FirstCash, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016, with fourth-quarter information disclosed in the quarterly data note. The filing was dated March 1, 2017. Results include Cash America operations from September 2 through December 31, 2016 following the September 1, 2016 merger; therefore, year-over-year comparisons are significantly affected by the transaction.
Business Context
FirstCash operates retail pawn stores and consumer finance locations in the United States and Latin America. At year-end, it operated 2,085 locations: 1,130 in the United States, 909 in Mexico, 33 in Guatemala and 13 in El Salvador. Pawn operations represented approximately 96% of consolidated revenue, while consumer loan and credit services revenue represented approximately 4%.
The merger added 815 Cash America locations and materially expanded the U.S. platform. The Company also added 220 Latin American locations during 2016, including 179 acquired stores and 41 new stores.
Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $1,088.4 million | $704.6 million | +54% |
| Net revenue | $604.8 million | $391.2 million | +55% |
| Income before taxes | $93.4 million | $87.7 million | +7% |
| Net income | $60.1 million | $60.7 million | -1% |
| Diluted EPS | $1.72 | $2.14 | -20% |
| Adjusted net income | $85.3 million | $68.5 million | +25% |
| Adjusted diluted EPS | $2.44 | $2.42 | +1% |
| Operating cash flow | $96.9 million | $92.7 million | +4% |
| Free cash flow | $46.9 million | $68.0 million | -31% |
Revenue consisted primarily of retail merchandise sales of $669.1 million, pawn loan fees of $312.8 million, consumer loan and credit services fees of $43.9 million and wholesale scrap jewelry sales of $62.6 million. Net revenue margin was approximately 55.6%, compared with 55.5% in 2015. Retail merchandise gross margin declined to 37.4% from 38.0%, while the consolidated pre-tax operating margin declined to 23.2% from 23.9%.
Fourth-quarter 2016 revenue was $462.0 million and net income was $36.7 million, or $0.76 diluted EPS. The quarter included three months of Cash America operations and significant seasonal retail activity.
Balance Sheet, Debt and Liquidity
| Balance-sheet metric at December 31 | 2016 | 2015 |
|---|---|---|
| Cash and cash equivalents | $90.0 million | $87.0 million |
| Pawn loans | $350.5 million | $117.6 million |
| Consumer loans, net | $29.2 million | $1.1 million |
| Inventories | $330.7 million | $93.5 million |
| Total assets | $2.145 billion | $752.9 million |
| Total liabilities | $695.2 million | $321.5 million |
| Stockholders’ equity | $1.450 billion | $431.4 million |
- Outstanding principal debt was $460.0 million: $260.0 million under revolving credit facilities and $200.0 million of 6.75% senior notes due 2021.
- The amended 2016 Credit Facility had $134.0 million of borrowing availability after $5.96 million of letters of credit; an additional $10.0 million Mexico facility was undrawn and available.
- Working capital was $748.5 million, with a 6.21-to-1 current ratio. Management stated that cash, operating cash flow and available borrowing capacity should fund operations and planned expansion for at least the next twelve months.
- Cash flow used in investing activities was $26.0 million, including $33.9 million of capital expenditures, $29.9 million for pawn-store acquisitions and $16.1 million of net loan funding, partly offset by $62.1 million of proceeds from selling Enova shares.
Material Changes Versus 2015
- The Cash America merger increased the store count by 815 locations, issued approximately 20.2 million FirstCash shares and added approximately $1.066 billion of merger consideration.
- U.S. revenue increased 99% to $671.5 million, primarily from the Cash America contribution. U.S. segment pre-tax operating income increased 83% to $148.7 million, but the segment margin declined to 22% from 24%.
- Latin American revenue increased 13% to $416.9 million, or 32% on a constant-currency basis. Latin American segment pre-tax operating income increased 19% to $104.0 million, with the margin rising to 25% from 24%.
- Administrative expenses increased 86% to $96.5 million, depreciation and amortization increased to $31.9 million, interest expense increased 20% to $20.3 million, and merger and acquisition expenses increased to $36.7 million from $2.9 million.
