Document
 
 

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 June 30, 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

fcfslogo.jpg
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 July 25, 2018, there were 44,327,042 shares of common stock outstanding.





 
 

FIRSTCASH, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 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 on Form 10-Q, 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)
 
 
 
 
 
 
 
June 30,
 
December 31,
 
 
2018
 
2017
 
2017
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
83,127

 
$
91,434

 
$
114,423

Fees and service charges receivable
 
42,920

 
42,810

 
42,736

Pawn loans
 
348,295

 
353,399

 
344,748

Consumer loans, net
 
17,256

 
24,192

 
23,522

Inventories
 
249,689

 
301,361

 
276,771

Income taxes receivable
 
486

 
23,866

 
19,761

Prepaid expenses and other current assets
 
19,913

 
19,667

 
20,236

Total current assets
 
761,686

 
856,729

 
842,197

 
 
 
 
 
 
 
Property and equipment, net
 
236,434

 
237,282

 
230,341

Goodwill
 
857,070

 
838,111

 
831,145

Intangible assets, net
 
89,962

 
98,664

 
93,819

Other assets
 
52,193

 
61,145

 
54,045

Deferred tax assets
 
12,295

 
12,388

 
11,237

Total assets
 
$
2,009,640

 
$
2,104,319

 
$
2,062,784

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Accounts payable and accrued liabilities
 
$
79,961

 
$
85,684

 
$
84,331

Customer deposits
 
34,300

 
37,601

 
32,019

Income taxes payable
 
3,207

 
1,807

 
4,221

Total current liabilities
 
117,468

 
125,092

 
120,571

 
 
 
 
 
 
 
Revolving unsecured credit facility
 
221,500

 
97,000

 
107,000

Senior unsecured notes
 
295,560

 
294,804

 
295,243

Deferred tax liabilities
 
51,011

 
74,298

 
47,037

Other liabilities
 
14,057

 
21,693

 
17,600

Total liabilities
 
699,596

 
612,887

 
587,451

 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
493

 
493

 
493

Additional paid-in capital
 
1,221,572

 
1,218,822

 
1,220,356

Retained earnings
 
546,097

 
416,937

 
494,457

Accumulated other comprehensive loss
 
(114,668
)
 
(83,464
)
 
(111,877
)
Common stock held in treasury, at cost
 
(343,450
)
 
(61,356
)
 
(128,096
)
Total stockholders’ equity
 
1,310,044

 
1,491,432

 
1,475,333

Total liabilities and stockholders’ equity
 
$
2,009,640

 
$
2,104,319

 
$
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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
255,742

 
$
243,822

 
$
525,583

 
$
503,816

Pawn loan fees
 
123,012

 
122,632

 
252,805

 
250,883

Wholesale scrap jewelry sales
 
27,475

 
31,646

 
62,200

 
69,757

Consumer loan and credit services fees
 
13,743

 
18,529

 
29,184

 
39,749

Total revenue
 
419,972

 
416,629

 
869,772

 
864,205

 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
163,574

 
156,473

 
338,071

 
322,108

Cost of wholesale scrap jewelry sold
 
24,076

 
30,590

 
56,571

 
65,539

Consumer loan and credit services loss provision
 
3,894

 
5,142

 
7,621

 
9,234

Total cost of revenue
 
191,544

 
192,205

 
402,263

 
396,881

 
 
 
 
 
 
 
 
 
Net revenue
 
228,428

 
224,424

 
467,509

 
467,324

 
 
 
 
 
 
 
 
 
Expenses and other income:
 
 
 
 
 
 
 
 
Store operating expenses
 
137,583

 
137,070

 
276,144

 
273,814

Administrative expenses
 
29,720

 
30,305

 
57,722

 
63,543

Depreciation and amortization
 
10,952

 
14,689

 
22,235

 
28,932

Interest expense
 
6,529

 
5,585

 
12,727

 
11,698

Interest income
 
(740
)
 
(393
)
 
(1,721
)
 
(720
)
Merger and other acquisition expenses
 
2,113

 
1,606

 
2,352

 
2,253

Loss on extinguishment of debt
 

 
14,094

 

 
14,094

Total expenses and other income
 
186,157

 
202,956

 
369,459

 
393,614

 
 
 
 
 
 
 
 
 
Income before income taxes
 
42,271

 
21,468

 
98,050

 
73,710

 
 
 
 
 
 
 
 
 
Provision for income taxes
 
12,100

 
6,229

 
26,244

 
25,826

 
 
 
 
 
 
 
 
 
Net income
 
$
30,171

 
$
15,239

 
$
71,806

 
$
47,884

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.67

 
$
0.32

 
$
1.57

 
$
0.99

Diluted
 
$
0.67

 
$
0.32

 
$
1.57

 
$
0.99

 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.22

 
$
0.19

 
$
0.44

 
$
0.38

 
 
 
 
 
 
 
 
 
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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
30,171

 
$
15,239

 
$
71,806

 
$
47,884

Other comprehensive income:
 
 
 
 
 
 
 
 
Currency translation adjustment
 
(24,625
)
 
13,337

 
(2,791
)
 
36,342

Comprehensive income
 
$
5,546

 
$
28,576

 
$
69,015

 
$
84,226

 
 
 
 
 
 
 
 
 
 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

 

Exercise of stock options
 

 

 

 

 
(294
)
 

 

 
(10
)
 
694

 
400

Share-based compensa-tion expense
 

 

 

 

 
2,750

 

 

 

 

 
2,750

Net income
 

 

 

 

 

 
71,806

 

 

 

 
71,806

Dividends paid
 

 

 

 

 

 
(20,166
)
 

 

 

 
(20,166
)
Currency translation adjustment
 

 

 

 

 

 

 
(2,791
)
 

 

 
(2,791
)
Purchases of treasury stock
 

 

 

 

 

 

 

 
2,619

 
(217,288
)
 
(217,288
)
Balance at 6/30/2018
 

 
$

 
49,276

 
$
493

 
$
1,221,572

 
$
546,097

 
$
(114,668
)
 
4,949

 
$
(343,450
)
 
$
1,310,044

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 

 

 

 

 
(242
)
 

 

 
(13
)
 
549

 
307

Share-based compensa-tion expense
 

 

 

 

 
1,535

 

 

 

 

 
1,535

Net income
 

 

 

 

 

 
47,884

 

 

 

 
47,884

Dividends paid
 

 

 

 

 

 
(18,348
)
 

 

 

 
(18,348
)
Currency translation adjustment
 

 

 

 

 

 

 
36,342

 

 

 
36,342

Purchases of treasury stock
 

 

 

 

 

 

 

 
518

 
(26,274
)
 
(26,274
)
Balance at 6/30/2017
 

 
$

 
49,276

 
$
493

 
$
1,218,822

 
$
416,937

 
$
(83,464
)
 
1,264

 
$
(61,356
)
 
$
1,491,432

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
 
Six Months Ended
 
 
June 30,
 
 
2018
 
2017
Cash flow from operating activities:
 
 
 
 
Net income
 
$
71,806

 
$
47,884

Adjustments to reconcile net income to net cash flow provided by operating activities:
 
 
 
 
Non-cash portion of credit loss provision
 
4,291

 
5,973

Share-based compensation expense
 
2,750

 
1,535

Depreciation and amortization expense
 
22,235

 
28,932

Amortization of debt issuance costs
 
963

 
864

Amortization of favorable/(unfavorable) lease intangibles, net
 
(356
)
 
(487
)
Loss on extinguishment of debt
 

 
14,094

Deferred income taxes, net
 
2,801

 
11,886

Changes in operating assets and liabilities, net of business combinations:
 
 
 
 
Fees and service charges receivable
 
553

 
(478
)
Inventories
 
8,931

 
8,588

Prepaid expenses and other assets
 
(1,824
)
 
12,379

Accounts payable, accrued liabilities and other liabilities
 
(10,327
)
 
(30,959
)
Income taxes
 
18,144

 
2,602

Net cash flow provided by operating activities
 
119,967

 
102,813

Cash flow from investing activities:
 
 
 
 
Loan receivables, net of cash repayments
 
30,913

 
33,963

Purchases of property and equipment
 
(23,188
)
 
(17,401
)
Acquisitions of pawn stores, net of cash acquired
 
(36,171
)
 
(1,115
)
Net cash flow provided by (used in) investing activities
 
(28,446
)
 
15,447

Cash flow from financing activities:
 
 
 
 
Borrowings from revolving unsecured credit facility
 
220,000

 
120,000

Repayments of revolving unsecured credit facility
 
(105,500
)
 
(283,000
)
Issuance of senior unsecured notes
 

 
300,000

Repurchase/redemption of senior unsecured notes
 

 
(200,000
)
Repurchase/redemption premiums paid on senior unsecured notes
 

 
(10,875
)
Debt issuance costs paid
 

 
(4,718
)
Purchases of treasury stock
 
(217,288
)
 
(26,274
)
Proceeds from exercise of share-based compensation awards
 
400

 
307

Dividends paid
 
(20,166
)
 
(18,348
)
Net cash flow used in financing activities
 
(122,554
)
 
(122,908
)
Effect of exchange rates on cash
 
(263
)
 
6,127

Change in cash and cash equivalents
 
(31,296
)
 
1,479

Cash and cash equivalents at beginning of the period
 
114,423

 
89,955

Cash and cash equivalents at end of the period
 
$
83,127

 
$
91,434

 
 
 
 
 
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.

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 June 30, 2018 and 2017, and for the three month and six month periods ended June 30, 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 periods ended June 30, 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 and six month periods ended June 30, 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 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. In July 2018, the Financial Accounting Standards Board issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”) which updates narrow aspects of the guidance issued in ASU 2016-02. ASU 2016-02 and ASU 2018-10 are 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 and ASU 2018-10 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.

In June 2018, the Financial Accounting Standards Board issued ASU No. 2018-07, “Compensation-Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. ASU 2018-07 is effective for public entities for fiscal years beginning after December 15, 2018, with early adoption permitted, but no earlier than a company’s adoption of ASC 606. The Company does not expect ASU 2018-07 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.


7

 
 

In July 2018, the Financial Accounting Standards Board issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). ASU 2018-09 does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different Financial Accounting Standards Board Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt in fiscal years beginning after December 15, 2018. The Company does not expect ASU 2018-09 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.

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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
30,171

 
$
15,239

 
$
71,806

 
$
47,884

 
 
 
 
 
 
 
 
 
Denominator (in thousands):
 
 
 
 
 
 
 
 
Weighted-average common shares for calculating basic earnings per share
 
44,942

 
48,261

 
45,680

 
48,324

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options and nonvested common stock awards
 
101

 
28

 
77

 
21

Weighted-average common shares for calculating diluted earnings per share
 
45,043

 
48,289

 
45,757

 
48,345

 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.67

 
$
0.32

 
$
1.57

 
$
0.99

Diluted
 
$
0.67

 
$
0.32

 
$
1.57

 
$
0.99


Note 3 - Acquisitions

Consistent with the Company’s strategy to continue its expansion of pawn stores in selected markets, during the six months ended June 30, 2018, the Company acquired 188 pawn stores in Mexico in two separate transactions and 18 pawn stores located in the U.S. in seven separate transactions. The all-cash aggregate purchase price for these acquisitions was $44.0 million, net of cash acquired and subject to future post-closing adjustments. The purchases were composed of $36.2 million in cash paid during the six months ended June 30, 2018 and remaining payables to the sellers of approximately $7.8 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.

The estimated fair value 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 preliminary allocation of the aggregate purchase price of the Company’s individually immaterial acquisitions during the six months ended June 30, 2018 is as follows:


8

 
 

Pawn loans
$
9,072

Pawn loan fees receivable
845

Inventory
6,483

Other current assets
306

Property and equipment
1,375

Goodwill (1)
26,355

Intangible assets (2)
371

Other non-current assets
168

Current liabilities
(973
)
Aggregate purchase price
$
44,002


(1) 
Substantially all of the goodwill is expected to be deductible for U.S. or Mexico income tax purposes.

(2) 
Intangible assets primarily consist of customer relationships, which are generally amortized over 5 years.

