FIRSTCASH, INC - FORM 10-Q

Attached files

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EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION - FIRSTCASH, INC	fcfs03312016exhibit321.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - FIRSTCASH, INC	fcfs03312016exhibit312.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT - FIRSTCASH, INC	fcfs03312016exhibit311.htm
EX-32.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION - FIRSTCASH, INC	fcfs03312016exhibit322.htm



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



[ X ]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016



[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ___________

Commission file number 0-19133

FIRST CASH FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)



Delaware	75-2237318
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
690 East Lamar Blvd., Suite 400	76011
Arlington, Texas	(Zip Code)
(Address of principal executive offices)

(817) 460-3947

(Registrant’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



x Large accelerated filer	o Accelerated filer
o Non-accelerated filer (Do not check if a smaller reporting company)	o Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes x No

As of May 3, 2016, there were 28,243,229 shares of common stock outstanding.



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FIRST CASH FINANCIAL SERVICES, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016

INDEX



PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Income	2
	Condensed Consolidated Statements of Comprehensive Income (Loss)	3
	Condensed Consolidated Statements of Changes in Stockholders' Equity	3
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37

SIGNATURES		38



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CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS

Forward-Looking Information

This quarterly report contains forward-looking statements about the business, financial condition and prospects of First Cash Financial Services, Inc. and its wholly owned subsidiaries (together, the “Company”) and the Company’s previously announced all-stock merger of equals transaction with Cash America International, Inc. (“Cash America”). Forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995, can be identified by the use of forward-looking terminology such as “believes,” “projects,” “expects,” “may,” “estimates,” “should,” “plans,” “targets,” “intends,” “could,” or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy or objectives. Forward-looking statements can also be identified by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Forward-looking statements in this quarterly report include, without limitation, the Company’s expectations of earnings per share, earnings growth, expansion strategies, the impact of new or existing regulations, store openings, liquidity (including the availability of capital under existing credit facilities), cash flow, consumer demand for the Company’s products and services, income tax rates, currency exchange rates, future share repurchases and anticipated dividend payments, the price of gold and the impacts thereof, future earnings accretion and related transaction expenses from acquisitions and mergers, the successful completion of expected acquisitions, anticipated debt repayments, the ability to successfully integrate acquisitions and other performance results. These forward-looking statements with respect to the proposed transaction with Cash America include, without limitation, the benefits of the proposed transaction and the expected completion of the transaction. These statements are made to provide the public with management’s current assessment of the Company’s business. Although the Company believes the expectations reflected in forward-looking statements are reasonable, there can be no assurances such expectations will prove to be accurate. Security holders are cautioned such forward-looking statements involve risks and uncertainties. Certain factors may cause results to differ materially from those anticipated by the forward-looking statements made in this quarterly report. Such factors are difficult to predict and many are beyond the control of the Company and may include, without limitation, the following:


•	changes in foreign currency exchange rates and the U.S. dollar to the Mexican peso and Guatemalan quetzal exchange rates in particular;


•	new federal, state or local legislative initiatives or governmental regulations (or changes to existing laws and regulations) affecting pawn businesses, consumer loan businesses and credit services organizations (in the United States, Mexico, Guatemala and El Salvador), including administrative or legal interpretations thereto;


•	changes in consumer demand, including purchasing, borrowing and repayment behaviors;


•	changes in regional, national or international economic conditions, including inflation rates, unemployment rates and energy prices;


•	changes in pawn forfeiture rates and credit loss provisions;


•	changes in the market value of pawn collateral and merchandise inventories, including gold prices and the value of consumer electronics and other products;


•	changes or increases in competition;


•	the ability to locate, open and staff new stores and successfully integrate acquisitions;


•	the availability or access to sources of used merchandise inventory;


•	changes in credit markets, interest rates and the ability to establish, renew and/or extend the Company’s debt financing;


•	the ability to maintain banking relationships for treasury services and processing of certain consumer lending transactions;


•	the ability to hire and retain key management personnel;


•	risks and uncertainties related to foreign operations in Mexico, Guatemala and El Salvador;


•	changes in import/export regulations and tariffs or duties;


•	changes in banking, anti-money laundering or gun control regulations;


•	unforeseen litigation;


•	changes in tax rates or policies in the U.S., Mexico, Guatemala and El Salvador;


•	inclement weather, natural disasters and public health issues;


•	security breaches, cyber attacks or fraudulent activity;


•	a prolonged interruption in the Company’s operations of its facilities, systems, and business functions, including its information technology and other business systems;



