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(Exact name of registrant as specified in its charter)
iDelaware
i87-3920732
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i1600 West 7th Street, iFort Worth, iTexasi76102
(Address of principal executive offices) (Zip code)
(i817) i335-1100
(Registrant’s telephone
number, including area code)
Not Applicable
(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
iCommon
Stock, par value $.01 per share
iFCFS
iThe Nasdaq Stock Market
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. ☒iYes☐ 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). ☒iYes☐ 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.
☒
iLarge
accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
i☐
Smaller reporting company
i☐
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). i☐Yes ☒ No
As of October 25, 2023, there were i45,107,912 shares of common stock outstanding.
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, outlook and prospects of FirstCash Holdings, 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, outlook 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.
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 that 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, risks related to the extensive regulatory environment in which the Company operates; risks associated with the legal and regulatory proceedings that the Company is a party to, or may become a party to in the future, including the Consumer Financial Protection Bureau (the “CFPB”) lawsuit filed against the
Company; risks related to the Company’s acquisitions, including the failure of the Company’s acquisitions, to deliver the estimated value and benefits expected by the Company and the ability of the Company to continue to identify and consummate acquisitions on favorable terms; potential changes in consumer behavior and shopping patterns which could impact demand for the Company’s pawn loan, retail, lease-to-own (“LTO”) and retail finance products, including, as a result to, changes in the general economic conditions; labor shortages and increased
labor costs; a deterioration in the economic conditions in the United States and Latin America, including as a result of inflation and rising interest rates, which potentially could have an impact on discretionary consumer spending and demand for the Company’s products; currency fluctuations, primarily involving the Mexican peso; competition the Company faces from other retailers and providers of retail payment solutions; the ability of the Company to successfully execute on its business strategies; and other risks discussed and described in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission
(the “SEC”), including the risks described in Part 1, Item 1A, “Risk Factors” thereof, and 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.
Cash
and cash equivalents at beginning of the period
i117,330
i120,046
Cash
and cash equivalents at end of the period
$
i86,547
$
i100,620
(1)Includes
the funding of new pawn loans net of cash repayments and recovery of principal through the sale of inventories acquired from forfeiture of pawn collateral.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - iGeneral
Basis
of Presentation
i
The accompanying consolidated balance sheet as of December 31, 2022, which is derived from audited consolidated financial statements, and the unaudited consolidated financial statements, including the notes thereto, includes the accounts of FirstCash Holdings, Inc. and its wholly-owned subsidiaries (together, the “Company”). The Company regularly makes acquisitions,
and the results of operations for the acquisitions 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 audited consolidated financial statements, which are included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 6, 2023. The consolidated financial statements as of September 30, 2023 and 2022, and for the three month and nine month periods ended September 30, 2023 and 2022, 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 September 30, 2023 are not necessarily indicative of the results that may be expected for the full year.
The
Company has pawn operations in Latin America, where in Mexico, Guatemala and Colombia, the functional currency is the Mexican peso, Guatemalan quetzal and Colombian peso. 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 respective period. The Company also has pawn operations in El Salvador, where the reporting and functional currency is the U.S. dollar.
Use of Estimates
iThe
preparation of interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and related revenue and expenses, and the disclosure of gain and loss contingencies at the date of the financial statements. Such estimates and assumptions are subject to a number of risks and uncertainties, which may cause actual results to differ materially from the Company’s estimates.
Recent Accounting Pronouncements
iIn
March 2022, the Financial Accounting Standards Board issued ASU No 2022-02, “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years for entities. Except for expanded disclosures to the Company’s vintage
disclosures, ASU 2022-02 did not have a material effect on the Company’s current financial position, results of operations or financial statements. See Note 6.
Weighted-average
common shares for calculating basic earnings per share
i45,114
i46,902
i45,531
i47,518
Effect
of dilutive securities:
Restricted stock unit awards
i260
i120
i216
i84
Weighted-average
common shares for calculating diluted earnings per share
i45,374
i47,022
i45,747
i47,602
Earnings
per share:
Basic
$
i1.27
$
i1.26
$
i3.29
$
i3.65
Diluted
$
i1.26
$
i1.26
$
i3.27
$
i3.64
/
Note
3 - iAcquisitions
Consistent with the Company’s strategy to continue its expansion of pawn stores in strategic markets, during the nine months ended September 30, 2023, the Company acquired i83
pawn stores in the U.S. in ifive separate transactions and acquired itwo pawn licenses that were used to open itwo
new pawn stores in the state of Nevada. The aggregate purchase price for these acquisitions totaled $i168.1 million, net of cash acquired and subject to future post-closing adjustments. The aggregate purchase price was composed of $i167.6 million
in cash paid during the nine months ended September 30, 2023, which included the repayment and extinguishment of $i59.7 million of debt of the acquired businesses at closing and remaining short-term amounts payable to certain of the sellers of approximately $i0.5 million.
