UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2019
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
(Exact name of registrant as specified in its charter)
Delaware | |||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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). ☒ Yes ☐ 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.
☒ | ☐ | Accelerated filer | |
☐ | Non-accelerated filer | Smaller reporting company | |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of July 23, 2019, there were 42,963,211 shares of common stock outstanding.
FIRSTCASH, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2019
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 that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.
While 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 (1) the Company’s 2018 annual report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 5, 2019, including the risks described in Part 1, Item 1A, “Risk Factors” thereof, (2) in this quarterly report on Form 10-Q, and (3) 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. | ||||||||||||
CONSOLIDATED BALANCE SHEETS | ||||||||||||
(unaudited, in thousands) | ||||||||||||
June 30, | December 31, | |||||||||||
2019 | 2018 | 2018 | ||||||||||
ASSETS | ||||||||||||
Cash and cash equivalents | $ | $ | $ | |||||||||
Fees and service charges receivable | ||||||||||||
Pawn loans | ||||||||||||
Consumer loans, net | ||||||||||||
Inventories | ||||||||||||
Income taxes receivable | ||||||||||||
Prepaid expenses and other current assets | ||||||||||||
Total current assets | ||||||||||||
Property and equipment, net | ||||||||||||
Operating lease right of use asset | ||||||||||||
Goodwill | ||||||||||||
Intangible assets, net | ||||||||||||
Other assets | ||||||||||||
Deferred tax assets | ||||||||||||
Total assets | $ | $ | $ | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Accounts payable and accrued liabilities | $ | $ | $ | |||||||||
Customer deposits | ||||||||||||
Income taxes payable | ||||||||||||
Lease liability, current | ||||||||||||
Total current liabilities | ||||||||||||
Revolving unsecured credit facility | ||||||||||||
Senior unsecured notes | ||||||||||||
Deferred tax liabilities | ||||||||||||
Lease liability, non-current | ||||||||||||
Other liabilities | ||||||||||||
Total liabilities | ||||||||||||
Stockholders’ equity: | ||||||||||||
Preferred stock | ||||||||||||
Common stock | ||||||||||||
Additional paid-in capital | ||||||||||||
Retained earnings | ||||||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ( | ) | ||||||
Common stock held in treasury, at cost | ( | ) | ( | ) | ( | ) | ||||||
Total stockholders’ equity | ||||||||||||
Total liabilities and stockholders’ equity | $ | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||
1
FIRSTCASH, INC. | ||||||||||||||||
CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||||||
(unaudited, in thousands, except per share amounts) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue: | ||||||||||||||||
Retail merchandise sales | $ | $ | $ | $ | ||||||||||||
Pawn loan fees | ||||||||||||||||
Wholesale scrap jewelry sales | ||||||||||||||||
Consumer loan and credit services fees | ||||||||||||||||
Total revenue | ||||||||||||||||
Cost of revenue: | ||||||||||||||||
Cost of retail merchandise sold | ||||||||||||||||
Cost of wholesale scrap jewelry sold | ||||||||||||||||
Consumer loan and credit services loss provision | ||||||||||||||||
Total cost of revenue | ||||||||||||||||
Net revenue | ||||||||||||||||
Expenses and other income: | ||||||||||||||||
Store operating expenses | ||||||||||||||||
Administrative expenses | ||||||||||||||||
Depreciation and amortization | ||||||||||||||||
Interest expense | ||||||||||||||||
Interest income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Merger and other acquisition expenses | ||||||||||||||||
Gain on foreign exchange | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total expenses and other income | ||||||||||||||||
Income before income taxes | ||||||||||||||||
Provision for income taxes | ||||||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||
Diluted | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||
2
FIRSTCASH, INC. | ||||||||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | ||||||||||||||||
(unaudited, in thousands) | ||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Other comprehensive income: | ||||||||||||||||
Currency translation adjustment | ( | ) | ( | ) | ||||||||||||
Comprehensive income | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||
3
FIRSTCASH, INC. | |||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||
(unaudited, in thousands) | |||||||||||||||||||||||||||||||||||||
Six Months Ended June 30, 2019 | |||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||
As of 12/31/2018 | — | $ | — | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||
Shares issued under share-based com-pensation plan | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||||
Share-based compensa-tion expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Cash dividends ($0.25 per share) | — | — | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Purchases of treasury stock | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
As of 3/31/2019 | — | $ | — | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||||
Share-based compensa-tion expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Cash dividends ($0.25 per share) | — | — | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Purchases of treasury stock | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
