000, net of cash acquired, and was composed of $68,967,000 in cash paid at closing and an additional $1,000,000 payable to the sellers in June 2014. The acquisition has been accounted for using the purchase method of accounting for both financial reporting and tax purposes. Accordingly, the purchase price was allocated to assets and liabilities acquired based upon their estimated fair market values at the date of acquisition, which were comparable for financial and tax purposes. The excess purchase price over the estimated fair market value of the net assets acquired has been recorded as goodwill of approximately $52,075,000, which is deductible for income tax purposes. For tax purposes, the goodwill and intangible assets are being amortized over the standard 15 years period. The goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of Valu + Pawn. The estimated fair values of the assets acquired are preliminary, as the Company is gathering information to finalize the valuation of these assets by year end. The assets, liabilities and results of operations of the locations were included in the Company’s consolidated results as of the acquisition date, June 25, 2013.

Additionally, during the six months ended June 30, 2013, three pawn stores located in three U.S. states were acquired in three separate acquisitions for an aggregate purchase price of $2,665,000, net of cash acquired, and composed of $2,475,000 in cash and payables to the sellers of $190,000. These acquisitions resulted in additional goodwill of approximately $1,632,000.


10

 
 

The preliminary allocations of the purchase prices for the Company's acquisitions during the six months ended June 30, 2013 (the "2013 acquisitions") are as follows (in thousands):
 
Valu + Pawn
 
Other
 
Total
Pawn loans
$
9,417

 
$
364

 
$
9,781

Inventory
5,053

 
498

 
5,551

Other current assets
1,071

 
43

 
1,114

Property and equipment
1,087

 
55

 
1,142

Goodwill
52,075

 
1,632

 
53,707

Intangible assets
2,190

 
120

 
2,310

Other non-current assets
73

 
4

 
77

Current liabilities
(999
)
 
(51
)
 
(1,050
)
Purchase price
$
69,967

 
$
2,665

 
$
72,632


During the six months ended June 30, 2013, revenue from the 2013 acquisitions since the acquisition dates was $1,115,000. The combined transaction and non-recurring integration costs of the 2013 acquisitions recorded during the six months ended June 30, 2013, were approximately $1,545,000. During the six months ended June 30, 2013, the net loss from the 2013 acquisitions since the acquisition dates (including acquisition and integration costs) was $912,000. The most significant acquisition during the year, Valu + Pawn, was completed on June 25, 2013, and as a result, there were limited revenues and operating profits during the period to offset the acquisition and integration costs. The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if all the 2013 acquisitions had occurred on January 1, 2012. The unaudited pro forma financial information has been prepared for informational purposes only and does not purport to be indicative of what would have resulted had the acquisitions occurred on the date indicated or what may result in the future (in thousands, except per share data):
 
 
Six Months Ended
 
Six Months Ended
 
 
June 30, 2013
 
June 30, 2012
 
 
As Reported
 
Pro Forma
 
As Reported
 
Pro Forma
Total revenue from continuing operations
 
$
303,974

 
$
329,230

 
$
267,011

 
$
291,750

Income from continuing operations
 
35,927

 
39,039

 
33,785

 
36,915

Net income
 
35,927

 
39,039

 
33,861

 
36,991

Income from continuing operations per share:
 
 
 
 
 
 
 
 
Basic
 
$
1.23

 
$
1.34

 
$
1.16

 
$
1.27

Diluted
 
1.21

 
1.31

 
1.13

 
1.24

Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
1.23

 
$
1.34

 
$
1.16

 
$
1.27

Diluted
 
1.21

 
1.31

 
1.13

 
1.24


Note 4 - Guarantees

The Company offers a fee-based credit services organization program (“CSO Program”) to assist consumers in Texas markets in obtaining extensions of credit.  The Company’s CSO Program in Texas is licensed as a Credit Access Business (“CAB”) under Texas Finance Code Chapter 393 and regulated by the Texas Office of the Consumer Credit Commissioner. Under the CSO Program, the Company assists customers in applying for a short-term extension of credit from an independent, non-bank, consumer lending company (the “Independent Lender”) and issues the Independent Lender a letter of credit to guarantee the repayment of the extension of credit.  The extensions of credit made by the Independent Lender to credit services customers of the Company range in amount from $50 to $1,500, have terms of 7 to 180 days and bear interest at a rate of 10% on an annualized basis.  The Independent Lender is considered a variable interest entity of the Company.  The Company does not have any ownership interest in the Independent Lender, does not exercise control over it and is not the primary beneficiary and, therefore, does not consolidate the Independent Lender’s results with its results.