The purchase price of each of the 2023 acquisitions was allocated to assets acquired and liabilities assumed based upon the estimated fair values at the date of acquisition. The excess purchase price over the estimated fair 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.
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 prices for these individually immaterial
acquisitions during the nine months ended September 30, 2023 is as follows (in thousands):
Pawn loans
$
i26,026
Accounts
receivable
i3,219
Inventories
i15,336
Prepaid
expenses and other current assets
i996
Property and equipment
i2,906
Goodwill
(1)
i119,299
Intangible assets
i4,330
Other
non-current assets
i280
Current liabilities
(i4,265)
Aggregate
purchase price
$
i168,127
(1)Substantially all of the goodwill is expected to be deductible for U.S. income tax purposes.
/
The
results of operations for the acquired stores have been consolidated since the respective acquisition dates. During 2023, revenue from the acquired stores was $i14.5 million and the earnings from the combined acquisitions since the acquisition dates (including $i2.8
million of transaction and integration costs, net of tax) was less than $i0.1 million.
Note 4 - iOperating
Leases
Lessor
For information about the Company’s revenue-generating activities as a lessor, refer to Note 2 to the consolidated financial statements included in the Company’s 2022 Annual Report on Form 10-K. All of the Company’s lease agreements are considered operating leases.
Lessee
The Company
leases the majority of its pawnshop locations and certain administrative offices under operating leases and determines if an arrangement is or contains a lease at inception. Many leases include both lease and non-lease components for which the Company accounts 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.
Leased facilities are generally leased for a term of three to ifive
years with one or more options to renew for an additional three to ifive years, 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 was i3.9 years as of September 30, 2023 and i4.1
years as of September 30, 2022.
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 September 30,
2023 and 2022 was i7.7% and i6.3%, respectively.
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 loss of $i0.6
million and $i0.4 million during the three months ended September 30, 2023 and 2022, respectively, related to the remeasurement of these U.S. dollar denominated operating leases, which is included in (gain) loss on foreign exchange in the accompanying consolidated statements of income. During the nine months ended September 30, 2023 and 2022, the
Company recognized a foreign currency gain of $i1.7 million and $i0.4 million, respectively, related to these U.S. dollar denominated leases.
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. iThe following table details the components of lease expense included in operating expenses in the consolidated statements of income during the three and nine months ended September 30, 2023 and 2022 (in thousands):
(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.
i
The following table details the maturity of lease liabilities for all operating leases as of September 30, 2023 (in thousands):
Less
amount of lease payments representing interest
(i47,225)
Total present value of lease payments
$
i301,261
/
The
following table details supplemental cash flow information related to operating leases for the nine months ended September 30, 2023 and 2022 (in thousands):
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
i
The Company did not have any financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023. The
Company’s financial assets and liabilities as of September 30, 2022 and December 31, 2022 that are measured at fair value on a recurring basis are as follows (in thousands):
(1)Under
the American First Finance (“AFF”) purchase agreement, the seller parties had the right to receive up to $i50.0 million of additional consideration if AFF achieved certain adjusted EBITDA targets for the first half of 2023. AFF did not achieve the threshold adjusted EBITDA target for the first half of 2023 and, therefore, the $i50.0 million
of additional consideration was not earned by the seller parties. As of June 30, 2023, there was ino remaining contingent consideration available to the seller parties. The contingent consideration related to the AFF acquisition is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheet as of September 30, 2022.
i
The
changes in financial assets and liabilities that are measured and recorded at fair value on a recurring basis using Level 3 fair value measurements for the three and nine months ended September 30, 2023 and September 30, 2022 are as follows (in thousands):
Contingent consideration at beginning of the period
$
i—
$
i46,560
$
i—
$
i109,549
Change
in fair value (1)
i—
(i19,800)
i—
(i82,789)
Contingent
consideration at end of the period
$
i—
$
i26,760
$
i—
$
i26,760
(1)The
Company recognized a gain of $i19.8 million and $i82.8
million during the three and nine months ended September 30, 2022, respectively, as a result of the change in fair value of the contingent consideration, which is included in gain on revaluation of contingent acquisition consideration in the accompanying consolidated statements of income.
