First Cash Financial Services, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; filed May 9, 2016. The interim financial statements are unaudited. The filing entity is First Cash Financial Services, Inc. The company operated 1,273 locations across the United States, Mexico, Guatemala and El Salvador, with approximately 97% of revenue generated by pawn operations.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $183.2 million | $176.0 million | 4% |
| Net revenue | $101.9 million | $98.8 million | 3% |
| Income before taxes | $19.7 million | $24.4 million | (19%) |
| Net income | $13.2 million | $16.8 million | (22%) |
| Diluted EPS | $0.47 | $0.59 | (20%) |
| Operating cash flow | $25.1 million | $27.4 million | (9%) |
| Adjusted EBITDA | $29.2 million | $32.7 million | (11%) |
- Retail merchandise sales rose 8% to $118.8 million, and pawn loan fees rose 6% to $51.4 million.
- Consumer loan and credit services fees declined 25% to $5.7 million; wholesale scrap jewelry revenue declined 22% to $7.3 million.
- Net income margin decreased to approximately 7.2% from 9.5%; retail merchandise gross margin declined to 37% from 38%, and store-level operating margin declined to 23% from 24%.
- Cash and cash equivalents were $54.2 million at March 31, 2016, compared with $87.0 million at December 31, 2015 and $75.8 million at March 31, 2015.
- Working capital was $240.5 million and the current ratio was 5.30:1. Customer loans and pawn fee receivables totaled $144.7 million, and inventories totaled $90.7 million.
- Debt consisted of $196.0 million of senior unsecured notes and $40.0 million drawn under the revolving credit facility. The $210.0 million revolving facility had $170.0 million available, while a $10.0 million Mexico facility was undrawn. Total indebtedness, excluding debt issuance costs, was $240.0 million.
- Net cash used in investing activities was $27.1 million, including $26.0 million for acquisitions and $6.3 million of capital expenditures. Net cash used in financing activities was $28.1 million, including $18.0 million of net revolving-credit repayments, $6.5 million of acquired debt repayment and $3.5 million of dividends.
Material Changes Versus the Prior Comparable Period
- Core pawn revenue increased, but reported growth was reduced by a 21% decline in the average Mexican peso exchange rate. On a constant-currency basis, total revenue increased 14%, Latin American revenue increased 28%, and consolidated pawn loans increased 19%.
- Latin America pawn loans increased 20% on a reported basis and 37% on a constant-currency basis; U.S. same-store pawn receivables declined 4% on a constant-currency basis.
- Consumer lending revenue fell because of weaker demand, regulatory restrictions and the closure of 17 stand-alone consumer finance stores. Management expected to close approximately 12 additional stores during the second and third quarters of 2016.
- Administrative expenses increased 28% to $17.7 million, reflecting the expanded store base and acquisition-related support costs. Approximately $0.4 million of acquisition and integration costs were recognized in the quarter.
- The company acquired 166 pawn stores in Mexico, 13 in El Salvador and one in the United States, and opened 20 new pawn stores in Mexico. Total stores increased 26% year over year.
- The company adopted new debt issuance cost presentation guidance, reducing other non-current assets and senior unsecured notes by $4.0 million at March 31, 2016. Prior-period information was also revised for tax-related errors and reclassified amounts; management stated the errors were not material to previously issued financial statements.
Guidance, Outlook, Risks and Unusual Items
- Management expected to add approximately 210 to 225 stores in fiscal 2016, with approximately 200 additions already completed during the first quarter, and anticipated administrative cost synergies from the Latin America acquisition beginning in the second half of 2016.
- Management expected an effective tax rate of approximately 32% to 33% for the remainder of 2016 and believed available cash, operating cash flow and credit capacity would fund operations and planned expansion for at least the next twelve months.
- On April 28, 2016, the company announced an all-stock merger of equals with Cash America International. The transaction was expected to close in the second half of 2016, subject to stockholder, regulatory and other customary approvals. Cash America shareholders would receive 0.84 First Cash shares per Cash America share; ownership was expected to be approximately 58% for First Cash shareholders and 42% for Cash America shareholders.
- The merger requires lender consent and may require amendment or refinancing of the revolving credit facility. The company stated that financing on favorable terms was not assured.
- Merger-related costs, integration difficulties, failure to obtain approvals, potential termination fees of up to $30 million under specified circumstances and failure to realize anticipated synergies were identified as material risks. Share repurchases were suspended pending completion of the merger, while quarterly dividends continued.
- Principal operating risks include foreign-currency volatility, regulatory changes affecting pawn and consumer lending, consumer demand and repayment trends, gold prices, collateral values, credit losses, competition, acquisitions and integration, interest rates, liquidity and cybersecurity.
- Disclosure controls and procedures were determined to be effective as of March 31, 2016, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile reported growth with constant-currency growth and assess the continuing effect of the Mexican peso on revenue, earnings and net assets.
- Evaluate whether the Latin America acquisition produces the expected earnings contribution and administrative cost synergies after integration.
- Monitor consumer lending store closures, regulatory restrictions and the decline in consumer loan and credit services revenue.
- Review liquidity after acquisition spending, debt repayments, dividends and the proposed merger, including the required amendment or refinancing of the revolving facility.
- Assess merger approval, lender-consent, regulatory, integration and termination-fee risks, as well as the effect of merger expenses on reported earnings.
- Consider the decline in operating cash flow, adjusted EBITDA and margins despite higher revenue, and verify the sustainability of the planned store expansion.