Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - FIRSTCASH, INC | fcfs03312018exhibit322.htm |
| EX-32.1 - EXHIBIT 32.1 - FIRSTCASH, INC | fcfs03312018exhibit321.htm |
| EX-31.2 - EXHIBIT 31.2 - FIRSTCASH, INC | fcfs03312018exhibit312.htm |
| EX-31.1 - EXHIBIT 31.1 - FIRSTCASH, INC | fcfs03312018exhibit311.htm |
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, 2018
OR
[ ] | 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 001-10960
FIRSTCASH, 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.) |
1600 West 7th Street, Fort Worth, Texas | 76102 |
(Address of principal executive offices) | (Zip Code) |
(817) 335-1100
(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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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 |
o Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 April 23, 2018, there were 45,415,242 shares of common stock outstanding.
FIRSTCASH, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2018
INDEX
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 FirstCash, Inc. and its wholly owned subsidiaries (together, the “Company”). 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,” “would,” “anticipates,” “potential,” “confident,” “optimistic” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy, objectives, estimates, guidance, expectations and future plans. Forward-looking statements can also be identified by the fact 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.
These forward-looking 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 may include, without limitation, the risks, uncertainties and regulatory developments discussed and described in (i) the Company’s 2017 annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2018, including the risks described in Part 1, Item 1A, “Risk Factors” thereof, (ii) in this quarterly report, and (iii) other reports filed with the SEC. 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.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTCASH, INC. | ||||||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||||||
(unaudited, in thousands) | ||||||||||||
March 31, | December 31, | |||||||||||
2018 | 2017 | 2017 | ||||||||||
ASSETS | ||||||||||||
Cash and cash equivalents | $ | 110,408 | $ | 73,148 | $ | 114,423 | ||||||
Fees and service charges receivable | 40,022 | 38,021 | 42,736 | |||||||||
Pawn loans | 322,625 | 314,505 | 344,748 | |||||||||
Consumer loans, net | 17,447 | 22,209 | 23,522 | |||||||||
Inventories | 254,298 | 308,165 | 276,771 | |||||||||
Income taxes receivable | 24 | 18,419 | 19,761 | |||||||||
Prepaid expenses and other current assets | 21,575 | 14,331 | 20,236 | |||||||||
Total current assets | 766,399 | 788,798 | 842,197 | |||||||||
Property and equipment, net | 234,126 | 237,258 | 230,341 | |||||||||
Goodwill | 844,516 | 835,567 | 831,145 | |||||||||
Intangible assets, net | 91,764 | 101,594 | 93,819 | |||||||||
Other assets | 54,392 | 69,088 | 54,045 | |||||||||
Deferred tax assets | 12,499 | 11,249 | 11,237 | |||||||||
Total assets | $ | 2,003,696 | $ | 2,043,554 | $ | 2,062,784 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Accounts payable and accrued liabilities | $ | 88,328 | $ | 79,726 | $ | 84,331 | ||||||
Customer deposits | 35,692 | 36,983 | 32,019 | |||||||||
Income taxes payable | 12,266 | 1,041 | 4,221 | |||||||||
Total current liabilities | 136,286 | 117,750 | 120,571 | |||||||||
Revolving unsecured credit facility | 83,000 | 137,000 | 107,000 | |||||||||
Senior unsecured notes | 295,400 | 196,721 | 295,243 | |||||||||
Deferred tax liabilities | 49,063 | 74,368 | 47,037 | |||||||||
Other liabilities | 15,661 | 30,480 | 17,600 | |||||||||
Total liabilities | 579,410 | 556,319 | 587,451 | |||||||||
Stockholders’ equity: | ||||||||||||
Preferred stock | — | — | — | |||||||||
Common stock | 493 | 493 | 493 | |||||||||
Additional paid-in capital | 1,220,491 | 1,217,756 | 1,220,356 | |||||||||
Retained earnings | 525,847 | 410,874 | 494,457 | |||||||||
Accumulated other comprehensive loss | (90,043 | ) | (96,801 | ) | (111,877 | ) | ||||||
Common stock held in treasury, at cost | (232,502 | ) | (45,087 | ) | (128,096 | ) | ||||||
Total stockholders’ equity | 1,424,286 | 1,487,235 | 1,475,333 | |||||||||
Total liabilities and stockholders’ equity | $ | 2,003,696 | $ | 2,043,554 | $ | 2,062,784 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||||||
1
FIRSTCASH, INC. | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF INCOME | ||||||||
(unaudited, in thousands, except per share amounts) | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
Revenue: | ||||||||
Retail merchandise sales | $ | 269,841 | $ | 259,994 | ||||
Pawn loan fees | 129,793 | 128,251 | ||||||
Wholesale scrap jewelry sales | 34,725 | 38,111 | ||||||
Consumer loan and credit services fees | 15,441 | 21,220 | ||||||
Total revenue | 449,800 | 447,576 | ||||||
Cost of revenue: | ||||||||
Cost of retail merchandise sold | 174,497 | 165,635 | ||||||
Cost of wholesale scrap jewelry sold | 32,495 | 34,949 | ||||||
Consumer loan and credit services loss provision | 3,727 | 4,092 | ||||||
Total cost of revenue | 210,719 | 204,676 | ||||||
Net revenue | 239,081 | 242,900 | ||||||
Expenses and other income: | ||||||||
Store operating expenses | 138,561 | 136,744 | ||||||
Administrative expenses | 28,002 | 33,238 | ||||||
Depreciation and amortization | 11,283 | 14,243 | ||||||
Interest expense | 6,198 | 6,113 | ||||||
Interest income | (981 | ) | (327 | ) | ||||
Merger and other acquisition expenses | 239 | 647 | ||||||
Total expenses and other income | 183,302 | 190,658 | ||||||
Income before income taxes | 55,779 | 52,242 | ||||||
Provision for income taxes | 14,144 | 19,597 | ||||||
