FirstCash Holdings, Inc. 10-Q Summary
Business context and reporting period
FirstCash operates pawn stores in the United States and Latin America and, following its December 17, 2021 acquisition of American First Finance (AFF), provides retail point-of-sale lease-to-own and financing solutions. The filing covers the unaudited quarter and six months ended June 30, 2022, compared with the corresponding 2021 periods.
At June 30, 2022, the Company operated 2,834 pawn stores and AFF served approximately 7,600 active merchant partner locations. AFF results are included in 2022 but not in the comparable 2021 periods, which significantly affects year-over-year comparisons.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total revenue | $647.6 million | $389.6 million | $1,307.5 million | $797.5 million |
| Net revenue | $301.0 million | $224.2 million | $592.2 million | $457.8 million |
| Income before taxes | $109.6 million | $38.8 million | $146.6 million | $85.1 million |
| Net income | $86.1 million | $28.4 million | $114.1 million | $62.1 million |
| Diluted EPS | $1.81 | $0.70 | $2.38 | $1.52 |
| Operating cash flow | Not separately provided in the filing excerpt | Not separately provided in the filing excerpt | $226.8 million | $113.7 million |
Reported net revenue margin was approximately 46.5% in the second quarter and 45.3% for the six-month period. Net income margin was approximately 13.3% in the second quarter and 8.7% for the six-month period.
- Second-quarter revenue increased 66%, net income increased 203%, and diluted EPS increased 159% versus the prior-year quarter.
- Six-month revenue increased 64%, net income increased 84%, and diluted EPS increased 57% versus the prior-year period.
- Pawn revenue remained the core business: second-quarter U.S. pawn revenue was $298.8 million and Latin America pawn revenue was $157.4 million.
- AFF contributed second-quarter revenue of $191.4 million and reported segment pre-tax operating income of $12.0 million. Excluding purchase-accounting effects, AFF adjusted segment pre-tax operating income was $25.2 million.
- Second-quarter retail POS payment solutions revenue included $147.7 million of leased merchandise income and $43.7 million of interest and fees on finance receivables.
Cash flow, liquidity, debt and capital allocation
- Six-month operating cash flow was $226.8 million, compared with $113.7 million in 2021.
- Investing cash flow used $136.4 million, including $32.3 million of net pawn-loan funding, $23.5 million of net finance-receivable funding, $19.7 million for equipment and improvements, and $58.6 million for store real estate.
- Financing cash flow used $102.0 million, including $87.7 million for treasury-stock purchases and $28.8 million of dividends, partly offset by $15.0 million of net credit-facility borrowings.
- Cash and cash equivalents were $110.4 million at June 30, 2022. Working capital was $728.7 million and the current ratio was 3.1 to 1.
- Total long-term debt was $1.309 billion, comprising $274.0 million under revolving credit facilities and $1.035 billion of senior unsecured notes. The principal amount of senior notes outstanding was $1.050 billion.
- The $500.0 million U.S. credit facility had $274.0 million drawn, $3.2 million of letters of credit outstanding and $222.8 million available, subject to covenants. Including the Mexican facility, management reported $252.9 million of total available and unused revolving capacity.
- The Company was in compliance with debt covenants. Its consolidated total debt ratio was 2.7 to 1 at June 30, 2022.
- The Company repurchased 1.349 million shares for $92.7 million during the first six months and had approximately $79.5 million remaining under its active authorization. The Board declared a third-quarter dividend of $0.33 per share payable August 26, 2022.
Material changes versus the prior comparable period
- The AFF acquisition added the retail POS payment solutions segment, finance receivables, leased merchandise and significant goodwill and intangible assets. Total assets increased to $3.797 billion from $2.456 billion at June 30, 2021.
- Pawn performance improved as demand recovered toward pre-pandemic levels. Second-quarter U.S. pawn fees increased 31%, U.S. pawn segment pre-tax operating income increased 36%, and Latin America pawn fees increased 8%.
- U.S. pawn segment operating margin increased to 21% from 19%; Latin America’s increased to 21% from 20%. U.S. retail merchandise margins declined to 41% from 45%, while Latin America remained at 37%.
- Interest expense increased to $16.2 million in the quarter and $32.5 million for six months, primarily due to higher debt, higher average revolver borrowings and higher interest rates.
- Depreciation and amortization increased materially because of AFF purchase-accounting amortization, including $14.2 million of identified-intangible amortization in the quarter and $28.4 million for six months.
- The Company recognized a $65.6 million second-quarter and $63.0 million six-month gain from revaluing AFF contingent acquisition consideration. Management indicated that the earnout is expected to be at the low end of the payout scale because of a macro-driven slowdown in AFF origination activity.
- Management’s adjusted six-month net income was $108.0 million, or $2.26 per diluted share, versus reported GAAP net income of $114.1 million, or $2.38 per diluted share. The filing identifies AFF purchase-accounting adjustments and the contingent-consideration gain as major reconciling items.
Guidance, outlook, commentary and risks
- Management expects to add up to 60 full-service pawn locations in 2022, subject to suitable markets, real estate, licensing, staffing and construction conditions.
- Management believes operating cash flow and available revolving credit capacity will be adequate for expected needs over the next 12 months and beyond, including growth investments, debt service, dividends and repurchases.
- Key risks include inflation, wage and operating-cost increases, rising interest rates, labor shortages, COVID-19 effects, weaker consumer spending, foreign-currency movements, gold-price changes and regulatory developments affecting pawn, lease-to-own and finance operations.
- Credit and lease-loss provisions were significant at AFF: second-quarter provision for lease losses was $38.0 million and provision for loan losses was $26.8 million; six-month amounts were $77.9 million and $51.5 million, respectively.
- At June 30, 2022, AFF finance receivables were $125.6 million net of a $73.9 million allowance, and leased merchandise was $118.9 million net of a $69.1 million allowance.
- Material legal matters include the CFPB lawsuit alleging Military Lending Act violations, a putative shareholder securities class action, a shareholder derivative action filed in July 2022, and California litigation involving AFF’s lease and finance agreements. The Company had not accrued amounts for matters where loss could not be reasonably estimated.
- The New Jersey Attorney General closed its investigation of AFF in May 2022 without further action.
- Management reported effective disclosure controls as of June 30, 2022. AFF’s internal-control documentation and testing were still being incorporated into the Company’s annual assessment.
Most important facts for investors to verify
- Separate the organic pawn-business trends from the acquisition-driven increase in consolidated revenue and earnings.
- Assess AFF’s sustainable profitability excluding purchase-accounting amortization and compare it with the reported $12.0 million second-quarter segment pre-tax income and $25.2 million adjusted amount.
- Monitor AFF origination growth, delinquency, charge-offs, lease losses and the adequacy of the $73.9 million finance-receivable and $69.1 million lease-loss allowances.
- Evaluate leverage, interest-rate exposure and covenant headroom given $1.309 billion of carrying-value debt and a 2.7-to-1 consolidated total debt ratio.
- Consider the nonrecurring $65.6 million contingent-consideration revaluation gain when assessing reported net income and EPS.
- Track the CFPB, shareholder and California litigation, including potential regulatory penalties, customer redress, damages, legal costs and effects on AFF operations.
- Verify whether operating cash flow remains sufficient to fund loan and lease growth, real-estate purchases, dividends, repurchases and debt service.