FirstCash Holdings, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. FirstCash operates U.S. and Latin American pawn stores and, following its December 2021 acquisition of American First Finance (AFF), retail point-of-sale payment solutions focused on lease-to-own and other financing products.
- 2,839 pawn stores at September 30, 2022: 1,076 in the U.S. and 1,763 in Latin America.
- AFF served approximately 8,600 active retail merchant partner locations.
- The AFF acquisition materially affects year-over-year comparability because AFF was not consolidated in 2021.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $672.1 million | $399.7 million | $2.0 billion | $1.2 billion |
| Net revenue | $323.3 million | $233.1 million | $915.5 million | $690.9 million |
| Income before taxes | $75.4 million | $44.3 million | $222.0 million | $129.4 million |
| Net income | $59.3 million | $33.4 million | $173.4 million | $95.5 million |
| Diluted EPS | $1.26 | $0.82 | $3.64 | $2.34 |
| Operating cash flow | Not separately provided | Not separately provided | $325.8 million | $137.9 million |
- Q3 revenue increased 68%, net income increased 78%, and diluted EPS increased 54%. For the first nine months, revenue increased 65%, net income increased 82%, and diluted EPS increased 56%.
- Q3 revenue included $300.9 million of retail merchandise sales, $145.7 million of pawn loan fees, $158.1 million of leased merchandise income, $48.8 million of AFF finance-receivable interest and fees, and $18.6 million of wholesale scrap jewelry sales.
- Q3 segment pre-tax operating income was $70.5 million for U.S. pawn, $36.6 million for Latin America pawn and $20.1 million for AFF. Segment operating margins were 23%, 22% and approximately 10%, respectively, based on reported segment revenue.
- U.S. pawn earning assets increased 16% year over year to $484.0 million; Latin American pawn earning assets increased 16% to $215.7 million.
- Q3 U.S. pawn same-store retail sales and pawn fees increased 16% and 25%, respectively. Latin American same-store retail sales increased 5%, or 7% on a constant-currency basis, and pawn fees increased 10%, or 12% on a constant-currency basis.
- Reported Q3 and nine-month adjusted EBITDA were $108.8 million and $306.6 million, respectively. These are non-GAAP measures and include adjustments for AFF purchase accounting and other items.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $100.6 million at September 30, 2022, compared with $120.0 million at December 31, 2021.
- Working capital was $810.9 million and the current ratio was 3.5:1.
- Total long-term debt was $1.37 billion, comprising $338.0 million drawn on revolving facilities and $1.04 billion of senior unsecured notes. Debt increased from $1.29 billion at December 31, 2021, primarily reflecting AFF acquisition financing.
- The amended revolving credit facility has a $590 million commitment, matures in August 2027 and had $248.8 million available at quarter-end after $3.2 million of letters of credit. The Company was in compliance with its debt covenants.
- The nine-month cash flow profile included $325.8 million of operating cash flow, $238.7 million of investing cash outflow and $107.6 million of financing cash outflow. Free cash flow was $171.8 million.
- The consolidated total debt ratio under the senior notes was 2.8:1 at September 30, 2022.
Material changes versus the prior comparable period
- AFF added $206.9 million of Q3 revenue and $590.8 million of nine-month revenue, but purchase accounting reduced reported AFF earnings through amortization of acquired finance-receivable, leased-merchandise and intangible-asset fair value adjustments.
- The Company recorded a $19.8 million Q3 gain and an $82.8 million nine-month gain from revaluing AFF contingent acquisition consideration. The liability was $26.8 million at September 30, 2022, versus $109.5 million at December 31, 2021.
- Interest expense increased 130% in Q3 and 127% for the nine months, reflecting higher debt balances, higher interest rates and increased credit-facility borrowings.
- Provision for lease losses was $31.9 million in Q3 and $109.8 million for the nine months; provision for loan losses was $32.0 million and $83.5 million, respectively. These costs relate primarily to AFF and were not present in the 2021 comparative periods.
- Retail merchandise margins declined in the U.S. to 41% from 44% in Q3 and for the nine months, while Latin American margins declined modestly to 36% from 37% for the nine months.
- The Company repurchased 2.035 million shares for $144.7 million during the first nine months and paid $44.4 million in dividends, compared with $49.6 million of repurchases and $35.4 million of dividends in the prior-year period.
Outlook, risks, contingencies and unusual items
- Management expected to add up to 60 full-service pawn locations during 2022. It also expected AFF growth to require additional leased merchandise purchases, finance-receivable funding, collection activity, technology investment and merchant-support spending.
- Management stated that operating cash flow and available revolving-credit capacity should be adequate for expected liquidity and capital needs over the next 12 months and beyond.
- The Board declared a $0.33 per-share fourth-quarter dividend payable November 30, 2022. In October 2022, it authorized an additional $100 million share-repurchase program; approximately $27.5 million remained under the prior program at September 30.
- Key risks include AFF integration and performance, credit and lease losses, rising interest rates, inflation and labor costs, consumer spending, foreign-currency movements, regulatory changes and litigation.
- The CFPB lawsuit alleges Military Lending Act violations in pawn transactions and seeks injunctions, borrower redress and civil penalties. A shareholder securities class action, a derivative action and California litigation involving AFF also remained pending. Management had accrued no amounts for these proceedings because potential losses could not be estimated.
- The Company noted no material changes to its previously disclosed risk factors or market-risk exposures. Disclosure controls were determined to be effective, while AFF internal-control documentation and testing remained in process.
Important facts for investors to verify
- Separate AFF organic operating performance from purchase-accounting effects and the nonrecurring $82.8 million contingent-consideration gain.
- Monitor finance-receivable and leased-merchandise delinquency, charge-offs and allowance adequacy; AFF carried $78.4 million of loan-loss allowance and $77.6 million of lease-loss allowance at quarter-end.
- Assess leverage, covenant headroom, variable-rate exposure and the effect of further interest-rate increases.
- Review the CFPB, shareholder and California legal proceedings, including possible financial, regulatory or operational consequences.
- Evaluate whether pawn-loan demand, inventory levels, retail margins and AFF merchant growth remain sustainable amid inflation and changing consumer credit conditions.