Net income | $ | 41,635 | $ | 32,645 | ||||
Net income per share: | ||||||||
Basic | $ | 0.90 | $ | 0.67 | ||||
Diluted | $ | 0.90 | $ | 0.67 | ||||
Dividends declared per common share | $ | 0.22 | $ | 0.19 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||
2
FIRSTCASH, INC. | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||||
(unaudited, in thousands) | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
Net income | $ | 41,635 | $ | 32,645 | ||||
Other comprehensive income: | ||||||||
Currency translation adjustment | 21,834 | 23,005 | ||||||
Comprehensive income | $ | 63,469 | $ | 55,650 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||
FIRSTCASH, 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 12/31/2017 | — | $ | — | 49,276 | $ | 493 | $ | 1,220,356 | $ | 494,457 | $ | (111,877 | ) | 2,362 | $ | (128,096 | ) | $ | 1,475,333 | ||||||||||||||||||
Shares issued under share-based com-pensation plan | — | — | — | — | (1,240 | ) | — | — | (22 | ) | 1,240 | — | |||||||||||||||||||||||||
Share-based compensa-tion expense | — | — | — | — | 1,375 | — | — | — | — | 1,375 | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | 41,635 | — | — | — | 41,635 | |||||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | (10,245 | ) | — | — | — | (10,245 | ) | |||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | 21,834 | — | — | 21,834 | |||||||||||||||||||||||||||
Purchases of treasury stock | — | — | — | — | — | — | — | 1,378 | (105,646 | ) | (105,646 | ) | |||||||||||||||||||||||||
Balance at 3/31/2018 | — | $ | — | 49,276 | $ | 493 | $ | 1,220,491 | $ | 525,847 | $ | (90,043 | ) | 3,718 | $ | (232,502 | ) | $ | 1,424,286 | ||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||||||||||||||||||||||||||||
3
FIRSTCASH, 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 12/31/2016 | — | $ | — | 49,276 | $ | 493 | $ | 1,217,969 | $ | 387,401 | $ | (119,806 | ) | 769 | $ | (36,071 | ) | $ | 1,449,986 | ||||||||||||||||||
Shares issued under share-based com-pensation plan | — | — | — | — | (440 | ) | — | — | (10 | ) | 440 | — | |||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | (549 | ) | — | — | (13 | ) | 549 | — | |||||||||||||||||||||||||
Share-based compensa-tion expense | — | — | — | — | 776 | — | — | — | — | 776 | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | 32,645 | — | — | — | 32,645 | |||||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | (9,172 | ) | — | — | — | (9,172 | ) | |||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | 23,005 | — | — | 23,005 | |||||||||||||||||||||||||||
Purchases of treasury stock | — | — | — | — | — | — | — | 228 | (10,005 | ) | (10,005 | ) | |||||||||||||||||||||||||
Balance at 3/31/2017 | — | $ | — | 49,276 | $ | 493 | $ | 1,217,756 | $ | 410,874 | $ | (96,801 | ) | 974 | $ | (45,087 | ) | $ | 1,487,235 | ||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||||||||||||||||||||||||||||||||||
4
FIRSTCASH, INC. | ||||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(unaudited, in thousands) | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
Cash flow from operating activities: | ||||||||
Net income | $ | 41,635 | $ | 32,645 | ||||
Adjustments to reconcile net income to net cash flow provided by operating activities: | ||||||||
Non-cash portion of credit loss provision | 1,874 | 2,639 | ||||||
Share-based compensation expense | 1,375 | 776 | ||||||
Depreciation and amortization expense | 11,283 | 14,243 | ||||||
Amortization of debt issuance costs | 480 | 467 | ||||||
Amortization of favorable/(unfavorable) lease intangibles, net | (466 | ) | (237 | ) | ||||
Deferred income taxes, net | 1,609 | 12,550 | ||||||
Changes in operating assets and liabilities, net of business combinations: | ||||||||
Fees and service charges receivable | 3,844 | 3,865 | ||||||
Inventories | 7,715 | 6,796 | ||||||
Prepaid expenses and other assets | (3,174 | ) | 11,594 | |||||
Accounts payable, accrued liabilities and other liabilities | (2,478 | ) | (29,071 | ) | ||||
Income taxes | 27,619 | 7,598 | ||||||
Net cash flow provided by operating activities | 91,316 | 63,865 | ||||||
Cash flow from investing activities: | ||||||||
Loan receivables, net of cash repayments | 56,220 | 67,189 | ||||||
Purchases of property and equipment | (8,837 | ) | (8,076 | ) | ||||
Acquisitions of pawn stores, net of cash acquired | (13,364 | ) | (854 | ) | ||||
Net cash flow provided by investing activities | 34,019 | 58,259 | ||||||
Cash flow from financing activities: | ||||||||
Borrowings from revolving unsecured credit facility | 61,000 | 15,000 | ||||||
Repayments of revolving unsecured credit facility | (85,000 | ) | (138,000 | ) | ||||
Purchases of treasury stock | (100,019 | ) | (10,005 | ) | ||||
Dividends paid | (10,245 | ) | (9,172 | ) | ||||
Net cash flow used in financing activities | (134,264 | ) | (142,177 | ) | ||||
Effect of exchange rates on cash | 4,914 | 3,246 | ||||||
Change in cash and cash equivalents | (4,015 | ) | (16,807 | ) | ||||
Cash and cash equivalents at beginning of the period | 114,423 | 89,955 | ||||||
Cash and cash equivalents at end of the period | $ | 110,408 | $ | 73,148 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||
5
FIRSTCASH, 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, 2017, which is derived from audited financial statements, and the unaudited condensed consolidated financial statements, including the notes thereto, include the accounts of FirstCash, Inc. and its wholly-owned subsidiaries (together, the “Company”). The Company regularly makes acquisitions and the results of operations for the acquired stores have been consolidated since the acquisition dates. All significant intercompany accounts and transactions have been eliminated. See Note 3.
