FirstCash, Inc. 2017 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and nine months ended September 30, 2017. FirstCash operated 2,106 pawn and consumer-loan locations in the United States and Latin America, up approximately 1% year over year. Pawn operations generated approximately 95% of nine-month revenue. Results include the Cash America business for the full 2017 periods, whereas 2016 includes Cash America only from September 2 through September 30, materially limiting period comparability.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | Nine Months 2017 | Nine Months 2016 |
|---|---|---|---|---|
| Revenue | $435.4 million | $261.2 million | $1,299.6 million | $626.3 million |
| Net revenue | $231.0 million | $147.4 million | $698.4 million | $350.7 million |
| Income before taxes | $41.6 million | $0.4 million | $115.3 million | $37.3 million |
| Net income | $28.3 million | $(1.4) million | $76.2 million | $23.4 million |
| Diluted EPS | $0.59 | $(0.04) | $1.58 | $0.77 |
| Operating cash flow | Not separately provided | Not separately provided | $148.8 million | $40.5 million |
| Adjusted EBITDA | $62.1 million | $42.3 million | $192.0 million | $101.8 million |
Approximate net-revenue margins were 53.1% in Q3 and 53.7% for the nine months. Approximate net-income margins were 6.5% and 5.9%, respectively. Nine-month free cash flow was $127.5 million, and adjusted free cash flow was $132.0 million.
At September 30, 2017, cash and equivalents were $93.4 million; pawn loans were $371.4 million; consumer loans, net, were $24.5 million; and inventories were $308.7 million. Working capital was $758.6 million and the current ratio was 6.57 to 1.
Total debt at principal value was $440.0 million, consisting of $300.0 million of 5.375% senior notes due 2024 and $140.0 million drawn under the revolving credit facility. The primary credit facility had $255.5 million available after considering borrowings and a letter of credit; the Mexico facility had $10.0 million available. The reported net debt ratio was 1.28 to 1, compared with 3.42 to 1 at September 30, 2016. The Company was in compliance with debt covenants.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased 67% and nine-month revenue increased 107%, primarily because 2017 includes a full period of Cash America operations.
- Q3 net income improved from a $1.4 million loss to $28.3 million of income; nine-month net income increased 225% to $76.2 million.
- U.S. Q3 segment revenue increased 94%, while U.S. segment pre-tax operating margin declined to 17% from 21%. Lower retail margins reflected Cash America’s historically lower margins and efforts to clear aged inventory.
- Latin America Q3 revenue increased 25%, or 20% on a constant-currency basis, and segment pre-tax operating income increased 18%, or 13% on a constant-currency basis. The segment margin declined to 25% from 27%.
- U.S. retail merchandise gross margin declined to 33% in Q3 from 39%; Latin America retail margin declined to 37% from 39%. U.S. scrap jewelry margin declined to 3% from 7%, while Latin America reported a 4% scrap loss versus a 23% profit margin in the prior year.
- U.S. pawn receivables declined 6% year over year, driven primarily by lower Cash America balances, reduced holding periods for delinquent loans and optimized loan-to-value ratios. Latin America pawn receivables increased 24%.
- Operating cash flow rose $108.4 million to $148.8 million. Investing cash use declined to $22.5 million from $89.0 million, while financing cash use was $128.4 million versus $50.5 million of financing cash provided in 2016.
- The Company issued $300.0 million of 5.375% notes due 2024, redeemed its $200.0 million of 6.75% notes due 2021 and recognized a $14.1 million loss on extinguishment of debt.
- The Company repurchased 1.182 million shares for $65.0 million during the nine months and paid $27.4 million of dividends. The quarterly dividend declared for Q4 was increased to $0.20 per share from $0.19.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expected to add approximately 50 to 60 stores during 2017, primarily in Latin America, and forecast 2017 capital expenditures of approximately $32 million to $37 million.
- Management stated that cash, operating cash flow and available credit should be sufficient for operations and planned expansion for at least the next twelve months.
- Management expects seasonal increases in loan balances and operating cash flow during the third and fourth quarters and higher retail sales during the fourth-quarter holiday period.
- The Company continues to de-emphasize consumer lending because of increasing regulatory constraints. Consumer-loan and credit-services revenue represented approximately 5% of consolidated nine-month revenue.
- Regulatory risk remains significant across pawn and consumer-lending operations. The CFPB small-dollar loan rule, scheduled for July 2019, generally does not apply to non-recourse pawn loans but could affect the Company’s other small-dollar lending products.
- Key operating exposures include interest rates, gold prices, foreign currency movements, inventory aging, loan losses, regulatory changes and changes in consumer demand. The Company had contractual commitments to deliver 7,475 gold ounces from October through December 2017 and expected to meet them.
- Merger and integration expenses totaled $3.2 million in the first nine months of 2017, and management expected additional Cash America integration expenses in 2017 and 2018.
- The Company planned to adopt ASC 606 using the modified retrospective method and had not identified a material expected impact, although evaluation was continuing. It was also assessing the potential impact of the new lease and credit-loss standards.
Most Important Facts for Investors to Verify
- Assess underlying same-store performance separately from acquisition-driven growth, particularly because the 2016 comparison includes only one month of Cash America results.
- Monitor Cash America inventory aging, retail and scrap margins, and the effect of inventory-clearing initiatives on future profitability.
- Review the sustainability of pawn-loan growth and the decline in U.S. Cash America pawn receivables.
- Verify debt covenant compliance, the 1.28-to-1 net debt ratio, available revolver capacity and refinancing requirements for the Mexico facility maturing in December 2017.
- Evaluate regulatory developments affecting consumer loans and credit services, including the CFPB small-dollar loan rule.
- Reconcile GAAP results with management’s adjusted net income, adjusted EBITDA and free-cash-flow measures, including the adjustments for merger costs and debt extinguishment.