The letters of credit under the CSO Program 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

11

 
 

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 June 30, 2013, was $13,637,000 compared to $15,233,000 at June 30, 2012. 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 as a component of its credit loss provision.  The Company is entitled to seek recovery, directly from its customers, of the 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, which was immaterial at June 30, 2013, in accrued liabilities.  The loss provision associated with the CSO Program is based primarily upon historical loss experience, with consideration given to recent loss trends, delinquency rates, economic conditions and management’s expectations of future credit losses.  See additional discussion of the loss provision and related allowances and accruals in the section titled “Results of Continuing Operations.”

Note 5 - Commitments and Contingencies

Forward Sales Commitments

The Company periodically uses forward sale agreements with a major gold bullion bank to sell a portion of the expected amount of scrap gold and silver jewelry, which is typically broken or of low retail value, produced in the normal course of business from its liquidation of such merchandise. These commitments qualify for an exemption from derivative accounting as normal sales, based on historical terms, conditions and quantities, and are therefore not recorded on the Company’s balance sheet. As of June 30, 2013, the Company had no forward sales commitments for gold and no sales commitments for silver ounces of its expected scrap jewelry sales.

Note 6 - Revolving Credit Facility

At June 30, 2013, the Company maintained a line of credit with five commercial lenders (the "Unsecured Credit Facility") in the amount of $175,000,000, which matures in February 2015. At June 30, 2013, the Company had $153,000,000 outstanding under the Unsecured Credit Facility and $22,000,000 available for borrowings. The Unsecured Credit Facility charges interest at the prevailing 30-day LIBOR rate plus a fixed spread of 2.0%. The interest rate on amounts outstanding under the Unsecured Credit Facility was 2.25% at June 30, 2013. During the six months ended June 30, 2013, the Company received net proceeds of $50,500,000 from the Unsecured Credit Facility.


12

 
 

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

The following discussion of financial condition, results of operations, liquidity and capital resources of First Cash Financial Services, Inc. and its wholly-owned subsidiaries (the “Company”) should be read in conjunction with the Company's condensed consolidated financial statements and accompanying notes included under Part I, Item 1 of this quarterly report on Form 10-Q, as well as with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's annual report on Form 10-K for the year ended December 31, 2012. References in this quarterly report on Form 10-Q to “year-to-date” refer to the six-month period from January 1, 2013 to June 30, 2013.

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, purchasing of secondhand goods and consumer finance activities. 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 jewelry, consumer electronics, 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.

The Company operates a significantly smaller 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.

During the six months ended June 30, 2013, the Company acquired 22 pawn stores, including 19 stores located in Texas in a single transaction. For more information on the Company's acquisitions during the six months ended June 30, 2013, see Note 3 (Acquisitions) to the unaudited condensed consolidated financial statements included in this quarterly report.

Pawn operations accounted for approximately 92% of the Company’s revenue from continuing operations during the first six months of 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 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 was approximately 8% of consolidated year-to-date revenue from continuing operations, was 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 Company's credit services organization ("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 Company's 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.


13

 
 

OPERATIONS AND LOCATIONS

The Company has operations in the United States and Mexico. For the three months ended June 30, 2013, approximately 60% of total revenue was generated from Mexico and 40% from the United States. Year-to-date, 55% of revenue was generated from Mexico and 45% from the United States.

As of June 30, 2013, the Company had 867 locations in 12 U.S. states and 25 states in Mexico, which represents a net store-count increase of 12% over the trailing twelve months. A total of 33 new store locations were added during the second quarter of 2013 and 55 have been added year-to-date.