The Company measures non-financial assets and liabilities, such as property and equipment and intangible assets, at fair value on a non-recurring 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, But for Which Fair Value is Disclosed
(1)Finance
receivables, gross as of December 31, 2022 were $i196.0 million. See Note 6.
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 accounts receivable, net approximate fair value.
Finance
receivables are measured at amortized cost, net of an allowance for loan losses on the consolidated balance sheets. In estimating fair value for finance receivables, the Company utilized a discounted cash flow methodology. The Company used various unobservable inputs reflecting its own assumptions, such as contractual future principal and interest cash flows, future charge-off rates and discount rates (which consider current interest rates and are adjusted for credit risk, among other factors).
The carrying value of the unsecured credit facilities approximates fair value as of September 30, 2023, September 30, 2022 and
December 31, 2022. The fair value of the unsecured credit facilities is estimated based on market values for debt issuances with similar characteristics or rates currently available for debt with similar terms. In addition, the unsecured credit facilities have a variable interest rate based on the prevailing secured overnight financing rate (“SOFR”) or the Mexican Central Bank’s interbank equilibrium rate (“TIIE”) and reprice with any changes in SOFR or TIIE. The fair value of the senior unsecured notes is estimated based on quoted prices in markets that are not active.
Note 6 - iFinance
Receivables, Net
i
Finance receivables, net, which include retail installment sales agreements and bank-originated installment loans, consist of the following (in thousands):
Fair
value premium on non-purchase credit deteriorated (”PCD”) finance receivables (1)
i—
i6,839
i—
Merchant
partner discounts and premiums, net
(i9,730)
(i2,044)
(i3,517)
Unearned
origination fees
(i4,897)
(i3,334)
(i4,143)
Finance
receivables, amortized cost
i209,991
i190,358
i188,327
Less
allowance for loan losses
(i96,684)
(i78,413)
(i84,833)
Finance
receivables, net
$
i113,307
$
i111,945
$
i103,494
(1)Represents
the difference between the initial fair value and the unpaid principal balance as of the date of the AFF acquisition, which is recognized through interest income on an effective yield basis over the lives of the related non-PCD finance receivables.
The
following is an assessment of the credit quality indicators of the amortized cost of finance receivables as of September 30, 2023 and 2022, by origination year (in thousands):
Total
past due finance receivables before fair value adjustments
i24,238
i10,993
i370
i35,601
Current
finance receivables before fair value adjustments
i111,023
i35,969
i926
i147,918
Finance
receivables before fair value adjustments
$
i135,261
$
i46,962
$
i1,296
i183,519
Fair
value premium on non-PCD finance receivables
i6,839
Finance receivables, amortized cost
$
i190,358
(1)The
Company charges off finance receivables when a receivable is 90 days or more contractually past due.
/
i
The following table details the gross charge-offs of finance receivables for the nine months ended September 30, 2023, by origination year (in thousands):
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):
(1)Debt
issuance costs related to the Company’s revolving unsecured credit facilities are included in other assets in the accompanying consolidated balance sheets.
(2)As of September 30, 2023, September 30, 2022 and December 31, 2022, deferred debt issuance costs of $i5.8 million, $i6.8
million and $i6.5 million, respectively, are included as a direct deduction from the carrying amount of the senior unsecured notes due 2028 in the accompanying consolidated balance sheets.
/
(3)As of September 30, 2023, September 30, 2022 and December 31,
2022, deferred debt issuance costs of $i7.1 million, $i8.0 million and $i7.8
million, respectively, are included as a direct deduction from the carrying amount of the senior unsecured notes due 2030 in the accompanying consolidated balance sheets.