The results of operations for the acquired stores have been consolidated since the acquisition dates. During the six months ended June 30, 2018, revenue from the combined acquisitions since the acquisition dates was $5.9 million and the net loss from the combined acquisitions since the acquisition dates (including transaction and integration costs) was approximately $0.9 million. Combined transaction and integration costs related to the acquisitions during the six months ended June 30, 2018 were approximately $1.3 million.

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):

 
June 30,
 
December 31,
 
2018
 
2017
 
2017
5.375% senior unsecured notes due 2024 (1)
$
295,560

 
$
294,804

 
$
295,243

Revolving unsecured credit facility, maturing 2022
221,500

 
97,000

 
107,000

Total long-term debt
$
517,060

 
$
391,804

 
$
402,243


(1)
As of June 30, 2018, June 30, 2017 and December 31, 2017, deferred debt issuance costs of $4.4 million, $5.2 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.

Senior Unsecured Notes

On May 30, 2017, the Company issued $300.0 million of 5.375% senior unsecured 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 unsecured 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.

The Company used the proceeds from the offering of the Notes to repurchase, or otherwise redeem, its previously outstanding $200.0 million6.75% senior unsecured notes due 2021 (the “2021 Notes”). As a result, during the six months ended June 30, 2017, the Company recognized a $14.1 million loss on extinguishment of debt related to the repurchase or redemption of the 2021 Notes.


9

 
 

Revolving Unsecured Credit Facility

At June 30, 2018, the Company maintained an unsecured line of credit with a group of U.S. based commercial lenders (the “Credit Facility”) in the amount of $400.0 million, which matures on September 2, 2022. At June 30, 2018, the Company had $221.5 million in outstanding borrowings and $5.1 million in outstanding letters of credit under the Credit Facility, leaving $173.4 million available for future borrowings. The 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 Credit Facility commitment. The weighted-average interest rate on amounts outstanding under the Credit Facility at June 30, 2018 was 4.50% based on 1 week LIBOR. Under the terms of the Credit Facility, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The 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 Credit Facility as of June 30, 2018. During the six months ended June 30, 2018, the Company received net proceeds of $114.5 million from borrowings pursuant to the 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 June 30, 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.

Financial Assets and Liabilities Not Measured at Fair Value

The Company’s financial assets and liabilities as of June 30, 2018, 2017 and December 31, 2017 that are not measured at fair value in the condensed consolidated balance sheets are as follows (in thousands):


10

 
 

 
 
Carrying Value
 
Estimated Fair Value
 
 
June 30,
 
June 30,
 
Fair Value Measurements Using
 
 
2018
 
2018
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
83,127

 
$
83,127

 
$
83,127

 
$

 
$

Pawn loans
 
348,295

 
348,295

 

 

 
348,295

Consumer loans, net
 
17,256

 
17,256

 

 

 
17,256

Fees and service charges receivable
 
42,920

 
42,920

 

 

 
42,920

 
 
$
491,598

 
$
491,598

 
$
83,127

 
$

 
$
408,471

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Revolving unsecured credit facility
 
$
221,500

 
$
221,500

 
$

 
$
221,500

 
$

Senior unsecured notes (outstanding principal)
 
300,000

 
300,000

 

 
300,000

 

 
 
$
521,500

 
$
521,500

 
$

 
$
521,500

 
$


 
 
Carrying Value
 
Estimated Fair Value
 
 
June 30,
 
June 30,
 
Fair Value Measurements Using
 
 
2017
 
2017
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
91,434

 
$
91,434

 
$
91,434

 
$

 
$

Pawn loans
 
353,399

 
353,399

 

 

 
353,399

Consumer loans, net
 
24,192

 
24,192

 

 

 
24,192

Fees and service charges receivable
 
42,810

 
42,810

 

 

 
42,810

 
 
$
511,835

 
$
511,835

 
$
91,434

 
$

 
$
420,401

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Revolving unsecured credit facility
 
$
97,000

 
$
97,000

 
$

 
$
97,000

 
$

Senior unsecured notes (outstanding principal)
 
300,000

 
312,000

 

 
312,000

 

 
 
$
397,000

 
$
409,000

 
$

 
$
409,000

 
$


 
 
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

 
$



11

 
 

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. Consumer loans, net 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 June 30, 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 consolidated effective tax rate for the six months ended June 30, 2018 was 26.8% compared to 35.0%, for the six months ended June 30, 2017. The decrease in the effective tax rate for the six months ended June 30, 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 generally 30%, 25%, 30% and 37% in Mexico, Guatemala, El Salvador and Colombia, 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 the fourth quarter of 2017. As of June 30, 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.

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 and six month periods ended June 30, 2018 and 2017 (in thousands):


12

 
 

 
 
Three Months Ended June 30, 2018
 
 
U.S.
Operations
 
Latin America
Operations
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
166,441

 
$
89,301

 
$

 
$
255,742

Pawn loan fees
 
87,825

 
35,187

 

 
123,012

Wholesale scrap jewelry sales
 
22,133

 
5,342

 

 
27,475

Consumer loan and credit services fees
 
13,401

 
342

 

 
13,743

Total revenue
 
289,800

 
130,172

 

 
419,972

 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
105,272

 
58,302

 

 
163,574

Cost of wholesale scrap jewelry sold
 
18,955

 
5,121

 

 
24,076

Consumer loan and credit services loss provision
 
3,810

 
84

 

 
3,894

Total cost of revenue
 
128,037

 
63,507

 

 
191,544

 
 
 
 
 
 
 
 
 
Net revenue
 
161,763

 
66,665

 

 
228,428

 
 
 
 
 
 
 
 
 
Expenses and other income:
 
 
 
 
 
 
 
 
Store operating expenses
 
103,625

 
33,958

 

 
137,583

Administrative expenses
 

 

 
29,720

 
29,720

Depreciation and amortization
 
5,037

 
2,740

 
3,175

 
10,952

Interest expense
 

 

 
6,529

 
6,529

Interest income
 

 

 
(740
)
 
(740
)
Merger and other acquisition expenses
 

 

 
2,113

 
2,113

Total expenses and other income
 
108,662

 
36,698

 
40,797

 
186,157

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
$
53,101

 
$
29,967

 
$
(40,797
)
 
$
42,271



13

 
 

 
 
Three Months Ended June 30, 2017
 
 
U.S.
Operations
 
Latin America
Operations
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
164,852

 
$
78,970

 
$

 
$
243,822

Pawn loan fees
 
90,254

 
32,378

 

 
122,632

Wholesale scrap jewelry sales
 
26,136

 
5,510

 

 
31,646

Consumer loan and credit services fees
 
18,085

 
444

 

 
18,529

Total revenue
 
299,327

 
117,302

 

 
416,629

 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
106,731

 
49,742

 

 
156,473

Cost of wholesale scrap jewelry sold
 
25,400

 
5,190

 

 
30,590

Consumer loan and credit services loss provision
 
5,057

 
85

 

 
5,142

Total cost of revenue
 
137,188

 
55,017

 

 
192,205

 
 
 
 
 
 
 
 
 
Net revenue
 
162,139

 
62,285

 

 
224,424

 
 
 
 
 
 
 
 
 
Expenses and other income:
 
 
 
 
 
 
 
 
Store operating expenses
 
105,521

 
31,549

 

 
137,070

Administrative expenses
 

 

 
30,305

 
30,305

Depreciation and amortization
 
6,421

 
2,622

 
5,646

 
14,689

Interest expense
 

 

 
5,585

 
5,585

Interest income
 

 

 
(393
)
 
(393
)
Merger and other acquisition expenses
 

 

 
1,606

 
1,606

Loss on extinguishment of debt
 

 

 
14,094

 
14,094

Total expenses and other income
 
111,942

 
34,171

 
56,843

 
202,956

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
$
50,197

 
$
28,114

 
$
(56,843
)
 
$
21,468



14

 
 

 
 
Six Months Ended June 30, 2018
 
 
U.S.
Operations
 
Latin America
Operations
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
352,493

 
$
173,090

 
$

 
$
525,583

Pawn loan fees
 
184,067

 
68,738

 

 
252,805

Wholesale scrap jewelry sales
 
51,590

 
10,610

 

 
62,200

Consumer loan and credit services fees
 
28,440

 
744

 

 
29,184

Total revenue
 
616,590

 
253,182

 

 
869,772

 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
225,888

 
112,183

 

 
338,071

Cost of wholesale scrap jewelry sold
 
46,608

 
9,963

 

 
56,571

Consumer loan and credit services loss provision
 
7,454

 
167

 

 
7,621

Total cost of revenue
 
279,950

 
122,313

 

 
402,263

 
 
 
 
 
 
 
 
 
Net revenue
 
336,640

 
130,869

 

 
467,509

 
 
 
 
 
 
 
 
 
Expenses and other income:
 
 
 
 
 
 
 
 
Store operating expenses
 
208,008

 
68,136

 

 
276,144

Administrative expenses
 

 

 
57,722

 
57,722

Depreciation and amortization
 
10,592

 
5,449

 
6,194

 
22,235

Interest expense
 

 

 
12,727

 
12,727

Interest income
 

 

 
(1,721
)
 
(1,721
)
Merger and other acquisition expenses
 

 

 
2,352

 
2,352

Total expenses and other income
 
218,600

 
73,585

 
77,274

 
369,459

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
$
118,040

 
$
57,284

 
$
(77,274
)
 
$
98,050



15

 
 

 
 
Six Months Ended June 30, 2017
 
 
U.S.
Operations
 
Latin America
Operations
 
Corporate
 
Consolidated
Revenue:
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
358,518

 
$
145,298

 
$

 
$
503,816

Pawn loan fees
 
192,072

 
58,811

 

 
250,883

Wholesale scrap jewelry sales
 
59,033

 
10,724

 

 
69,757

Consumer loan and credit services fees
 
38,900

 
849

 

 
39,749

Total revenue
 
648,523

 
215,682

 

 
864,205

 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
230,228

 
91,880

 

 
322,108

Cost of wholesale scrap jewelry sold
 
56,082

 
9,457

 

 
65,539

Consumer loan and credit services loss provision
 
9,047

 
187

 

 
9,234

Total cost of revenue
 
295,357

 
101,524

 

 
396,881

 
 
 
 
 
 
 
 
 
Net revenue
 
353,166

 
114,158

 

 
467,324

 
 
 
 
 
 
 
 
 
Expenses and other income:
 
 
 
 
 
 
 
 
Store operating expenses
 
213,489

 
60,325

 

 
273,814

Administrative expenses
 

 

 
63,543

 
63,543

Depreciation and amortization
 
12,840

 
5,019

 
11,073

 
28,932

Interest expense
 

 

 
11,698

 
11,698

Interest income
 

 

 
(720
)
 
(720
)
Merger and other acquisition expenses
 

 

 
2,253

 
2,253

Loss on extinguishment of debt
 

 

 
14,094

 
14,094

Total expenses and other income
 
226,329

 
65,344

 
101,941

 
393,614

 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 
$
126,837

 
$
48,814

 
$
(101,941
)
 
$
73,710



16

 
 

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 (together, 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. References in this quarterly report on Form 10-Q to “year-to-date” refer to the six-month period from January 1, 2018 to June 30, 2018.

GENERAL   

The Company is a leading operator of retail-based pawn stores with almost 2,300 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 six month periods ended June 30, 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. These stores provide consumer financial services products including credit services and consumer loans. In addition, 307 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. In addition, effective June 30, 2018, the Company no longer offers an unsecured consumer loan product in Mexico. Consumer loan and credit services revenue accounted for approximately 3% and 5% of consolidated revenue during the six month periods ended June 30, 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.


17

 
 

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 include incremental costs directly associated with merger and acquisition activities, including professional fees, legal expenses, severance, retention and other employee-related costs, contract breakage costs and costs related to consolidation of technology systems and corporate facilities among others.

The Company’s business is subject to seasonal variations and operating results for the current quarter and year-to-date periods 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.


18

 
 

OPERATIONS AND LOCATIONS

As of June 30, 2018, the Company had 2,289 store locations in 25 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 9% over the number of stores at June 30, 2017.
 
