Business Context and Reporting Period
FirstCash Holdings, Inc. filed an unaudited Form 10-Q for the quarter ended March 31, 2022. The company 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.
At March 31, 2022, FirstCash operated 2,829 pawn stores and AFF served approximately 6,900 active merchant locations. The quarter includes AFF operations for the full period, whereas the prior-year comparison does not include AFF.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $659.8 million | $407.9 million | +62% |
| Net revenue | $291.2 million | $233.6 million | +25% |
| Income before taxes | $37.0 million | $46.3 million | -20% |
| Net income | $28.0 million | $33.7 million | -17% |
| Diluted EPS | $0.58 | $0.82 | -29% |
| Operating cash flow | $120.1 million | $69.2 million | +74% |
Reported net income margin was approximately 4.2% of revenue versus 8.3% in the prior-year quarter. Net revenue margin was approximately 44.1%, compared with 57.3% in Q1 2021, primarily reflecting the addition of AFF's lease and finance revenue streams and related costs.
- U.S. pawn revenue increased 13% to $311.8 million; segment pre-tax operating income increased 20% to $73.1 million, with a 23% operating margin versus 22%.
- Latin America pawn revenue increased 18% to $155.6 million; segment pre-tax operating income increased 15% to $29.5 million, with a 19% margin unchanged from the prior year. Constant-currency revenue increased 19%.
- AFF generated $192.4 million of reported revenue and $4.6 million of reported segment pre-tax operating income. Excluding purchase-accounting effects, AFF segment pre-tax operating income was $25.1 million.
- Reported AFF revenue and earnings were reduced by purchase-accounting amortization and fair-value effects. Management reported adjusted net income of $56.9 million, or $1.18 per diluted share, versus GAAP net income of $28.0 million and diluted EPS of $0.58.
- Cash and equivalents were $113.3 million at March 31, 2022, down from $120.0 million at December 31, 2021 but more than double the March 31, 2021 balance.
- Working capital was $651.8 million and the current ratio was 2.7:1.
Debt, Liquidity and Capital Allocation
- Total long-term debt was $1.252 billion, consisting of $218.0 million drawn on the revolving credit facility and $1.034 billion of senior unsecured notes. Outstanding principal of the notes was $1.050 billion.
- The $500 million revolving facility matured in December 2024; $278.8 million remained available after $218.0 million of borrowings and $3.2 million of letters of credit, subject to covenants. Including the Mexico facility, total available and unused revolving capacity was $308.9 million.
- The company’s consolidated total debt ratio was 2.72:1 at March 31, 2022. The company stated that it was in compliance with applicable credit-facility covenants.
- Financing cash outflows included $72.2 million of share repurchases and $14.5 million of dividends. The company repurchased 1.048 million shares at an average price of $68.87, completing its prior $100 million authorization.
- In April 2022, the board authorized a new $100 million repurchase program. It also declared a $0.30 per share second-quarter dividend, expected to total approximately $14.2 million.
Material Changes Versus the Prior Comparable Period
- The AFF acquisition materially increased revenue, assets, debt, goodwill and intangible assets. Goodwill was $1.541 billion and intangible assets were $373.9 million at March 31, 2022, compared with $974.1 million and $83.2 million, respectively, a year earlier.
- Revenue growth was offset at the bottom line by higher operating costs, interest expense, depreciation and amortization, and AFF purchase-accounting charges. Interest expense rose 124% to $16.2 million, while depreciation and amortization rose to $25.5 million from $10.6 million.
- Corporate depreciation and amortization included $14.2 million of amortization associated with AFF acquired intangible assets.
- The company recorded $24.7 million of provision for finance-receivable loan losses and $39.8 million of provision for lease losses. At quarter-end, net finance receivables were $140.5 million and net leased merchandise was $119.1 million.
- Operating cash flow improved substantially, but financing cash usage increased to $127.9 million from $96.7 million, primarily because of higher share repurchases and dividends.
Outlook, Risks, Contingencies and Unusual Items
- Management expected to add up to 60 de novo full-service pawn locations in Latin America during 2022 and intended to continue investing in AFF’s merchant network, marketing and proprietary decisioning platform.
- Management stated that operating cash flow and available revolving credit capacity should be adequate to meet expected liquidity and capital needs over the next 12 months and beyond.
- COVID-19 effects remained uncertain, including potential impacts from variants, government responses, consumer spending, staffing constraints, supply-chain delays and retailer traffic. Inflation, labor costs, economic conditions, currency movements and interest rates were additional risks.
- The company faces a CFPB lawsuit alleging violations of the Military Lending Act and breach of a prior consent order. It also faces a putative shareholder securities class action and California litigation involving AFF’s lending and lease-to-own practices. The company could not estimate potential losses for these matters and had not accrued amounts for the shareholder action.
- The company recognized a $2.6 million loss from revaluation of contingent AFF acquisition consideration, which increased the liability to $112.1 million at March 31, 2022.
- Market risks include interest rates, gold prices and foreign currency exchange rates, particularly the Mexican peso. Management reported no material change in market-risk exposure from December 31, 2021.
Facts Investors Should Verify
- Reconcile reported AFF results with management’s non-GAAP measures and separately assess the continuing effects of purchase accounting.
- Monitor AFF loan and lease credit performance, including the $72.3 million finance-receivable allowance and $40.4 million lease-loss allowance.
- Evaluate leverage, debt maturities, variable-rate exposure and compliance with debt-ratio and restricted-payment covenants.
- Track developments and potential financial exposure in the CFPB, shareholder class action and California AFF proceedings.
- Assess whether pawn-loan demand, inventory growth, margins and store expansion can offset inflation, labor pressure and slower consumer spending.
- Confirm the sustainability of dividends and the new $100 million repurchase authorization against liquidity needs and acquisition or growth investments.