First Cash Financial Services, Inc. — 2016 Q2 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2016, compared with the prior-year periods. The Company operated 1,271 locations across the United States, Mexico, Guatemala and El Salvador, a 22% increase in store count year over year. Approximately 97% of year-to-date revenue came from pawn operations.
The Company announced an all-stock merger of equals with Cash America International, Inc. on April 28, 2016. The transaction was expected to close in the third quarter of 2016, subject to shareholder approval and customary closing conditions.
Financial performance and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $182.0 million | $167.6 million | $365.2 million | $343.6 million |
| Net revenue | $101.5 million | $94.0 million | $203.3 million | $192.8 million |
| Income before taxes | $17.2 million | $19.4 million | $36.9 million | $43.8 million |
| Net income | $11.7 million | $13.3 million | $24.8 million | $30.1 million |
| Diluted EPS | $0.41 | $0.47 | $0.88 | $1.06 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $39.6 million | $41.9 million |
- Revenue increased 9% in Q2 and 6% year to date; constant-currency growth was 19% and 16%, respectively.
- Net income declined 12% in Q2 and 18% year to date. Net margins were approximately 6.4% and 6.8%, compared with 8.0% and 8.8% in the comparable periods.
- Adjusted EBITDA was $30.4 million in Q2 and $59.6 million year to date, compared with $28.9 million and $61.6 million, respectively. Trailing-twelve-month adjusted EBITDA was $130.1 million, with an 18% margin and a 1.9x debt-to-adjusted-EBITDA ratio.
- Retail merchandise sales increased 9% in Q2 and 8% year to date. Retail gross margin was 38% in both comparable periods.
- Pawn loan fees increased 9% in Q2 and 7% year to date. Pawn loans outstanding were $134.7 million at June 30, up 8% year over year.
- Consumer loan and credit services fees declined 27% in Q2 and 26% year to date; these products represented 3% of year-to-date revenue versus 4% in the prior year.
- Store-level operating margin was 24% in Q2 versus 23% previously, but 23% year to date versus 24% previously.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $46.3 million at June 30, 2016, compared with $77.4 million at June 30, 2015 and $87.0 million at December 31, 2015.
- Working capital was $247.3 million and the current ratio was 5.70:1, compared with $272.2 million and 7.67:1 at June 30, 2015.
- Senior unsecured notes had a carrying value of $196.2 million, bear interest at 6.75% and mature April 1, 2021.
- The U.S. revolving facility had $50.5 million outstanding and $159.5 million available under its $210.0 million commitment. The Mexico facility had no borrowings and $10.0 million available.
- Total debt, excluding deferred issuance costs, was approximately $250.5 million. Management reported compliance with applicable debt covenants.
- Six-month investing cash outflows were $54.2 million, including $27.7 million for acquisitions, $17.1 million for property and equipment, and $9.5 million for net loan receivables. Financing cash outflows were $21.1 million, including debt repayments and $7.1 million of dividends.
Material changes versus the prior comparable period
- Core pawn and retail operations expanded, supported by 31 new Latin American stores and 180 acquired pawn stores, including 166 in Mexico, 13 in El Salvador and one in the United States.
- The Latin America acquisition had a preliminary purchase price of $29.9 million; total 2016 acquisition purchase price was $30.7 million. Acquired operations contributed $23.6 million of revenue and $1.8 million of net earnings after acquisition dates.
- Currency translation was a significant headwind. The Mexican peso depreciated approximately 18% to 19% against the U.S. dollar, reducing reported Latin American revenue and earnings. Management estimated that constant exchange rates would have increased Q2 Latin American revenue by $16.9 million and net income by $2.4 million.
- Merger and acquisition expenses rose to $4.1 million in Q2 and $4.5 million year to date, versus $1.1 million and $1.2 million, respectively.
- Administrative expenses increased 22% in Q2 and 24% year to date, primarily because of the larger store base and acquisition integration.
- Cash flow from operations declined 6% year to date, while investing outflows increased 23%. The Company ended the period with materially less cash than at year-end 2015.
- The Company initiated quarterly dividends in 2016 and suspended share repurchases pending completion of the merger.
Guidance, outlook, risks and unusual items
- Management expected a 2016 effective tax rate of 32% to 33% and anticipated administrative cost synergies from the Latin America acquisition beginning in the second half of 2016.
- Excluding the Cash America merger and additional acquisitions, management expected to add approximately 220 to 225 stores during 2016; 211 additions had occurred through June 30.
- The Company entered into a $400.0 million amended and restated credit facility on July 25, 2016. It becomes effective only upon merger closing and satisfaction of customary conditions, and would replace the existing $210.0 million facility.
- The planned merger remained subject to shareholder approval and other closing conditions. A Cash America shareholder lawsuit sought to enjoin the transaction; the defendants stated that the claims were without merit and intended to defend the action.
- The Consumer Financial Protection Bureau proposed rules covering the Company’s short-term and installment consumer loans, including ability-to-repay requirements, cooling-off periods and collection restrictions. Pawn loans were excluded from the proposed rules.
- Key market and operating risks include Mexican peso and other foreign-exchange movements, gold prices, consumer demand, pawn forfeiture rates, collateral values, competition, regulatory changes, credit losses, acquisition integration, litigation and debt-financing availability.
- The filing corrected prior-period foreign deferred-tax and foreign-currency translation errors and made related reclassifications. Management concluded the errors were not material to previously issued financial statements and stated they did not affect prior-period income or cash flow.
Most important facts for investors to verify
- Whether the Cash America merger closed as expected, including shareholder approval, litigation resolution, integration costs and the effectiveness of the $400.0 million credit facility.
- The sustainability of reported growth after separating store additions, acquisitions and constant-currency effects from same-store performance.
- The effect of continued foreign-currency weakness on reported revenue, earnings, comprehensive income and net assets.
- The trajectory of declining consumer lending revenue and the impact of additional store closures and proposed CFPB rules.
- Actual acquisition synergies, purchase-price allocations, goodwill and integration expenses.
- Liquidity after merger-related costs, refinancing of Cash America debt, dividends, capital expenditures and continued store expansion.
- The Company’s ability to maintain debt covenants and satisfy any minimum-liquidity requirement tied to Cash America’s senior notes.