As of 6/30/2019 | — | $ | — | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||||||||||||||||||||||||||||
4
FIRSTCASH, INC. | |||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||||||||||||||||
CONTINUED | |||||||||||||||||||||||||||||||||||||
(unaudited, in thousands) | |||||||||||||||||||||||||||||||||||||
Six Months Ended June 30, 2018 | |||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||
As of 12/31/2017 | — | $ | — | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||
Shares issued under share-based com-pensation plan | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||||
Share-based compensa-tion expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Cash dividends ($0.22 per share) | — | — | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Purchases of treasury stock | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
As of 3/31/2018 | — | $ | — | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||
Exercise of stock options | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||||
Share-based compensa-tion expense | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Cash dividends ($0.22 per share) | — | — | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||
Currency translation adjustment | — | — | — | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||
Purchases of treasury stock | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
As of 6/30/2018 | — | $ | — | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||||||||||||||||||||||||||||
5
FIRSTCASH, INC. | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(unaudited, in thousands) | ||||||||
Six Months Ended | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
Cash flow from operating activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash flow provided by operating activities: | ||||||||
Non-cash portion of credit loss provision | ||||||||
Share-based compensation expense | ||||||||
Depreciation and amortization expense | ||||||||
Amortization of debt issuance costs | ||||||||
Amortization of favorable/(unfavorable) lease intangibles, net | ( | ) | ||||||
Deferred income taxes, net | ||||||||
Changes in operating assets and liabilities, net of business combinations: | ||||||||
Fees and service charges receivable | ( | ) | ||||||
Inventories | ||||||||
Prepaid expenses and other assets | ( | ) | ||||||
Accounts payable, accrued liabilities and other liabilities | ( | ) | ( | ) | ||||
Income taxes | ( | ) | ||||||
Net cash flow provided by operating activities | ||||||||
Cash flow from investing activities: | ||||||||
Loan receivables, net of cash repayments | ||||||||
Purchases of furniture, fixtures, equipment and improvements | ( | ) | ( | ) | ||||
Purchases of store real property | ( | ) | ( | ) | ||||
Acquisitions of pawn stores, net of cash acquired | ( | ) | ( | ) | ||||
Net cash flow used in investing activities | ( | ) | ( | ) | ||||
Cash flow from financing activities: | ||||||||
Borrowings from revolving unsecured credit facility | ||||||||
Repayments of revolving unsecured credit facility | ( | ) | ( | ) | ||||
Purchases of treasury stock | ( | ) | ( | ) | ||||
Proceeds from exercise of share-based compensation awards | ||||||||
Dividends paid | ( | ) | ( | ) | ||||
Net cash flow used in financing activities | ( | ) | ( | ) | ||||
Effect of exchange rates on cash | ( | ) | ||||||
Change in cash and cash equivalents | ( | ) | ( | ) | ||||
Cash and cash equivalents at beginning of the period | ||||||||
Cash and cash equivalents at end of the period | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
6
FIRSTCASH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Significant Accounting Policies
Basis of Presentation
The accompanying consolidated balance sheet as of December 31, 2018, which is derived from audited financial statements, and the unaudited 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 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include certain information and disclosures required for comprehensive 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, 2018, filed with the Securities and Exchange Commission (the “SEC”) on February 5, 2019. The consolidated financial statements as of June 30, 2019 and 2018, and for the three month and six month periods ended June 30, 2019 and 2018, 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, 2019 are not necessarily indicative of the results that may be expected for the full 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, 2019 and 2018. The Company also has operations in El Salvador where the reporting and functional currency is the U.S. dollar.
Reclassifications
A gain on foreign exchange of $0.5 million and $0.2 million for the three and six months ended June 30, 2018, respectively, was reclassified on the consolidated statements of income in order to conform with the presentation for the three and six months ended June 30, 2019. The gain on foreign exchange was reclassified from store operating expenses and reported separately on the consolidated statements of income.
Purchases of store real property of $8.7 million for the six months ended June 30, 2018 were reclassified on the consolidated statements of cash flows in order to conform with the presentation for the six months ended June 30, 2019. Purchases of store real property were formerly included in purchases of furniture, fixtures, equipment and improvements on the consolidated statements of cash flows and are now reclassified and reported separately. As a result, purchases of furniture, fixtures, equipment and improvements now excludes discretionary store real property purchases.