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, 2017, filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2018. The condensed consolidated financial statements as of March 31, 2018 and 2017, and for the three month periods ended March 31, 2018 and 2017, 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, 2018 are not necessarily indicative of the results that may be expected for the full fiscal year.
The Company has significant operations in Latin America, where in Mexico, Guatemala and Colombia the functional currency is the Mexican peso, Guatemalan quetzal and Colombian peso, 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. Revenues and expenses are translated at the average exchange rates occurring during the three month periods ended March 31, 2018 and 2017. The Company also has operations in El Salvador where the reporting and functional currency is the U.S. dollar.
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 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 disclosure 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 August 2015, the Financial Accounting Standards Board issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606),” which delayed the effective date of ASU 2014-09 by one year. In addition, between March 2016 and December 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”), ASU No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”). ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 clarify certain aspects of ASU 2014-09 and provide additional implementation guidance. ASU 2014-09, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 (collectively, “ASC 606”) became effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Entities are permitted to adopt ASC 606 using one of two methods: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustment to the opening retained earnings balance.
The Company adopted ASC 606 as of January 1, 2018 using the modified retrospective method. The adoption of ASC 606 did not impact the Company’s revenue recognition for pawn loan fees, consumer loan fees, or credit services fees, as each of these revenue streams is outside of the scope of ASC 606. Further, the Company has not identified any impacts to its consolidated financial statements that were material as a result of the adoption of ASC 606 for its retail merchandise sales or wholesale scrap jewelry sales revenue streams. The Company has not changed the presentation of its consolidated financial statements for assets, liabilities, or revenues from contracts with customers, nor has the Company recognized any cumulative effect adjustment as a result of the adoption of ASC 606.
6
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 June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the potential impact of ASU 2016-13 on its consolidated financial statements.
In August 2016, the Financial Accounting Standards Board issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing existing diversity in practice. ASU 2016-15 became effective for public entities for fiscal years beginning after December 15, 2017. The adoption of ASU 2016-15 did not have a material effect on the Company’s consolidated financial statements or financial statement disclosures.
In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 provides amendments to clarify the definition of a business and affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance became effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. The adoption of ASU 2017-01 did not have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.
In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). These amendments eliminate step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017 and should be adopted on a prospective basis. The Company does not expect ASU 2017-04 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.
In March 2018, the Financial Accounting Standards Board issued ASU No 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”), which became effective immediately. ASU 2018-05 adds various SEC paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”). See Note 6 for additional information regarding the adoption of ASU 2018-05.
7
Note 2 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Three Months Ended | ||||||||
March 31, | ||||||||
2018 | 2017 | |||||||
Numerator: | ||||||||
Net income | $ | 41,635 | $ | 32,645 | ||||
Denominator (in thousands): | ||||||||
Weighted-average common shares for calculating basic earnings per share | 46,426 | 48,389 | ||||||
Effect of dilutive securities: | ||||||||
Stock options and nonvested common stock awards | 53 | 13 | ||||||
Weighted-average common shares for calculating diluted earnings per share | 46,479 | 48,402 | ||||||
Net income per share: | ||||||||
Basic | $ | 0.90 | $ | 0.67 | ||||
Diluted | $ | 0.90 | $ | 0.67 | ||||
Note 3 - Acquisitions
Consistent with the Company’s strategy to continue its expansion of pawn stores in selected markets, during the three months ended March 31, 2018, the Company acquired 126 stores in Mexico and three single pawn stores located in the U.S. in four separate transactions. The all-cash aggregate purchase price for these acquisitions was $15.5 million, net of cash acquired and subject to future post-closing adjustments. The purchases were composed of $13.4 million in cash paid during the three months ended March 31, 2018 and remaining payables to the sellers of approximately $2.1 million. 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 and liabilities assumed 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. These acquisitions were not material individually or in the aggregate to the Company’s consolidated financial statements.