The following table details store openings for the three months ended June 30, 2013:

 
 
Pawn Locations
 
Consumer
 
 
 
 
Large
 
Small
 
Loan
 
Total
 
 
Format (1)
 
Format (2)
 
Locations (3)
 
Locations
Domestic:
 
 
 
 
 
 
 
 
Total locations, beginning of period
 
185

 
27

 
65

 
277

New locations opened
 
2

 

 

 
2

Locations acquired
 
21

 

 

 
21

Locations closed or consolidated
 

 

 
(1
)
 
(1
)
Total locations, end of period
 
208

 
27

 
64

 
299

 
 
 
 
 
 
 
 
 
International:
 
 
 
 
 
 
 
 
Total locations, beginning of period
 
506

 
19

 
34

 
559

New locations opened
 
10

 

 

 
10

Locations closed or consolidated
 

 
(1
)
 

 
(1
)
Total locations, end of period
 
516

 
18

 
34

 
568

 
 
 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
 
 
Total locations, beginning of period
 
691

 
46

 
99

 
836

New locations opened
 
12

 

 

 
12

Locations acquired
 
21

 

 

 
21

Locations closed or consolidated
 

 
(1
)
 
(1
)
 
(2
)
Total locations, end of period
 
724

 
45

 
98

 
867


(1)
The large format locations include retail showrooms and accept a broad array of pawn collateral including electronics, appliances, tools, jewelry and other consumer hard goods. At June 30, 2013, 113 of the U.S. large format pawn stores also offered consumer loans or credit services products.

(2)
The small format locations typically have limited retail operations and primarily accept jewelry and small electronic items as pawn collateral. At June 30, 2013, all but one of the 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, the Company is also an equal partner in Cash & Go, Ltd., a joint venture, which owns and operates 37 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 residing in the state of Texas.

14

 
 

The following table details store openings for the six months ended June 30, 2013:

 
 
Pawn Locations
 
Consumer
 
 
 
 
Large
 
Small
 
Loan
 
Total
 
 
Format (1)
 
Format (2)
 
Locations (3)
 
Locations
Domestic:
 
 
 
 
 
 
 
 
Total locations, beginning of period
 
184

 
27

 
65

 
276

New locations opened
 
2

 

 

 
2

Locations acquired
 
22

 

 

 
22

Locations closed or consolidated
 

 

 
(1
)
 
(1
)
Total locations, end of period
 
208

 
27

 
64

 
299

 
 
 
 
 
 
 
 
 
International:
 
 
 
 
 
 
 
 
Total locations, beginning of period
 
485

 
19

 
34

 
538

New locations opened
 
31

 

 

 
31

Locations closed or consolidated
 

 
(1
)
 

 
(1
)
Total locations, end of period
 
516

 
18

 
34

 
568

 
 
 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
 
 
Total locations, beginning of period
 
669

 
46

 
99

 
814

New locations opened
 
33

 

 

 
33

Locations acquired
 
22

 

 

 
22

Locations closed or consolidated
 

 
(1
)
 
(1
)
 
(2
)
Total locations, end of period
 
724

 
45

 
98

 
867


(1)
The large format locations include retail showrooms and accept a broad array of pawn collateral including electronics, appliances, tools, jewelry and other consumer hard goods. At June 30, 2013, 113 of the U.S. large format pawn stores also offered consumer loans or credit services products.

(2)
The small format locations typically have limited retail operations and primarily accept jewelry and small electronic items as pawn collateral. At June 30, 2013, all but one of the 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, the Company is also an equal partner in Cash & Go, Ltd., a joint venture, which owns and operates 37 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.


15

 
 

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 2012 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 "Non-GAAP Financial Information” for additional discussion of constant currency operating results.

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 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.

While the Company has had significant increases in revenue due to new store openings and acquisitions, the Company has also incurred increases in operating and administrative 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.


16

 
 

RESULTS OF CONTINUING OPERATIONS

Three Months Ended June 30, 2013, Compared To The Three Months Ended June 30, 2012

The following table details the components of the Company's revenue for the three months ended June 30, 2013, as compared to the three months ended June 30, 2012 (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 increased 8%, from 13.5 to 1 in the second quarter of 2012 to 12.5 to 1 in the second quarter of 2013. The end-of-period value of the Mexican peso to the U.S. dollar increased 5%, from 13.7 to 1 at June 30, 2012, to 13.0 to 1 at June 30, 2013. As a result of these currency exchange movements, revenue and net assets of Mexican operations translated into more U.S. dollars relative to the prior-year period. While the strengthening of the Mexican peso positively increased the translated dollar-value of assets and 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.