The following table details store count activity for the three months ended June 30, 2018:

 
 
 
 
Consumer
 
 
 
 
Pawn
 
Loan
 
Total
 
 
Locations (1), (2)
 
Locations (3)
 
Locations
U.S.:
 
 
 
 
 
 
Total locations, beginning of period
 
1,064

 
41

 
1,105

Locations acquired
 
15

 

 
15

Locations closed or consolidated
 
(5
)
 
(8
)
 
(13
)
Total locations, end of period
 
1,074

 
33

 
1,107

 
 
 
 
 
 
 
Latin America:
 
 
 
 
 
 
Total locations, beginning of period
 
1,105

 
28

 
1,133

New locations opened
 
16

 

 
16

Locations acquired
 
62

 

 
62

Locations closed or consolidated
 
(1
)
 
(28
)
 
(29
)
Total locations, end of period
 
1,182

 

 
1,182

 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
Total locations, beginning of period
 
2,169

 
69

 
2,238

New locations opened
 
16

 

 
16

Locations acquired
 
77

 

 
77

Locations closed or consolidated
 
(6
)
 
(36
)
 
(42
)
Total locations, end of period
 
2,256

 
33

 
2,289


(1) 
At June 30, 2018, 307 of the U.S. pawn stores, primarily located in Texas and Ohio, also offered consumer loans and/or credit services as an ancillary product. Effective June 30, 2018, the Company no longer offers an unsecured consumer loan product in Latin America.

(2) 
The Company closed six pawn stores, five in the U.S. and one in Latin America, during the second 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 merger and acquisition activity.

(3) 
The Company’s U.S. free-standing consumer loan locations offer consumer loans and/or credit services products and are located in Ohio and Texas.

19

 
 

The following table details store count activity for the six months ended June 30, 2018:

 
 
 
 
Consumer
 
 
 
 
Pawn
 
Loan
 
Total
 
 
Locations (1), (2)
 
Locations (3)
 
Locations
U.S.:
 
 
 
 
 
 
Total locations, beginning of period
 
1,068

 
44

 
1,112

Locations acquired
 
18

 

 
18

Locations closed or consolidated
 
(12
)
 
(11
)
 
(23
)
Total locations, end of period
 
1,074

 
33

 
1,107

 
 
 
 
 
 
 
Latin America:
 
 
 
 
 
 
Total locations, beginning of period
 
971

 
28

 
999

New locations opened
 
27

 

 
27

Locations acquired
 
188

 

 
188

Locations closed or consolidated
 
(4
)
 
(28
)
 
(32
)
Total locations, end of period
 
1,182

 

 
1,182

 
 
 
 
 
 
 
Total:
 
 
 
 
 
 
Total locations, beginning of period
 
2,039

 
72

 
2,111

New locations opened
 
27

 

 
27

Locations acquired
 
206

 

 
206

Locations closed or consolidated
 
(16
)
 
(39
)
 
(55
)
Total locations, end of period
 
2,256

 
33

 
2,289


(1) 
At June 30, 2018, 307 of the U.S. pawn stores, primarily located in Texas and Ohio, also offered consumer loans and/or credit services as an ancillary product. Effective June 30, 2018, the Company no longer offers an unsecured consumer loan product in Latin America.

(2) 
The Company closed 16 pawn stores, 12 in the U.S. and four in Latin America, during the six months ended June 30, 2018, which were primarily smaller format stores emphasizing payday lending or underperforming locations which were consolidated into existing stores, an opportunity driven by merger and acquisition activity.

(3) 
The Company’s U.S. free-standing consumer loan locations offer consumer loans and/or credit services products and are located in Ohio and Texas.

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 six months ended June 30, 2018.

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.


20

 
 

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 financial 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 jewelry 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:  

 
 
June 30,
 
Favorable /
 
 
2018
 
2017
 
(Unfavorable)
Mexican peso / U.S. dollar exchange rate:
 
 
 
 
 
 
 
 
End-of-period
 
19.9

 
17.9

 
 
(11
)%
 
Three months ended
 
19.4

 
18.6

 
 
(4
)%
 
Six months ended
 
19.1

 
19.5

 
 
2
 %
 
 
 
 
 
 
 
 
 
 
Guatemalan quetzal / U.S. dollar exchange rate:
 
 
 
 
 
 
 
 
End-of-period
 
7.5

 
7.3

 
 
(3
)%
 
Three months ended
 
7.4

 
7.3

 
 
(1
)%
 
Six months ended
 
7.4

 
7.4

 
 
 %
 
 
 
 
 
 
 
 
 
 
Colombian peso / U.S. dollar exchange rate:
 
 
 
 
 
 
 
 
End-of-period
 
2,931

 
3,038

 
 
4
 %
 
Three months ended
 
2,839

 
2,920

 
 
3
 %
 
Six months ended
 
2,849

 
2,920

 
 
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.


21

 
 

Operating Results for the Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 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 June 30, 2018 as compared to June 30, 2017 (dollars in thousands, except as otherwise noted):

 
Balance at June 30,
 
Increase /
 
2018
 
2017
 
(Decrease)
U.S. Operations Segment
 
 
 
 
 
 
 
 
 
Earning assets:
 
 
 
 
 
 
 
 
 
Pawn loans
$
267,586

 
$
273,823

 
 
(2
)%
 
Inventories
 
184,531

 
 
243,991

 
 
(24
)%
 
Consumer loans, net (1)
 
17,109

 
 
23,801

 
 
(28
)%
 
 
$
469,226

 
$
541,615

 
 
(13
)%
 
 
 
 
 
 
 
 
 
 
 
Average outstanding pawn loan amount (in ones)
$
160

 
$
148

 
 
8
 %
 
 
 
 
 
 
 
 
 
 
 
Composition of pawn collateral:
 
 
 
 
 
 
 
 
 
General merchandise
37
%
 
38
%
 
 
 
 
Jewelry
63
%
 
62
%
 
 
 
 
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Composition of inventories:
 
 
 
 
 
 
 
 
 
General merchandise
41
%
 
44
%
 
 
 
 
Jewelry
59
%
 
56
%
 
 
 
 
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of inventory aged greater than one year
4
%
 
12
%
 
 
 
 

(1) 
Does not include the off-balance sheet principal portion of active extensions of credit made by independent third-party lenders, which are guaranteed by the Company through its credit services organization programs. These amounts, net of the Company’s estimated fair value of its liability for guaranteeing the extensions of credit, totaled $7.5 million and $9.1 million as of June 30, 2018 and 2017, respectively.


22

 
 

The following table presents segment pre-tax operating income of the U.S. operations segment for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 (dollars in thousands). Store operating expenses include salary and benefit expense of store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the stores.

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase /
 
 
2018
 
2017
 
(Decrease)
U.S. Operations Segment
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
166,441

 
$
164,852

 
 
1
 %
 
Pawn loan fees
 
87,825

 
90,254

 
 
(3
)%
 
Wholesale scrap jewelry sales
 
22,133

 
26,136

 
 
(15
)%
 
Consumer loan and credit services fees
 
13,401

 
18,085

 
 
(26
)%
 
Total revenue
 
289,800

 
299,327

 
 
(3
)%
 
 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
105,272

 
106,731

 
 
(1
)%
 
Cost of wholesale scrap jewelry sold
 
18,955

 
25,400

 
 
(25
)%
 
Consumer loan and credit services loss provision
 
3,810

 
5,057

 
 
(25
)%
 
Total cost of revenue
 
128,037

 
137,188

 
 
(7
)%
 
 
 
 
 
 
 
 
 
 
Net revenue
 
161,763

 
162,139

 
 
 %
 
 
 
 
 
 
 
 
 
 
Segment expenses:
 
 
 
 
 
 
 
 
Store operating expenses
 
103,625

 
105,521

 
 
(2
)%
 
Depreciation and amortization
 
5,037

 
6,421

 
 
(22
)%
 
Total segment expenses
 
108,662

 
111,942

 
 
(3
)%
 
 
 
 
 
 
 
 
 
 
Segment pre-tax operating income
 
$
53,101

 
$
50,197

 
 
6
 %
 

Retail Merchandise Sales Operations

U.S. retail merchandise sales increased 1% to $166.4 million during the second quarter of 2018 compared to $164.9 million for the second quarter of 2017. Same-store retail sales were consistent between the second quarter of 2018 and the second quarter of 2017. During the second quarter of 2018, the gross profit margin on retail merchandise sales in the U.S. was 37% compared to a margin of 35% during the second quarter of 2017. The improvements were driven primarily by the transition of the Cash America locations to the FirstPawn IT platform and compensation plans focused on improving key profitability metrics such as retail margins.

U.S. inventories decreased 24% from $244.0 million at June 30, 2017 to $184.5 million at June 30, 2018. The decrease was primarily a result of strategic reductions in inventory levels including targeted liquidation of aged inventories in the Cash America stores over the past several quarters. Inventories aged greater than one year in the U.S. at June 30, 2018 were 4% compared to 12% at June 30, 2017.

Pawn Lending Operations

U.S. pawn loan fees decreased 3% totaling $87.8 million during the second quarter of 2018 compared to $90.3 million for the second quarter of 2017. Same-store pawn fees decreased 3% in the second quarter of 2018 compared to the second quarter of 2017. Pawn loan receivables as of June 30, 2018 decreased 2% in total and 3% on a same-store basis compared to June 30, 2017. The decline in total and same-store pawn receivables and pawn loan fees relates primarily to the adoption of FirstCash’s lending practices and the FirstPawn IT platform in the Cash America stores during 2017.


23

 
 

Wholesale Scrap Jewelry Operations

U.S. wholesale scrap jewelry revenue, consisting primarily of gold sales, decreased 15% to $22.1 million during the second quarter of 2018 compared to $26.1 million during the second quarter of 2017. The scrap jewelry gross profit margin in the U.S. was 14% compared to the prior-year margin of 3%. Scrap jewelry profits accounted for 2% of U.S. net revenue (gross profit) for the second quarter of 2018 and less than 1% for the second quarter of 2017 and is considered a non-core revenue stream of the Company.

Consumer Lending Operations

Service fees from U.S. consumer loans and credit services transactions (collectively, consumer lending operations) decreased 26% to $13.4 million during the second quarter of 2018 compared to $18.1 million for the second quarter of 2017. The Company continues to de-emphasize consumer lending operations in light of increasing regulatory constraints and internet-based competition and expects to continue to strategically close underperforming stand-alone consumer loan and credit services stores in 2018 and beyond. Revenues from consumer lending operations comprised 5% of U.S. revenue during the second quarter of 2018 compared to 6% of U.S. revenue during the second quarter of 2017 and is considered a non-core revenue stream of the Company.

In April 2018, the Company sold the remaining assets of its eight California consumer lending stores. As a result, the Company no longer has operations in California. The Company recorded an immaterial loss resulting from the sale and store closures, which includes the cost of terminating the remaining lease liabilities.
 
The Company is currently evaluating regulatory changes in the state of Ohio. A state bill, recently signed into law by the governor, will significantly reduce, if not eliminate entirely, the consumer lending and credit services products and related revenues in Ohio when it becomes effective on or about April 26, 2019. The Company currently operates 119 stores in Ohio, all of which offer consumer loan and credit services products, which will be negatively impacted by the legislation when it becomes effective. See “—Regulatory Developments” for further information about the legislation and the potential impact on the Company’s results of operations.

Segment Expenses and Segment Pre-Tax Operating Income

U.S. store operating expenses decreased 2% to $103.6 million during the second quarter of 2018 compared to $105.5 million during the second quarter of 2017, primarily due to continued efforts to optimize store operations in the Cash America stores. Same-store operating expenses decreased less than 1% compared with the prior-year period.

U.S. store depreciation and amortization decreased 22% to $5.0 million during the second quarter of 2018 compared to $6.4 million during the second quarter of 2017, primarily due to a reduction in capital spending in Cash America stores compared to pre-merger levels.

The U.S. segment pre-tax operating income for the second quarter of 2018 was $53.1 million, which generated a pre-tax segment operating margin of 18% compared to $50.2 million and 17% in the prior year, respectively. The increase in the segment pre-tax operating margin was primarily due to increased retail sales gross profits and reductions in store operating expenses and store depreciation and amortization, partially offset by expected and continued reductions in non-core consumer lending gross profits.