Recent Accounting Pronouncements
On January 1, 2019, the Financial Accounting Standards Board’s lease accounting standard (“ASC 842”) became effective requiring lessees to recognize, in the statement of financial position, a liability for the present value of future minimum lease payments (the lease liability) and an asset representing its right to use the underlying leased property for the lease term (the right of use asset). 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. ASC 842 provides for a modified retrospective transition approach, which requires lessees to recognize and measure leases on the balance sheet at the beginning of the earliest period presented, or a cumulative effect adjustment transition approach, which requires prospective application from the adoption date. The Company adopted ASC 842 prospectively as of January 1, 2019 using the cumulative effect adjustment approach. As a result of the transition method used, ASC 842 was not applied to periods prior to adoption and the adoption of ASC 842 had no impact on the Company’s comparative prior periods presented.
7
ASC 842 provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which permit it to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs but did not elect any other practical expedient available under ASC 842.
The adoption of ASC 842 resulted in a material increase in the assets and liabilities reflected on the Company’s consolidated balance sheets, but did not have a material impact on its consolidated statements of income or consolidated statements of cash flows. See Note 4.
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. In November 2018, the Financial Accounting Standards Board issued ASU No. 2018-19, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (“ASU 2018-19”) which clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. In April 2019, the Financial Accounting Standards Board issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” (“ASU 2019-04”) which clarifies treatment of certain credit losses. In May 2019, the Financial Accounting Standards Board issued ASU No. 2019-05, “Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief ” (“ASU 2019-05”) which provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. ASU 2016-13, ASU 2018-19, ASU 2019-04 and ASU 2019-05 are effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not expect ASU 2016-13, ASU 2018-19, ASU 2019-04 and ASU 2019-05 to 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”), which eliminates step 2 from the goodwill impairment test. ASU 2017-04 also eliminates 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 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. The adoption of ASU 2018-07 did not have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.
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 adoption of ASU 2018-09 did not have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.
8
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, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Denominator: | ||||||||||||||||
Weighted-average common shares for calculating basic earnings per share | ||||||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options and restricted stock unit awards | ||||||||||||||||
Weighted-average common shares for calculating diluted earnings per share | ||||||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||
Diluted | $ | $ | $ | $ | ||||||||||||
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, 2019, the Company acquired 158 pawn stores in Mexico in ten separate transactions and 20 pawn stores located in the U.S. in three separate transactions. The aggregate purchase prices for these acquisitions totaled $37.0 million, net of cash acquired and subject to future post-closing adjustments. The aggregate purchase price was composed of $33.2 million in cash paid during the six months ended June 30, 2019 and remaining short-term amounts payable to the sellers of approximately $3.8 million.
The purchase price of each of the 2019 acquisitions was allocated to assets acquired and liabilities assumed based upon the estimated fair market values at the date of acquisition. The excess purchase price over the estimated fair market value of the net assets acquired has been recorded as goodwill. The goodwill arising from these acquisitions consists largely of the synergies and economies of scale expected from combining the operations of the Company and the pawn stores acquired. These acquisitions were not material individually or in the aggregate to the Company’s consolidated financial statements.
Note 4 - Operating Leases
As described in Note 1, the Company adopted ASC 842 prospectively as of January 1, 2019. The Company leases the majority of its pawnshop locations under operating leases and determines if an arrangement is or contains a lease at inception. Many leases include both lease and non-lease components, which the Company accounts for separately. Lease components include rent, taxes and insurance costs while non-lease components include common area or other maintenance costs. Operating leases are included in operating lease right of use assets, lease liability, current and lease liability, non-current in the consolidated balance sheets. The Company does not have any finance leases.
9
The following table details the components of the operating lease right of use asset and lease liability recognized upon adoption of ASC 842 on January 1, 2019 (in thousands):
Initial measurement of operating lease right of use asset (present value of the future minimum lease payments) | $ | ||
Accrued straight-line rent liability (1) | ( | ) | |
Amounts previously recognized in respect of business combinations: | |||
Favorable lease intangible assets (2) | |||
Unfavorable lease intangible liabilities (3) | ( | ) | |
Total initial operating lease right of use asset | $ | ||
Lease liability, current | $ | ( | ) |
Lease liability, non-current | ( | ) | |
Total initial lease liability (present value of the future minimum lease payments) | $ | ( | ) |
(1) | Included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets as of June 30, 2018 and December 31, 2018. |
(2) | Included in prepaid expenses and other current assets and other assets in the accompanying consolidated balance sheets as of June 30, 2018 and December 31, 2018. |
(3) | Included in accounts payable and accrued liabilities and other liabilities in the accompanying consolidated balance sheets as of June 30, 2018 and December 31, 2018. |
Leased facilities are generally leased for a term of three to five years with one or more options to renew, typically at the Company’s sole discretion. In addition, the majority of these leases can be terminated early upon an adverse change in law which negatively affects the store’s profitability. The Company regularly evaluates renewal and termination options to determine if the Company is reasonably certain to exercise the option, and excludes these options from the lease term included in the recognition of the operating lease right of use asset and lease liability until such certainty exists. The weighted-average remaining lease term for operating leases as of June 30, 2019 was 3.9 years.