Revolving Unsecured Credit Facility
As of September 30, 2023, the Company maintained an unsecured line of credit with a group of U.S.-based commercial lenders (the “Credit Facility”) in the amount of $i590.0
million. The Credit Facility matures on August 30, 2027. As of September 30, 2023, the Company had $i531.0 million in outstanding borrowings and $i2.9
million in outstanding letters of credit under the Credit Facility, leaving $i56.1 million available for future borrowings, subject to certain financial covenants. The Credit Facility bears interest at the Company’s option of either (i) the prevailing SOFR (with interest periods of 1, 3 or 6 months at the Company’s option) plus a fixed spread of i2.5%
and a fixed SOFR adjustment of i0.1% or (ii) the prevailing prime or base rate plus a fixed spread of i1.5%. The agreement has an interest rate floor of i0%.
Additionally, the Company is required to pay an annual commitment fee of i0.325% on the average daily unused portion of the Credit Facility commitment. The weighted-average interest rate on amounts outstanding under the Credit Facility at September 30, 2023 was i7.93%
based on 1-month SOFR. 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 September 30, 2023. During the nine months ended September 30, 2023, the
Company received net proceeds of $i192.0 million from borrowings pursuant to the Credit Facility.
On October 18, 2023, the Company amended its domestic Credit Facility. The total lender commitment under the amended facility, which is provided by a group of twelve commercial banks, was increased by $i50.0
million, from $i590.0 million to $i640.0 million. The amended credit facility remains unsecured and all other terms remained unchanged.
In August 2023, the Company’s primary subsidiary in Mexico, First Cash S.A. de C.V., entered into an unsecured and uncommitted line of credit guaranteed by FirstCash, Inc. with a bank in Mexico (the “Mexico Credit Facility”) in the amount of $i600.0
million Mexican pesos. The Mexico Credit Facility matures on August 24, 2027. As of September 30, 2023, the Company had $i29.2 million ($i515.0
million pesos) in outstanding borrowings, leaving $i4.8 million ($i85.0 million pesos) available for future borrowings, subject to certain financial covenants. The Mexico
Credit Facility bears interest at TIIE plus a fixed spread of i2.25%. The interest rate on the amount outstanding under the Mexico Credit Facility at September 30, 2023 was i13.75%. Under the terms
of the Mexico Credit Facility, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The Company was in compliance with the covenants of the Mexico Credit Facility as of September 30, 2023. During the nine months ended September 30, 2023, the Company received net proceeds of $i29.2
million ($i515.0 million pesos) from borrowings pursuant to the Mexico Credit Facility.
Senior Unsecured Notes Due 2028
On August 26, 2020, the Company issued $i500.0
million of i4.625% senior unsecured notes due on September 1, 2028 (the “2028 Notes”), all of which are currently outstanding. Interest on the 2028 Notes is payable semi-annually in arrears on March 1 and September 1. The 2028 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 2028 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 is less than i2.75 to 1. The consolidated total debt ratio is defined generally in the indenture
governing the 2028 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. As of September 30, 2023, the Company’s consolidated total debt ratio was i2.9
to 1. While the 2028 Notes generally limit the Company’s ability to make restricted payments if the consolidated total debt ratio is greater than i2.75 to 1, restricted payments are allowable within certain permitted baskets, which currently provide the Company with continued flexibility to make restricted payments when the Company’s consolidated total debt ratio is greater than i2.75
to 1.
Senior Unsecured Notes Due 2030
On December 13, 2021, the Company issued $i550.0 million of i5.625%
senior unsecured notes due on January 1, 2030 (the “2030 Notes”), all of which are currently outstanding. Interest on the 2030 Notes is payable semi-annually in arrears on January 1 and July 1. The 2030 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 2030 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 is less than i3.0 to 1. The consolidated total debt ratio is defined generally in the indenture governing the 2030 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. As of September 30, 2023, the Company’s consolidated total debt ratio was i2.9 to 1. While the 2030 Notes generally limit the Company’s ability to make restricted payments if the consolidated total debt ratio is greater than i3.0
to 1, restricted payments are allowable within certain permitted baskets, which currently provides the Company with continued flexibility to make restricted payments when the Company’s consolidated total debt ratio is greater than i3.0 to 1.