24

 
 

Latin America Operations Segment

Latin American results of operations for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 were hindered by a 4% unfavorable change in the average value of the Mexican peso compared to the U.S. dollar. The translated value of Latin American earning assets as of June 30, 2018 compared to June 30, 2017 also were hindered by an 11% unfavorable change in the end-of-period value of the Mexican peso compared to the U.S. dollar.

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 Latin America operations segment as of June 30, 2018 as compared to June 30, 2017 (dollars in thousands, except as otherwise noted):

 
 
 
 
 
 
 
 
 
 
 
Constant Currency Basis
 
 
 
 
 
 
 
 
 
 
 
 
Balance at
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
 
Increase /
 
Balance at June 30,
 
Increase /
 
2018
 
(Decrease)
 
2018
 
2017
 
(Decrease)
 
(Non-GAAP)
 
(Non-GAAP)
Latin America Operations Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pawn loans
$
80,709

 
$
79,576

 
 
1
 %
 
 
$
89,138

 
 
12
 %
 
Inventories
 
65,158

 
 
57,370

 
 
14
 %
 
 
72,046

 
 
26
 %
 
Consumer loans, net
 
147

 
 
391

 
 
(62
)%
 
 
163

 
 
(58
)%
 
 
$
146,014

 
$
137,337

 
 
6
 %
 
 
$
161,347

 
 
17
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average outstanding pawn loan amount (in ones)
$
62

 
$
66

 
 
(6
)%
 
 
$
69

 
 
5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Composition of pawn collateral:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General merchandise
79
%
 
81
%
 
 
 
 
 
 
 
 
 
 
Jewelry
21
%
 
19
%
 
 
 
 
 
 
 
 
 
 
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Composition of inventories:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General merchandise
75
%
 
74
%
 
 
 
 
 
 
 
 
 
 
Jewelry
25
%
 
26
%
 
 
 
 
 
 
 
 
 
 
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of inventory aged greater than one year
1
%
 
1
%
 
 
 
 
 
 
 
 
 
 


25

 
 

The following table presents segment pre-tax operating income of the Latin America operations segment for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 (dollars in thousands). Store operating expenses include salary and benefit expense of store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the stores.

 
 
 
 
 
 
 
 
 
 
Constant Currency Basis
 
 
 
 
 
 
 
 
 
 
Three Months
 
 
 
 
 
 
 
 
 
 
 
 
Ended
 
 
 
 
 
 
Three Months Ended
 
 
 
 
 
June 30,
 
Increase /
 
 
June 30,
 
Increase /
 
2018
 
(Decrease)
 
 
2018
 
2017
 
(Decrease)
 
(Non-GAAP)
 
(Non-GAAP)
Latin America Operations Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
89,301

 
$
78,970

 
 
13
 %
 
 
$
92,898

 
 
18
 %
 
Pawn loan fees
 
35,187

 
32,378

 
 
9
 %
 
 
36,591

 
 
13
 %
 
Wholesale scrap jewelry sales
 
5,342

 
5,510

 
 
(3
)%
 
 
5,342

 
 
(3
)%
 
Consumer loan and credit services fees
 
342

 
444

 
 
(23
)%
 
 
356

 
 
(20
)%
 
Total revenue
 
130,172

 
117,302

 
 
11
 %
 
 
135,187

 
 
15
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
58,302

 
49,742

 
 
17
 %
 
 
60,641

 
 
22
 %
 
Cost of wholesale scrap jewelry sold
 
5,121

 
5,190

 
 
(1
)%
 
 
5,324

 
 
3
 %
 
Consumer loan and credit services loss provision
 
84

 
85

 
 
(1
)%
 
 
88

 
 
4
 %
 
Total cost of revenue
 
63,507

 
55,017

 
 
15
 %
 
 
66,053

 
 
20
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue
 
66,665

 
62,285

 
 
7
 %
 
 
69,134

 
 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Store operating expenses
 
33,958

 
31,549

 
 
8
 %
 
 
35,185

 
 
12
 %
 
Depreciation and amortization
 
2,740

 
2,622

 
 
5
 %
 
 
2,840

 
 
8
 %
 
Total segment expenses
 
36,698

 
34,171

 
 
7
 %
 
 
38,025

 
 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment pre-tax operating income
 
$
29,967

 
$
28,114

 
 
7
 %
 
 
$
31,109

 
 
11
 %
 

Retail Merchandise Sales Operations

Latin America retail merchandise sales increased 13% (18% on a constant currency basis) to $89.3 million during the second quarter of 2018 compared to $79.0 million for the second quarter of 2017. The increase was primarily due to a 9% increase (13% on a constant currency basis) in same-store retail sales driven by strong retail demand trends, revenue contributions from recent acquisition activity and new store openings. The gross profit margin on retail merchandise sales was 35% during the second quarter of 2018 compared to 37% during the second quarter of 2017. The decrease in retail margins was in large part the result of recent acquisitions of smaller format stores that have historically had lower retail margins. The Company expects retail margins to increase over time from current levels as these acquired smaller format stores utilize the FirstPawn IT platform and store associates are trained in Company best practices that focus on general merchandise lending and retail operations.

Inventories in Latin America increased 14% (26% on a constant currency basis) from $57.4 million at June 30, 2017 to $65.2 million at June 30, 2018. The increase was primarily due to the acquisition of 188 smaller format stores in Mexico over the previous two quarters, new store openings and the maturation of existing stores. Inventories aged greater than one year in Latin America were 1% at June 30, 2018 and 2017.


26

 
 

Pawn Lending Operations

Pawn loan fees in Latin America increased 9% (13% on a constant currency basis) totaling $35.2 million during the second quarter of 2018 compared to $32.4 million for the second quarter of 2017, primarily as a result of the 1% (12% on a constant currency basis) increase in pawn loan receivables as of June 30, 2018 compared to June 30, 2017. The increase in pawn loan receivables was primarily driven by pawn loans acquired in the recent acquisitions and new store additions, partially offset by a same-store pawn receivable decrease of 8% (2% increase on a constant currency basis).

Wholesale Scrap Jewelry Operations

Latin America wholesale scrap jewelry revenue, consisting primarily of gold sales, decreased 3% to $5.3 million during the second quarter of 2018 compared to $5.5 million during the second quarter of 2017. The scrap jewelry gross profit margin in Latin America was 4% (less than 1% on a constant currency basis) compared to the prior-year margin of 6%. Scrap jewelry profits accounted for less than 1% of net revenue (gross profit) for the second quarter of 2018 compared to 1% in the second quarter of 2017 and is considered a non-core revenue stream of the Company.

Consumer Lending Operations

The Company continues to strategically focus on its core pawn business and reduce its exposure to non-core unsecured lending products. Effective June 30, 2018, the Company ceased offering its unsecured consumer loan products in Mexico and the 28 consumer loan stores were closed. As a result, the Company no longer offers an unsecured consumer loan product in Latin America.

Segment Expenses and Segment Pre-Tax Operating Income

Store operating expenses increased 8% (12% on a constant currency basis) to $34.0 million during the second quarter of 2018 compared to $31.5 million during the second quarter of 2017 and same-store operating expenses decreased less than 1% (increased 3% on a constant currency basis) compared to the prior-year period. Total store operating expenses increased primarily due to the 8% increase in the weighted-average store count.

The segment pre-tax operating income for the second quarter of 2018 was $30.0 million, which generated a pre-tax segment operating margin of 23% compared to $28.1 million and 24% in the prior year, respectively.


27

 
 

Consolidated Results of Operations

The following table reconciles pre-tax operating income of the Company’s U.S. operations segment and Latin America operations segment discussed above to consolidated net income for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 (dollars in thousands):

 
 
Three Months Ended
 
 
 
 
 
 
June 30,
 
Increase /
 
 
2018
 
2017
 
(Decrease)
Consolidated Results of Operations
 
 
 
 
 
 
 
 
Segment pre-tax operating income:
 
 
 
 
 
 
 
 
U.S. operations segment pre-tax operating income
 
$
53,101

 
$
50,197

 
 
6
 %
 
Latin America operations segment pre-tax operating income
 
29,967

 
28,114

 
 
7
 %
 
Consolidated segment pre-tax operating income
 
83,068

 
78,311

 
 
6
 %
 
 
 
 
 
 
 
 
 
 
Corporate expenses and other income:
 
 
 
 
 
 
 
 
Administrative expenses
 
29,720

 
30,305

 
 
(2
)%
 
Depreciation and amortization
 
3,175

 
5,646

 
 
(44
)%
 
Interest expense
 
6,529

 
5,585

 
 
17
 %
 
Interest income
 
(740
)
 
(393
)
 
 
88
 %
 
Merger and other acquisition expenses
 
2,113

 
1,606

 
 
32
 %
 
Loss on extinguishment of debt
 

 
14,094

 
 
(100
)%
 
Total corporate expenses and other income
 
40,797

 
56,843

 
 
(28
)%
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
42,271

 
21,468

 
 
97
 %
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
12,100

 
6,229

 
 
94
 %
 
 
 
 
 
 
 
 
 
 
Net income
 
$
30,171

 
$
15,239

 
 
98
 %
 

Corporate Expenses and Taxes

Administrative expenses decreased 2% to $29.7 million during the second quarter of 2018 compared to $30.3 million during the second quarter of 2017, primarily due to administrative synergies realized from the Cash America merger partially offset by an 8% increase in the weighted-average store count resulting in additional management and supervisory compensation and other support expenses required for such growth. In addition, there was a 4% unfavorable change in the average value of the Mexican peso for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, which reduced comparative administrative expenses in Mexico. As a percentage of revenue, administrative expenses were 7% during the second quarter of both 2018 and 2017.

Corporate depreciation and amortization decreased to $3.2 million during the second quarter of 2018 compared to $5.6 million during the second quarter of 2017, primarily due to the realization of depreciation and amortization merger synergies and a reduction in capital spending compared to pre-merger levels.

Interest expense increased to $6.5 million in the second quarter of 2018 compared to $5.6 million for the second quarter of 2017. See “—Liquidity and Capital Resources.”


28

 
 

Merger and other acquisition expenses increased to $2.1 million during the second quarter of 2018 compared to $1.6 million during the second quarter of 2017, reflecting timing in acquisition and integration costs associated with the Cash America merger and the recent Latin America acquisitions. See “—Non-GAAP Financial Information” for additional details of merger and other acquisition expenses.

During the second quarter of 2017, the Company repurchased through a tender offer, or otherwise redeemed, its previously outstanding $200 million, 6.75% senior unsecured notes due 2021, incurring a loss on extinguishment of debt of $14.1 million.

For the second quarter of 2018 and 2017, the Company’s consolidated effective income tax rates were 28.6% and 29.0%, respectively. The effective tax rate for the second quarter of 2018 was impacted primarily as a result of the passage of the Tax Cuts and Jobs Act (“Tax Act”) on December 22, 2017, which reduced the U.S. corporate income tax rate from 35% in 2017 to 21% in 2018. The 28.6% effective income tax rate for the second quarter of 2018 was negatively impacted by the refinement of certain 2018 U.S. tax estimates during the quarter. The Company expects its blended effective income tax rate, including corporate income taxes on Latin American operations, to be between 26% and 27% for fiscal 2018 as a result of the Tax Act.

Net Income, Adjusted Net Income, Net Income Per Share and Adjusted Net Income Per Share

The following table sets forth revenue, net revenue, net income, net income per share, adjusted net income and adjusted net income per share for the second quarter of 2018 compared to the second quarter of 2017 (in thousands, except per share amounts):

 
 
Three Months Ended June 30,
 
 
2018
 
2017
 
 
As Reported
 
Adjusted
 
As Reported
 
Adjusted
 
 
(GAAP)
 
(Non-GAAP)
 
(GAAP)
 
(Non-GAAP)
Revenue
 
$
419,972

 
$
419,972

 
$
416,629

 
$
416,629

Net revenue
 
$
228,428

 
$
228,428

 
$
224,424

 
$
224,424

Net income
 
$
30,171

 
$
31,683

 
$
15,239

 
$
25,130

Diluted earnings per share
 
$
0.67

 
$
0.70

 
$
0.32

 
$
0.52

Weighted average diluted shares
 
45,043

 
45,043

 
48,289

 
48,289


Adjusted net income removes certain items from GAAP net income that the Company does not consider to be representative of its actual operating performance, such as merger and other acquisition expenses and debt extinguishment costs, but does not adjust for the effects of foreign currency rate fluctuations. See “—Non-GAAP Financial Information—Adjusted Net Income and Adjusted Net Income Per Share” below.