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•	the implementation of new, or changes in the interpretation of existing, accounting principles or financial reporting requirements;


•	future business decisions;


•	the risk that the required stockholder approvals to approve the proposed transaction with Cash America may not be obtained;


•	the risks that the other condition(s) to closing of the proposed transaction may not be satisfied;


•	the length of time necessary to consummate the proposed transaction;


•	the risk that the Company and the Cash America businesses will not be integrated successfully;


•	the risk that the cost savings, synergies, growth and cash flows from the proposed transaction may not be fully realized or may take longer to realize than expected;


•	the diversion of management time on transaction-related issues;


•	the risk that costs associated with the integration of the Company and Cash America are higher than anticipated; and


•	litigation risk related to the proposed transaction.

These and other risks, uncertainties and regulatory developments are further and more completely described in the Company’s 2015 annual report on Form 10-K filed with the Securities and Exchange Commission on February 17, 2016, including the risks described in Part 1, Item 1A, “Risk Factors” of the Company’s annual report, and in Part II, Item 1A, “Risk Factors” of this quarterly report. Many of these risks and uncertainties are beyond the ability of the Company to control, nor can the Company predict, in many cases, all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. The forward-looking statements contained in this quarterly report speak only as of the date of this quarterly report, and the Company expressly disclaims any obligation or undertaking to report any updates or revisions to any such statement to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which any such statement is based, except as required by law.



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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)

	March 31,						December 31,
	2016			2015			2015
ASSETS
Cash and cash equivalents	$	54,150		$	75,803		$	86,954
Pawn loan fees and service charges receivable	17,070			16,232			16,406
Pawn loans	126,620			114,306			117,601
Consumer loans, net	985			977			1,118
Inventories	90,714			82,554			93,458
Prepaid expenses and other current assets	6,911			3,302			9,897
Total current assets	296,450			293,174			325,434

Property and equipment, net	120,712			112,587			112,447
Goodwill	315,439			276,545			295,609
Other non-current assets	10,291			10,887			10,084
Deferred tax assets	10,993			8,845			9,321
Total assets	$	753,885		$	702,038		$	752,895

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities	$	54,496		$	41,704		$	42,252
Income taxes payable	1,433			50			3,923
Total current liabilities	55,929			41,754			46,175

Revolving unsecured credit facilities	40,000			14,500			58,000
Senior unsecured notes	196,037			195,409			195,874
Deferred tax liabilities	22,632			17,901			21,464
Total liabilities	314,598			269,564			321,513

Stockholders’ equity:
Preferred stock	—			—			—
Common stock	403			399			403
Additional paid-in capital	203,143			193,278			202,393
Retained earnings	653,248			599,682			643,604
Accumulated other comprehensive loss from
cumulative foreign currency translation adjustments	(80,899		)	(47,277		)	(78,410		)
Common stock held in treasury, at cost	(336,608		)	(313,608		)	(336,608		)
Total stockholders’ equity	439,287			432,474			431,382
Total liabilities and stockholders’ equity	$	753,885		$	702,038		$	752,895

The accompanying notes are an integral part of these condensed consolidated financial statements.



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FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except per share amounts)

	Three Months Ended
	March 31,
	2016			2015
Revenue:
Retail merchandise sales	$	118,776		$	110,454
Pawn loan fees	51,433			48,654
Consumer loan and credit services fees	5,686			7,595
Wholesale scrap jewelry revenue	7,308			9,320
Total revenue	183,203			176,023

Cost of revenue:
Cost of retail merchandise sold	74,422			68,246
Consumer loan and credit services loss provision	1,047			997
Cost of wholesale scrap jewelry sold	5,871			8,009
Total cost of revenue	81,340			77,252

Net revenue	101,863			98,771

Expenses and other income:
Store operating expenses	55,411			52,321
Administrative expenses	17,668			13,838
Depreciation and amortization	4,937			4,547
Interest expense	4,460			4,020
Interest income	(274		)	(344		)
Total expenses and other income	82,202			74,382

Income before income taxes	19,661			24,389

Provision for income taxes	6,487			7,601


Net income	$	13,174		$	16,788

Net income per share:
Basic	$	0.47		$	0.59
Diluted	$	0.47		$	0.59

Dividends declared per common share	$	0.125		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.