Note 4 - Long-Term Debt
The following table details the Company’s long-term debt at the respective principal amounts, net of unamortized debt issuance costs (in thousands):
March 31, | December 31, | ||||||||||
2018 | 2017 | 2017 | |||||||||
Senior unsecured notes: | |||||||||||
5.375% senior notes due 2024 (1) | $ | 295,400 | $ | — | $ | 295,243 | |||||
6.75% senior notes due 2021 (2) | — | 196,721 | — | ||||||||
$ | 295,400 | $ | 196,721 | $ | 295,243 | ||||||
Revolving unsecured credit facility, maturing 2022 | $ | 83,000 | $ | 137,000 | $ | 107,000 | |||||
(1) | As of March 31, 2018 and December 31, 2017, deferred debt issuance costs of $4.6 million and $4.8 million, respectively, are included as a direct deduction from the carrying amount of the senior unsecured notes due 2024 in the accompanying condensed consolidated balance sheets. |
8
(2) | As of March 31, 2017, deferred debt issuance costs of $3.3 million are included as a direct deduction from the carrying amount of the senior unsecured notes due 2021 in the accompanying condensed consolidated balance sheets. |
Senior Unsecured Notes
On May 30, 2017, the Company issued $300.0 million of 5.375% senior notes due on June 1, 2024 (the “Notes”), all of which are currently outstanding. Interest on the Notes is payable semi-annually in arrears on June 1 and December 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 its primary revolving bank credit facility. The Notes will permit the Company to make restricted payments, such as purchasing shares of its stock and paying cash dividends, in an unlimited amount if, after giving pro forma effect to the incurrence of any indebtedness to make such payment, the Company's consolidated total debt ratio (“Net Debt Ratio”) is less than 2.25 to 1. The Net Debt Ratio is defined generally in the indenture governing the Notes as the ratio of (1) the total consolidated debt of the Company minus cash and cash equivalents of the Company to (2) the Company’s consolidated trailing twelve months EBITDA, as adjusted to exclude certain non-recurring expenses and giving pro forma effect to operations acquired during the measurement period.
Revolving Credit Facility
At March 31, 2018, the Company maintained a line of credit with a group of U.S. based commercial lenders (the “2016 Credit Facility”) in the amount of $400.0 million, which matures on September 2, 2022. At March 31, 2018, the Company had $83.0 million in outstanding borrowings and $5.1 million in outstanding letters of credit under the 2016 Credit Facility, leaving $311.9 million available for future borrowings. The 2016 Credit Facility bears interest, at the Company’s option, at either (i) the prevailing London Interbank Offered Rate (“LIBOR”) (with interest periods of 1 week or 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 agreement has a LIBOR floor of 0%. Additionally, the Company is required to pay an annual commitment fee of 0.50% on the average daily unused portion of the 2016 Credit Facility commitment. The weighted-average interest rate on amounts outstanding under the 2016 Credit Facility at March 31, 2018 was 4.25% based on 1 week LIBOR. Under the terms of the 2016 Credit Facility, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The 2016 Credit Facility also contains customary restrictions on the Company’s ability to incur additional debt, grant liens, make investments, consummate acquisitions and similar negative covenants with customary carve-outs and baskets. The Company was in compliance with the requirements and covenants of the 2016 Credit Facility as of March 31, 2018. During the three months ended March 31, 2018, the Company made net payments of $24.0 million pursuant to the 2016 Credit Facility.
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.
Recurring Fair Value Measurements
As of March 31, 2018, 2017 and December 31, 2017, the Company did not have any financial assets or liabilities measured at fair value on a recurring basis.
Fair Value Measurements on a Nonrecurring Basis
The Company measures non-financial assets and liabilities such as property and equipment and intangible assets at fair value on a nonrecurring basis or when events or circumstances indicate that the carrying amount of the assets may be impaired.
9
Financial Assets and Liabilities Not Measured at Fair Value
The Company’s financial assets and liabilities as of March 31, 2018, 2017 and December 31, 2017 that are not measured at fair value in the condensed consolidated balance sheets are as follows (in thousands):
Carrying Value | Estimated Fair Value | |||||||||||||||||||
March 31, | March 31, | Fair Value Measurements Using | ||||||||||||||||||
2018 | 2018 | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 110,408 | $ | 110,408 | $ | 110,408 | $ | — | $ | — | ||||||||||
Pawn loans | 322,625 | 322,625 | — | — | 322,625 | |||||||||||||||
Consumer loans, net | 17,447 | 17,447 | — | — | 17,447 | |||||||||||||||