29

 
 

Operating Results for the Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017

U.S. Operations Segment

The following table presents segment pre-tax operating income of the U.S. operations segment for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 (dollars in thousands). Store operating expenses include salary and benefit expense of store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the stores.

 
 
Six Months Ended
 
 
 
 
 
 
June 30,
 
 
 
 
2018
 
2017
 
Decrease
U.S. Operations Segment
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
352,493

 
$
358,518

 
 
(2
)%
 
Pawn loan fees
 
184,067

 
192,072

 
 
(4
)%
 
Wholesale scrap jewelry sales
 
51,590

 
59,033

 
 
(13
)%
 
Consumer loan and credit services fees
 
28,440

 
38,900

 
 
(27
)%
 
Total revenue
 
616,590

 
648,523

 
 
(5
)%
 
 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
225,888

 
230,228

 
 
(2
)%
 
Cost of wholesale scrap jewelry sold
 
46,608

 
56,082

 
 
(17
)%
 
Consumer loan and credit services loss provision
 
7,454

 
9,047

 
 
(18
)%
 
Total cost of revenue
 
279,950

 
295,357

 
 
(5
)%
 
 
 
 
 
 
 
 
 
 
Net revenue
 
336,640

 
353,166

 
 
(5
)%
 
 
 
 
 
 
 
 
 
 
Segment expenses:
 
 
 
 
 
 
 
 
Store operating expenses
 
208,008

 
213,489

 
 
(3
)%
 
Depreciation and amortization
 
10,592

 
12,840

 
 
(18
)%
 
Total segment expenses
 
218,600

 
226,329

 
 
(3
)%
 
 
 
 
 
 
 
 
 
 
Segment pre-tax operating income
 
$
118,040

 
$
126,837

 
 
(7
)%
 

Retail Merchandise Sales Operations

U.S. retail merchandise sales decreased 2% to $352.5 million during the six months ended June 30, 2018 compared to $358.5 million for the six months ended June 30, 2017. Same-store retail sales also decreased 2% during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. During the six months ended June 30, 2018, the gross profit margin on retail merchandise sales in the U.S. was 36% which equaled the gross profit margin during the six months ended June 30, 2017. The decline in retail sales was primarily due to strategic reductions in inventory levels in the Cash America stores.

Pawn Lending Operations

U.S. pawn loan fees decreased 4% totaling $184.1 million during the six months ended June 30, 2018 compared to $192.1 million for the six months ended June 30, 2017. Same-store pawn fees also decreased 4% during the six months ended June 30, 2018 compared to the six months ended June 30, 2017. Pawn loan receivables as of June 30, 2018 decreased 2% in total and 3% on a same-store basis compared to June 30, 2017. The decline in same-store pawn receivables and pawn loan fees relates primarily to the adoption of FirstCash’s lending practices and the FirstPawn IT platform during 2017.


30

 
 

Wholesale Scrap Jewelry Operations

U.S. wholesale scrap jewelry revenue, consisting primarily of gold sales, decreased 13% to $51.6 million during the six months ended June 30, 2018 compared to $59.0 million during the six months ended June 30, 2017. The scrap jewelry gross profit margin in the U.S. was 10% compared to the prior-year margin of 5%. Scrap jewelry profits accounted for 1% of U.S. net revenue (gross profit) for both the six months ended June 30, 2018 and 2017 and is considered a non-core revenue stream of the Company.

Consumer Lending Operations

Service fees from U.S. consumer loans and credit services transactions (collectively, consumer lending operations) decreased 27% to $28.4 million during the six months ended June 30, 2018 compared to $38.9 million for the six months ended June 30, 2017. The Company continues to de-emphasize consumer lending operations in light of increasing regulatory constraints and internet-based competition and expects to continue to strategically close underperforming stand-alone consumer loan and credit services stores in 2018 and beyond. Revenues from consumer lending operations comprised 5% of U.S. revenue during the six months ended June 30, 2018 compared to 6% of U.S. revenue during the six months ended June 30, 2017 and is considered a non-core revenue stream of the Company.

In April 2018, the Company sold the remaining assets of its eight California consumer lending stores. As a result, the Company no longer has operations in California. The Company recorded an immaterial loss resulting from the sale and store closures, which includes the cost of terminating the remaining lease liabilities.
 
The Company is currently evaluating regulatory changes in the state of Ohio. A state bill, recently signed into law by the governor, will significantly reduce, if not eliminate entirely, the consumer lending and credit services products and related revenues in Ohio when it becomes effective on or about April 26, 2019. The Company currently operates 119 stores in Ohio, all of which offer consumer loan and credit services products, which will be negatively impacted by the legislation when it becomes effective. See “—Regulatory Developments” for further information about the legislation and the potential impact on the Company’s results of operations.

Segment Expenses and Segment Pre-Tax Operating Income

U.S. store operating expenses decreased 3% to $208.0 million during the six months ended June 30, 2018 compared to $213.5 million during the six months ended June 30, 2017, primarily due to continued efforts to optimize store operations in the Cash America stores. Same-store operating expenses decreased 1% compared with the prior-year period.

U.S. store depreciation and amortization decreased 18% to $10.6 million during the six months ended June 30, 2018 compared to $12.8 million during the six months ended June 30, 2017, primarily due to a reduction in capital spending in Cash America stores compared to pre-merger levels.

The U.S. segment pre-tax operating income for the six months ended June 30, 2018 was $118.0 million, which generated a pre-tax segment operating margin of 19% compared to $126.8 million and 20% in the prior year, respectively. The decline in the segment pre-tax operating margin was due to net revenue pressure during the six months ended June 30, 2018 primarily a result of declines in non-core consumer lending gross profits and Cash America store integration efforts, partially offset by a reduction in store operating expenses and store depreciation and amortization.



31

 
 

Latin America Operations Segment

Latin American results of operations for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 benefited from a 2% favorable change in the average value of the Mexican peso compared to the U.S. dollar.

The following table presents segment pre-tax operating income of the Latin America operations segment for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 (dollars in thousands). Store operating expenses include salary and benefit expense of store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the stores.

 
 
 
 
 
 
 
 
 
 
Constant Currency Basis
 
 
 
 
 
 
 
 
 
 
Six Months
 
 
 
 
 
 
 
 
 
 
 
 
Ended
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
Increase /
 
 
June 30,
 
Increase /
 
2018
 
(Decrease)
 
 
2018
 
2017
 
(Decrease)
 
(Non-GAAP)
 
(Non-GAAP)
Latin America Operations Segment
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
173,090

 
$
145,298

 
 
19
 %
 
 
$
169,483

 
 
17
 %
 
Pawn loan fees
 
68,738

 
58,811

 
 
17
 %
 
 
67,324

 
 
14
 %
 
Wholesale scrap jewelry sales
 
10,610

 
10,724

 
 
(1
)%
 
 
10,610

 
 
(1
)%
 
Consumer loan and credit services fees
 
744

 
849

 
 
(12
)%
 
 
728

 
 
(14
)%
 
Total revenue
 
253,182

 
215,682

 
 
17
 %
 
 
248,145

 
 
15
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
112,183

 
91,880

 
 
22
 %
 
 
109,857

 
 
20
 %
 
Cost of wholesale scrap jewelry sold
 
9,963

 
9,457

 
 
5
 %
 
 
9,752

 
 
3
 %
 
Consumer loan and credit services loss provision
 
167

 
187

 
 
(11
)%
 
 
163

 
 
(13
)%
 
Total cost of revenue
 
122,313

 
101,524

 
 
20
 %
 
 
119,772

 
 
18
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net revenue
 
130,869

 
114,158

 
 
15
 %
 
 
128,373

 
 
12
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Store operating expenses
 
68,136

 
60,325

 
 
13
 %
 
 
66,856

 
 
11
 %
 
Depreciation and amortization
 
5,449

 
5,019

 
 
9
 %
 
 
5,347

 
 
7
 %
 
Total segment expenses
 
73,585

 
65,344

 
 
13
 %
 
 
72,203

 
 
10
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment pre-tax operating income
 
$
57,284

 
$
48,814

 
 
17
 %
 
 
$
56,170

 
 
15
 %
 


32

 
 

Retail Merchandise Sales Operations

Latin America retail merchandise sales increased 19% (17% on a constant currency basis) to $173.1 million during the six months ended June 30, 2018 compared to $145.3 million for the six months ended June 30, 2017. The increase was primarily due to a 15% increase (13% on a constant currency basis) in same-store retail sales driven by strong retail demand trends, revenue contributions from recent acquisition activity and new store openings. The gross profit margin on retail merchandise sales was 35% during the six months ended June 30, 2018 compared to 37% during the six months ended June 30, 2017. The decrease in retail margins was in large part the result of recent acquisitions of smaller format stores that have historically had lower retail margins. The Company expects retail margins to increase over time from current levels as these acquired smaller format stores utilize the FirstPawn IT platform and store associates are trained in Company best practices that focus on general merchandise lending and retail operations.

Pawn Lending Operations

Pawn loan fees in Latin America increased 17% (14% on a constant currency basis) totaling $68.7 million during the six months ended June 30, 2018 compared to $58.8 million for the six months ended June 30, 2017, primarily as a result of the 1% (12% on a constant currency basis) increase in pawn loan receivables as of June 30, 2018 compared to June 30, 2017. The increase in pawn receivables was primarily driven by pawn loans acquired in the recent acquisitions and new store additions, partially offset by a same-store pawn receivable decrease of 8% (2% increase on a constant currency basis).

Wholesale Scrap Jewelry Operations

Latin America wholesale scrap jewelry revenue, consisting primarily of gold sales, decreased 1% to $10.6 million during the six months ended June 30, 2018 compared to $10.7 million during the six months ended June 30, 2017. The scrap jewelry gross profit margin in Latin America was 6% (8% on a constant currency basis) compared to the prior-year margin of 12%. Scrap jewelry profits accounted for less than 1% of Latin America net revenue (gross profit) for the six months ended June 30, 2018 compared to 1% for the six months ended June 30, 2017 and is considered a non-core revenue stream of the Company.

Consumer Lending Operations

The Company continues to strategically focus on its core pawn business and reduce its exposure to non-core unsecured lending products. Effective June 30, 2018, the Company ceased offering its unsecured consumer loan products in Mexico and the 28 consumer loan stores were closed. As a result, the Company no longer offers an unsecured consumer loan product in Latin America.

Segment Expenses and Segment Pre-Tax Operating Income

Store operating expenses increased 13% (11% on a constant currency basis) to $68.1 million during the six months ended June 30, 2018 compared to $60.3 million during the six months ended June 30, 2017 and same-store operating expenses increased 7% (5% on a constant currency basis) compared to the prior-year period. The increase in both total and same-store operating expenses was partially due to increased compensation expense related to wage inflation beginning during the second quarter of 2017. Additionally, total store operating expenses increased due to the 7% increase in the weighted-average store count.

The segment pre-tax operating income for the six months ended June 30, 2018 was $57.3 million, which generated a pre-tax segment operating margin of 23% compared to $48.8 million and 23% in the prior year, respectively.


