FirstCash, Inc. 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, with quarterly data including the fourth quarter. The filing was dated February 4, 2019. FirstCash operated 2,473 company-owned locations across the U.S. and Latin America, with pawn operations representing approximately 97% of revenue.
Business context
- Core activities are pawn lending, retail sales of forfeited and purchased merchandise, and wholesale scrap jewelry sales.
- U.S. operations generated 69% of revenue and Latin America generated 31%.
- At year-end, the company had 2,456 pawn stores and 17 stand-alone U.S. consumer loan stores.
- The company acquired 393 pawn stores and opened 52 new Latin American stores during 2018, including 366 acquired Mexican stores.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $1.781 billion | $1.780 billion | Flat |
| Net revenue | $966.8 million | $947.5 million | +2% |
| Net income | $153.2 million | $143.9 million | +6% |
| Diluted EPS | $3.41 | $3.00 | +14% |
| Adjusted net income | $158.3 million | $131.2 million | +21% |
| Adjusted diluted EPS | $3.53 | $2.74 | +29% |
| Pre-tax profit margin | 11.5% | 9.7% | +180 bps |
| Net income margin | 8.6% | 8.1% | +50 bps |
| Operating cash flow | $243.4 million | $220.4 million | +10% |
| Free cash flow | $217.9 million | $235.1 million | -$17.2 million |
Revenue composition was approximately 61% retail merchandise sales, 30% pawn loan fees and 6% wholesale scrap jewelry sales. Consumer loan and credit services fees represented approximately 3% of revenue.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $71.8 million, compared with $114.4 million at year-end 2017.
- Working capital was $656.8 million; the current ratio was 5.9 to 1.
- Total debt principal was $595.0 million, consisting of $295.0 million drawn under the revolving credit facility and $300.0 million of 5.375% senior unsecured notes due 2024.
- The amended revolving facility increased commitments to $425.0 million and maturity to October 2023; $126.8 million remained available at year-end.
- Net debt to adjusted EBITDA was 1.8 to 1, compared with 1.1 to 1 in 2017. The company reported compliance with its debt covenants.
- Cash used for acquisitions, capital expenditures and real estate purchases totaled approximately $159.2 million in investing activities. Share repurchases totaled $274.5 million and dividends paid totaled $40.9 million.
Fourth-quarter results
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Total revenue | $481.2 million | $480.2 million |
| Net revenue | $262.0 million | $249.1 million |
| Net income | $48.1 million | $67.7 million |
| Diluted EPS | $1.09 | $1.43 |
Fourth-quarter net income declined despite modestly higher revenue and net revenue. The filing does not provide a single summarized explanation for the full year-over-year quarterly decline; investors should review the quarterly expense, tax and segment details.
Material changes versus the prior comparable period
- Core pawn revenue increased $54.8 million, or 4%, while total revenue remained essentially flat because U.S. scrap jewelry and consumer lending revenue declined.
- U.S. revenue decreased 5% to $1.224 billion, but segment pre-tax operating margin improved to 20% from 19%, supported by better retail merchandise margins and lower operating expenses.
- Latin America revenue increased 14% to $556.7 million, or 16% on a constant-currency basis. Segment pre-tax operating income increased 10%, while margin declined to 23% from 24% because of recently acquired smaller-format stores.
- Consumer loan and credit services revenue decreased 27% to $56.3 million. The company closed or discontinued consumer lending at numerous U.S. and Mexican locations and exited unsecured consumer lending in Latin America effective June 30, 2018.
- Wholesale scrap jewelry revenue decreased 23% to $107.8 million, primarily because 2017 included unusually high liquidation activity in legacy Cash America stores.
- Retail merchandise gross margin improved in the U.S. to 37% from 35%, while Latin American retail margin declined to 36% from 37%.
- Goodwill increased to $917.4 million from $831.1 million, primarily from 2018 acquisitions. No goodwill impairment was recorded.
- The company repurchased 3.343 million shares, reducing outstanding shares and contributing to EPS growth.
Guidance, outlook and unusual items
- Management expected to add approximately 80 to 85 full-service pawn locations in 2019, primarily in Mexico, including approximately 15 in Guatemala and 10 in Colombia.
- Expected 2019 purchases of furniture, fixtures, equipment and improvements were approximately $30 million to $35 million, excluding discretionary real estate purchases.
- Management stated that cash, operating cash flow and available credit should fund current operations and planned 2019 expansion.
- The Ohio Fairness in Lending Act becomes applicable to relevant loans and credit extensions beginning April 27, 2019. It caps rates and loan costs and substantially restricts traditional consumer lending and credit services products.
- The company reported $41.7 million of 2018 Ohio consumer lending and credit services revenue and warned that one-third or more of its 113 Cashland stores in Ohio could become unprofitable and potentially close.
- A fourth-quarter 2018 fixed-asset impairment charge of approximately $1.5 million was recorded for consumer loan operations due to expected regulatory effects.
- Adjusted results exclude acquisition expenses, consumer lending asset impairment and the 2018 tax benefit related to finalizing Tax Act estimates. Adjusted measures are non-GAAP and should not replace GAAP results.
- Gold forward commitments covered 18,000 ounces for January-June 2019 at a weighted-average price of $1,258 per ounce and an additional 18,000 ounces for July-December 2019 at $1,300 per ounce.
Principal risks and contingencies
- Extensive and changing regulation of pawn, consumer loan and credit services operations in the U.S. and Latin America, including licensing, fee limits, disclosures and reporting.
- Ohio regulatory changes may reduce consumer lending revenue, impair store economics and require closures.
- Foreign exchange exposure is significant; management estimated that a one-point change in the average Mexican peso exchange rate could affect 2019 annual earnings by approximately $3.4 million to $4.3 million.
- Gold price declines could reduce jewelry inventory values, collateral values, pawn balances and merchandise margins. Jewelry represented 51% of inventory and approximately 56% of pawn collateral at year-end.
- Debt service, variable interest rates, banking relationships, access to capital and covenant compliance could affect liquidity and expansion capacity.
- Goodwill totaled $917.4 million, creating potential exposure to future impairment charges.
- Cybersecurity, data privacy, litigation, regulatory enforcement, competition, economic weakness and political or operational risks in Latin America could materially affect results.
Investor verification priorities
- Verify the pace and profitability of the 2018 Mexican acquisitions and the integration performance of the 366 acquired stores.
- Assess the post-April 2019 effect of the Ohio Act on Cashland revenue, margins, store closures and replacement products.
- Reconcile reported GAAP earnings with adjusted net income and adjusted EPS, including acquisition costs, impairment and tax adjustments.
- Monitor leverage, variable-rate debt, available revolver capacity and the sustainability of share repurchases and dividends.
- Track Latin American same-store growth on both reported and constant-currency bases, especially given peso and other currency exposure.
- Evaluate sensitivity to gold prices, jewelry collateral concentration and the company’s forward gold delivery commitments.
- Confirm the adoption effects of the forthcoming lease and credit-loss accounting standards, which the filing states may materially increase recognized lease assets and liabilities.