FirstCash, Inc. 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; unaudited interim results. FirstCash operated 2,446 locations across the U.S. and Latin America, up 16% from September 30, 2017. Pawn operations generated approximately 97% of year-to-date revenue.
Financial Performance and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $429.9 million | $435.4 million | $1,299.7 million | $1,299.6 million |
| Net revenue | $237.3 million | $231.0 million | $704.8 million | $698.4 million |
| Income before taxes | $44.1 million | $41.6 million | $142.1 million | $115.3 million |
| Net income | $33.3 million | $28.3 million | $105.1 million | $76.2 million |
| Diluted EPS | $0.76 | $0.59 | $2.33 | $1.58 |
| Operating cash flow | Not separately provided | Not separately provided | $174.2 million | $148.8 million |
- Q3 revenue declined 1%, while net revenue increased 3%, pre-tax income increased 6%, and net income increased 18%.
- Year-to-date revenue was essentially flat, while net revenue increased 1%, pre-tax income increased 23%, and net income increased 38%.
- Year-to-date effective tax rate was 26.0%, compared with 33.9% in 2017, primarily reflecting the Tax Cuts and Jobs Act. Management expected a full-year 2018 blended tax rate of approximately 26%.
- Q3 adjusted net income was $35.6 million, or $0.81 per diluted share, compared with $28.9 million, or $0.61, in the prior-year quarter. Year-to-date adjusted net income was $109.1 million, or $2.41 per diluted share.
- Q3 adjusted pre-tax margin was 11.0%, versus 9.8%; year-to-date adjusted pre-tax margin was 11.4%, versus 10.2%. Adjusted net income margin was 8.3% for Q3 and 8.4% year to date.
Segment and Operating Changes
- U.S. operations: Q3 revenue decreased 6% to $288.2 million, but segment pre-tax operating income increased 7% to $54.6 million; margin improved to 19% from 17%. U.S. retail merchandise gross margin increased to 37% from 33%, while consumer lending revenue declined 24%.
- Latin America operations: Q3 revenue increased 10% to $141.6 million and segment pre-tax operating income increased 1% to $32.7 million; margin declined to 23% from 25%. On a constant-currency basis, revenue increased 17%.
- During the first nine months, the Company acquired 342 pawn stores in Mexico and 18 in the U.S. for an aggregate purchase price of approximately $105.0 million, including $88.4 million paid in cash and approximately $16.6 million payable to sellers.
- Effective June 30, 2018, the Company discontinued unsecured consumer loans in Latin America and closed 28 related locations. The Company also continued reducing its U.S. consumer lending footprint.
- U.S. inventories declined 17% year over year to $200.4 million, and inventory aged more than one year declined to 4% from 9%.
Cash Flow, Debt and Liquidity
- September 30, 2018 cash and cash equivalents were $57.0 million, compared with $114.4 million at December 31, 2017.
- Year-to-date operating cash flow was $174.2 million. Investing cash use was $142.2 million, including $88.4 million for acquisitions and $40.8 million for property and equipment. Financing cash use was $90.0 million, including $258.5 million of share repurchases and $29.9 million of dividends, partially offset by $198.0 million of net revolving-facility borrowings.
- Total debt at September 30 was approximately $605.0 million principal, consisting of $300.0 million of 5.375% senior unsecured notes due 2024 and $305.0 million drawn on the revolving facility. The facility had $91.8 million available after $3.2 million of letters of credit.
- The reported net debt ratio was 2.0 times, compared with 1.3 times at September 30, 2017. The Company was in compliance with its debt covenants.
- Working capital was $669.2 million and the current ratio was 5.8 to 1. Management believed available cash, operating cash flow, working capital and borrowing capacity were sufficient for at least the next twelve months.
- On October 4, 2018, the revolving facility was amended and extended: commitments increased to $425.0 million and maturity extended to October 4, 2023. Certain permitted leverage ratios were also increased.
Outlook, Risks and Unusual Items
- Management expected to add at least 420 locations during 2018 and forecast approximately $30 million to $35 million of capital expenditures, excluding store real estate purchases.
- Management expected to continue expansion through acquisitions and new store openings, while retaining flexibility to adjust lending, inventory, capital spending and other cash uses.
- The Ohio Fairness in Lending Act, effective on or about April 26, 2019, caps loan amounts, interest rates, terms and fees and substantially restricts credit service organization activity. The Company operated 119 affected Ohio locations and estimated 2018 Ohio consumer lending and credit services revenue of approximately $40 million, less than 2.5% of consolidated revenue. Store closures or conversion to pawn operations were under evaluation.
- Management planned to close 13 stand-alone consumer lending locations and discontinue unsecured consumer loan products in 38 pawn locations during Q4 2018.
- Q3 merger and acquisition expenses were $3.2 million, and nine-month expenses were $5.6 million. The prior-year nine-month period included a $14.1 million loss on extinguishment of debt, which did not recur in 2018.
- Foreign exchange movements, gold prices, interest rates, regulatory changes, seasonality, acquisition integration and consumer loan credit losses may materially affect future results.
- The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method with no material financial statement impact. The Company expected adoption of the new lease standard to materially increase reported assets and liabilities.
Investor Verification Points
- Verify the sustainability of earnings growth given flat consolidated revenue, declining U.S. pawn and consumer lending activity, and increased leverage.
- Assess integration progress and returns from the 360 acquired pawn stores, particularly the lower-margin Mexican acquisitions.
- Monitor the impact of Ohio legislation on consumer lending revenue, store closures, conversion costs and pawn expansion.
- Reconcile GAAP earnings with management’s adjusted measures and evaluate the recurring nature of acquisition expenses.
- Review liquidity after acquisitions, capital expenditures, dividends and substantial share repurchases, including the $160 million of remaining repurchase authorization described after quarter-end.
- Evaluate currency, interest-rate and commodity-price sensitivity, as well as compliance with the amended revolving-credit-facility covenants.