33

 
 

Consolidated Results of Operations

The following table reconciles pre-tax operating income of the Company’s U.S. operations segment and Latin America operations segment discussed above to consolidated net income for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 (dollars in thousands):

 
 
Six Months Ended
 
 
 
 
 
 
June 30,
 
Increase /
 
 
2018
 
2017
 
(Decrease)
Consolidated Results of Operations
 
 
 
 
 
 
 
 
Segment pre-tax operating income:
 
 
 
 
 
 
 
 
U.S. operations segment pre-tax operating income
 
$
118,040

 
$
126,837

 
 
(7
)%
 
Latin America operations segment pre-tax operating income
 
57,284

 
48,814

 
 
17
 %
 
Consolidated segment pre-tax operating income
 
175,324

 
175,651

 
 
 %
 
 
 
 
 
 
 
 
 
 
Corporate expenses and other income:
 
 
 
 
 
 
 
 
Administrative expenses
 
57,722

 
63,543

 
 
(9
)%
 
Depreciation and amortization
 
6,194

 
11,073

 
 
(44
)%
 
Interest expense
 
12,727

 
11,698

 
 
9
 %
 
Interest income
 
(1,721
)
 
(720
)
 
 
139
 %
 
Merger and other acquisition expenses
 
2,352

 
2,253

 
 
4
 %
 
Loss on extinguishment of debt
 

 
14,094

 
 
(100
)%
 
Total corporate expenses and other income
 
77,274

 
101,941

 
 
(24
)%
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
98,050

 
73,710

 
 
33
 %
 
 
 
 
 
 
 
 
 
 
Provision for income taxes
 
26,244

 
25,826

 
 
2
 %
 
 
 
 
 
 
 
 
 
 
Net income
 
$
71,806

 
$
47,884

 
 
50
 %
 

Corporate Expenses and Taxes

Administrative expenses decreased 9% to $57.7 million during the six months ended June 30, 2018 compared to $63.5 million during the six months ended June 30, 2017, primarily due to administrative synergies realized from the Cash America merger, partially offset by a 7% increase in the weighted-average store count resulting in additional management and supervisory compensation and other support expenses required for such growth and a 2% favorable change in the average value of the Mexican peso, which increased comparative administrative expenses in Mexico. As a percentage of revenue, administrative expenses were 7% during both the six months ended June 30, 2018 and 2017.

Corporate depreciation and amortization decreased to $6.2 million during the six months ended June 30, 2018 compared to $11.1 million during the six months ended June 30, 2017, primarily due to the realization of depreciation and amortization merger synergies and a reduction in capital spending compared to pre-merger levels.

Interest expense increased to $12.7 million during the six months ended June 30, 2018 compared to $11.7 million for the six months ended June 30, 2017. See “—Liquidity and Capital Resources.”

Merger and other acquisition expenses increased to $2.4 million during the six months ended June 30, 2018 compared to $2.3 million for the six months ended June 30, 2017, reflecting timing in acquisition and integration costs associated with the Cash America merger and the recent Latin America acquisitions. See “—Non-GAAP Financial Information” for additional details of merger and other acquisition expenses.

34

 
 

During the six months ended June 30, 2017, the Company repurchased through a tender offer, or otherwise redeemed, its previously outstanding $200 million, 6.75% senior unsecured notes due 2021, incurring a loss on extinguishment of debt of $14.1 million.

For the six months ended June 30, 2018 and 2017, the Company’s consolidated effective income tax rates were 26.8% and 35.0%, respectively. The effective tax rate for the six months ended June 30, 2018 was impacted primarily as a result of the passage of the Tax Act on December 22, 2017, which reduced the U.S. corporate income tax rate from 35% in 2017 to 21% in 2018. The Company expects its blended effective income tax rate, including corporate income taxes on Latin American operations, to be between 26% and 27% for fiscal 2018 as a result of the Tax Act.

Net Income, Adjusted Net Income, Net Income Per Share and Adjusted Net Income Per Share

The following table sets forth revenue, net revenue, net income, net income per share, adjusted net income and adjusted net income per share for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 (in thousands, except per share amounts):

 
 
Six Months Ended June 30,
 
 
2018
 
2017
 
 
As Reported
 
Adjusted
 
As Reported
 
Adjusted
 
 
(GAAP)
 
(Non-GAAP)
 
(GAAP)
 
(Non-GAAP)
Revenue
 
$
869,772

 
$
869,772

 
$
864,205

 
$
864,205

Net revenue
 
$
467,509

 
$
467,509

 
$
467,324

 
$
467,324

Net income
 
$
71,806

 
$
73,502

 
$
47,884

 
$
58,183

Diluted earnings per share
 
$
1.57

 
$
1.61

 
$
0.99

 
$
1.20

Weighted average diluted shares
 
45,757

 
45,757

 
48,345

 
48,345


Adjusted net income removes certain items from GAAP net income that the Company does not consider to be representative of its actual operating performance, such as merger and other acquisition expenses and debt extinguishment costs, but does not adjust for the effects of foreign currency rate fluctuations. See “—Non-GAAP Financial Information—Adjusted Net Income and Adjusted Net Income Per Share” below.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2018, the Company’s primary sources of liquidity were $83.1 million in cash and cash equivalents, $173.4 million of available and unused funds under the Company’s revolving credit facility, $408.5 million in customer loans and fees and service charges receivable and $249.7 million in inventories. As of June 30, 2018, the amount of cash associated with indefinitely reinvested foreign earnings was $49.5 million, which is primarily held in Mexican pesos. The Company had working capital of $644.2 million as of June 30, 2018 and total equity exceeded liabilities by a ratio of 1.9 to 1.

On May 30, 2017, the Company issued $300.0 million of 5.375% senior unsecured 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 unsecured 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 (the “Indenture”) 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. As of June 30, 2018, the Net Debt Ratio was 1.6 to 1. See “—Non-GAAP Financial Information” for additional information on the calculation of the Net Debt Ratio.

The Company used the proceeds from the offering of the Notes to repurchase, or otherwise redeem, its previously outstanding $200.0 million, 6.75% senior unsecured notes due 2021 (the “2021 Notes”). As a result, during the six months ended June 30, 2017, the Company recognized a $14.1 million loss on extinguishment of debt related to the repurchase or redemption of the 2021 Notes.


35

 
 

At June 30, 2018, the Company maintained an unsecured line of credit with a group of U.S. based commercial lenders (the “Credit Facility”) in the amount of $400.0 million which matures on September 2, 2022. At June 30, 2018, the Company had $221.5 million in outstanding borrowings and $5.1 million in outstanding letters of credit under the Credit Facility, leaving $173.4 million available for future borrowings. The 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 Credit Facility commitment. The weighted-average interest rate on amounts outstanding under the Credit Facility at June 30, 2018 was 4.50% based on 1 week LIBOR. Under the terms of the Credit Facility, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The 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 Credit Facility as of June 30, 2018, and believes it has the capacity to borrow a substantial portion of the amount available under the Credit Facility under the most restrictive covenant. During the six months ended June 30, 2018, the Company received net proceeds of $114.5 million from borrowings pursuant to the Credit Facility.

In general, revenue growth is dependent upon the Company’s ability to fund the addition of store locations (both de novo openings and acquisitions) and growth in customer loan balances and inventories. In addition to these factors, changes in loan balances, collection of pawn fees, merchandise sales, inventory levels, seasonality, operating expenses, administrative expenses, expenses related to merger and acquisition activities, tax rates, gold prices, foreign currency exchange rates and the pace of new store expansions and acquisitions, affect the Company’s liquidity. Management believes cash on hand, the borrowings available under its revolving unsecured credit facility, anticipated cash generated from operations (including the normal seasonal increases in operating cash flows occurring in the first and fourth quarters) and other current working capital will be sufficient to meet the Company’s anticipated capital requirements for its business for at least the next twelve months. Where appropriate or desirable, in connection with the Company’s efficient management of its liquidity position, the Company could seek to raise additional funds from a variety of sources, including the sale of assets, reductions in capital spending, the issuance of debt or equity securities and/or changes to its management of current assets. The characteristics of the Company’s current assets, specifically the ability to rapidly liquidate gold jewelry inventory and adjust outflows of cash in its lending practices, gives the Company flexibility to quickly modify its business strategy to increase cash flow from its business, if necessary. Regulatory developments affecting the Company’s operations may also impact profitability and liquidity. See “—Regulatory Developments.”

The Company regularly evaluates opportunities to optimize its capital structure, including through consideration of the issuance of debt or equity, to refinance existing debt and to fund ongoing cash needs such as general corporate purposes, growth initiatives and its stock repurchase program.

The following tables set forth certain historical information with respect to the Company’s sources and uses of cash and other key indicators of liquidity (dollars in thousands):

 
 
Six Months Ended
 
 
June 30,
 
 
2018
 
2017
Cash flow provided by operating activities
 
$
119,967

 
$
102,813

Cash flow provided by (used in) investing activities
 
$
(28,446
)
 
$
15,447

Cash flow used in financing activities
 
$
(122,554
)
 
$
(122,908
)

 
 
Balance at June 30,
 
 
2018
 
2017
Working capital
 
$
644,218

 
$
731,637

Current ratio
6.5:1
 
6.8:1
 
Liabilities to equity ratio
0.5:1
 
0.4:1
 
Net Debt Ratio (1)
1.6:1
 
1.2:1
 

(1)
Adjusted EBITDA, a component of the Net Debt Ratio, is a non-GAAP financial measure. See “—Non-GAAP Financial Information” for a calculation of the Net Debt Ratio.

36

 
 

Net cash provided by operating activities increased $17.2 million, or 17%, from $102.8 million for the six months ended June 30, 2017 to $120.0 million for the six months ended June 30, 2018, due to an increase in net income of $23.9 million and net changes in certain non-cash adjustments to reconcile net income to operating cash flow and net changes in operating assets and liabilities (as detailed in the condensed consolidated statements of cash flows).

Net cash provided by investing activities decreased $43.9 million, or 284%, from $15.4 million for the six months ended June 30, 2017 to net cash used in investing activities of $28.4 million for the six months ended June 30, 2018. Cash flows from investing activities are utilized primarily to fund pawn store acquisitions and purchases of property and equipment. In addition, net cash flows related to fundings/repayments of pawn and consumer loans are included in investing activities. The Company paid $36.2 million in cash related to acquisitions and $23.2 million for property and equipment during the six months ended June 30, 2018 compared to $1.1 million and $17.4 million in the prior-year period, respectively. The Company received funds from a net decrease in pawn and consumer loans of $30.9 million during the six months ended June 30, 2018 compared to $34.0 million during the six months ended June 30, 2017.

Net cash used in financing activities decreased $0.4 million, or 0%, from $122.9 million for the six months ended June 30, 2017 to $122.6 million for the six months ended June 30, 2018. Net borrowings on the Company’s credit facility were $114.5 million during the six months ended June 30, 2018 compared to net payments of $163.0 million during the six months ended June 30, 2017. During the six months ended June 30, 2017, the Company received $300.0 million in proceeds from the private offering of the Notes and paid $4.7 million in debt issuance costs related to the Notes and the Credit Facility. Using part of the proceeds from the Notes, the Company repurchased, or otherwise redeemed, the 2021 Notes and paid tender or redemption premiums over the face value of the 2021 Notes and other reacquisition costs of $10.9 million during the six months ended June 30, 2017. The Company funded $217.3 million worth of common stock share repurchases and paid dividends of $20.2 million during the six months ended June 30, 2018, compared to funding $26.3 million worth of share repurchases and dividends paid of $18.3 million during the six months ended June 30, 2017.

During the six months ended June 30, 2018, the Company opened 27 new pawn stores in Latin America, acquired 188 pawn stores in Latin America and acquired 18 pawn stores in the U.S. The cumulative all-cash purchase price of the 2018 acquisitions was $44.0 million, net of cash acquired and subject to future post-closing adjustments. The purchases were composed of $36.2 million in cash paid during the six months ended June 30, 2018 and $7.8 million of deferred purchase price payable in cash to the sellers in 2018 and 2019. The Company funded $23.2 million in capital expenditures during the six months ended June 30, 2018, primarily for maintenance capital expenditures, new store additions and corporate assets, but also included $8.7 million related to the purchase of real estate primarily at existing stores.

The Company intends to continue expansion primarily through acquisitions and new store openings. For fiscal 2018, the Company expects to add 265 to 270 locations, which includes the 188 smaller format stores acquired in Mexico and the 45 large format stores acquired or opened during the first half of the year. The Company anticipates opening an additional 32 to 37 large format stores over the remainder of the year. Additionally, as opportunities arise at attractive prices, the Company intends to continue purchasing the real estate from its landlords at existing stores. Excluding these real estate purchases, the Company expects total capital expenditures for 2018, including expenditures for new and remodeled stores and other corporate assets, will total approximately $27.5 million to $32.5 million. Management believes cash on hand, the amounts available to be drawn under the credit facility and cash generated from operations will be sufficient to accommodate the Company’s current operations and store expansion plans for the remainder of 2018.