- GAAP earnings were reduced by merger and integration expenses. The Company reported $36.2 million of merger-related expenses and $450,000 of other acquisition expenses; after-tax adjustments totaled $25.2 million.
- Goodwill increased to $831.2 million, primarily from the merger. No goodwill impairment was recorded in 2016; a $7.9 million impairment had been recorded in 2015 for U.S. consumer loan operations.
- The Mexican peso weakened 18% on average against the U.S. dollar. Management estimated that 2016 Latin American revenue and pre-tax operating income would have been approximately $67.9 million and $17.0 million higher, respectively, at prior-year exchange rates.
Guidance, Outlook and Unusual Items
- Management expected to add approximately 85 stores in 2017, primarily in Latin America, including planned entry into Colombia.
- 2017 capital expenditures were expected to total approximately $32 million to $37 million.
- Management expected consumer loan revenue to represent approximately 5% of consolidated revenue in 2017 and continued to characterize consumer lending as non-core and subject to regulatory pressure.
- The Company expected additional merger and integration expenses through 2017 and 2018, including technology, facilities, severance, retention and professional costs.
- The Company assumed gold forward-sale commitments covering 30,700 ounces deliverable through December 31, 2017 and expected to have sufficient gold volumes to satisfy them.
- The Company paid $19.8 million of dividends in 2016 and initiated an annualized dividend rate of $0.76 per share beginning in the fourth quarter. The Board declared a $0.19 per share first-quarter 2017 dividend.
- Consumer lending remains exposed to CFPB proposed short-term lending rules, state and local restrictions, Military Lending Act requirements, credit-loss volatility and possible limitations on access to banking and ACH services.
Principal Risks and Contingencies
- Extensive U.S. and Latin American regulation could limit fees, loan terms, licensing, collateral acceptance, store operations or product availability.
- Foreign-exchange exposure is substantial; a one-point change in the average Mexican peso-to-dollar exchange rate was estimated to affect annual 2017 earnings by approximately $2.9 million to $3.9 million.
- Gold price declines could reduce jewelry inventory values, pawn collateral values, loan balances, sales and margins. Jewelry represented 49% of inventory and collateralized approximately 57% of pawn loans at year-end.
- Goodwill totaled $831.2 million, creating impairment exposure if reporting-unit performance, regulation, currency or market conditions deteriorate.
- The Company had $379.4 million of future operating lease payments, including $102.5 million due within one year, in addition to debt obligations.
- Maximum exposure under CSO guarantees was $13.2 million, with $582,000 accrued for expected losses on outstanding guarantees.
- The Company disclosed ordinary-course litigation and a settled Senior Notes Lawsuit inherited through Cash America. Management stated that routine litigation was not expected to materially affect financial position, results or liquidity.
- Other key risks include merger integration, competition, economic deterioration, credit losses, cybersecurity, theft, banking relationships, ACH access, FCPA compliance and political or operating risks in Latin America.
Important Facts for Investors to Verify
- Separate the underlying performance of the legacy FirstCash business from the partial-year Cash America contribution and the substantial merger-related charges.
- Review adjusted earnings reconciliations and assess whether the Company’s expected merger synergies justify excluding recurring integration costs.
- Monitor U.S. and Latin American same-store pawn trends, retail merchandise margins, inventory aging and pawn-loan redemption rates.
- Assess leverage, variable-rate exposure, debt covenant headroom and the 2021 maturity concentration of $460.0 million.
- Track Mexican peso movements, gold prices and their effects on reported earnings, collateral values and inventory margins.
- Evaluate the potential financial and operational effects of CFPB, Military Lending Act, state, local and Mexican regulatory developments.
- Confirm the final purchase-price allocation for the Cash America merger, which was preliminary at the filing date, and monitor the substantial goodwill balance for impairment.
- Reconcile quarterly results and per-share figures carefully because the merger materially increased the share count and caused quarterly diluted EPS to differ from the annual amount.