The Company, in the ordinary course of business, is a party to various legal and regulatory proceedings and other general claims. Although
no assurances can be given, in management’s opinion, such outstanding proceedings are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
The Company believes it has meritorious defenses to all of the claims described below, and intends to vigorously defend itself against such claims. However, legal and regulatory proceedings involve an inherent level of uncertainty and no assurances can be given regarding the ultimate outcome of any such matters or whether an adverse outcome would not have a material adverse impact on the Company’s financial position, results of operations,
or cash flows. At this stage, the Company is unable to determine whether a future loss will be incurred for any of its outstanding legal and regulatory proceedings or estimate a range of loss with respect to such proceeding, if any, and accordingly, no material amounts have been accrued in the Company’s financial statements for legal and regulatory proceedings.
On November 12, 2021, the CFPB initiated a civil action in the United States District Court for the Northern District of Texas against FirstCash, Inc. and Cash America West, Inc., two of the Company’s subsidiaries,
alleging violations of the Military Lending Act (“MLA”) in connection with pawn transactions. The CFPB also alleges that these same alleged violations of the MLA constitute breaches of a 2013 CFPB consent order entered into by its predecessor company that, among other things, allegedly required the company and its successors to cease and desist from further MLA violations. The CFPB is seeking an injunction, redress for affected borrowers and a civil monetary penalty. On March 28, 2022, the CFPB filed a motion to strike certain affirmative defenses of the Company. The Company responded by filing a motion for partial summary judgment. On October
24, 2022, the Company filed a motion to dismiss the lawsuit on the basis that the funding structure of the CFPB is unconstitutional. This motion to dismiss follows the recent decision in another case by the Fifth Circuit Court of Appeals which found that the CFPB is unconstitutionally structured. The Fifth Circuit’s decisions govern the law applied in the jurisdiction in which the CFPB action is pending against the Company. In light of the CFPB's stated intent to seek Supreme Court review of that decision, the parties stipulated to a stay of the action against the Company, which the Court entered on November 4, 2022. The Supreme Court is currently reviewing the Fifth
Circuit's decision, with oral arguments having been completed on October 3, 2023. The stay of the CFPB’s action against the Company will remain in effect until the Supreme Court issues its decision with respect to the appeal. If the Supreme Court decides in favor of the CFPB, the stay will be lifted and the Company and the CFPB will continue to litigate the civil action brought against the Company by the CFPB.
As
of September 30, 2023, the Company had contractual commitments to deliver a total of i57,600 gold ounces during the months of October 2023 through June 2025 at a weighted-average price of $i2,024
per ounce. The ounces required to be delivered over this time period are within historical scrap gold volumes and the Company expects to have the required gold ounces to meet the commitments as they come due.
Note 10 - iSegment Information
The
Company organizes its operations into ithree reportable segments as follows:
•U.S. pawn
•Latin America pawn
•Retail POS payment solutions (AFF)
Corporate expenses and income, which include administrative expenses, corporate depreciation and amortization, interest expense, interest
income, (gain) loss on foreign exchange, merger and acquisition expenses, gain on revaluation of contingent acquisition consideration, and other expenses (income), net, are presented on a consolidated basis and are not allocated between the U.S. pawn segment, Latin America pawn segment or retail POS payment solutions segment. Intersegment transactions relate to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores and are eliminated to arrive at consolidated totals.
The following tables present reportable segment information for the three and nine month periods ended September 30, 2023 and 2022 as well as segment earning assets (in thousands):
(1)Represents
the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores.
(1)Represents
the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores.
(1)Represents
the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores.
Gain
on revaluation of contingent acquisition consideration
i—
i—
i—
(i19,800)
(i19,800)
Other
expenses (income), net
i—
i—
i—
i164
i164
Total
expenses and other income
i108,314
i52,545
i35,835
i51,203
i247,897
Income
(loss) before income taxes
$
i70,481
$
i36,612
$
i20,091
$
(i51,789)
$
i75,395
(1)Represents
the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores.
Gain
on revaluation of contingent acquisition consideration
i—
i—
i—
(i82,789)
(i82,789)
Other
expenses (income), net
i—
i—
i—
(i2,721)
(i2,721)
Total
expenses and other income
i319,833
i155,094
i97,408
i121,089
i693,424
Income
(loss) before income taxes
$
i207,632
$
i99,375
$
i36,695
$
(i121,675)
$
i222,027
(1)Represents
the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores.
(1)Represents
the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores.
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 Holdings, Inc. and its wholly-owned subsidiaries (together, the “Company”) should be read in conjunction with the Company’s 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, 2022.