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FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)

	Three Months Ended
	March 31,
	2016			2015
Net income	$	13,174		$	16,788
Other comprehensive income (loss):
Currency translation adjustment	(2,489		)	(6,999		)
Comprehensive income	$	10,685		$	9,789

The accompanying notes are an integral part of these condensed consolidated financial statements.



FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited, in thousands)

	Preferred Stock			Common Stock			Additional Paid-In Capital		Retained Earnings			Accum- ulated Other Compre- hensive Loss			Common Stock Held in Treasury				Total Stock- holders’ Equity
	Shares	Amount		Shares	Amount										Shares	Amount
Balance at 12/31/2015	—	$	—	40,288	$	403	$	202,393	$	643,604		$	(78,410	)	12,052	$	(336,608	)	$	431,382
Shares issued under share-based com-pensation plan	—	—		7	—		—		—			—			—	—			—
Share-based compensation expense	—	—		—	—		750		—			—			—	—			750
Net income	—	—		—	—		—		13,174			—			—	—			13,174
Dividends paid	—	—		—	—		—		(3,530		)	—			—	—			(3,530		)
Currency translation adjustment	—	—		—	—		—		—			(2,489		)	—	—			(2,489		)
Balance at 3/31/2016	—	$	—	40,295	$	403	$	203,143	$	653,248		$	(80,899	)	12,052	$	(336,608	)	$	439,287

The accompanying notes are an integral part of these condensed consolidated financial statements.



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FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
CONTINUED
(unaudited, in thousands)

	Preferred Stock			Common Stock			Additional Paid-In Capital		Retained Earnings		Accum- ulated Other Compre- hensive Loss			Common Stock Held in Treasury				Total Stock- holders’ Equity
	Shares	Amount		Shares	Amount									Shares	Amount
Balance at 12/31/2014	—	$	—	39,708	$	397	$	188,062	$	582,894	$	(40,278	)	11,200	$	(296,634	)	$	434,441
Shares issued under share-based com-pensation plan	—	—		5	—		—		—		—			—	—			—
Exercise of stock options	—	—		145	2		2,899		—		—			—	—			2,901
Income tax benefit from exercise of stock options	—	—		—	—		1,617		—		—			—	—			1,617
Share-based compensation expense	—	—		—	—		700		—		—			—	—			700
Net income	—	—		—	—		—		16,788		—			—	—			16,788
Currency translation adjustment	—	—		—	—		—		—		(6,999		)	—	—			(6,999		)
Repurchases of treasury stock	—	—		—	—		—		—		—			336	(16,974		)	(16,974		)
Balance at 3/31/2015	—	$	—	39,858	$	399	$	193,278	$	599,682	$	(47,277	)	11,536	$	(313,608	)	$	432,474

The accompanying notes are an integral part of these condensed consolidated financial statements.



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FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
	Three Months Ended
	March 31,
	2016			2015
Cash flow from operating activities:
Net income	$	13,174		$	16,788
Adjustments to reconcile net income to net cash flow provided by operating activities:
Non-cash portion of credit loss provision	222			79
Share-based compensation expense	750			700
Depreciation and amortization expense	4,937			4,547
Amortization of debt issuance costs	230			256
Deferred income taxes	1,678			640
Changes in operating assets and liabilities, net of business combinations:
Pawn fees and service charges receivable	173			480
Merchandise inventories	1,812			2,354
Prepaid expenses and other assets	3,281			1,070
Accounts payable and accrued expenses	(645		)	(10		)
Income taxes payable	(536		)	526
Net cash flow provided by operating activities	25,076			27,430
Cash flow from investing activities:
Loan receivables, net of cash repayments	5,293			8,312
Purchases of property and equipment	(6,343		)	(4,386		)
Acquisitions of pawn stores, net of cash acquired	(26,045		)	(1,550		)
Net cash flow provided by (used in) investing activities	(27,095		)	2,376
Cash flow from financing activities:
Borrowings from revolving credit facilities	11,500			21,555
Repayments of revolving credit facilities	(29,500		)	(29,455		)
Repayments of notes payable	(6,532		)	—
Purchases of treasury stock	—			(16,974		)
Proceeds from exercise of share-based compensation awards	—			2,901
Income tax benefit from exercise of stock options	—			1,617
Dividends paid	(3,530		)	—
Net cash flow used in financing activities	(28,062		)	(20,356		)
Effect of exchange rates on cash	(2,723		)	(1,639		)
Change in cash and cash equivalents	(32,804		)	7,811
Cash and cash equivalents at beginning of the period	86,954			67,992
Cash and cash equivalents at end of the period	$	54,150		$	75,803

The accompanying notes are an integral part of these condensed consolidated financial statements.



