First Cash Financial Services, Inc. — Fiscal 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015, with quarterly data included for the fourth quarter. The company operated retail pawn stores and a declining consumer-lending business in the United States, Mexico and Guatemala. At year-end, it had 1,005 pawn locations and 70 consumer-loan locations, or 1,075 total locations, up 7% from 2014. Approximately 96% of revenue came from pawn operations, with 52% of total revenue generated in Latin America and 48% in the United States.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $704.6 million | $712.9 million | (1%) |
| Net revenue | $391.2 million | $400.9 million | (2%) |
| Income from continuing operations | $60.7 million | $85.4 million | (29%) |
| Net income | $60.7 million | $85.2 million | (29%) |
| Diluted earnings per share | $2.14 | $2.93 | (27%) |
| Cash flow from operating activities | $92.7 million | $97.7 million | (5%) |
| Free cash flow | $68.0 million | $71.3 million | (5%) |
| Adjusted EBITDA | $132.2 million | $148.0 million | (11%) |
- Revenue composition was retail merchandise sales of $449.3 million, pawn loan fees of $195.4 million, consumer-loan and credit-services fees of $27.8 million, and wholesale scrap-jewelry revenue of $32.1 million.
- Retail merchandise sales increased 5%, but the gross margin declined to 38.0% from 38.9%. Pawn loan fees declined 2% on a reported basis but increased 8% on a constant-currency basis.
- Store-level operating profit was $168.7 million, with a 24% margin versus 26% in 2014. Adjusted EBITDA margin was 19%, compared with 21%.
- Year-end cash and cash equivalents were $87.0 million. Working capital was $279.3 million, and the current ratio was 7.05x.
- Year-end inventories were $93.5 million and pawn loans were $117.6 million. The average pawn loan was approximately $99, including $169 in the United States and $63 in Latin America.
- Total indebtedness was $258.0 million, consisting of $200.0 million of 6.75% senior notes due 2021 and $58.0 million drawn under revolving credit facilities. The company reported $162.0 million of unused credit availability and compliance with its debt covenants.
- Goodwill was $295.6 million at year-end, representing a substantial portion of total assets of $757.0 million.
Material changes versus the prior comparable period
- The Mexican peso weakened materially, with the average exchange rate moving from 13.3 pesos per U.S. dollar in 2014 to 15.8 in 2015. Management estimated that Latin American revenue and net income would have been approximately $68.1 million and $9.5 million higher, respectively, at 2014 exchange rates.
- On a constant-currency basis, total revenue increased 8%, driven primarily by 16% growth in retail merchandise sales and 8% growth in pawn loan fees. Reported revenue declined because of currency translation.
- Consumer-loan and credit-services revenue declined 24% to $27.8 million, and the company closed 23 stand-alone U.S. consumer-loan stores. These products represented 4% of revenue versus 5% in 2014.
- Wholesale scrap-jewelry revenue decreased 34% to $32.1 million, reflecting lower gold volumes and prices. Gold ounces sold declined to approximately 24,100 from 33,100.
- The company recorded a $7.9 million goodwill impairment charge for U.S. consumer-loan operations and approximately $0.97 million of restructuring expenses related to store closures. No goodwill or other intangible assets remained for that reporting unit.
- Interest expense increased to $16.9 million from $13.5 million, primarily due to the 2014 issuance of the senior notes and higher revolving-facility borrowings.
- The company repurchased approximately 852,000 shares for $40.0 million at an average price of $46.94, leaving 1.148 million shares authorized for future repurchase.
Guidance, outlook, commentary, risks and unusual items
Management planned approximately 210 to 225 net store additions in 2016, with at least 190 expected in the first quarter. The company stated that cash, operating cash flow and available credit should fund current operations and planned expansion for at least the next twelve months. It also announced a 2016 annual cash dividend program of $0.50 per share, payable quarterly.
- Subsequent to year-end, the company acquired 166 pawn stores in Mexico and 13 in El Salvador. Including the 32 Guatemala stores acquired on December 31, 2015, the related transactions had an aggregate purchase price of approximately $45 million, plus approximately $7 million of assumed net debt that was repaid in January 2016.
- Major risks include additional U.S. and Latin American regulation of pawn, payday, title-loan and credit-services products, including proposed CFPB small-dollar lending rules and the 2016 Military Lending Act changes.
- Access to banking services and the ACH system remains important to consumer-lending operations and could be affected by regulatory scrutiny of short-term lenders.
- Foreign-currency exposure is significant, particularly to the Mexican peso; the company does not use foreign-exchange derivatives to hedge this exposure.
- Gold-price volatility affects pawn collateral values, jewelry inventory, retail margins and scrap-jewelry revenue. At year-end, jewelry represented 37% of pawn collateral and 31% of inventory.
- The company faces competition, economic and regional concentration risks, credit-loss estimation risk, goodwill impairment risk, cybersecurity and operational interruption risks, litigation exposure and risks associated with integrating acquisitions.
- The CSO Program exposed the company to maximum potential losses of $8.2 million through letters of credit at year-end; the recorded liability for expected losses was $0.5 million.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded that disclosure controls and internal controls were effective.
Important facts for investors to verify
- Whether constant-currency pawn growth can offset reported declines caused by further Mexican peso depreciation.
- The pace, funding and integration results of the 2016 Mexico and El Salvador acquisitions and the planned 210 to 225 store additions.
- The final form and economic impact of CFPB, Military Lending Act and local regulations on the remaining consumer-lending operations and potentially on pawn products.
- Whether retail merchandise margins recover from 38.0% and whether inventory turnover improves from 3.4x.
- The sustainability of $92.7 million of operating cash flow and $68.0 million of free cash flow after acquisitions, repurchases and the new dividend.
- Debt covenant capacity, the October 2020 revolving-facility maturity, and the company’s ability to refinance or repay the $200 million of senior notes due 2021.
- Gold-price trends, jewelry inventory aging, pawn redemption rates and collateral valuation assumptions.
- The adequacy of the $0.5 million CSO liability and $66,000 consumer-loan allowance relative to future defaults and regulatory changes.