GENERAL
The Company’s primary line of business is the operation of retail pawn stores, also known as “pawnshops,” which focus on serving cash and credit-constrained consumers. The Company is the leading operator of pawn stores in the U.S. and Latin America. Pawn stores help customers meet small short-term cash needs by providing non-recourse pawn loans and buying merchandise directly from customers.
Personal property, such as jewelry, electronics, tools, appliances, sporting goods and musical instruments, is pledged and held as collateral for the pawn loans over the typical 30-day term of the loan. Pawn stores also generate retail sales primarily from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers.
The Company is also a leading provider of technology-driven, retail POS payment solutions focused on serving credit-constrained consumers. The Company’s retail POS payment solutions business line consists solely of the operations of AFF, which focuses on LTO products and facilitating other retail financing payment options across a large network of traditional and
e-commerce merchant partners in all 50 states in the U.S., the District of Columbia and Puerto Rico. AFF’s retail partners provide consumer goods and services to their customers and use AFF’s LTO and retail finance solutions to facilitate payments on such transactions.
The Company’s two business lines are organized into three reportable segments. The U.S. pawn segment consists of all pawn operations in the U.S. and the Latin America pawn segment consists of all pawn operations in Mexico, Guatemala, Colombia and El Salvador. The retail POS payment solutions segment consists of the operations of AFF in the U.S. and Puerto Rico.
As of September 30, 2023, the Company operated 2,988 pawn store locations composed of 1,181 stores in 29 U.S. states and the District of Columbia, 1,715 stores in 32 states in Mexico, 64 stores in Guatemala, 14 stores in Colombia and 14 stores in El Salvador.
The following tables detail pawn store count activity for the three
and nine months ended September 30, 2023:
(1)In addition to new store openings, the Company strategically relocated one store in the U.S. during the three months ended September 30, 2023. During the nine months ended September 30, 2023, the Company strategically relocated
three stores in the U.S. and two stores in Latin America.
(2)Store consolidations were primarily acquired locations over the past seven years which have been combined with overlapping stores and for which the Company expects to maintain a significant portion of the acquired customer base in the consolidated location.
POS Payment Solutions
As of September 30, 2023, AFF provided LTO and retail POS payment solutions for consumer goods and services through a network of approximately 10,800 active retail merchant partner locations located in all 50 U.S. states, the District
of Columbia and Puerto Rico.
CRITICAL ACCOUNTING ESTIMATES
The financial statements have been prepared in accordance with GAAP. The significant accounting policies and estimates 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 2022 Annual Report on Form 10-K. There have been no changes to the Company’s significant accounting policies for the nine
months ended September 30, 2023.
The following table presents segment pre-tax operating income and other operating metrics of the U.S. pawn segment for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 (dollars in thousands). Operating expenses include salary and benefit expenses of pawn store-level employees, occupancy costs, bank charges, security,
insurance, utilities, supplies and other costs incurred by the pawn stores.
The following table details earning assets, which consist of pawn loans and inventories as well as other earning asset metrics of the U.S. pawn segment, as of September 30, 2023 compared to September 30, 2022 (dollars in thousands, except as otherwise noted):
Percentage
of inventory aged greater than one year
1
%
1
%
Inventory turns (trailing twelve months cost of merchandise sales divided by average inventories)
2.8 times
2.7
times
Retail Merchandise Sales Operations
U.S. retail merchandise sales increased 4%, totaling $203.8 million during the third quarter of 2023 compared to $195.9 million for the third quarter of 2022. Same-store retail sales decreased 3% in the third quarter of 2023 compared to the third quarter of 2022. The increase in total retail sales was primarily due to sales contributions from acquired stores, whereas the decrease in same-store retail sales was primarily due to lower than normal inventory levels in these locations during the third quarter of 2023 compared to the third quarter of 2022, as further described below. The gross profit margin on retail merchandise sales in the
U.S. was 43% in the third quarter of 2023 and 41% in the third quarter of 2022, reflecting continued demand for value-priced, pre-owned merchandise and low levels of aged inventory.
U.S. inventories increased 6% from $204.4 million at September 30, 2022 to $217.4 million at September 30, 2023. The increase was primarily due to inventory from acquired stores partially offset by slightly lower inventory levels in existing (same-store) locations. Inventories aged greater than one year in the U.S. were 1% at both September 30, 2023 and September 30, 2022.