 
 
Three Months Ended
 
 
 
 
 
Increase/(Decrease)
 
 
June 30,
 
 
 
 
 
Constant Currency
 
 
2013
 
2012
 
Increase/(Decrease)
 
Basis
Domestic revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
29,094

 
$
21,200

 
$
7,894

 
37
 %
 
 
37
 %
 
Pawn loan fees
 
17,209

 
13,108

 
4,101

 
31
 %
 
 
31
 %
 
Consumer loan and credit services fees
 
9,958

 
11,202

 
(1,244
)
 
(11
)%
 
 
(11
)%
 
Wholesale scrap jewelry revenue
 
1,556

 
11,740

 
(10,184
)
 
(87
)%
 
 
(87
)%
 
 
 
57,817

 
57,250

 
567

 
1
 %
 
 
1
 %
 
International revenue:
 
 
 
 
 
 
 
 
 
 
 

 
Retail merchandise sales
 
54,806

 
41,061

 
13,745

 
33
 %
 
 
23
 %
 
Pawn loan fees
 
25,843

 
20,824

 
5,019

 
24
 %
 
 
14
 %
 
Consumer loan and credit services fees
 
908

 
949

 
(41
)
 
(4
)%
 
 
(12
)%
 
Wholesale scrap jewelry revenue
 
3,761

 
12,301

 
(8,540
)
 
(69
)%
 
 
(69
)%
 
 
 
85,318

 
75,135

 
10,183

 
14
 %
 
 
5
 %
 
Total revenue:
 
 
 
 
 
 
 
 

 
 
 
 
Retail merchandise sales
 
83,900

 
62,261

 
21,639

 
35
 %
 
 
28
 %
 
Pawn loan fees
 
43,052

 
33,932

 
9,120

 
27
 %
 
 
21
 %
 
Consumer loan and credit services fees
 
10,866

 
12,151

 
(1,285
)
 
(11
)%
 
 
(11
)%
 
Wholesale scrap jewelry revenue
 
5,317

 
24,041

 
(18,724
)
 
(78
)%
 
 
(78
)%
 
 
 
$
143,135

 
$
132,385

 
$
10,750

 
8
 %
 
 
3
 %
 

Domestic revenue accounted for approximately 40% of the total revenue for the current quarter, while international revenue (from Mexico) accounted for 60% 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 June 30, 2013, as compared to June 30, 2012 (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. For more information on the Company's CSO program, see Note 4 (Guarantees) to the Company's condensed consolidated financial statements included in this quarterly report on Form 10-Q.

17

 
 

 
 
 
 
 
 
 
 
 
 
Increase/(Decrease)
 
 
Balance at June 30,
 
 
 
 
 
Constant Currency
 
 
2013
 
2012
 
Increase/(Decrease)
 
Basis
Domestic:
 
 
 
 
 
 
 
 
 
 
 
 
Pawn loans
 
$
58,887

 
$
42,596

 
$
16,291

 
38
 %
 
 
38
 %
 
CSO credit extensions held by independent third-party (1)
 
11,882

 
13,170

 
(1,288
)
 
(10
)%
 
 
(10
)%
 
Other consumer loans
 
769

 
1,242

 
(473
)
 
(38
)%
 
 
(38
)%
 
 
 
71,538

 
57,008

 
14,530

 
25
 %
 
 
25
 %
 
International:
 
 
 
 
 
 
 
 
 
 
 
 
Pawn loans
 
53,325

 
45,702

 
7,623

 
17
 %
 
 
11
 %
 
Other consumer loans
 
735

 
793

 
(58
)
 
(7
)%
 
 
(12
)%
 
 
 
54,060

 
46,495

 
7,565

 
16
 %
 
 
11
 %
 
Total:
 
 
 
 
 
 
 
 
 
 
 
 
Pawn loans
 
112,212

 
88,298

 
23,914

 
27
 %
 
 
24
 %
 
CSO credit extensions held by independent third-party (1)
 
11,882

 
13,170

 
(1,288
)
 
