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

https://cdn.kscope.io/17b4593c4fb34471100dce3ce57ba3d0-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