Pawn Lending Operations
U.S.
pawn loan receivables as of September 30, 2023 increased 22% in total and 11% on a same-store basis compared to September 30, 2022. The increase in total pawn receivables was due to incremental pawn loans from acquired stores and an increase in same-store pawn receivables, which the Company believes was primarily due to continued inflationary pressures driving additional demand for pawn loans and tightened underwriting for other competing forms of consumer credit.
U.S. pawn loan fees increased 18% to $114.0 million during the third quarter of 2023 compared to $96.2 million for the third quarter of 2022. Same-store pawn fees in the third quarter of 2023 increased 11% compared to the third quarter of 2022. The increase in total and same-store pawn loan fees was primarily due to higher average pawn receivables, as described above, and increased portfolio yield driven by slightly improved customer redemption rates.
Segment Expenses
U.S. operating expenses increased 11% to $114.0 million during the third quarter of 2023 compared to $102.5 million during
the third quarter of 2022 while same-store operating expenses increased 3% compared with the prior-year period. The increase in total operating expenses was primarily due to acquired stores and the increase in same-store operating expenses, which was primarily due to inflationary increases in wages and certain other operating costs and increased store-level incentive compensation driven by increased net revenues and segment profit during the third quarter of 2023 compared to the third quarter of 2022.
Segment Pre-Tax Operating Income
The U.S. segment pre-tax operating income for the third quarter of 2023 was $84.4 million, which generated a pre-tax segment operating margin of 25% compared to $70.5 million and 23% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected
an improved net revenue margin partially offset by the increase in segment expenses.
Latin
American segment pre-tax operating income for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 benefited from a 15% favorable 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 September 30, 2023 compared to September 30, 2022 benefited from a 13% favorable change in the end-of-period Mexican peso compared to the U.S. dollar. 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. See the “Constant Currency Results” section in “Non-GAAP Financial Information” below for additional
discussion of constant currency operating results.
The following table presents segment pre-tax operating income and other operating metrics of the Latin America pawn segment for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 (dollars in thousands). Operating expenses include salary and benefit expenses of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.
The following table details earning assets, which consist of pawn loans and inventories as well as other earning asset metrics of the Latin America pawn segment, as of September 30, 2023 compared to September 30, 2022 (dollars in thousands, except as otherwise noted):
Percentage
of inventory aged greater than one year
1
%
1
%
Inventory
turns (trailing twelve months cost of merchandise sales divided by average inventories)
4.3 times
4.0 times
Retail Merchandise Sales Operations
Latin America retail merchandise sales increased 23% (5% on a constant currency basis) to $132.8 million during the third quarter of 2023 compared to $107.6 million for the third quarter of 2022. Same-store retail
sales also increased 23% (5% on a constant currency basis) during the third quarter of 2023 compared to the third quarter of 2022. The increase in total and same-store retail sales was primarily due to greater demand for value-priced consumer goods, with such demand believed to be driven in part by inflationary pressures on the Company’s customers, and the impact of increases in government-mandated minimum wage and benefit programs in Mexico benefiting many cash-constrained consumers. The gross profit margin on retail merchandise sales was 36% during both the third quarter of 2023 and the third quarter of 2022.
Latin America inventories increased 6% (7% decrease on a constant currency basis) from $91.1 million at September 30, 2022 to $97.0 million at
September 30, 2023. The decrease in constant currency inventories was primarily due to the greater demand for value-priced consumer goods mentioned above and slightly lower pawn loan forfeiture rates in the third quarter of 2023 compared to the third quarter of 2022. Inventories aged greater than one year in Latin America were 1% at both September 30, 2023 and 2022.
Latin America pawn loan receivables increased 15% (less than 1% on a constant currency basis) as of September 30, 2023 compared to September 30, 2022. On a same-store basis, pawn loan receivables increased 14% (decreased less than 1% on a constant currency basis) as of September 30, 2023 compared to September 30, 2022. The relatively flat constant currency total and same-store pawn receivables is believed to be driven in part by the impact of
increases in government-mandated minimum wage and benefit programs in Mexico benefiting many cash-constrained consumers.