The Company continually looks for, and is presented with, potential acquisition opportunities. The Company currently has no other contractual commitments for materially significant future acquisitions, business combinations or capital commitments. The Company will evaluate potential acquisitions based upon growth potential, purchase price, available liquidity, debt covenant restrictions, strategic fit and quality of management personnel, among other factors. If the Company encounters an attractive opportunity to acquire new stores in the near future, the Company may seek additional financing, the terms of which will be negotiated on a case-by-case basis.

In May 2017, the Company’s Board of Directors authorized a common stock repurchase program to repurchase up to $100.0 million of the Company’s outstanding common stock. During January 2018, the Company completed the May 2017 stock repurchase program after repurchasing approximately 239,000 shares of its common stock at an aggregate cost of $17.3 million. In October 2017, the Company’s Board of Directors authorized an additional $100.0 million share repurchase plan that became effective on January 31, 2018, following the completion of the May 2017 share repurchase plan. The Company completed the October 2017 share repurchase program in April 2018 after repurchasing 1,282,000 shares of its common stock at an aggregate cost of $100.0 million and an average cost per share of $78.01. In April 2018, the Company’s Board of Directors authorized an additional common stock repurchase program to repurchase up to $100.0 million of the Company’s outstanding common stock, which became effective

37

 
 

on April 25, 2018. The Company completed the April 2018 share repurchase program in June 2018 after repurchasing 1,098,000 shares of its common stock at an aggregate cost of $100.0 million and an average cost per share of $91.06.

In July 2018, the Company’s Board of Directors authorized a new common stock repurchase program to repurchase up to $100.0 million of the Company’s outstanding common stock, which became effective on July 25, 2018. The Company intends to continue repurchases under the July 2018 repurchase program through open market transactions under trading plans in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act of 1934, as amended, subject to a variety of factors, including, but not limited to, the level of cash balances, credit availability, debt covenant restrictions, general business conditions, regulatory requirements, the market price of the Company’s stock, dividend policy and the availability of alternative investment opportunities.

Total cash dividends paid during the six months ended June 30, 2018 and 2017 were $20.2 million and $18.3 million, respectively. In January 2018, the Company’s Board of Directors approved a plan to increase the annual dividend to $0.88 per share, or $0.22 per share quarterly, beginning in the first quarter of 2018. The declared $0.22 per share third quarter cash dividend on common shares outstanding, or an aggregate of $9.8 million based on June 30, 2018 share counts, will be paid on August 31, 2018 to stockholders of record as of August 15, 2018. The declaration and payment of cash dividends in the future (quarterly or otherwise) will be made by the Board of Directors, from time to time, subject to the Company’s financial condition, results of operations, business requirements, compliance with legal requirements and debt covenant restrictions.

NON-GAAP FINANCIAL INFORMATION

The Company uses certain financial calculations such as adjusted net income, adjusted net income per share, EBITDA, adjusted EBITDA, free cash flow, adjusted free cash flow and constant currency results (as defined or explained below) as factors in the measurement and evaluation of the Company’s operating performance and period-over-period growth. The Company derives these financial calculations on the basis of methodologies other than GAAP, primarily by excluding from a comparable GAAP measure certain items the Company does not consider to be representative of its actual operating performance. These financial calculations are “non-GAAP financial measures” as defined in Securities and Exchange Commission (“SEC”) rules. The Company uses these non-GAAP financial measures in operating its business because management believes they are less susceptible to variances in actual operating performance that can result from the excluded items, other infrequent charges and currency fluctuations. The Company presents these financial measures to investors because management believes they are useful to investors in evaluating the primary factors that drive the Company’s operating performance and because management believes they provide greater transparency into the Company’s results of operations. However, items that are excluded and other adjustments and assumptions that are made in calculating adjusted net income, adjusted net income per share, EBITDA, adjusted EBITDA, free cash flow, adjusted free cash flow and constant currency results are significant components in understanding and assessing the Company’s financial performance. These non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, the Company’s GAAP financial measures. Further, because these non-GAAP financial measures are not determined in accordance with GAAP and are thus susceptible to varying calculations, adjusted net income, adjusted net income per share, EBITDA, adjusted EBITDA, free cash flow, adjusted free cash flow and constant currency results, as presented, may not be comparable to other similarly titled measures of other companies.

The Company has adjusted the applicable financial measures to exclude, among other expenses and benefits, merger and other acquisition expenses because it generally would not incur such costs and expenses as part of its continuing operations. Merger and other acquisition expenses include incremental costs directly associated with merger and acquisition activities, including professional fees, legal expenses, severance, retention and other employee-related costs, contract breakage costs and costs related to consolidation of technology systems and corporate facilities among others.


38

 
 

Adjusted Net Income and Adjusted Net Income Per Share

Management believes the presentation of adjusted net income and adjusted net income per share (“Adjusted Income Measures”) provides investors with greater transparency and provides a more complete understanding of the Company’s financial performance and prospects for the future by excluding items that management believes are non-operating in nature and not representative of the Company’s core operating performance. In addition, management believes the adjustments shown below are useful to investors in order to allow them to compare the Company’s financial results for the current periods presented with the prior periods presented.

The following table provides a reconciliation between the net income and diluted earnings per share calculated in accordance with GAAP to the Adjusted Income Measures, which are shown net of tax (in thousands, except per share amounts):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
In Thousands
 
Per Share
 
In Thousands
 
Per Share
 
In Thousands
 
Per Share
 
In Thousands
 
Per Share
Net income, as reported
$
30,171

 
$
0.67

 
$
15,239

 
$
0.32

 
$
71,806

 
$
1.57

 
$
47,884

 
$
0.99

Adjustments, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Merger and other acquisition expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transaction
1,344

 
0.03

 

 

 
1,344

 
0.03

 

 

Severance and retention
1

 

 
447

 
0.01

 
43

 

 
801

 
0.02

Other
167

 

 
565

 
0.01

 
309

 
0.01

 
619

 
0.01

Total merger and other acquisition expenses
1,512

 
0.03

 
1,012

 
0.02

 
1,696

 
0.04

 
1,420

 
0.03

Loss on extinguishment of debt

 

 
8,879

 
0.18

 

 

 
8,879

 
0.18

Adjusted net income
$
31,683

 
$
0.70

 
$
25,130

 
$
0.52

 
$
73,502

 
$
1.61

 
$
58,183

 
$
1.20


The following tables provide a reconciliation of the gross amounts, the impact of income taxes and the net amounts for the adjustments included in the table above (in thousands):

 
Three Months Ended June 30,
 
2018
 
2017
 
Pre-tax
 
Tax
 
After-tax
 
Pre-tax
 
Tax
 
After-tax
Merger and other acquisition expenses
$
2,113

 
$
601

 
$
1,512

 
$
1,606

 
$
594

 
$
1,012

Loss on extinguishment of debt

 

 

 
14,094

 
5,215

 
8,879

Total adjustments
$
2,113

 
$
601

 
$
1,512

 
$
15,700

 
$
5,809

 
$
9,891


 
Six Months Ended June 30,
 
2018
 
2017
 
Pre-tax
 
Tax
 
After-tax
 
Pre-tax
 
Tax
 
After-tax
Merger and other acquisition expenses
$
2,352

 
$
656

 
$
1,696

 
$
2,253

 
$
833

 
$
1,420

Loss on extinguishment of debt

 

 

 
14,094

 
5,215

 
8,879

Total adjustments
$
2,352

 
$
656

 
$
1,696

 
$
16,347

 
$
6,048

 
$
10,299



39

 
 

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA

The Company defines EBITDA as net income before income taxes, depreciation and amortization, interest expense and interest income and adjusted EBITDA as EBITDA adjusted for certain items as listed below that management considers to be non-operating in nature and not representative of its actual operating performance. The Company believes EBITDA and adjusted EBITDA are commonly used by investors to assess a company’s financial performance, and adjusted EBITDA is used in the calculation of the Net Debt Ratio as defined in the Company’s senior notes covenants. The following table provides a reconciliation of net income to EBITDA and adjusted EBITDA (dollars in thousands):
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trailing Twelve
 
 
Three Months Ended
 
Six Months Ended
 
Months Ended
 
 
June 30,
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Net income
 
$
30,171

 
$
15,239

 
$
71,806

 
$
47,884

 
$
167,814

 
$
83,164

Income taxes
 
 
12,100

 
 
6,229

 
 
26,244

 
 
25,826

 
 
28,838

 
 
47,086

Depreciation and amortization
 
 
10,952

 
 
14,689

 
 
22,235

 
 
28,932

 
 
48,536

 
 
50,913

Interest expense
 
 
6,529

 
 
5,585

 
 
12,727

 
 
11,698

 
 
25,064

 
 
23,232

Interest income
 
 
(740
)
 
 
(393
)
 
 
(1,721
)
 
 
(720
)
 
 
(2,598
)
 
 
(973
)
EBITDA
 
 
59,012

 
 
41,349

 
 
131,291

 
 
113,620

 
 
267,654

 
 
203,422

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Merger and other acquisition expenses
 
 
2,113

 
 
1,606

 
 
2,352

 
 
2,253

 
 
9,161

 
 
34,444

Loss on extinguishment of debt
 
 

 
 
14,094

 
 

 
 
14,094

 
 
20

 
 
14,094

Net gain on sale of common stock of Enova
 
 

 
 

 
 

 
 

 
 

 
 
(1,299
)
Adjusted EBITDA
 
$
61,125

 
$
57,049

 
$
133,643

 
$
129,967

 
$
276,835

 
$
250,661

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Debt Ratio calculated as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total debt (outstanding principal)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
521,500

 
$
397,000

Less: cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(83,127
)
 
 
(91,434
)
Net debt
 
 
 
 
 
 
 
 
 
 
 
 
 
$
438,373

 
$
305,566

Adjusted EBITDA
 
 
 
 
 
 
 
 
 
 
 
 
 
$
276,835

 
$
250,661

Net Debt Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
1.6
:1
 
1.2
:1




40

 
 

Free Cash Flow and Adjusted Free Cash Flow

For purposes of its internal liquidity assessments, the Company considers free cash flow and adjusted free cash flow. The Company defines free cash flow as cash flow from operating activities less purchases of property and equipment and net fundings/repayments of pawn and consumer loans, which are considered to be operating in nature by the Company but are included in cash flow from investing activities, and adjusted free cash flow as free cash flow adjusted for merger and other acquisition expenses paid that management considers to be non-operating in nature. Free cash flow and adjusted free cash flow are commonly used by investors as an additional measure of cash generated by business operations that may be used to repay scheduled debt maturities and debt service or, following payment of such debt obligations and other non-discretionary items, may be available to invest in future growth through new business development activities or acquisitions, repurchase stock, pay cash dividends or repay debt obligations prior to their maturities. These metrics can also be used to evaluate the Company’s ability to generate cash flow from business operations and the impact that this cash flow has on the Company’s liquidity. However, free cash flow and adjusted free cash flow have limitations as analytical tools and should not be considered in isolation or as a substitute for cash flow from operating activities or other income statement data prepared in accordance with GAAP. The following table reconciles cash flow from operating activities to free cash flow and adjusted free cash flow (in thousands):

 
 
 
 
 
 
 
 
 
 
Trailing Twelve
 
 
Three Months Ended
 
Six Months Ended
 
Months Ended
 
 
June 30,
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Cash flow from operating activities
 
$
28,651

 
$
38,948

 
$
119,967

 
$
102,813

 
$
237,511

 
$
160,094

Cash flow from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Loan receivables, net of cash repayments
 
(25,307
)
 
(33,226
)
 
30,913

 
33,963

 
37,685

 
27,357

Purchases of property and equipment (1)
 
(14,351
)
 
(9,325
)
 
(23,188
)
 
(17,401
)
 
(42,922
)
 
(34,191
)
Free cash flow
 
(11,007
)
 
(3,603
)
 
127,692

 
119,375

 
232,274

 
153,260

Merger and other acquisition expenses paid, net of tax benefit
 
1,531

 
1,743

 
3,099

 
3,545

 
6,213

 
22,929

Adjusted free cash flow
 
$
(9,476
)
 
$
(1,860
)
 
$
130,791

 
$
122,920

 
$
238,487

 
$
176,189


(1)
Includes $5.3 million and $2.7 million of real estate expenditures, primarily at existing stores, for the three months ended June 30, 2018 and 2017, respectively, $8.7 million and $4.6 million for the six months ended June 30, 2018 and 2017, respectively, and $15.2 million and $8.8 million for the trailing twelve months ended June 30, 2018 and 2017, respectively.

