FirstCash, Inc. 2017 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2017. FirstCash operates retail pawn stores and smaller consumer-finance operations in the United States and Latin America. At year-end, it operated 2,111 locations: 1,112 in the U.S., 953 in Mexico, 33 in Guatemala and 13 in El Salvador. Pawn operations generated approximately 96% of consolidated revenue.
Comparability with 2016 is materially affected by the September 1, 2016 Cash America merger: 2017 includes a full year of Cash America operations, while 2016 includes only the post-merger period from September 2 through December 31.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $1.780 billion | $1.088 billion | +64% |
| Net revenue | $947.5 million | $604.8 million | +57% |
| Income before taxes | $172.3 million | $93.4 million | +84% |
| Net income | $143.9 million | $60.1 million | +139% |
| Diluted EPS | $3.00 | $1.72 | +74% |
| Operating cash flow | $220.4 million | $96.9 million | +128% |
| Cash and equivalents | $114.4 million | $90.0 million | +27% |
| Working capital | $721.6 million | $748.5 million | -4% |
Reported net margin was 8.1%, net revenue represented 53.2% of revenue, and pre-tax operating margin was 9.7%. Retail merchandise sales were $1.051 billion, pawn loan fees were $510.9 million, wholesale scrap jewelry sales were $140.8 million and consumer loan and credit services fees were $77.0 million.
Retail merchandise gross margin declined to 35.3% from 37.4%, primarily reflecting historically lower Cash America margins and liquidation of aged Cash America inventory. Store operating expenses were 31.0% of revenue versus 30.1% in 2016, while administrative expenses declined to 6.9% from 8.9%.
Liquidity, debt and capital allocation
- Total outstanding principal debt was $407.0 million, consisting of $300.0 million of 5.375% senior notes due 2024 and $107.0 million drawn under the revolving credit facility.
- The $400.0 million credit facility had $287.9 million of unused availability, including the effect of $5.1 million of letters of credit. The company was in compliance with its covenants.
- The 2017 Net Debt Ratio was 1.1x, compared with 2.1x in 2016.
- The company issued the 2024 notes and used proceeds to redeem its $200.0 million 6.75% notes due 2021 and repay revolving borrowings. The refinancing generated a $14.1 million loss on extinguishment of debt.
- Financing cash outflows were $197.5 million, including $153.0 million of net credit-facility repayments, $91.7 million of share repurchases and $36.8 million of dividends.
- Inventories were $276.8 million and total customer loans were $368.3 million, including $344.7 million of pawn loans and $23.5 million of net consumer loans.
Material changes versus the prior comparable period
- U.S. operations revenue increased 92% to $1.292 billion, largely because 2017 included a full year of Cash America results. U.S. segment pre-tax operating income increased 65% to $244.8 million, but its margin declined to 19% from 22%.
- Latin America revenue increased 17% to $487.3 million, or 18% on a constant-currency basis. Latin America segment pre-tax operating income increased 12% to $116.5 million, with margin declining to 24% from 25%.
- U.S. same-store retail sales declined 1% at legacy First Cash stores and 4% at legacy Cash America stores. Legacy First Cash same-store pawn fees increased 4%, while legacy Cash America same-store pawn fees declined 9%.
- U.S. inventories declined 23% to $216.7 million as management liquidated aged inventory through discounts and jewelry scrapping. Inventory aged over one year declined to 6% from 11%.
- Latin America pawn receivables increased 19% in reported dollars and 14% in constant currency; Latin America inventories increased 26% in reported dollars and 20% in constant currency.
- Consumer lending remains non-core and was de-emphasized. Consumer loan and credit-services revenue increased on a consolidated basis because of the merger but declined 31% on an adjusted U.S. basis excluding the partial-period merger contribution.
- Adjusted net income was $131.2 million, or $2.74 diluted EPS, compared with $85.3 million, or $2.44, in 2016. Adjusted results exclude selected merger costs, debt extinguishment costs and the Tax Act benefit.