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FIRST CASH FINANCIAL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated balance sheet at December 31, 2015, which is derived from audited financial statements, and the unaudited condensed consolidated financial statements, including the notes thereto, include the accounts of First Cash Financial Services, Inc. and its wholly-owned subsidiaries (together, the “Company”). All significant intercompany accounts and transactions have been eliminated.

These unaudited consolidated financial statements are condensed and do not include all disclosures and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. These interim period financial statements should be read in conjunction with the Company’s consolidated financial statements, which are included in the Company’s annual report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (the “SEC”) on February 17, 2016. The condensed consolidated financial statements as of March 31, 2016 and 2015, and for the three month periods ended March 31, 2016 and 2015, are unaudited, but in management’s opinion include all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flow for such interim periods. Operating results for the period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the full fiscal year.

The Company manages its pawn and consumer loan operations under three operating segments: U.S. pawn operations, U.S. consumer loan operations and Latin America pawn and consumer loan operations. The three operating segments have been aggregated into one reportable segment because they have similar economic characteristics and similar long-term financial performance metrics. Additionally, all three segments offer similar and overlapping products and services to a similar customer demographic and are supported by a single, centralized administrative support platform.

The Company has significant operations in Mexico and Guatemala, to a lesser extent, where the functional currency is the Mexican peso and Guatemalan quetzal, respectively. Accordingly, the assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each balance sheet date, and the resulting adjustments are accumulated in other comprehensive income (loss) as a separate component of stockholders’ equity. Revenue and expenses are translated at the average exchange rates occurring during the three month period ended March 31, 2016. The Company also has operations in El Salvador where the reporting and functional currency is the U.S. dollar.

Revisions and Reclassifications

Certain amounts for the periods ended March 31, 2015 and December 31, 2015 have been reclassified in order to conform to the 2016 presentation. See “—Recent accounting pronouncements” below regarding the impact of the Company’s adoption of ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”) on the classification of debt issuance costs in the Company’s consolidated balance sheets. In addition, after the impact of the revision to deferred tax assets described below, the Company’s adoption of ASU No. 2015-17 “Balance Sheet Classification of Deferred Taxes” at December 31, 2015 resulted in a $7,056,000 decrease in current deferred tax assets, a $24,957,000 increase in non-current deferred tax assets and a $17,901,000 increase in non-current deferred tax liabilities in the accompanying condensed consolidated balance sheets as of March 31, 2015.

The Company revised certain previously reported amounts for the three months ended March 31, 2015 for the correction of prior period errors. ASC 740 “Income Taxes,” provides an exception to recording deferred tax attributes associated with foreign currency translation adjustments, which are recorded in comprehensive income. In July 2013, the Company terminated an election to include foreign subsidiaries in its consolidated U.S. federal income tax return and it is the Company’s intent to indefinitely reinvest the earnings of these subsidiaries outside the U.S. The Company had incorrectly recorded a deferred tax asset on these accumulated foreign currency translation adjustments in prior periods. The correction of the error resulted in a reduction in comprehensive income of $2,450,000 for the three months ended March 31, 2015 and a decrease in deferred tax assets with a corresponding increase in accumulated other comprehensive loss from cumulative foreign currency translation adjustments of $16,560,000 as of March 31, 2015, but had no impact on the Company’s condensed consolidated statements of income or cash flows. In addition, see Note 6 for a description of revisions made to the condensed consolidating guarantor financial statements. The Company has



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evaluated the effects of these errors, both qualitatively and quantitatively, and concluded that they did not have a material impact on any previously issued financial statements.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the Financial Accounting Standards Board issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting revenue gross versus net)” (“ASU 2016-08”), which clarifies gross versus net revenue reporting when another party is involved in the transaction. In April 2016, the Financial Accounting Standards Board issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. In August 2015, the Financial Accounting Standards Board issued ASU No. 2015-14, which delayed the effective date of ASU 2014-09 by one year resulting in it becoming effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Early adoption is permitted but not before annual reporting periods beginning after December 15, 2016. There are two transition methods available under ASU 2014-09, either cumulative effect or retrospective. The effective date and transition requirements for ASU 2016-08 and ASU 2016-10 are the same as the effective date and transition requirements for ASU 2014-09. The Company is currently assessing the potential impact of ASU 2014-09, ASU 2016-08 and ASU 2016-10 on its consolidated financial statements.

