Firstcash Holdings, Inc. annual report, FY2021

FirstCash Holdings, Inc. 2021 Form 10-K Summary

Business Context and Reporting Period

Annual report for the fiscal year ended December 31, 2021. FirstCash operates pawn stores in the United States and Latin America and, following the December 17, 2021 acquisition of American First Finance (AFF), provides technology-driven retail point-of-sale payment solutions, primarily lease-to-own and retail finance products.

At December 31, 2021, the Company operated 2,825 pawn stores: 1,081 in the U.S. and 1,744 in Latin America. AFF operated through more than 6,500 active merchant partner stores and e-commerce platforms. AFF was consolidated only from December 17, 2021, so reported 2021 results do not represent a full year of combined operations.

Financial Performance and Key Metrics

Metric	2021	2020	Change
Revenue	$1.699 billion	$1.631 billion	4% increase
Net income	$124.9 million	$106.6 million	17% increase
Diluted EPS	$3.04	$2.56	19% increase
Adjusted net income	$161.5 million	$125.2 million	29% increase
Adjusted diluted EPS	$3.94	$3.01	31% increase
EBITDA	$244.1 million	$213.6 million	14% increase
Adjusted EBITDA	$289.6 million	$237.0 million	22% increase
Cash flow from operating activities	$223.3 million	$222.3 million	Approximately flat

Reported net margin was approximately 7.4%. Revenue included $1.134 billion of retail merchandise sales, $475.8 million of pawn loan fees, $57.2 million of wholesale scrap jewelry sales, $22.7 million of leased merchandise income and $9.0 million of interest and fees on finance receivables.

• U.S. pawn: Revenue was $1.075 billion, essentially flat year over year. Segment pre-tax operating income increased 14% to $232.8 million, and the segment operating margin improved to 22% from 19%. Retail merchandise sales increased 3% to $742.4 million, with the merchandise margin improving to 44% from 42%. Pawn loans increased 16% to $256.3 million at year-end.
• Latin America pawn: Revenue increased 7% to $592.3 million, or 2% on a constant-currency basis. Segment pre-tax operating income increased 14% to $121.8 million, and the operating margin improved to 21% from 19%. Pawn loan fees increased 16% reported and 10% on a constant-currency basis.
• AFF: Reported revenue was $31.7 million for the 15 days after acquisition, and the segment recorded a $40.5 million pre-tax operating loss, substantially affected by purchase accounting and an initial allowance for expected credit losses. On a pro forma full-year basis, AFF would have represented approximately 27% of 2021 combined revenue.

Cash Flow, Liquidity, Debt and Capital Allocation

• Operating cash flow was $223.3 million. Free cash flow, as defined by the Company, was $102.1 million, compared with $291.7 million in 2020, primarily reflecting increased pawn-loan funding and finance-receivable investment.
• Investing cash outflows were $744.6 million, including $462.1 million of cash consideration for AFF, $81.8 million for pawn-store acquisitions, $79.5 million for store real estate and $42.0 million for capital expenditures.
• Cash and cash equivalents were $120.0 million, including $57.5 million held by foreign subsidiaries. Working capital was $737.2 million and the current ratio was 2.9 to 1.
• Total outstanding principal debt was $1.309 billion, consisting of $259.0 million under revolving credit facilities and $1.050 billion of senior unsecured notes. The Company reported $267.0 million of available credit-facility capacity, subject to covenants and outstanding letters of credit.
• The Company issued $550.0 million of 5.625% senior unsecured notes due 2030 and had $500.0 million of 4.625% senior unsecured notes due 2028. The consolidated total debt ratio was 3.1 to 1 at year-end.
• The Company paid $47.5 million in dividends and repurchased 688,000 shares for $49.6 million during 2021. In February 2022, the Board declared a $0.30 per-share quarterly dividend and approximately $72.2 million remained available under the share-repurchase authorization.

Material Changes Versus the Prior Comparable Period

• The AFF Acquisition added a new retail POS payment solutions business, approximately $1.46 billion of assets, $503.1 million of goodwill and $305.1 million of identifiable intangible assets at acquisition, and 8.05 million newly issued shares.
• Consolidated assets increased to $3.836 billion from $2.372 billion, while stockholders’ equity increased to $1.808 billion from $1.284 billion, primarily because of the AFF transaction.
• Finance receivables and leased merchandise were new material balance-sheet categories, reported at $181.0 million and $143.9 million net, respectively.
• Provision for loan losses increased to $49.0 million, including a $44.3 million initial allowance for expected lifetime losses on acquired non-purchased-credit-deteriorated finance receivables.
• Merger and acquisition expenses increased to $15.4 million from $1.3 million. The Company also recorded a $17.9 million gain from revaluing AFF contingent consideration.
• Pawn operations continued recovering from pandemic-related disruptions. U.S. and Latin America pawn loans and inventories increased, while scrap jewelry sales declined sharply in both regions.

Guidance, Outlook, Commentary and Risks

• Management expects to add up to 60 de novo full-service pawn locations in Latin America during 2022, subject to construction, licensing, staffing and COVID-19-related conditions.
• Management believes operating cash flow and available revolving credit capacity will satisfy expected liquidity and capital needs over the next 12 months and beyond, but this assessment depends on operating performance, covenant capacity and market conditions.
• Management intends to expand AFF by adding and increasing utilization of merchant partners, increasing e-commerce activity and investing in AFF’s decisioning and servicing technology.
• Key risks include continued COVID-19 effects, inflation and labor shortages, consumer demand and credit performance, foreign-exchange exposure, gold prices, cybersecurity, competition and extensive consumer-finance regulation.
• The CFPB sued Company subsidiaries in November 2021, alleging Military Lending Act violations and violations of a prior CFPB order. The CFPB seeks injunctive relief, borrower redress and civil penalties; the ultimate outcome and potential loss are not determinable from the filing.
• A putative securities class action was filed in January 2022 concerning alleged disclosures related to the CFPB matter. The Company recorded no amount because any loss could not be estimated.
• AFF is subject to additional litigation and regulatory matters, including California class actions and a New Jersey Attorney General subpoena concerning its bank-partner loan program.
• AFF sellers may receive up to $375.0 million of contingent consideration, including up to $300.0 million based on performance and up to $75.0 million based on the Company’s stock price, plus a fixed $25.0 million working-capital payment due at the end of 2022.
• Management and the auditor concluded that internal control over financial reporting was effective, but AFF was excluded from the 2021 assessment because it was acquired late in the year. AFF represented approximately 31% of consolidated assets and 2% of consolidated revenue for 2021.

Most Important Facts for Investors to Verify

• Reconcile reported results with pro forma AFF results, because AFF contributed only 15 days of reported revenue and materially affected purchase-accounting adjustments.
• Review AFF’s credit performance, allowance methodology, delinquency trends and charge-offs, particularly against the $75.6 million year-end finance-receivable allowance.
• Assess leverage, debt-covenant headroom, the $259.0 million revolving balance and potential AFF earnout and working-capital payments.
• Monitor the CFPB lawsuit, securities class action, AFF litigation, New Jersey subpoena and any resulting remediation, penalties or business-practice changes.
• Evaluate whether AFF can retain major merchants and grow originations without deteriorating credit quality; its top five merchant partners represented 16% of pro forma 2021 combined revenue.
• Track pawn-loan demand, inventory turnover, merchandise margins, gold prices and foreign-currency movements, especially the Mexican peso.
• Confirm completion of AFF’s purchase-price allocation and the potential for goodwill or intangible-asset impairment; the filing states that the allocation remained preliminary.