Constant Currency Results

The Company’s reporting currency is the U.S. dollar. However, certain performance metrics discussed in this report are presented on a “constant currency” basis, which is considered a non-GAAP financial measure. The Company’s management uses constant currency results to evaluate operating results of business operations in Latin America, which are primarily transacted in local currencies.

The Company believes constant currency results provide investors with valuable supplemental information regarding the underlying performance of its business operations in Latin America, consistent with how the Company’s management evaluates such performance and operating results. Constant currency results reported herein are calculated by translating certain balance sheet and income statement items denominated in local currencies using the exchange rate from the prior-year comparable period, as opposed to the current comparable period, in order to exclude the effects of foreign currency rate fluctuations for purposes of evaluating period-over-period comparisons. 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. See the Latin America operations segment tables in “—Results of Continuing Operations” above for additional reconciliation of certain constant currency amounts to as reported GAAP amounts.


41

 
 

REGULATORY DEVELOPMENTS   

The Company is subject to significant regulation of its pawn, consumer loan and general business operations in all of the jurisdictions in which it operates. Existing regulations and regulatory developments are further and more completely described under “Governmental Regulation” in Part I, Item 1 of the Company’s 2017 annual report on Form 10-K filed with the SEC on February 20, 2018. There have been no material changes in regulatory developments affecting the Company since December 31, 2017, except as explained below.

Beginning on January 1, 2018, the Company ceased offering fee-based check cashing services in its non-franchise stores and no longer considers itself a money services business as defined under U.S. federal law. As a result, the Company is no longer subject to anti-money laundering requirements under U.S. federal laws pertaining to money services businesses.

On July 30, 2018, the governor of Ohio signed into law the Ohio Fairness in Lending Act (the “Act”). The Act will significantly impact the consumer loan industry in Ohio. The Act effectively caps a consumer loan amount at $1,000, substantially limits consumer loans with maturities of less than 90 days by capping monthly payments as a percentage of the borrower’s gross income, creates a maximum loan term of one year, caps interest rates at 28% per annum and caps the total cost of a consumer loan (including fees) at 60% of the original principal. There are also other provisions such as disclosure requirements, maximum borrowing levels and collections restrictions. In addition, the Act essentially eliminates the use of credit service organizations (each a “CSO”) by prohibiting a CSO from brokering loans that meet any of the following conditions: (i) the loan amount is less than $5,000, (ii) the term of the loan is less than one year, and (iii) the APR exceeds 28%. The provisions of the Act become effective on or about April 26, 2019.

The Company currently operates 113 Cashland-branded stores in Ohio that primarily offer consumer loan and credit services products and six Cash America-branded pawn stores in Ohio that offer consumer loan and credit services as ancillary products, all of which will be negatively impacted by the Act. It is not expected that the regulatory changes will materially affect the Company’s Ohio-based consumer lending and credit services revenues in 2018, which the Company estimates to be approximately $40 million, representing less than 2.5% of consolidated revenue. The Company will continue to analyze the viability of its Cashland operations in Ohio in 2019, which is when the provisions of the law become effective. Most of the Cashland stores currently offer pawn loans and pawn retailing as ancillary products. While many of the Cashland stores will likely be closed, a significant number may continue operating as pawn stores.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to the Company’s operations result primarily from changes in interest rates, gold prices and foreign currency exchange rates, and are described in detail in the Company’s 2017 annual report on Form 10-K. The impact of current-year fluctuations in gold prices and foreign currency exchange rates, in particular, are further discussed in Part I, Item 2 herein. The Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. There have been no material changes to the Company’s exposure to market risks since December 31, 2017.


42

 
 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934) (the “Exchange Act”) as of June 30, 2018 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or internal controls will prevent all possible error and fraud. The Company’s disclosure controls and procedures are, however, designed to provide reasonable assurance of achieving their objectives, and the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective at that reasonable assurance level.


43

 
 

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There have been no material changes in the status of legal proceedings previously reported in the Company’s 2017 annual report on Form 10-K.

ITEM 1A. RISK FACTORS

Important risk factors that could materially affect the Company’s business, financial condition or results of operations in future periods are described in Part I, Item 1A, “Risk Factors” of the Company’s 2017 annual report on Form 10-K. These factors are supplemented by those discussed under “Management’s Discussion And Analysis Of Financial Condition And Results Of Operations” and “Regulatory Developments” in Part I, Item 2 of this quarterly report and in “Governmental Regulation” in Part I, Item 1 of the Company’s 2017 annual report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In May 2017, the Company’s Board of Directors authorized a common stock repurchase program to repurchase up to $100.0 million of the Company’s outstanding common stock. During January 2018, the Company completed the May 2017 stock repurchase program after repurchasing approximately 239,000 shares of its common stock at an aggregate cost of $17.3 million. In October 2017, the Company’s Board of Directors authorized an additional $100.0 million share repurchase plan that became effective on January 31, 2018, following the completion of the May 2017 share repurchase plan. The Company completed the October 2017 share repurchase program in April 2018 after repurchasing 1,282,000 shares of its common stock at an aggregate cost of $100.0 million and an average cost per share of $78.01. In April 2018, the Company’s Board of Directors authorized an additional common stock repurchase program to repurchase up to $100.0 million of the Company’s outstanding common stock, which became effective on April 25, 2018. The Company completed the April 2018 share repurchase program in June 2018 after repurchasing 1,098,000 shares of its common stock at an aggregate cost of $100.0 million and an average cost per share of $91.06.

The following table provides the information with respect to purchases made by the Company of shares of its common stock during each month the programs were in effect during the six months ended June 30, 2018 (in thousands, except per share amounts):

 
 
Total
Number
Of Shares
Purchased
 
Average
Price
Paid
Per Share
 
Total Number Of
Shares Purchased
As Part Of Publicly
Announced Plans
 
Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans
January 1 through January 31, 2018
 
239,000

 
$
72.29

 
239,000

 
$
100,000

February 1 through February 28, 2018
 
405,000

 
74.15

 
405,000

 
$
69,971

March 1 through March 31, 2018
 
734,000

 
79.43

 
734,000

 
$
11,645

April 1 through April 30, 2018
 
178,000

 
82.73

 
178,000

 
$
96,955

May 1 through May 31, 2018
 
770,000

 
90.23

 
770,000

 
$
27,478

June 1 through June 30, 2018
 
293,000

 
93.71

 
293,000

 

Total
 
2,619,000

 
$
82.96

 
2,619,000

 
 

In July 2018, the Company’s Board of Directors authorized a new common stock repurchase program to repurchase up to $100.0 million of the Company’s outstanding common stock, which became effective on July 25, 2018. The Company intends to continue repurchases under the July 2018 repurchase program through open market transactions under trading plans in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act of 1934, as amended, subject to a variety of factors, including, but not limited to, the level of cash balances, credit availability, debt covenant restrictions, general business conditions, regulatory requirements, the market price of the Company’s stock, dividend policy and the availability of alternative investment opportunities.


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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

On July 30, 2018, the Company entered into new employment agreements with Raul R. Ramos, the Company’s SVP Latin American Operations and Anna M. Alvarado, the Company’s General Counsel, which were approved by the Compensation Committee (the “Committee”) of the Board of Directors of the Company on July 25, 2018. The employment agreements became effective upon signing and terms of the employment agreements run through December 31, 2021, subject to automatic one-year extensions thereafter, unless either the Company or the executive gives at least 90 days’ written notice to the other party that the employment agreement shall not be extended.

The employment agreements provide for annual base salaries of $420,000 for Mr. Ramos and $500,000 for Ms. Alvarado, in each case subject to annual review and increases in the discretion of the Committee. The executives will also be eligible to earn an annual bonus based on satisfaction of performance criteria established by the Committee for each fiscal year during the term of the agreement, with a target bonus opportunity equal to not less than 50% of the executive’s then current base salary. In addition, the executives will be eligible to participate in any of the Company’s incentive, savings, retirement and welfare benefit plans available to other senior officers of the Company.

The employment agreements provide that if an executive’s employment with the Company is terminated during the term by the Company without “cause” or by the executive for “good reason” (as such terms are defined in the employment agreements), the executive would be entitled to a lump sum cash severance payment equal to 75% (or 150%, if such termination occurs within twelve months following a change in control of the Company) of the sum of (i) the executive’s base salary in effect as of the termination, and (ii) the average of the annual bonuses earned by the executive for each of the three fiscal years immediately preceding the year in which the termination occurs. The executive would also be entitled to continue to participate in the Company’s health and welfare benefit plans at active employee rates for a period of twelve months (the “COBRA subsidy”). In addition, if such termination occurs within twelve months following a change in control of the Company, the executive would be entitled to a pro rata annual bonus for the year in which the termination occurs, and accelerated vesting and full payout under of all outstanding time-vesting and performance-based equity incentive awards (based on an assumed achievement of all relevant performance goals at “target” level, or based on a higher actual or deemed level of achievement of performance goals, in the sole discretion of the Committee). Furthermore, if such termination occurs within twelve months following a change in control of the Company, the Company will pay to the executive, in lieu of the COBRA subsidy described above, a lump sum in cash in an amount equal to the full monthly cost of the executive’s health and welfare benefit coverage multiplied by 18.

The employment agreements prohibit the executives from competing with the Company during the employment term and for a period of 24 months following termination of employment. The executives would also be prohibited from soliciting Company customers and recruiting Company employees during this period.

The employment agreements of Mr. Ramos and Ms. Alvarado are filed as Exhibits 10.1 and 10.2, respectively, to this Quarterly Report on Form 10-Q and each is incorporated herein by reference and the foregoing descriptions of these employment agreement are qualified in their entirety by these exhibits.




45

 
 

ITEM 6. EXHIBITS
 
 
 
 
Incorporated by Reference
 
 
Exhibit No.
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
 
Filed Herewith
3.1
 
 
DEF 14A
 
0-19133
 
B
 
04/29/2004
 
 
3.2
 
 
8-K
 
001-10960
 
3.1
 
09/02/2016
 
 
3.3
 
 
8-K
 
001-10960
 
3.2
 
09/02/2016
 
 
10.1
 
 
 
 
 
 
 
 
 
 
X
10.2
 
 
 
 
 
 
 
 
 
 
X
31.1
 
 
 
 
 
 
 
 
 
 
X
31.2
 
 
 
 
 
 
 
 
 
 
X
32.1
 
 
 
 
 
 
 
 
 
 
X
32.2
 
 
 
 
 
 
 
 
 
 
X
101 (1)
 
The following financial information from the Company's Quarterly Report on Form 10-Q for the second quarter of fiscal 2018, filed with the SEC on August 1, 2018, is formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets at June 30, 2018, June 30, 2017 and December 31, 2017, (ii) Condensed Consolidated Statements of Income for the three and six months ended June 30, 2018 and June 30, 2017, (iii) Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and June 30, 2017, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2018 and June 30, 2017, (v) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and June 30, 2017 and (vi) Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 
 
 
X

**
Indicates management contract or compensatory plan, contract or agreement.

(1) 
The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

46

 
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
Dated: August 1, 2018
FIRSTCASH, INC.
 
(Registrant)
 
 
 
/s/ RICK L. WESSEL
 
Rick L. Wessel
 
Chief Executive Officer
 
(On behalf of the Registrant)
 
 
 
/s/ R. DOUGLAS ORR
 
R. Douglas Orr
 
Executive Vice President and Chief Financial Officer
 
(As Principal Financial and Accounting Officer)

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