Fourth-quarter results and unusual items
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Revenue | $480.2 million | $462.0 million |
| Net income | $67.7 million | $36.7 million |
| Diluted EPS | $1.43 | $0.76 |
Fourth-quarter 2017 net income included a provisional $27.3 million net tax benefit from the Tax Cuts and Jobs Act, comprising a $29.2 million deferred-tax remeasurement benefit partly offset by a $1.9 million tax expense on previously deferred foreign earnings. Management stated that the provisional amount could be adjusted no later than the fourth quarter of 2018.
The company also incurred $9.1 million of merger and acquisition expenses in 2017, compared with $36.7 million in 2016, and recognized the $14.1 million debt-extinguishment loss described above.
Guidance, outlook and management commentary
- Management expected an effective tax rate of approximately 26.5% to 27.5% for fiscal 2018, compared with 16.5% in 2017 after the provisional Tax Act benefit.
- The company planned approximately 85 additional stores in 2018, primarily in Latin America, including its first stores in Colombia.
- Expected 2018 capital expenditures were approximately $27.5 million to $32.5 million, excluding purchases of real estate.
- Management expected cash on hand, operating cash flow and available credit capacity to fund operations and planned expansion for at least the next twelve months.
- Consumer loan revenue was expected to represent approximately 3.5% of consolidated revenue in 2018. The company planned to discontinue fee-based check-cashing services in non-franchised stores beginning in 2018.
- The board increased the annualized dividend to $0.88 per share, or $0.22 quarterly, beginning in the first quarter of 2018. A separate $100 million repurchase program became effective January 31, 2018.
Principal risks, contingencies and unusual exposures
- Extensive and changing regulation of pawn, consumer-loan, credit-services and check-cashing activities could restrict products, fees, licenses or store operations. The CFPB's small-dollar lending rule was subject to reconsideration and potential legislative or litigation challenges as of the filing date.
- Foreign-currency exposure is significant: Latin America contributed 27% of revenue. Management estimated that a one-point change in the 2018 average Mexican peso exchange rate could affect annual earnings by approximately $3.7 million to $4.6 million.
- Gold and precious-metal prices affect collateral values, inventory margins, pawn balances and scrap-jewelry results. Jewelry represented 51% of inventory and 56% of pawn collateral at year-end.
- Goodwill totaled $831.1 million, and impairment could materially reduce earnings if operating performance or valuation assumptions deteriorate.
- Consumer-loan credit losses, CSO guarantee obligations, banking and ACH access, cybersecurity, litigation, licensing, political conditions in Latin America and competition remain material risks.
- The company reported $367.6 million of future operating-lease obligations and a maximum CSO guarantee exposure of $10.1 million at year-end; $0.4 million was accrued for expected losses on outstanding guarantees.
- Routine litigation was not expected by management to have a material adverse effect. The filing text does not identify a material pending legal matter requiring a separate quantified reserve.
Important facts for investors to verify
- Separate sustainable operating earnings from the $27.3 million provisional Tax Act benefit, the $14.1 million debt-extinguishment loss and merger-related costs.
- Assess whether Cash America integration benefits are offset by lower U.S. retail margins, weaker Cash America same-store pawn trends and elevated operating expenses.
- Monitor Latin America performance on a constant-currency basis and the effect of Mexican peso movements on reported earnings.
- Review debt covenants, refinancing requirements, variable-rate exposure and the planned combination of dividends, share repurchases and store expansion.
- Evaluate the carrying value and performance of $831.1 million of goodwill and the sensitivity of jewelry-related assets to gold-price declines.
- Confirm the ultimate tax accounting for the provisional Tax Act amounts and any resulting 2018 adjustments.
- Track regulatory developments affecting consumer lending, pawn transactions, ACH processing and licenses in the U.S. and Latin America.