FirstCash, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2018; filed April 30, 2018. The unaudited results include U.S. and Latin American pawn and consumer-lending operations. The Company operated 2,238 locations at quarter-end, up 7% year over year. Pawn operations generated approximately 97% of consolidated revenue.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $449.8 million | $447.6 million | Up 1% |
| Net revenue | $239.1 million | $242.9 million | Down 2% |
| Income before taxes | $55.8 million | $52.2 million | Up 7% |
| Net income | $41.6 million | $32.6 million | Up 28% |
| Diluted EPS | $0.90 | $0.67 | Up $0.23 |
| Operating cash flow | $91.3 million | $63.9 million | Up 43% |
- Retail merchandise sales were $269.8 million, pawn loan fees were $129.8 million, wholesale scrap jewelry sales were $34.7 million, and consumer loan and credit services fees were $15.4 million.
- Net income margin was approximately 9.3%, compared with 7.3% in the prior-year quarter. Net revenue margin was approximately 53.2%, compared with 54.3%.
- The effective tax rate declined to 25.4% from 37.5%, primarily because of the Tax Cuts and Jobs Act. Management expects a blended fiscal 2018 effective rate of approximately 26% to 27%.
- Cash and cash equivalents were $110.4 million. Working capital was $630.1 million, and the current ratio was 5.6:1.
- Debt consisted of $300.0 million principal amount of 5.375% senior notes due 2024 and $83.0 million drawn under the revolving credit facility. The facility had $311.9 million available, including the effect of $5.1 million of letters of credit. The reported Net Debt Ratio was 1.0:1.
- Financing cash uses included $100.0 million of share repurchases, $10.2 million of dividends, and $24.0 million of net repayments under the revolving facility.
- Free cash flow was $138.7 million, or $140.3 million after adjustment for merger-related expenses.
Material Changes Versus the Prior Period
- U.S. segment revenue declined 6% and pre-tax operating income declined 15% to $64.9 million. U.S. retail sales fell 4%, pawn fees fell 5%, scrap jewelry sales fell 10%, and consumer lending fees fell 28%.
- U.S. segment pre-tax margin declined to approximately 20% from 22%, reflecting lower net revenue, Cash America integration effects, and weaker non-core consumer-lending and scrap-jewelry results.
- U.S. inventories declined 27% to $187.5 million as the Company reduced inventory and liquidated aged Cash America merchandise. Inventory aged over one year declined to 5% from 12%.
- Latin America revenue increased 25% to $123.0 million and segment pre-tax operating income increased 32% to $27.3 million. On a constant-currency basis, revenue increased 16% and segment income increased 23%.
- The Company acquired 126 pawn stores in Mexico and three U.S. pawn stores for an aggregate purchase price of $15.5 million, including $13.4 million paid during the quarter. It also opened 11 Latin American pawn stores.
- Administrative expenses declined 16% to $28.0 million, while merger and acquisition expenses declined to $0.2 million from $0.6 million. Lower taxes and corporate expenses more than offset the decline in consolidated segment operating income.
- Comprehensive income increased 14% to $63.5 million, including a $21.8 million favorable currency translation adjustment.
Guidance, Outlook, Risks and Unusual Items
- Management expects to add approximately 200 stores during fiscal 2018, including the 126 Mexican stores acquired in the first quarter. Planned 2018 capital expenditures, excluding real estate purchases, are approximately $27.5 million to $32.5 million.
- Management believes cash on hand, operating cash flow and available revolver capacity will fund operations and planned expansion for at least the next twelve months.
- The Company is de-emphasizing consumer lending because of regulatory constraints and internet-based competition. It agreed after quarter-end to sell the assets of eight California consumer-lending locations and expects a loss of less than $0.01 per share.
- Beginning January 1, 2018, the Company ceased offering fee-based check-cashing services in its non-franchise stores and no longer considers itself a U.S. federally defined money services business.
- The Company adopted ASC 606 using the modified retrospective method with no material impact and no cumulative-effect adjustment. It is assessing the future effects of lease and expected-credit-loss accounting standards.
- The Company had commitments to deliver 9,000 gold ounces between April and June 2018 and expected to satisfy those commitments through historical scrap-gold volumes.
- Key risks include regulation of pawn and consumer lending, interest-rate changes, gold prices, foreign-currency movements, seasonality, inventory valuation, credit losses, acquisition integration, and competition.
- The Company completed its prior share-repurchase authorization in April 2018 and authorized a new $100.0 million program effective April 25, 2018. The quarterly dividend was increased to $0.22 per share.
Investor Verification Points
- Verify the sustainability of earnings growth, particularly the benefit from the lower tax rate versus underlying operating performance.
- Assess whether U.S. same-store pawn and retail trends stabilize as Cash America integration and inventory reductions continue.
- Monitor Latin American growth, acquisition integration, and the effect of foreign-currency changes on reported results.
- Review the pace and funding of acquisitions, store openings, share repurchases, and dividends relative to cash generation and debt covenants.
- Evaluate regulatory developments affecting consumer lending, pawn fees, licensing, and the discontinued check-cashing business.
- Reconcile non-GAAP measures, including constant-currency results, adjusted net income, EBITDA, and free cash flow, with GAAP results.