In April 2015, the Financial Accounting Standards Board issued ASU No. 2015-03, which requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. In August 2015, the Financial Accounting Standards Board issued ASU No. 2015-15, which clarified the guidance in ASU 2015-03 regarding presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The SEC Staff announced they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 requires retrospective application and represents a change in accounting principle. ASU 2015-03 became effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The adoption of ASU 2015-03 resulted in a $3,963,000, $4,591,000 and $4,126,000 decrease in other non-current assets and senior unsecured notes in the accompanying condensed consolidated balance sheets as of March 31, 2016, 2015 and December 31, 2015, respectively. The Company elected to present debt issuance costs related to the Company’s revolving unsecured credit facilities as an asset as allowed in ASU 2015-15.

In July 2015, the Financial Accounting Standards Board issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires inventory be measured at the lower of cost or net realizable value. ASU 2015-11 defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory measured using last-in, first-out (“LIFO”) or the retail inventory method are excluded from the scope of this update. ASU 2015-11 requires prospective application and is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, with early adoption permitted. The Company does not expect ASU 2015-11 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.

In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires a lessee to recognize, in the statement of financial position, a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. Lessor accounting remains largely unchanged. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently assessing the potential impact of ASU 2016-02 on its consolidated financial statements.

In March 2016, the Financial Accounting Standards Board issued No. 2016-09 “Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). Under ASU 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them.



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ASU 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. ASU 2016-09 is effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is currently assessing the potential impact of ASU 2016-09 on its consolidated financial statements.

Note 2 - Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (unaudited, in thousands, except per share data):



	Three Months Ended
	March 31,
	2016		2015
Numerator:
Net income	$	13,174	$	16,788

Denominator:
Weighted-average common shares for calculating basic earnings per share	28,241		28,402
Effect of dilutive securities:
Stock options and nonvested awards	—		218
Weighted-average common shares for calculating diluted earnings per share	28,241		28,620

Net income per share:
Basic	$	0.47	$	0.59
Diluted	$	0.47	$	0.59

Note 3 - Acquisitions

The Company completed acquisitions during the three months ended March 31, 2016, as described below, consistent with its strategy to continue its expansion of pawn stores in selected markets. The purchase price of each acquisition was allocated to assets and liabilities acquired based upon their estimated fair market values at the date of acquisition. The excess purchase price over the estimated fair market value of the net assets acquired has been recorded as goodwill. The goodwill arising from these acquisitions consists largely of the synergies and economies of scale expected from combining the operations of the Company and the pawn stores acquired.

Consistent with the Company’s strategy to continue its expansion of pawn stores in Latin America, the Company acquired the operating entity owning the pawn loans, inventory, layaways and other operating assets and liabilities of 166 pawn stores located in Mexico on January 6, 2016 and the assets of 13 pawn stores located in El Salvador on February 2, 2016 in related transactions (collectively the “Latin America Acquisition”). The combined purchase price for the all-cash transaction was $30,123,000, net of cash acquired before certain post-closing adjustments, and was composed of $25,271,000 in cash paid during the three months ended March 31, 2016 and payables to the sellers of $4,852,000. In addition, the Company assumed approximately $6,630,000 in peso-denominated debt from these acquisitions which was repaid in full by the Company in January 2016. The estimated fair values of the assets acquired and liabilities assumed are preliminary, as the Company is gathering information to finalize the valuation of these assets and liabilities. The assets, liabilities and results of operations of the locations are included in the Company’s consolidated results as of the acquisition dates.



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During the three months ended March 31, 2016, one pawn store located in the U.S. was acquired by the Company (“U.S. Acquisition”) for an aggregate purchase price of $824,000, net of cash acquired, and was composed of $774,000 in cash paid during the three months ended March 31, 2016 and payables to the sellers of $50,000.

The preliminary allocations of the purchase prices for the Company’s acquisitions during the three months ended March 31, 2016 (the “2016 acquisitions”) are as follows (in thousands):



	Latin America Acquisition			U.S. Acquisition			Total
Pawn loans	$	10,586		$	138		$	10,724
Pawn loan fees and service charges receivable	885			6			891
Inventory	3,351			169			3,520
Other current assets	2,039			—			2,039
Property and equipment	6,950			10			6,960
Goodwill ⁽¹⁾	19,730			509			20,239
Intangible assets ⁽²⁾	405			16			421
Other non-current assets	512			—			512
Deferred tax assets	2,296			—			2,296
Current liabilities	(10,001		)	(24		)	(10,025		)
Notes payable	(6,630		)	—			(6,630		)
Purchase price	$	30,123		$	824		$	30,947


(1)	Substantially all of the goodwill for the U.S. Acquisition is expected to be deductible for U.S. income tax purposes. However, the goodwill for the Latin America Acquisition is not expected to be deductible for Mexico and El Salvador income tax purposes.


