Dollar Financial Corporation (DLLR) reported its fourth-quarter earnings (excluding one-time charges) of 42 cents per share, ahead of both the Zacks Consensus Estimate and the year-ago quarter’s estimate of 39 cents. Dollar Financial also reported its fiscal-year earnings (excluding one-time charges) of $2.01, which exceeded the Zacks Consensus Estimate of $1.99 and $1.90 from a year ago.
The operating results exclude non-recurring and non-cash charges, and are adjusted for pro forma effective income tax rates. Including these charges, GAAP loss was 21 cents per share in the fourth quarter while the loss was 20 cents in the fiscal year of 2010. This compares to $1.39 per share in the fourth quarter of 2009 and 28 cents in the fiscal year 2009.
Results for the quarter benefited primarily from increased revenues as a result of improvements in all revenue sources. However, higher operating expenses were the downside. Dollar Financial’s global business units continued to deliver strong earnings growth and cash flows during the reported quarter.
In addition, Dollar Financial remains on track on its expansion and diversification strategy. Along with the earnings, Dollar Financial has announced an acquisition agreement with Folkia Group AS, a leading Internet lending business based in Stockholm, Sweden.
Fourth Quarter of 2010
Total revenues for the quarter increased 27.8% year over year to $159.0 million. Consumer lending revenues increased 28.5% year over year to $81.2 million, but check cashing revenues decreased marginally to $35.9 million.
Operating expenses for the reported quarter increased 14.6% year over year to $93.2 million. Salaries and benefits increased 15.8% year over year to $39.6 million.
Operating margin increased 52.9% year over year to $65.9 million. Provision for loan losses decreased 3.5% to $11.3 million.
Fiscal Year of 2010
Total revenues for the year increased 15.7% year over year to $610.9 million. Consumer lending revenues increased 19.9% year over year to $319.5 million, but check-cashing revenues decreased 10.4% to $149.5 million.
Operating expenses for 2010 increased 5.4% year over year to $364.6 million. Salaries and benefits increased 5.7% year over year to $154.0 million.
Operating margin increased 35.5% year over year to $246.3 million. The increase was driven by Dollar Financial’s strong organic revenue growth, supported by improved store operating efficiency implemented throughout the company’s global store base and diversification through acquisitions.
The loan loss provision as a percentage of gross consumer-lending revenues improved to 14.4% from 19.6% in the prior-year of 2009. This reflects Dollar Financial’s conservative approach to consumer lending and cashing third-party checks amidst the weak global economy. The implementation of proprietary credit scoring models for the global loan products also benefited the company. Provision for loan losses declined 13.5% to $45.9 million.
Evaluation of Capital and Balance Sheet
Dollar Financial retired its remaining $18.3 million of legacy senior secured term loans in Canada and the United Kingdom on June 23. Following this transaction, the debt structure of Dollar Financial included a $44.8 million tranche of 2.875% U.S. senior convertible notes due 2027 and a $120.0 million tranche of 3.0% U.S. senior convertible notes due 2028. In addition, Dollar Financial has $600.0 million of senior unsecured notes which are not due until December, 2016.
In addition, Dollar Financial continues to maintain its undrawn global revolving credit facilities, which include a $75.0 million U.S. facility, a C$28.5 million Canadian facility, and a £5.0 million overdraft credit facility in the U.K.
As of June 30, 2010, Dollar Financial’s total assets were $1.21 billion and total shareholders’ equity was $218.3 million.
Acquisition Update
Concurrent with the earnings release, Dollar Financial agreed to buy Swedish Internet lending business Folkia Group AS for $28 million. Folkia currently originates loans through both Internet and SMS text cell phone technology in four countries of Sweden, Finland, Denmark and Estonia.
The completion of the acquisition is contingent upon customary closing conditions, including local regulatory approval, which is expected to take 45 to 90 days to obtain.
The acquisition will provide an Internet and cell-phone lending platform for expansion within Northern Europe and Scandinavia, and credit and finance licenses for expansion into other European Union countries.
Dollar Financial expects the acquisition to be immediately accretive to its earnings. It further expects to update its fiscal 2011 outlook after the closure of the deal.
Outlook for Fiscal 2011
Dollar Financial anticipates operating earnings of $2.05 to $2.30 per share, excluding one-time charges, the non-cash impact of adopting ASC 470-20, the non-cash amortization associated with the cross-currency interest rate swap agreements and non-cash unrealized foreign exchange gains and losses. The guidance considers an expected effective income tax rate from operations of 37%.
Adjusted EBITDA is expected between $205.0 million and $215.0 million.
We remain concerned about the risks related to Dollar Financial’s tax strategies, extremely fragmented nature of business and international dependence. However, a solid liquidity position, exposure to a somewhat recession-proof sector and cost containment measures will drive future growth.
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