Firstcash Holdings, Inc. quarterly report, Q3 FY2016

FirstCash, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2016. The interim financial statements are unaudited. Results include Cash America International, Inc. from September 2, 2016, following completion of the merger on September 1, 2016. The combined company operated 2,081 locations across the United States, Mexico, Guatemala and El Salvador at quarter-end.

Financial Performance and Position

Metric	Three months ended Sept. 30, 2016	Three months ended Sept. 30, 2015	Nine months ended Sept. 30, 2016	Nine months ended Sept. 30, 2015
Total revenue	$261.2 million	$169.5 million	$626.3 million	$513.2 million
Net revenue	$147.4 million	$95.4 million	$350.7 million	$288.3 million
Net income (loss)	$(1.4) million	$11.2 million	$23.4 million	$41.3 million
Diluted EPS	$(0.04)	$0.40	$0.77	$1.45
Operating cash flow	Not provided for the quarter	Not provided for the quarter	$40.5 million	$65.1 million

Third-quarter revenue increased 54%; nine-month revenue increased 22%. On a constant-currency basis, the increases were 62% and 31%, respectively.
Retail merchandise sales increased 45% in the quarter and 20% year to date. Pawn loan fees increased 59% in the quarter and 25% year to date.
Consumer loan and credit-services fees increased 50% in the quarter but decreased 1% year to date. Consumer lending represented approximately 4% of quarterly revenue and 3% of year-to-date revenue.
Retail merchandise gross margin was 39% in the quarter and 38% year to date. Scrap jewelry gross margin was 10% in the quarter and 14% year to date.
Store-level operating margin was 23% in both the quarter and year-to-date period, compared with 24% in the respective 2015 periods.
GAAP net margin was approximately negative 0.5% in the quarter and 3.7% year to date, compared with 6.6% and 8.0%, respectively, in the prior comparable periods.
Management reported adjusted net income of $20.1 million, or $0.58 per diluted share, for the quarter and $47.9 million, or $1.58 per diluted share, for the nine months. These are non-GAAP measures that exclude specified acquisition, restructuring and equity-sale items.
Adjusted EBITDA was $42.3 million for the quarter and $101.8 million year to date. Trailing-twelve-month adjusted EBITDA was $139.4 million versus $140.4 million in the prior-year period.

Liquidity, Capital Resources and Debt

September 30, 2016 cash and cash equivalents were $83.4 million, compared with $87.0 million at December 31, 2015.
Working capital was $817.6 million; the current ratio was 5.85 to 1. Total equity exceeded liabilities by a ratio of 1.7 to 1.
Operating cash flow of $40.5 million was offset by $89.0 million of investing cash outflows and supplemented by $50.5 million of financing cash inflows, resulting in a $3.6 million decrease in cash before foreign-exchange effects.
Investing outflows included $31.5 million of net loan funding, $23.4 million of capital expenditures, $28.8 million for pawn-store acquisitions and $8.3 million of cash merger consideration, net of cash acquired.
The amended 2016 Credit Facility increased commitments from $210 million to $400 million and was extended to September 2021. Borrowings were $360.0 million, with $5.956 million of letters of credit and $34.0 million of remaining availability at quarter-end. The reported weighted-average interest rate was 3.06% based on 30-day LIBOR.
The company also had $200 million principal amount of 6.75% senior unsecured notes due April 2021, carried at $196.4 million after debt issuance costs.
A Mexico credit facility provided an additional $10.0 million of undrawn availability through December 2017.
Management stated that available cash, credit capacity, operating cash flow and working capital should be sufficient for anticipated requirements for at least the next twelve months.

Material Changes Versus Prior Comparable Period

The Cash America merger issued approximately 20.2 million FirstCash shares and created a combined company with more than 2,000 locations. Former FirstCash shareholders owned approximately 58% and former Cash America shareholders approximately 42% immediately after closing.
The merger materially expanded the balance sheet: total assets were $2.28 billion at September 30, 2016, versus $752.9 million at December 31, 2015. Pawn loans increased to $373.2 million from $117.6 million at year-end 2015, and inventories increased to $332.9 million from $93.5 million.
Merger and acquisition expenses were $29.4 million in the quarter and $33.9 million year to date, compared with zero and $1.2 million, respectively, in the 2015 comparable periods. These charges were the primary reason for the quarterly GAAP loss and lower year-to-date earnings.
Operating cash flow declined 38% year to date, while net debt financing increased substantially to fund the merger, debt refinancing and expansion.
The Mexican peso weakened 14% on average in the quarter and 18% on average year to date, reducing reported U.S.-dollar revenue and net assets from Latin American operations. Management estimated that Latin American revenue would have been $13.3 million higher in the quarter and $48.2 million higher year to date at prior-year exchange rates.
The company began paying dividends in 2016. Dividends declared were $0.375 per share through the first nine months, and management announced a planned quarterly dividend of $0.19 beginning in the fourth quarter.

Guidance, Outlook, Risks and Unusual Items

Management expected the effective tax rate for the remainder of 2016 to be approximately 34% to 35%.
Excluding the merger and unanticipated acquisitions, management expected to add approximately 220 to 225 stores during 2016; 217 additions had occurred through the first nine months.
Management anticipated that the merger would be accretive to adjusted earnings per share in 2017, while acknowledging expected near-term dilution and substantial remaining integration costs.
Additional merger-related integration, severance, retention, legal, systems, facility and restructuring costs were expected through the fourth quarter of 2016 and 2017; the amount and timing were uncertain.
The company assumed 53,000 ounces of forward gold delivery commitments through December 31, 2017. Management stated that expected scrap-gold volumes should be sufficient to satisfy the commitments.
A lawsuit concerning Cash America’s former 2018 senior notes and the Enova spin-off resulted in an adverse summary judgment in September 2016. The company filed an appeal and included an assumed contingent liability in the merger purchase-price allocation; the filing does not provide a clear final cash exposure.
The company must dispose of its Enova investment by September 15, 2017. The investment had a September 30, 2016 fair value of $54.8 million, and subsequent to quarter-end the company sold approximately 1.2 million additional shares.
New Military Lending Act rules effective October 3, 2016 expanded restrictions to certain pawn and other secured products offered to military members and dependents. Proposed Consumer Financial Protection Bureau rules could increase compliance costs and restrict consumer lending products, although pawn loans were excluded from the proposal as described.
Key ongoing risks include merger integration, foreign-currency movements, gold prices, interest rates, regulatory changes, consumer-loan credit losses, litigation, tax liabilities related to the Enova spin-off, and compliance with debt covenants.

Important Facts for Investors to Verify

Reconcile reported GAAP earnings with management’s non-GAAP adjusted earnings and assess whether merger costs and expected integration charges are genuinely nonrecurring.
Review the final purchase-price allocation for Cash America, including goodwill, intangible assets and assumed contingent liabilities, which remained preliminary at September 30, 2016.
Monitor leverage, interest expense, covenant headroom and the $34.0 million of reported availability under the principal revolving facility.
Assess whether operating cash flow can support loan growth, capital expenditures, acquisitions, dividends and remaining merger costs without additional borrowing.
Evaluate the sustainability of same-store performance after the full Cash America store base is included and distinguish acquisition-driven growth from organic growth.
Track Mexican peso exposure, gold-price sensitivity and the value and required disposal schedule of the Enova investment.
Follow the Senior Notes Lawsuit appeal, potential merger-related liabilities and the tax and indemnification risks associated with the Enova spin-off.
Confirm the eventual impact of Military Lending Act and CFPB regulatory developments on consumer lending revenue, compliance costs and store operations.