The operating lease right of use asset and lease liability is recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The Company’s leases do not provide an implicit rate and therefore, it uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company utilizes a portfolio approach for determining the incremental borrowing rate to apply to groups of leases with similar characteristics. The weighted-average discount rate used to measure the lease liability as of June 30, 2019 was 7.4 %.
The Company has certain operating leases in Mexico which are denominated in U.S. dollars. The liability related to these leases is considered a monetary liability, and requires remeasurement each reporting period into the functional currency (Mexican pesos) using reporting date exchange rates. The remeasurement results in the recognition of foreign currency exchange gains or losses each reporting period, which can produce a certain level of earnings volatility. The Company recognized a foreign currency gain of $0.2 million and $0.5 million during the three and six months ended June 30, 2019, respectively, related to the remeasurement of these U.S. dollar denominated operating leases, which is included in gain on foreign exchange in the accompanying consolidated statements of income.
10
Lease expense is recognized on a straight-line basis over the lease term, with variable lease expense recognized in the period such payments are incurred. The following table details the components of lease expense included in store operating expenses in the consolidated statements of income during the three and six months ended June 30, 2019 (in thousands):
Three Months Ended | Six Months Ended | ||||||
June 30, 2019 | June 30, 2019 | ||||||
Operating lease expense | $ | $ | |||||
Variable lease expense (1) | |||||||
Total operating lease expense | $ | $ | |||||
(1) | Variable lease costs consist primarily of taxes, insurance and common area or other maintenance costs paid based on actual costs incurred by the lessor and can therefore vary over the lease term. |
The following table details the maturity of lease liabilities for all operating leases as of June 30, 2019 (in thousands):
Six months ending December 31, 2019 | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
Thereafter | |||
Total | $ | ||
Less amount of lease payments representing interest | ( | ) | |
Total present value of lease payments | $ | ||
The following table details supplemental cash flow information related to operating leases for the six months ended June 30, 2019 (in thousands):
Cash paid for amounts included in the measurement of operating lease liabilities | $ | ||
Leased assets obtained in exchange for new operating lease liabilities | $ | ||
Note 5 - Long-Term Debt
The following table details the Company’s long-term debt at the respective principal amounts, net of unamortized debt issuance costs on the senior unsecured notes (in thousands):
As of June 30, 2019 | As of December 31, | ||||||||||
2019 | 2018 | 2018 | |||||||||
Revolving unsecured credit facility, maturing 2023 (1) | $ | $ | $ | ||||||||
5.375% senior unsecured notes due 2024 (2) | |||||||||||
Total long-term debt | $ | $ | $ | ||||||||
(1) | Debt issuance costs related to the Company’s revolving unsecured credit facility are included in other assets in the accompanying consolidated balance sheets. |
(2) | As of June 30, 2019, 2018 and December 31, 2018, deferred debt issuance costs of $ |
11
Revolving Unsecured Credit Facility
As of June 30, 2019, the Company maintained an unsecured line of credit with a group of U.S. based commercial lenders (the “Credit Facility”) in the amount of $425.0 million, which matures on October 4, 2023. As of June 30, 2019, the Company had $340.0 million in outstanding borrowings and $3.7 million in outstanding letters of credit under the Credit Facility, leaving $81.3 million available for future borrowings. The Credit Facility bears interest, at the Company’s option, at either (1) 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 (2) 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, 2019 was 4.88 % 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 covenants of the Credit Facility as of June 30, 2019. During the six months ended June 30, 2019, the Company received net proceeds of $45.0 million from borrowings pursuant to the Credit Facility.
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 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.
Note 6 - 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.
Recurring Fair Value Measurements
As of June 30, 2019, 2018 and December 31, 2018, 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, 2019, 2018 and December 31, 2018 that are not measured at fair value in the consolidated balance sheets are as follows (in thousands):
12
Carrying Value | Estimated Fair Value | |||||||||||||||||||
June 30, | June 30, | Fair Value Measurements Using | ||||||||||||||||||
2019 | 2019 | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
Fees and service charges receivable | ||||||||||||||||||||
Pawn loans | ||||||||||||||||||||
Consumer loans, net | ||||||||||||||||||||
$ | ||||||||||||||||||||