FirstCash, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2018, filed August 1, 2018. FirstCash operated 2,289 pawn and consumer-loan locations across the United States and Latin America, 9% more than a year earlier. Pawn operations generated approximately 97% of year-to-date revenue.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $420.0 million, up 1% | $869.8 million, up 1% |
| Net revenue | $228.4 million, up 2% | $467.5 million, essentially flat |
| Net income | $30.2 million, up 98% | $71.8 million, up 50% |
| Diluted EPS | $0.67 versus $0.32 | $1.57 versus $0.99 |
| Net margin | 7.2% versus 3.7% | 8.3% versus 5.5% |
| Operating cash flow | Not separately provided for the quarter | $120.0 million versus $102.8 million |
- Quarterly segment pre-tax operating income was $53.1 million in the U.S., up 6%, and $30.0 million in Latin America, up 7%. Segment margins were approximately 18% and 23%, respectively.
- Year-to-date adjusted EBITDA was $133.6 million versus $130.0 million; trailing-twelve-month adjusted EBITDA was $276.8 million.
- Cash and equivalents were $83.1 million at June 30, 2018, compared with $114.4 million at December 31, 2017.
- Pawn loans were $348.3 million, consumer loans net were $17.3 million, and inventories were $249.7 million.
- Total debt was $521.5 million, consisting of $221.5 million drawn on the revolving facility and $300.0 million principal amount of 5.375% senior notes due 2024. Net debt ratio was 1.6:1, compared with 1.2:1 at June 30, 2017.
- The $400.0 million revolving facility had $173.4 million available after $5.1 million of letters of credit. The weighted-average borrowing rate was 4.50%, and the company was in compliance with its covenants.
- Working capital was $644.2 million and the current ratio was 6.5:1.
Material changes versus the prior comparable period
- Revenue growth was modest because U.S. declines in pawn fees, scrap jewelry sales and consumer-lending fees offset stronger Latin American retail and pawn performance.
- U.S. quarterly consumer-loan and credit-services fees fell 26%; year-to-date fees fell 27%. U.S. pawn fees declined 3% for the quarter and 4% year to date.
- U.S. retail merchandise gross margin improved to 37% from 35% in the quarter, while Latin American retail margin declined to 35% from 37%, partly because of recently acquired smaller-format stores.
- U.S. inventories decreased 24% year over year to $184.5 million, and inventory aged more than one year declined to 4% from 12%.
- Latin American revenue increased 11% in the quarter and 17% year to date as reported; constant-currency growth was 15% and 15%, respectively. Results benefited from acquisitions, new stores and stronger same-store retail sales, but were affected by currency movements.
- Administrative expense declined 9% year to date, and depreciation and amortization declined 23% year to date, reflecting merger synergies and lower capital spending.
- The prior-year period included a $14.1 million loss on extinguishment of debt; its absence materially increased 2018 net income.
- The company repurchased 2.619 million shares for $217.3 million during the first six months, completing two $100 million repurchase programs. The board authorized another $100 million program effective July 25, 2018.
- The company acquired 206 pawn stores during the first six months, including 188 in Mexico and 18 in the U.S., for an aggregate purchase price of approximately $44.0 million.
Guidance, outlook, commentary, risks and unusual items
- Management expected a blended fiscal 2018 effective tax rate of 26% to 27%, compared with 35.0% for the first six months of 2017, primarily because of the Tax Cuts and Jobs Act.
- Management expected to add 265 to 270 locations during 2018, including 32 to 37 additional large-format stores during the remainder of the year.
- Excluding real-estate purchases, 2018 capital expenditures were expected to be approximately $27.5 million to $32.5 million.
- Management believed cash, available revolver capacity and operating cash flow would fund operations and planned expansion for at least the next twelve months.
- The company ceased offering unsecured consumer loans in Mexico effective June 30, 2018 and closed 28 consumer-loan stores. It also exited California consumer lending after selling the remaining assets of eight stores.
- Ohio’s Fairness in Lending Act, effective on or about April 26, 2019, caps loan amounts, terms, rates and fees and substantially restricts credit-services organizations. The company estimated Ohio consumer-lending and credit-services revenue at approximately $40 million in 2018, less than 2.5% of consolidated revenue, and expected material future pressure on its 119 Ohio locations offering these products.
- Principal market risks include interest rates, gold prices and foreign-currency movements. Second-quarter comprehensive income was reduced by a $24.6 million currency translation loss.
- The company adopted ASC 606 using the modified retrospective method without a material impact or cumulative-effect adjustment. It was assessing the future effects of the new lease and expected-credit-loss standards.
- Second-quarter adjusted net income was $31.7 million, or $0.70 per diluted share, versus reported net income of $30.2 million, or $0.67. Adjustments primarily excluded acquisition-related expenses.
Investor verification checklist
- Verify the sustainability of U.S. pawn and retail trends after Cash America integration and inventory reductions.
- Track the effect of Ohio’s 2019 lending restrictions on revenue, store closures, asset values and potential restructuring costs.
- Assess leverage, interest-rate exposure and revolver usage following acquisitions and $217.3 million of share repurchases.
- Reconcile reported results with adjusted EBITDA, adjusted net income and constant-currency measures.
- Monitor Latin American currency movements, acquisition integration, retail-margin recovery and the performance of the 188 recently acquired Mexican stores.
- Confirm the company’s ability to fund expansion, dividends and repurchases while maintaining debt covenants and liquidity.