(10
)%
 
 
(10
)%
 
Other consumer loans
 
1,504

 
2,035

 
(531
)
 
(26
)%
 
 
(28
)%
 
 
 
$
125,598

 
$
103,503

 
$
22,095

 
21
 %
 
 
19
 %
 
Pawn inventories:
 
 
 
 
 
 
 
 
 
 
 
 
Domestic pawn inventories
 
$
38,534

 
$
24,415

 
$
14,119

 
58
 %
 
 
58
 %
 
International pawn inventories
 
43,471

 
28,563

 
14,908

 
52
 %
 
 
45
 %
 
 
 
$
82,005

 
$
52,978

 
$
29,027

 
55
 %
 
 
51
 %
 

(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 3% (constant currency basis) was due primarily to additional retail sales and pawn fee revenue from new and existing pawn stores, offset by a decrease in wholesale scrap jewelry revenue and consumer loan fees. Second quarter revenue generated by the stores opened or acquired since April 1, 2012, increased by $5,409,000 in Mexico and $11,061,000 in the United States, compared to the same quarter last year. Excluding wholesale scrap jewelry sales, same-store revenue in pawn stores increased 12% in Mexico, 4% in the U.S. and 9% overall, on a constant currency basis. Same-store wholesale scrap jewelry revenue decreased 81% in total, 90% in the U.S. and 72% in Mexico, reflecting significantly lower gold prices and the Company's decision to hold a significant portion of its second quarter scrap gold production in inventory rather than selling it at market prices during the quarter. Subsequent to June 30, 2013, the Company sold 6,100 ounces of the held gold inventory as described below.

The increase in pawn loan fees was primarily the result of an increase in the average outstanding pawn receivables. Consolidated pawn receivables increased 27% as of June 30, 2013 (24% on a constant currency basis), primarily from store additions and growth in same-store receivables, compared to June 30, 2012. In Mexico, pawn receivables increased 17% (11% on a constant currency basis), and in the U.S., increased by 38% versus the prior-year period. Consolidated same-store pawn receivables grew 4% (1% on a constant currency basis). While U.S. same-store pawn receivables declined 2%, same-store receivables increased 9% in Mexico (4% on a constant currency basis). Pawn receivables collateralized with hard good (non-jewelry) items increased 19% in Mexico (constant currency basis), while growth in pawn receivables collateralized with jewelry in both the U.S. and Mexico was dampened somewhat by adjustments to the loan to value ratios reflecting the decline in gold prices.

The increase in store-based retail sales reflected new store contributions, maturation of existing stores and an increased mix of consumer hard good (primarily consumer electronics, appliances and power tools) inventories, especially in Mexico. Revenue from wholesale scrap jewelry operations in the second quarter decreased 78% compared to the same period last year and reflects the Company's decision to hold a significant portion of its scrap jewelry in inventory rather than selling at market prices during the quarter. The volume of scrap jewelry acquired (including sold and unsold) decreased 25%, reflecting the continued decline in

18

 
 

demand for gold buying services. The average selling price for the 2,100 ounces of gold liquidated during the quarter was $1,561 per ounce, which generated a scrap gross profit margin of 13%. Scrap jewelry profits accounted for only 1% of net revenue (gross profit) for the second quarter, compared to 7% in the second quarter of the prior year. The average market price of gold for the second quarter of 2013 decreased 12% compared to the second quarter of 2012, while the ending price at June 30, 2013, decreased 25% compared to June 30, 2012. The Company's exposure to gold price risk is described in detail in the Company's 2012 annual report on Form 10-K, Item 1A.

Service fees from consumer loans and credit services transactions for the second quarter of 2013 decreased 11% compared to the second quarter of 2012. The majority of the payday loan revenues are generated in the Company's stand-alone stores in Texas, which experienced a revenue decline of 16% during the second quarter of 2013. The Company attributes much of the decrease to increased competition from online and other store-front lenders, such as installment and title loan providers, in the Texas markets. Payday loan-related products comprised 8% of total revenue for the second quarter of 2013.