Fees and service charges receivable | 40,022 | 40,022 | — | — | 40,022 | |||||||||||||||
$ | 490,502 | $ | 490,502 | $ | 110,408 | $ | — | $ | 380,094 | |||||||||||
Financial liabilities: | ||||||||||||||||||||
Revolving unsecured credit facility | $ | 83,000 | $ | 83,000 | $ | — | $ | 83,000 | $ | — | ||||||||||
Senior unsecured notes, outstanding principal | 300,000 | 305,000 | — | 305,000 | — | |||||||||||||||
$ | 383,000 | $ | 388,000 | $ | — | $ | 388,000 | $ | — | |||||||||||
Carrying Value | Estimated Fair Value | |||||||||||||||||||
March 31, | March 31, | Fair Value Measurements Using | ||||||||||||||||||
2017 | 2017 | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 73,148 | $ | 73,148 | $ | 73,148 | $ | — | $ | — | ||||||||||
Pawn loans | 314,505 | 314,505 | — | — | 314,505 | |||||||||||||||
Consumer loans, net | 22,209 | 22,209 | — | — | 22,209 | |||||||||||||||
Fees and service charges receivable | 38,021 | 38,021 | — | — | 38,021 | |||||||||||||||
$ | 447,883 | $ | 447,883 | $ | 73,148 | $ | — | $ | 374,735 | |||||||||||
Financial liabilities: | ||||||||||||||||||||
Revolving unsecured credit facility | $ | 137,000 | $ | 137,000 | $ | — | $ | 137,000 | $ | — | ||||||||||
Senior unsecured notes, outstanding principal | 200,000 | 208,000 | — | 208,000 | — | |||||||||||||||
$ | 337,000 | $ | 345,000 | $ | — | $ | 345,000 | $ | — | |||||||||||
10
Carrying Value | Estimated Fair Value | |||||||||||||||||||
December 31, | December 31, | Fair Value Measurements Using | ||||||||||||||||||
2017 | 2017 | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 114,423 | $ | 114,423 | $ | 114,423 | $ | — | $ | — | ||||||||||
Pawn loans | 344,748 | 344,748 | — | — | 344,748 | |||||||||||||||
Consumer loans, net | 23,522 | 23,522 | — | — | 23,522 | |||||||||||||||
Fees and service charges receivable | 42,736 | 42,736 | — | — | 42,736 | |||||||||||||||
$ | 525,429 | $ | 525,429 | $ | 114,423 | $ | — | $ | 411,006 | |||||||||||
Financial liabilities: | ||||||||||||||||||||
Revolving unsecured credit facility | $ | 107,000 | $ | 107,000 | $ | — | $ | 107,000 | $ | — | ||||||||||
Senior unsecured notes, outstanding principal | 300,000 | 314,000 | — | 314,000 | — | |||||||||||||||
$ | 407,000 | $ | 421,000 | $ | — | $ | 421,000 | $ | — | |||||||||||
As cash and cash equivalents have maturities of less than three months, the carrying value of cash and cash equivalents approximates fair value. Due to their short-term maturities, the carrying value of pawn loans and fees and service charges receivable approximate fair value. Short-term loans and installment loans, collectively, represent consumer loans, net on the accompanying condensed consolidated balance sheets and are carried net of the allowance for estimated loan losses, which is calculated by applying historical loss rates combined with recent default trends to the gross consumer loan balance. The unobservable inputs used to calculate the fair value of these loans include historical loss rates, recent default trends and estimated remaining loan terms. Therefore, the carrying value approximates the fair value.
The carrying value of the Company’s revolving unsecured credit facility approximates fair value as of March 31, 2018, 2017 and December 31, 2017. The fair value of the senior unsecured notes have been estimated based on a discounted cash flow analysis using a discount rate representing the Company’s estimate of the rate that would be used by market participants. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.
Note 6 - Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted into law. The Tax Act significantly changed U.S. corporate income tax law by, among other things, reducing the U.S. corporate income tax rate from 35% to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. corporations.
The Company’s effective tax rate for the three months ended March 31, 2018 was 25.4% compared to 37.5%, for the three months ended March 31, 2017. The decrease in the effective tax rate for the three months ended March 31, 2018 reflects the reduced U.S. corporate income tax rate as a result of the passage of the Tax Act blended with the statutory tax rates of the Company’s foreign subsidiaries which are 30%, 25% and 30% in Mexico, Guatemala and El Salvador, respectively.
In December 2017, the SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. As a result of the Tax Act, the Company recorded a provisional net income tax benefit of $27.3 million in fourth quarter of 2017. As of March 31, 2018, no adjustments to the estimates used to determine the provisional net tax benefit have been made. Any adjustments will be included in the provision for income taxes in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018. See Note 11 in the accompanying notes to the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2017 for further information on the provisional income tax benefit.