(2)	Intangible assets primarily consist of customer relationships, which are included in other non-current assets in the accompanying condensed consolidated balance sheets. Customer relationships are generally amortized over five years.

During the three months ended March 31, 2016, revenue from the 2016 acquisitions since the acquisition dates was $11,330,000. During the three months ended March 31, 2016, the net earnings from the 2016 acquisitions since the acquisition dates (including acquisition and integration costs) was $203,000. Combined transaction and integration costs related to the 2016 acquisitions were approximately $400,000, which are primarily included in administrative expenses in the accompanying condensed consolidated statements of income.

The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if all the above acquisitions had occurred on January 1, 2015. The unaudited pro forma financial information has been prepared for informational purposes only and does not purport to be indicative of what would have resulted had the acquisition occurred on the date indicated or what may result in the future (in thousands, except per share data):



	Three Months Ended				Three Months Ended
	March 31, 2016				March 31, 2015
	As Reported		Pro Forma		As Reported		Pro Forma
Total revenue	$	183,203	$	184,484	$	176,023	$	189,436
Net income	13,174		13,221		16,788		17,057

Net income per share:
Basic	$	0.47	$	0.47	$	0.59	$	0.60
Diluted	0.47		0.47		0.59		0.60



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Note 4 - Long-Term Debt

Senior Unsecured Notes

On March 24, 2014, the Company issued $200,000,000 of 6.75% senior notes due on April 1, 2021 (the “Notes”). Interest on the Notes is payable semi-annually in arrears on April 1 and October 1. The Notes are fully and unconditionally guaranteed on a senior unsecured basis jointly and severally by all of the Company's existing and future domestic subsidiaries that guarantee the 2015 Credit Facility. The Notes permit the Company to make certain restricted payments, such as repurchasing shares of its stock and paying cash dividends, within certain parameters, the most restrictive of which generally limits such restricted payments to 50% of adjusted net income. As of March 31, 2016, 2015 and December 31, 2015, deferred debt issuance costs of $3,963,000, $4,591,000 and $4,126,000, respectively, are included as a direct deduction from the carrying amount of the Notes in the accompanying condensed consolidated balance sheets.

Revolving Credit Facilities

At March 31, 2016, the Company maintained a line of credit with a group of U.S. based commercial lenders (the “2015 Credit Facility”) in the amount of $210,000,000, which matures in October 2020. At March 31, 2016, the Company had $40,000,000 outstanding under the 2015 Credit Facility and $170,000,000 was available for borrowings. The 2015 Credit Facility bears interest, at the Company’s option, at either (i) the prevailing London Interbank Offered Rate (“LIBOR”) (with interest periods of 1, 2, 3 or 6 months at the Company’s option) plus a fixed spread of 2.5% or (ii) the prevailing prime or base rate plus a fixed spread of 1.5%. The 2015 Credit Facility requires a minimum LIBOR rate of 0%. The weighted-average interest rate on amounts outstanding under the 2015 Credit Facility at March 31, 2016 was 3.00% based on the prevailing 30-day LIBOR rate. The 2015 Credit Facility requires the Company to maintain certain financial ratios and comply with certain financial covenants and allows the Company to make certain restricted payments, such as repurchasing shares of its stock and paying cash dividends, within certain parameters, provided the Company maintains compliance with those financial ratios and covenants after giving effect to such restricted payments. The Company was in compliance with the requirements and covenants of the 2015 Credit Facility as of March 31, 2016. During the three months ended March 31, 2016, the Company made net payments of $18,000,000 pursuant to the 2015 Credit Facility.

At March 31, 2016, the Company maintained a line of credit with a bank in Mexico (the “Mexico Credit Facility”) in the amount of $10,000,000. The Mexico Credit Facility bears interest at the prevailing 30-day LIBOR rate plus a fixed spread of 2.0% and matures in December 2017. Under the terms of the Mexico Credit Facility, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The Company is required to pay a one-time commitment fee of $25,000 due when the first amount is drawn/borrowed. At March 31, 2016, the Company had no amount outstanding under the Mexico Credit Facility and $10,000,000 was available for borrowings.