The gross profit margin on retail merchandise sales, which excludes scrap jewelry sales, was 39% during the second quarter of 2013, while the margin on wholesale scrap jewelry was 13%, compared to margins of 42% on retail merchandise sales and 22% on wholesale scrap jewelry for the second quarter of 2012. The slight decline in retail margins relates primarily to the continued shift in the Company's retail product mix toward lower margin hard good items and away from jewelry, resulting from the overall growth of the hard good business, especially in Mexico, and lower average retail margin in certain of the recently acquired U.S. pawn store chains.

Pawn inventories increased from the prior year by 51% on a constant currency basis from June 30, 2012 to June 30, 2013. Ending inventories included approximately 7,700 ounces of melted gold derived from scrap jewelry at a cost of $9,276,000. Excluding this amount, inventories totaled $72,729,000 at June 30, 2013, up 37% from June 30, 2012, and consistent with the growth in pawn loans receivable. At June 30, 2013, the Company’s pawn inventories, at cost, were composed of: 29% jewelry (primarily gold jewelry held for retail sale), 39% electronics and appliances, 7% tools, 12% melted scrap gold (held for sale), and 13% other. At June 30, 2013, 97% of total inventories, at cost, had been held for one year or less, while 3% had been held for more than one year. Subsequent to June 30, 2013, the Company sold 6,100 ounces of the melted scrap gold inventories at an average price of $1,305 per ounce. The remaining melted scrap gold inventories could become subject to impairment if gold prices fall below $1,200 per ounce. Additionally, retail jewelry inventories and pawn loans collateralized with gold could potentially be subject to impairment if there is a further significant decline in the price of gold.

The Company’s consumer loan and credit services loss provision was 25% of consumer loan and credit services fee revenue during the second quarter of 2013, which was the same for the second quarter of 2012. The estimated fair value of liabilities under the CSO letters of credit, net of anticipated recoveries from customers, was $572,000, or 4.6% of the gross loan balance at June 30, 2013, compared to $716,000, or 5.2% of the gross loan balance at June 30, 2012, which is included as a component of the Company’s accrued liabilities. The Company’s loss reserve on consumer loans was $87,000, or 5.5% of the gross loan balance at June 30, 2013, compared to $107,000, or 5.0% of the gross loan balance at June 30, 2012.

Store operating expenses increased by 26% to $44,000,000 during the second quarter of 2013 compared to $35,025,000 during the second quarter of 2012, primarily as a result of a 13% increase in the weighted-average store count, which included a number of large, mature U.S. stores added through acquisitions, and an 8% increase in the value of the Mexican peso. Same-store expenses increased 2% on a constant currency basis, compared to the prior-year period.

The net store profit contribution from continuing operations for the current-year quarter was $37,623,000, which equates to a store-level operating margin of 26%, compared to 28% in the prior-year quarter.

Administrative Expenses, Interest, Taxes & Income

Administrative expenses increased 9% to $12,662,000 during the second quarter of 2013, compared to $11,612,000 during the second quarter of 2012, primarily due to the 13% 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 were 9% in both the second quarter of 2012 and 2013.

Interest expense increased to $633,000 in the second quarter of 2013, compared to $176,000 for the second quarter of 2012, reflecting increased borrowing levels under the existing credit facilities.

For the second quarter of 2013 and 2012, the Company’s effective federal income tax rates were 34.1% and 34.5%, respectively.


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Income from continuing operations decreased 4% to $15,663,000 during the second quarter of 2013, compared to $16,333,000 during the second quarter of 2012. Net income was $15,663,000 during the second quarter of 2013, compared to $16,349,000 during the second quarter of 2012, which included the results of discontinued operations.

Six Months Ended June 30, 2013, Compared To The Six Months Ended June 30, 2012

The following table details the components of the Company's revenue for the six months ended June 30, 2013, as compared to the six months ended June 30, 2012 (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 increased 5%, from 13.3 to 1 in the first six months of 2012 to 12.6 to 1 in the first six months of 2013. The end-of-period value of the Mexican peso to the U.S. dollar increased 5%, from 13.7 to 1 at June 30, 2012, to 13.0 to 1 at June 30, 2013. As a result of these currency exchange movements, revenue and net assets of Mexican operations translated into more U.S. dollars relative to the prior-year period. While the strengthening of the Mexican peso positively increased the translated dollar-value of assets and 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.
 
 
Six Months Ended