11
Note 7 - Segment Information
The Company organizes its operations into two reportable segments as follows:
• | U.S. operations - Includes all pawn and consumer loan operations in the U.S. |
• | Latin America operations - Includes all pawn and consumer loan operations in Latin America, which currently includes operations in Mexico, Guatemala, El Salvador and Colombia |
The following tables present reportable segment information for the three month period ended March 31, 2018 and 2017 (in thousands):
Three Months Ended March 31, 2018 | ||||||||||||||||
U.S. Operations | Latin America Operations | Corporate | Consolidated | |||||||||||||
Revenue: | ||||||||||||||||
Retail merchandise sales | $ | 186,052 | $ | 83,789 | $ | — | $ | 269,841 | ||||||||
Pawn loan fees | 96,242 | 33,551 | — | 129,793 | ||||||||||||
Wholesale scrap jewelry sales | 29,457 | 5,268 | — | 34,725 | ||||||||||||
Consumer loan and credit services fees | 15,039 | 402 | — | 15,441 | ||||||||||||
Total revenue | 326,790 | 123,010 | — | 449,800 | ||||||||||||
Cost of revenue: | ||||||||||||||||
Cost of retail merchandise sold | 120,616 | 53,881 | — | 174,497 | ||||||||||||
Cost of wholesale scrap jewelry sold | 27,653 | 4,842 | — | 32,495 | ||||||||||||
Consumer loan and credit services loss provision | 3,644 | 83 | — | 3,727 | ||||||||||||
Total cost of revenue | 151,913 | 58,806 | — | 210,719 | ||||||||||||
Net revenue | 174,877 | 64,204 | — | 239,081 | ||||||||||||
Expenses and other income: | ||||||||||||||||
Store operating expenses | 104,383 | 34,178 | — | 138,561 | ||||||||||||
Administrative expenses | — | — | 28,002 | 28,002 | ||||||||||||
Depreciation and amortization | 5,555 | 2,709 | 3,019 | 11,283 | ||||||||||||
Interest expense | — | — | 6,198 | 6,198 | ||||||||||||
Interest income | — | — | (981 | ) | (981 | ) | ||||||||||
Merger and other acquisition expenses | — | — | 239 | 239 | ||||||||||||
Total expenses and other income | 109,938 | 36,887 | 36,477 | 183,302 | ||||||||||||
Income (loss) before income taxes | $ | 64,939 | $ | 27,317 | $ | (36,477 | ) | $ | 55,779 | |||||||
12
Three Months Ended March 31, 2017 | ||||||||||||||||
U.S. Operations | Latin America Operations | Corporate | Consolidated | |||||||||||||
Revenue: | ||||||||||||||||
Retail merchandise sales | $ | 193,666 | $ | 66,328 | $ | — | $ | 259,994 | ||||||||
Pawn loan fees | 101,818 | 26,433 | — | 128,251 | ||||||||||||
Wholesale scrap jewelry sales | 32,897 | 5,214 | — | 38,111 | ||||||||||||
Consumer loan and credit services fees | 20,815 | 405 | — | 21,220 | ||||||||||||
Total revenue | 349,196 | 98,380 | — | 447,576 | ||||||||||||
Cost of revenue: | ||||||||||||||||
Cost of retail merchandise sold | 123,497 | 42,138 | — | 165,635 | ||||||||||||
Cost of wholesale scrap jewelry sold | 30,682 | 4,267 | — | 34,949 | ||||||||||||
Consumer loan and credit services loss provision | 3,990 | 102 | — | 4,092 | ||||||||||||
Total cost of revenue | 158,169 | 46,507 | — | 204,676 | ||||||||||||
Net revenue | 191,027 | 51,873 | — | 242,900 | ||||||||||||
Expenses and other income: | ||||||||||||||||
Store operating expenses | 107,968 | 28,776 | — | 136,744 | ||||||||||||
Administrative expenses | — | — | 33,238 | 33,238 | ||||||||||||
Depreciation and amortization | 6,419 | 2,397 | 5,427 | 14,243 | ||||||||||||
Interest expense | — | — | 6,113 | 6,113 | ||||||||||||
Interest income | — | — | (327 | ) | (327 | ) | ||||||||||
Merger and other acquisition expenses | — | — | 647 | 647 | ||||||||||||
Total expenses and other income | 114,387 | 31,173 | 45,098 | 190,658 | ||||||||||||
Income (loss) before income taxes | $ | 76,640 | $ | 20,700 | $ | (45,098 | ) | $ | 52,242 | |||||||
13
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of financial condition, results of operations, liquidity and capital resources of FirstCash, Inc. and its wholly-owned subsidiaries (the “Company”) should be read in conjunction with the Company’s condensed consolidated financial statements and accompanying notes included under Part I, Item 1 of this quarterly report on Form 10-Q, as well as with the audited consolidated financial statements and accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s annual report on Form 10-K for the year ended December 31, 2017.
GENERAL
The Company is a leading operator of retail-based pawn stores with over 2,200 store locations in the U.S. and Latin America. The Company’s pawn stores generate significant retail sales primarily from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers. The stores also offer pawn loans to help customers meet small short-term cash needs. Personal property, such as consumer electronics, jewelry, power tools, household appliances, sporting goods and musical instruments, is pledged as collateral for the pawn loans and held by the Company over the term of the loan plus a stated grace period. In addition, some of the Company’s pawn stores offer consumer loans or credit services products. The Company’s strategy is to focus on growing its retail-based pawn operations in the U.S. and Latin America through new store openings and strategic acquisition opportunities as they arise. Pawn operations, which include retail merchandise sales, pawn loan fees and wholesale scrap jewelry sales, accounted for approximately 97% and 95% of the Company’s consolidated revenue during the three month periods ended March 31, 2018 and 2017, respectively.
The Company organizes its operations into two reportable segments. The U.S. operations segment consists of all pawn and consumer loan operations in the U.S. and the Latin America operations segment consists of all pawn and consumer loan operations in Latin America, which currently includes operations in Mexico, Guatemala, El Salvador and Colombia.
The Company recognizes pawn loan fee revenue on a constant-yield basis over the life of the pawn loan for all pawn loans of which the Company deems collection to be probable based on historical redemption statistics. If a pawn loan is not repaid prior to the expiration of the loan term, including any extension or grace period, if applicable, the property is forfeited to the Company and transferred to inventory at a value equal to the principal amount of the loan, exclusive of accrued pawn fee revenue. The Company records merchandise sales revenue at the time of the sale and presents merchandise sales net of any sales or value-added taxes collected. The Company does not provide direct financing to customers for the purchase of its merchandise, but does permit its customers to purchase merchandise on an interest-free layaway plan. Should the customer fail to make a required payment pursuant to a layaway plan, the previous payments are typically forfeited to the Company. Interim payments from customers on layaway sales are recorded as deferred revenue and subsequently recorded as income during the period in which final payment is received or when previous payments are forfeited to the Company. Some jewelry is processed at third-party facilities and the precious metal and diamond content is sold at either prevailing market commodity prices or a previously agreed upon price with a commodity buyer. The Company records revenue from these wholesale scrap jewelry transactions when a price has been agreed upon and the Company ships the commodity to the buyer.