Note 5 - Fair Value of Financial Instruments

The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The three fair value levels are (from highest to lowest):

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

As cash and cash equivalents have maturities of less than three months, the carrying values of cash and cash equivalents approximate fair value (Level 1 of the fair value hierarchy). Due to their short-term maturities, pawn loans, consumer loans (net) and pawn loan fees and service charges receivable approximate fair value (Level 3 of the fair value hierarchy).

The carrying value of the Company’s prior credit facility approximated fair value as of March 31, 2015. The carrying value of the Company’s current credit facilities (the 2015 Credit Facility and the Mexico Credit Facility) approximated fair value as of March 31, 2016 and December 31, 2015. The fair value of the Notes was approximately $193,000,000, $206,000,000 and $199,000,000 as of March 31, 2016, 2015 and December 31, 2015, respectively, compared to a carrying value of $196,037,000, $195,409,000 and $195,874,000, respectively. These fair values have been estimated based on a discounted cash flow analysis using a discount rate



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representing the Company’s estimate of the rate that would be used by market participants (Level 2 of the fair value hierarchy). Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

Note 6 - Condensed Consolidating Guarantor Financial Statements

In connection with the issuance of the Notes, certain of the Company’s domestic subsidiaries (collectively, “Guarantor Subsidiaries”), fully, unconditionally, jointly and severally guaranteed the payment obligations under the Notes. Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Company. The following supplemental financial information sets forth, on a consolidating basis, the balance sheets, statements of comprehensive income (loss) and statements of cash flows of First Cash Financial Services, Inc. (the “Parent Company”), the Guarantor Subsidiaries and the Parent Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”).

The supplemental condensed consolidating financial information has been prepared pursuant to SEC rules and regulations for interim condensed financial information and does not include the more complete disclosures included in annual financial statements. Investments in consolidated subsidiaries have been presented under the equity method of accounting. The principal eliminating entries eliminate investments in subsidiaries, intercompany balances and intercompany revenues and expenses. The condensed financial information may not necessarily be indicative of the results of operations or financial position had the Guarantor Subsidiaries or Non-Guarantor Subsidiaries operated as independent entities.



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Condensed Consolidating Balance Sheet
March 31, 2016
(unaudited, in thousands)

	Parent Company		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	8,216	$	2,838	$	43,096	$	—		$	54,150
Pawn loan fees and service charges receivable	—		6,511		10,559		—			17,070
Pawn loans	—		52,809		73,811		—			126,620
Consumer loans, net	—		497		488		—			985
Inventories	—		41,163		49,551		—			90,714
Prepaid expenses and other current assets	4,300		—		2,611		—			6,911
Intercompany receivable	10,570		—		1,601		(12,171		)	—
Total current assets	23,086		103,818		181,717		(12,171		)	296,450

Property and equipment, net	3,856		57,101		59,755		—			120,712
Goodwill	—		196,733		118,706		—			315,439
Other non-current assets	1,222		4,631		4,438		—			10,291
Deferred tax assets	—		—		10,993		—			10,993
Investments in subsidiaries	665,322		—		—		(665,322		)	—
Total assets	$	693,486	$	362,283	$	375,609	$	(677,493	)	$	753,885

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities	$	17,975	$	7,681	$	28,840	$	—		$	54,496
Income taxes payable	—		—		1,433		—			1,433
Intercompany payable	—		—		12,171		(12,171		)	—
Total current liabilities	17,975		7,681		42,444		(12,171		)	55,929

Revolving unsecured credit facilities	40,000		—		—		—			40,000
Senior unsecured notes	196,037		—		—		—			196,037
Deferred tax liabilities	186		19,964		2,482		—			22,632
Total liabilities	254,198		27,645		44,926		(12,171		)	314,598

Total stockholders’ equity	439,288		334,638		330,683		(665,322		)	439,287
Total liabilities and stockholders’ equity	$	693,486	$	362,283	$	375,609	$	(677,493	)	$	753,885



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Condensed Consolidating Balance Sheet
March 31, 2015
(unaudited, in thousands)

	Parent Company		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	13,136	$	2,697	$	59,970	$	—		$	75,803
Pawn loan fees and service charges receivable	—		6,667		9,565		—			16,232
Pawn loans	—		52,461		61,845		—			114,306
Consumer loans, net	—		461		516		—			977
Inventories	—		34,802		47,752		—			82,554
Prepaid expenses and other current assets	1,647		—		2,145		(490		)	3,302
Intercompany receivable	6,526		—		—		(6,526		)	—
Total current assets	21,309		97,088		181,793		(7,016		)	293,174

