FirstCash, Inc. 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, with quarterly data included for the quarter ended December 31, 2019.
Business Context
FirstCash operates retail pawn stores and limited consumer-lending businesses in the United States and Latin America. At December 31, 2019, it operated 2,679 locations: 1,056 in the U.S. and 1,623 in Latin America, including 1,548 in Mexico. Approximately 99% of 2019 revenue came from pawn operations, primarily merchandise sales and pawn-loan fees.
The company added 279 locations during 2019, consisting of 89 new stores and 190 acquired stores. Latin America accounted for 36% of revenue and the U.S. for 64%.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $1.864 billion | $1.781 billion | Up 5% |
| Net revenue | $1.018 billion | $967 million | Up $51.6 million |
| Income before taxes | $224.6 million | $205.3 million | Up 9% |
| Net income | $164.6 million | $153.2 million | Up 7% |
| Diluted EPS | $3.81 | $3.41 | Up 12% |
| Adjusted net income | $167.9 million | $158.3 million | Up 6% |
| Adjusted diluted EPS | $3.89 | $3.53 | Up 10% |
| Adjusted EBITDA | $303.8 million | $284.2 million | Up 7% |
| Net income margin | 8.8% | 8.6% | Up 20 basis points |
| Pre-tax margin | 12.0% | 11.5% | Up 50 basis points |
| Operating cash flow | $231.6 million | $243.4 million | Down 5% |
- Retail merchandise sales were $1.176 billion, or 63.0% of revenue, up from $1.092 billion in 2018.
- Pawn-loan fees were $564.8 million, or 30.3% of revenue, up from $525.1 million.
- Wholesale scrap-jewelry sales were $103.9 million, down from $107.8 million.
- Consumer-loan and credit-services fees fell to $20.2 million from $56.3 million and represented approximately 1% of revenue.
- Consolidated gross margin increased to approximately 55% from 54.3%.
- Fourth-quarter 2019 revenue was $498.4 million and net income was $54.2 million, compared with $481.2 million and $48.1 million, respectively, in the fourth quarter of 2018. Fourth-quarter diluted EPS increased to $1.27 from $1.09.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $46.5 million at year-end, compared with $71.8 million in 2018.
- Pawn loans totaled $369.5 million, up from $362.9 million; inventories totaled $265.3 million, down from $275.1 million.
- Total assets were $2.439 billion and stockholders’ equity was $1.350 billion.
- Outstanding principal debt was $635.0 million, consisting of $335.0 million under the revolving credit facility and $300.0 million of 5.375% senior unsecured notes due 2024.
- The credit facility was amended in December 2019, increasing total commitments from $425 million to $500 million and extending maturity to December 19, 2024. Availability at year-end was $161.7 million, including outstanding letters of credit.
- The company reported a 1.9-to-1 net debt ratio and was in compliance with its debt covenants.
- Working capital was $538.1 million, although the current ratio declined to 3.7-to-1 from 5.9-to-1, partly because ASC 842 added current lease liabilities to the balance sheet.
- The company repurchased 1.305 million shares for $114.0 million and paid $44.0 million in dividends. The annual dividend was increased 8% to $1.08 per share beginning in the fourth quarter.
Material Changes Versus 2018
- Latin America was the primary growth driver: revenue increased 21% to $670.9 million and segment pre-tax operating income increased 13% to $145.2 million. The company added 89 stores and acquired 163 stores in the region.
- U.S. revenue declined 3% to $1.194 billion, while U.S. segment pre-tax operating income was essentially flat at $242.1 million. Retail sales and pawn-loan fees increased modestly, but consumer-lending revenue declined sharply.
- The company stopped offering unsecured consumer loans and credit services in all 119 Ohio locations in April 2019 following regulatory changes, closed 52 Ohio locations, and discontinued or reduced similar products at other stores. The wind-down generated approximately $2.7 million of after-tax nonrecurring charges.
- U.S. consumer-loan and credit-services revenue fell 64% to $20.2 million, while the related loss provision fell 76% to $4.2 million.
- The adoption of ASC 842 resulted in $304.5 million of operating lease right-of-use assets and $280.0 million of lease liabilities at year-end, materially increasing reported assets and liabilities without a material income-statement or cash-flow effect.
- Acquisition activity moderated: cash paid for store acquisitions declined to $52.5 million from $113.7 million, while purchases of store real estate increased to $74.7 million from $20.0 million.
Outlook, Commentary and Risks
- Management expected to add approximately 90 to 100 de novo full-service pawn stores in Latin America during 2020.
- Expected 2020 purchases of furniture, fixtures, equipment and improvements were $35 million to $40 million, excluding discretionary real-estate purchases.
- Management stated that cash on hand, operating cash flow and available credit were expected to fund operations and planned 2020 expansion for at least the next twelve months.
- Consumer-loan and credit-services revenue was expected to decline to approximately $5 million in 2020, or about 0.25% of consolidated revenue.
- Key risks include extensive and changing regulation of pawn and consumer lending, CFPB and state enforcement, licensing requirements, litigation, competition, cybersecurity, theft and robbery, labor costs, economic conditions, foreign exchange, gold prices, banking access and acquisition integration.
- Approximately 57% of pawn loans and 47% of inventory were jewelry, primarily gold, creating exposure to precious-metal prices. A 1% increase in interest rates was estimated to increase annual interest expense by approximately $3.3 million based on 2019 average debt.
- The company had $948.6 million of goodwill at year-end. Management reported no goodwill or indefinite-lived intangible-asset impairment in 2019, but impairment remains a material judgment risk.
- The company had commitments to deliver 30,500 ounces of gold during 2020 at a weighted-average price of $1,440 per ounce. Management expected the required ounces to be within historical scrap-gold volumes.
- Routine litigation and regulatory matters were not expected by management to have a material adverse effect, but the filing notes that future proceedings could result in penalties, refunds, operating restrictions or license loss.
Important Facts for Investors to Verify
- Confirm the sustainability of Latin American growth and whether same-store pawn receivables and margins recover from late-2019 weakness.
- Track the continued contraction of U.S. consumer lending and the financial effects of the Ohio store closures.
- Assess debt refinancing and covenant capacity before the 2024 maturity of $635 million of principal debt.
- Review cash conversion, acquisition spending, discretionary real-estate purchases, dividends and share repurchases relative to operating cash flow.
- Monitor gold prices, jewelry inventory and collateral exposure, foreign-exchange movements, and the effect of Mexican economic and regulatory developments.
- Evaluate the sensitivity of reported liquidity and leverage metrics to ASC 842 lease liabilities and other non-GAAP adjustments.
- Review the critical audit matter concerning the $46.5 million accrual for earned but uncollected pawn-loan fees, which depends on expected collection and pawn-loan yields.