The Company operates a small number of stand-alone consumer finance stores in the U.S. and Mexico. These stores provide consumer financial services products including credit services and consumer loans. In addition, 360 of the Company’s pawn stores also offer credit services and/or consumer loans as an ancillary product, which products have been deemphasized by the Company in recent years due to regulatory constraints and increased internet based competition for such products. Beginning in fiscal 2018, the Company no longer offers fee-based check cashing services in its company-owned, non-franchised stores. Consumer loan and credit services revenue accounted for approximately 3% and 5% of consolidated revenue during the three month periods ended March 31, 2018 and 2017, respectively.
The Company recognizes service fee income on consumer loan transactions on a constant-yield basis over the life of the loan and recognizes credit services fees ratably over the life of the extension of credit made by independent third-party lenders. Changes in the valuation reserve on consumer loans and credit services transactions are charged or credited to the consumer loan credit loss provision. The credit loss provision associated with the Company’s credit services organization program and consumer loans is based primarily upon historical credit loss experience, with consideration given to recent credit loss trends, delinquency rates, economic conditions and management’s expectations of future credit losses.
14
Operating expenses consist of all items directly related to the operation of the Company’s stores, including salaries and related payroll costs, rent, utilities, facilities maintenance, advertising, property taxes, licenses, supplies and security. Administrative expenses consist of items relating to the operation of the corporate offices, including the compensation and benefit costs of corporate management, area supervisors and other operations management personnel, collection operations and personnel, accounting and administrative costs, information technology costs, liability and casualty insurance, outside legal and accounting fees and stockholder-related expenses. Merger and other acquisition expenses primarily include incremental costs directly associated with the merger and integration of Cash America International, Inc. (“Cash America”), including professional fees, legal expenses, severance, retention and other employee-related costs, accelerated vesting of certain equity compensation awards, contract breakage costs and costs related to consolidation of technology systems and corporate facilities. See below for further information regarding the merger.
The Company’s business is subject to seasonal variations and operating results for the current quarter are not necessarily indicative of the results of operations for the full year. Typically, the Company experiences seasonal growth of service fees in the third and fourth quarter of each year due to loan balance growth. Service fees generally decline in the first and second quarter of each year after the heavy repayment period of pawn and consumer loans associated with statutory bonuses received by customers in the fourth quarter in Mexico and with tax refund proceeds received by customers in the first quarter in the U.S. Retail sales are seasonally higher in the fourth quarter associated with holiday shopping and, to a lesser extent, in the first quarter associated with tax refunds.
Stores included in the same-store calculations presented in this report are those stores that were opened or acquired prior to the beginning of the prior-year comparative period and remained open through the end of the reporting period. Also included are stores that were relocated during the applicable period within a specified distance serving the same market where there is not a significant change in store size and where there is not a significant overlap or gap in timing between the opening of the new store and the closing of the existing store.
On September 1, 2016, the Company completed its merger with Cash America, whereby Cash America merged with and into a wholly owned subsidiary of the Company (the “Merger”). The accompanying unaudited condensed consolidated results of operations for the three month periods ended March 31, 2018 and 2017 include the results of operations for Cash America and are therefore included in the same-store calculations referred to above. In addition, legacy First Cash and legacy Cash America same-store calculations have also been presented in this report to provide additional insight into the results of operations at each of the store brands given the significant integration activities impacting the legacy Cash America stores. These legacy same-store calculations refer to each brand’s respective stores that were opened prior to the beginning of the prior-year comparative fiscal period and remained open through the end of the reporting period.
15
OPERATIONS AND LOCATIONS
As of March 31, 2018, the Company had 2,238 store locations in 26 U.S. states (including the District of Columbia), 32 states in Mexico, Guatemala, El Salvador and Colombia, which represents a net store-count increase of 7% over the number of stores at March 31, 2017.
