FirstCash, Inc. 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended June 30, 2017, filed August 7, 2017. The company operated 2,097 pawn and consumer-loan locations across the United States, Mexico, Guatemala and El Salvador. Results include Cash America International operations following the September 1, 2016 merger, which materially limits direct comparability with 2016.
Pawn operations represented 95% of consolidated revenue for the six months ended June 30, 2017. The company continued to deemphasize consumer lending because of increasing regulatory constraints.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $416.6 million, up 129% | $864.2 million, up 137% |
| Net revenue | $224.4 million | $467.3 million |
| Income before taxes | $21.5 million, up 24% | $73.7 million, up 100% |
| Net income | $15.2 million, up 31% | $47.9 million, up 93% |
| Diluted EPS | $0.32, versus $0.41 | $0.99, versus $0.88 |
| Adjusted diluted EPS | $0.52, versus $0.51 | $1.20, versus $0.98 |
| Operating cash flow | Not separately presented | $102.8 million, versus $39.6 million |
Net revenue margin was approximately 53.9% for the quarter and 54.1% year to date. Net income margin was approximately 3.7% for the quarter and 5.5% year to date. Adjusted net income was $25.1 million for the quarter and $58.2 million year to date; these are non-GAAP measures.
- Revenue growth was primarily merger-driven. Six-month revenue included retail merchandise sales of $503.8 million, pawn loan fees of $250.9 million, consumer loan and credit services fees of $39.7 million, and wholesale scrap jewelry sales of $69.8 million.
- Cash and cash equivalents were $91.4 million at June 30, 2017. Working capital was $731.6 million and the current ratio was 6.85 to 1.
- Pawn loans were $353.4 million, consumer loans net were $24.2 million, and inventories were $301.4 million.
- Operating cash flow was $102.8 million; investing activities provided $15.4 million, including $34.0 million of net loan repayments; financing activities used $122.9 million.
- Total debt at principal amounts was $397.0 million, consisting of $300.0 million of senior notes and $97.0 million drawn under the revolving credit facility. Net debt was $305.6 million and the reported Net Debt Ratio was 1.22 to 1.
Material Changes Versus the Prior Comparable Period
- The Cash America merger increased the store base by approximately 65% year over year and drove most of the increases in U.S. revenue, pawn receivables and inventories.
- U.S. segment pre-tax operating income increased 218% in the quarter and 240% year to date, but the U.S. pre-tax operating margin declined to 17% from 20% in the quarter and to 20% from 22% year to date, reflecting lower historical margins at Cash America stores.
- U.S. retail merchandise gross margin declined to 35% from 38% in the quarter and to 36% from 39% year to date. U.S. scrap jewelry margin declined to 3% from 16% in the quarter and to 5% from 18% year to date.
- Latin America revenue increased 14% in the quarter and 10% year to date, or 17% and 18%, respectively, on a constant-currency basis. Latin America segment pre-tax operating margin was 24% in the quarter and 23% year to date, versus 26% and 24%.
- Administrative expenses increased 84% in the quarter and 88% year to date, while depreciation and amortization increased substantially because of merger-related assets and acquired intangible amortization. Administrative expense nevertheless declined to 7% of revenue from 9%.
- Diluted shares increased approximately 71% because of the merger, limiting per-share growth despite higher net income.
- Comprehensive income benefited from foreign-currency translation gains of $13.3 million in the quarter and $36.3 million year to date, versus translation losses in the prior-year periods.
Debt, Liquidity, Guidance and Unusual Items
- On May 30, 2017, the company issued $300.0 million of 5.375% senior notes due 2024. Proceeds were used to redeem the $200.0 million of 6.75% notes due 2021, repay revolving debt and fund related costs.
- The redemption generated a $14.1 million pre-tax loss on extinguishment of debt, including premiums and write-off of unamortized issuance costs.
- The $400.0 million primary revolving credit facility was extended to September 2, 2022. At quarter-end, $298.5 million remained available after $97.0 million of borrowings and a $4.5 million letter of credit. A separate Mexico facility provided $10.0 million of additional availability and had no borrowings.
- Management expected to add approximately 65 to 85 stores during 2017, primarily in Latin America, and forecast 2017 capital expenditures of approximately $32 million to $37 million. Six-month capital expenditures were $17.4 million.
- Management stated that cash, available credit and expected operating cash flow should be sufficient for operations and planned expansion for at least the next twelve months.
- The company repurchased 518,000 shares for $26.3 million during the first six months and had $83.7 million remaining under its current $100 million authorization. The quarterly dividend was $0.19 per share.
- The company had commitments to deliver 12,300 ounces of gold through December 31, 2017 and expected its historical scrap-gold volumes to satisfy those commitments.
- Risks include regulatory changes affecting pawn and consumer lending, foreign-currency movements, gold prices, interest rates, inventory aging, lower Cash America store margins, integration execution and seasonality. The company could not predict the impact of a CFPB arbitration rule issued after quarter-end.
- Management indicated that merger and integration expenses would continue during 2017 and 2018. The purchase price allocation for the merger remained subject to finalization within the applicable measurement period.
Investor Verification Items
- Separate merger-driven growth from organic same-store performance, particularly in U.S. pawn receivables, retail sales and inventories.
- Track whether Cash America store margins and inventory aging improve toward legacy First Cash levels.
- Reconcile adjusted net income, adjusted EBITDA and free cash flow to GAAP results and review the company’s exclusion of merger and debt-refinancing costs.
- Monitor compliance with debt covenants, the 1.22-to-1 Net Debt Ratio, floating-rate exposure and the December 2017 maturity of the Mexico facility.
- Assess the effect of consumer-lending regulation, including the uncertain impact of the CFPB arbitration rule and the company’s continued reduction of consumer lending.
- Verify execution of the 2017 store-opening plan, capital-expenditure guidance, share repurchases and dividend policy.
- Review the final merger purchase-price allocation, acquired goodwill and intangible assets, and any subsequent impairment or integration charges.