Property and equipment, net	3,916		53,807		54,864		—			112,587
Goodwill	—		181,752		94,793		—			276,545
Other non-current assets	1,120		5,364		4,403		—			10,887
Deferred tax assets	1,600		—		8,845		(1,600		)	8,845
Investments in subsidiaries	630,832		—		—		(630,832		)	—
Total assets	$	658,777	$	338,011	$	344,698	$	(639,448	)	$	702,038

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities	$	15,854	$	7,604	$	18,246	$	—		$	41,704
Income taxes payable	540		—		—		(490		)	50
Intercompany payable	—		—		6,526		(6,526		)	—
Total current liabilities	16,394		7,604		24,772		(7,016		)	41,754

Revolving unsecured credit facilities	14,500		—		—		—			14,500
Senior unsecured notes	195,409		—		—		—			195,409
Deferred tax liabilities	—		17,370		2,131		(1,600		)	17,901
Total liabilities	226,303		24,974		26,903		(8,616		)	269,564

Total stockholders’ equity	432,474		313,037		317,795		(630,832		)	432,474
Total liabilities and stockholders’ equity	$	658,777	$	338,011	$	344,698	$	(639,448	)	$	702,038



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Condensed Consolidating Balance Sheet
December 31, 2015
(unaudited, in thousands)

	Parent Company		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	5,460	$	3,765	$	77,729	$	—		$	86,954
Pawn loan fees and service charges receivable	—		7,596		8,810		—			16,406
Pawn loans	—		61,204		56,397		—			117,601
Consumer loans, net	—		624		494		—			1,118
Inventories	—		46,349		47,109		—			93,458
Prepaid expenses and other current assets	6,477		—		3,420		—			9,897
Intercompany receivable	7,382		—		—		(7,382		)	—
Total current assets	19,319		119,538		193,959		(7,382		)	325,434

Property and equipment, net	3,568		55,585		53,294		—			112,447
Goodwill	—		196,224		99,385		—			295,609
Other non-current assets	1,290		4,893		3,901		—			10,084
Deferred tax assets	—		—		9,321		—			9,321
Investments in subsidiaries	675,574		—		—		(675,574		)	—
Total assets	$	699,751	$	376,240	$	359,860	$	(682,956	)	$	752,895

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities	$	14,308	$	7,929	$	20,015	$	—		$	42,252
Income taxes payable	—		—		3,923		—			3,923
Intercompany payable	—		—		7,382		(7,382		)	—
Total current liabilities	14,308		7,929		31,320		(7,382		)	46,175

Revolving unsecured credit facilities	58,000		—		—		—			58,000
Senior unsecured notes	195,874		—		—		—			195,874
Deferred tax liabilities	187		18,880		2,397		—			21,464
Total liabilities	268,369		26,809		33,717		(7,382		)	321,513

Total stockholders’ equity	431,382		349,431		326,143		(675,574		)	431,382
Total liabilities and stockholders’ equity	$	699,751	$	376,240	$	359,860	$	(682,956	)	$	752,895



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Condensed Consolidating Statement of Comprehensive Income (Loss)
Three Months Ended March 31, 2016
(unaudited, in thousands)

	Parent Company		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Eliminations		Consolidated
Revenue:
Retail merchandise sales	$	—	$	45,825	$	72,951	$	—	$	118,776
Pawn loan fees	—		21,329		30,104		—		51,433
Consumer loan and credit services fees	—		5,127		559		—		5,686
Wholesale scrap jewelry revenue	—		4,243		3,065		—		7,308
Total revenue	—		76,524		106,679		—		183,203

Cost of revenue:
Cost of retail merchandise sold	—		27,601		46,821		—		74,422
Consumer loan and credit services loss provision	—		907		140		—		1,047
Cost of wholesale scrap jewelry sold	—		3,443		2,428		—		5,871
Total cost of revenue	—		31,951		49,389		—		81,340

Net revenue	—		44,573		57,290		—		101,863

Expenses and other income:
Store operating expenses	—		23,935		31,476		—		55,411
Administrative expenses ⁽¹⁾	9,609		—		8,059		—		17,668
Depreciation and amortization	174		1,696		3,067		—		4,937
Interest expense	4,394		—		66		—		4,460
Interest income

FIRSTCASH, INC - FORM 10-Q - May 9, 2016

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