The following table details store count activity for the three months ended March 31, 2018:
Consumer | |||||||||
Pawn | Loan | Total | |||||||
Locations (1), (2) | Locations (2), (3) | Locations | |||||||
U.S.: | |||||||||
Total locations, beginning of period | 1,068 | 44 | 1,112 | ||||||
Locations acquired | 3 | — | 3 | ||||||
Locations closed or consolidated | (7 | ) | (3 | ) | (10 | ) | |||
Total locations, end of period | 1,064 | 41 | 1,105 | ||||||
Latin America: | |||||||||
Total locations, beginning of period | 971 | 28 | 999 | ||||||
New locations opened | 11 | — | 11 | ||||||
Locations acquired | 126 | — | 126 | ||||||
Locations closed or consolidated | (3 | ) | — | (3 | ) | ||||
Total locations, end of period | 1,105 | 28 | 1,133 | ||||||
Total: | |||||||||
Total locations, beginning of period | 2,039 | 72 | 2,111 | ||||||
New locations opened | 11 | — | 11 | ||||||
Locations acquired | 129 | — | 129 | ||||||
Locations closed or consolidated | (10 | ) | (3 | ) | (13 | ) | |||
Total locations, end of period | 2,169 | 69 | 2,238 | ||||||
(1) | At March 31, 2018, 311 of the U.S. pawn stores, which are primarily located in Texas and Ohio, also offered consumer loans or credit services products, while 49 Mexico pawn stores offered consumer loan products. |
(2) | The Company closed 10 pawn stores, seven in the U.S. and three in Latin America, during the first quarter of 2018, which were primarily smaller format stores emphasizing payday lending or underperforming locations which were consolidated into existing stores, an opportunity driven by acquisitions and the Merger. Additionally, three consumer loan stores were closed in the U.S. during the quarter. |
(3) | The Company’s U.S. free-standing consumer loan locations offer consumer loans and/or credit services products and are located in Ohio, Texas, California and limited markets in Mexico. Subsequent to March 31, 2018, the Company entered into an agreement to sell the assets of the eight remaining California consumer loan locations included in this table. The table does not include 62 check cashing locations operated by independent franchises under franchising agreements with the Company. |
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, related revenue and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. Such estimates, assumptions and judgments are subject to a number of risks and uncertainties, which may cause actual results to differ materially from the Company’s estimates. The significant accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results have been reported in the Company’s 2017 annual report on Form 10-K. There have been no changes to the Company’s significant accounting policies for the three months ended March 31, 2018.
16
Recent Accounting Pronouncements
See Note 1 - Significant Accounting Policies of the condensed consolidated financial statements contained in Part I, Item 1 of this report for a discussion of recent accounting pronouncements that the Company has adopted or will adopt in future periods.
RESULTS OF OPERATIONS (unaudited)
Constant Currency Results
The Company’s management reviews and analyzes certain operating results in Latin America on a constant currency basis because the Company believes this better represents the Company’s underlying business trends. Constant currency results are non-GAAP measures, which exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates. The scrap jewelry generated in Latin America is sold and settled in U.S. dollars and therefore, wholesale scrap jewelery sales revenue is not affected by foreign currency translation. A small percentage of the operating and administrative expenses in Latin America are also billed and paid in U.S. dollars which are not affected by foreign currency translation.
Business operations in Mexico, Guatemala and Colombia are transacted in Mexican pesos, Guatemalan quetzales and Colombian pesos, respectively. The Company also has operations in El Salvador where the reporting and functional currency is the U.S. dollar. The following table provides exchange rates for the Mexican peso, Guatemalan quetzal and Colombian peso for the current and prior-year periods:
March 31, | Favorable / | ||||||||
2018 | 2017 | (Unfavorable) | |||||||
Mexican peso / U.S. dollar exchange rate: | |||||||||
End-of-period | 18.3 | 18.8 | 3 | % | |||||
Three months ended | 18.8 | 20.4 | 8 | % | |||||
Guatemalan quetzal / U.S. dollar exchange rate: | |||||||||
End-of-period | 7.4 | 7.3 | (1 | )% | |||||
Three months ended | 7.4 | 7.4 | — | % | |||||
Colombian peso / U.S. dollar exchange rate: | |||||||||
End-of-period | 2,780 | 2,880 | 3 | % | |||||
Three months ended | 2,859 | 2,921 | 2 | % | |||||
Amounts presented on a constant currency basis are denoted as such. See “—Non-GAAP Financial Information” for additional discussion of constant currency operating results.
17
Operating Results for the Three Months Ended March 31, 2018 Compared to the Three Months Ended March 31, 2017
U.S. Operations Segment
The following table details earning assets, which consist of pawn loans, inventories and consumer loans, net as well as other earning asset metrics of the U.S. operations segment as of March 31, 2018 as compared to March 31, 2017 (dollars in thousands, except as otherwise noted):
Balance at March 31, | Increase / | |||||||||||
2018 | 2017 | (Decrease) | ||||||||||
U.S. Operations Segment | ||||||||||||
Earning assets: | ||||||||||||
Pawn loans | $ | 237,022 | $ | 244,233 | (3 | )% | ||||||
Inventories | 187,526 | 257,531 | (27 | )% | ||||||||
Consumer loans, net (1) | 17,084 | 21,833 | (22 | )% | ||||||||
$ | 441,632 | $ | 523,597 | (16 | )% | |||||||
Average outstanding pawn loan amount (in ones) | $ | 164 | $ | 154 | 6 | % | ||||||
Composition of pawn collateral: | ||||||||||||
General merchandise | 34 | % | 36 | % | ||||||||
Jewelry | 66 | % | 64 | % | ||||||||
100 | % | 100 | % | |||||||||
Composition of inventories: | ||||||||||||
General merchandise | 39 | % | 44 | % | ||||||||
Jewelry | 61 | % | 56 | % | ||||||||
100 | % | 100 | % | |||||||||
Percentage of inventory aged greater than one year | 5 | % | 12 | % | ||||||||
(1) | Does not include the off-balance sheet principal portion of active CSO extensions of credit made by independent third-party lenders. These amounts, net of the Company’s estimated fair value of its liability for guaranteeing the extensions of credit, totaled $7.1 million and $9.1 million as of March 31, 2018 and 2017</ |