FirstCash, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2017. The filing identifies the registrant as FirstCash, Inc. Results include Cash America International operations following the September 1, 2016 merger, making year-over-year comparisons materially affected by the transaction. The company operated 2,090 locations across the U.S., Mexico, Guatemala and El Salvador at quarter-end.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $447.6 million | $183.2 million | +144% |
| Net revenue | $242.9 million | $101.9 million | +138% |
| Income before taxes | $52.2 million | $19.7 million | +166% |
| Net income | $32.6 million | $13.2 million | +148% |
| Diluted EPS | $0.67 | $0.47 | +43% |
| Operating cash flow | $63.9 million | $25.1 million | +155% |
| Adjusted EBITDA | $72.9 million | $29.2 million | +150% |
Revenue mix: Retail merchandise sales were $260.0 million, pawn loan fees were $128.3 million, consumer loan and credit services fees were $21.2 million, and wholesale scrap jewelry sales were $38.1 million. Pawn operations represented approximately 95% of consolidated revenue.
Margins: Net revenue was approximately 54% of revenue, and GAAP net income was approximately 7% of revenue. Adjusted EBITDA margin was approximately 16% for the quarter. U.S. segment pre-tax operating margin was 22%, compared with 24% in the prior-year quarter; Latin America segment margin was 21%, compared with 22%.
Balance sheet and liquidity: Cash and cash equivalents were $73.1 million; pawn loans were $314.5 million; consumer loans, net, were $22.2 million; and inventories were $308.2 million. Working capital was $671.0 million, with a current ratio of 6.7:1. Total assets were $2.04 billion and stockholders’ equity was $1.49 billion.
Debt: Revolving credit borrowings were $137.0 million and senior unsecured notes had a carrying value of $196.7 million, representing $337.0 million of principal debt before other items. The $400.0 million U.S. credit facility had $257.0 million available after borrowings and letters of credit; a separate $10.0 million Mexico facility was undrawn. The company was in compliance with applicable debt covenants.
Cash flows and capital allocation: Investing activities provided $58.3 million, primarily reflecting $67.2 million of net loan receivable repayments. Financing activities used $142.2 million, including $123.0 million of net revolver repayments, $10.0 million of share repurchases and $9.2 million of dividends. Cash declined from $90.0 million at December 31, 2016 to $73.1 million at March 31, 2017.
Material Changes Versus the Prior Comparable Period
- The Cash America merger drove most of the substantial increases in U.S. revenue, pawn receivables, inventories, operating expenses, depreciation and amortization, and administrative expenses.
- U.S. revenue increased 291% to $349.2 million, while U.S. segment pre-tax operating income increased 256% to $76.6 million.
- Latin America revenue increased 5% as reported and 17% on a constant-currency basis. Latin America segment pre-tax operating income was essentially unchanged as reported at $20.7 million, but increased 10% on a constant-currency basis.
- U.S. retail merchandise gross margin declined to 36% from 39%, primarily reflecting the historically lower margins of acquired Cash America stores. U.S. scrap jewelry gross margin declined to 7% from 19%.
- Consumer loan and credit services fees increased 300% on a consolidated basis due to the merger; excluding Cash America, U.S. consumer lending fees declined 27% as the company continued to deemphasize the business amid regulatory constraints.
- Depreciation and amortization increased to $14.2 million from $4.9 million, including $2.6 million of amortization related to merger-acquired intangible assets. Interest expense increased to $6.1 million from $4.5 million.
- The effective tax rate increased to 37.5% from 33.0%, primarily due to a greater proportion of U.S.-sourced taxable income and additional foreign tax expenses.
Guidance, Outlook, Risks and Unusual Items
- Management expected to add approximately 85 stores during 2017, primarily in Latin America, including potential initial stores in Colombia.
- Expected capital expenditures for the remainder of 2017 were approximately $32 million to $37 million. Management believed cash, operating cash flow and available credit would fund planned operations and expansion for at least the next twelve months.
- Management expected additional merger and integration expenses over the following two years. Q1 2017 merger-related expenses were $647,000 pretax, or $408,000 after tax; adjusted net income was $33.1 million versus GAAP net income of $32.6 million.
- The company had commitments to deliver 19,900 ounces of gold through December 31, 2017 and expected historical scrap gold volumes to satisfy those commitments.
- Key risks include extensive and changing pawn and consumer-lending regulation, licensing requirements, foreign currency movements, gold prices, interest rates, credit losses, inventory aging and valuation, seasonal demand, integration of Cash America, and execution of store expansion plans.
- Results are seasonal: service fees generally decline in the first and second quarters following heavy loan repayments, while retail sales are typically strongest in the fourth quarter.
- The company stated that there were no material changes in previously reported legal proceedings, regulatory developments or market-risk exposures. Disclosure controls were considered effective.
Important Facts for Investors to Verify
- Separate the effects of the Cash America merger from organic same-store trends, particularly given the significant impact on year-over-year revenue and asset growth.
- Monitor legacy Cash America same-store performance, including the reported 12% decline in pawn receivables and 3% decline in pawn fees.
- Assess whether lower U.S. retail and scrap jewelry margins persist as acquired inventories and operations are integrated.
- Verify progress toward the approximately 85-store expansion plan and the $32 million to $37 million remaining capital expenditure outlook.
- Track revolver utilization, covenant compliance, interest-rate exposure and the April 2021 maturity of the senior unsecured notes.
- Evaluate regulatory developments affecting consumer lending, which management identified as a reason for reducing emphasis on that business.
- Confirm the final purchase-price allocation for the Cash America merger, which remained subject to completion within the applicable measurement period.