Latin America pawn loan fees increased 22% (4% on a constant currency basis), totaling $60.5 million during the third quarter of 2023 compared to $49.5 million for the third quarter of 2022. Same-store pawn fees also increased 22% (4% on a constant currency basis) in the third quarter of 2023 compared to the third quarter of 2022. The increase in total and same-store constant currency pawn loan fees was primarily due to improved pawn yields.
Segment Expenses
Operating expenses increased 33% (14% on a constant currency basis) to $63.9 million during the third quarter of 2023 compared to $48.0 million
during the third quarter of 2022. Same-store operating expenses increased 31% (13% on a constant currency basis) compared to the prior-year period. The increase in total and same-store operating expenses was primarily driven by general inflationary impacts and increases in the federally mandated minimum wage and other required benefit programs.
Segment Pre-Tax Operating Income
The segment pre-tax operating income for the third quarter of 2023 was $41.0 million, which generated a pre-tax segment operating margin of 20% compared to $36.6 million and 22% in the prior year, respectively. The increase in the segment pre-tax operating income reflected an increase in net revenue partially offset by an increase in segment expenses, which caused a decrease in the segment pre-tax operating margin.
The following table presents segment pre-tax operating income of the retail POS payment solutions segment for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 (dollars in thousands):
Adjusted
(1)
Three Months
Ended
Three
Months Ended
September 30,
Increase /
September 30,
Increase /
2022
(Decrease)
2023
2022
(Decrease)
(Non-GAAP)
(Non-GAAP)
Retail
POS Payment Solutions Segment
Revenue:
Leased merchandise income
$
189,382
$
158,089
20
%
$
158,089
20
%
Interest
and fees on finance receivables
61,413
48,846
26
%
55,957
10
%
Total
revenue
250,795
206,935
21
%
214,046
17
%
Cost
of revenue:
Depreciation of leased merchandise
104,198
86,703
20
%
85,864
21
%
Provision
for lease losses
39,640
32,350
23
%
32,350
23
%
Provision for loan losses
33,096
31,956
4
%
31,956
4
%
Total
cost of revenue
176,934
151,009
17
%
150,170
18
%
Net
revenue
73,861
55,926
32
%
63,876
16
%
Segment
expenses:
Operating expenses
33,641
35,060
(4)
%
35,060
(4)
%
Depreciation
and amortization
771
775
(1)
%
775
(1)
%
Total segment expenses
34,412
35,835
(4)
%
35,835
(4)
%
Segment
pre-tax operating income
$
39,449
$
20,091
96
%
$
28,041
41
%
(1)As a result
of purchase accounting, AFF’s as reported amounts for the three months ended September 30, 2022 contain significant fair value adjustments. The adjusted amounts for the three months ended September 30, 2022 exclude these fair value purchase accounting adjustments.
The
following table provides a detail of gross transaction volumes originated during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 (in thousands):
Leased
merchandise, before allowance for lease losses
$
250,298
$
210,703
19
%
$
217,412
15
%
Less allowance for lease losses
(105,472)
(78,020)
35
%
(85,630)
23
%
Leased
merchandise, net (1)
$
144,826
$
132,683
9
%
$
131,782
10
%
Finance
receivables, net:
Finance receivables, before allowance for loan losses
$
209,991
$
190,358
10
%
$
182,500
15
%
Less
allowance for loan losses
(96,684)
(78,413)
23
%
(78,413)
23
%
Finance receivables, net
$
113,307
$
111,945
1
%
$
104,087
9
%
(1)Includes
$1.7 million and $0.6 million of intersegment transactions as of September 30, 2023 and 2022, respectively, related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores that are eliminated upon consolidation. Excluding the intersegment transactions, consolidated net leased merchandise as of September 30, 2023 and 2022 totaled $143.2 million and $132.1 million, respectively.
(2)As a result of purchase accounting, AFF’s September 30, 2022 as reported earning assets contain significant fair value
adjustments, which were fully amortized during 2022. The adjusted amounts as of September 30, 2022 exclude these fair value purchase accounting adjustments.
The
following table details the changes in the allowance for lease and loan losses and other portfolio metrics for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 (in thousands):
Provision expense as percentage of originations (2)
27
%
24
%
Average
monthly net charge-off rate (3)
5.9
%
5.2
%
Delinquency rate (4)
21.1
%
18.9
%
Allowance
for loan losses:
Balance at beginning of period
$
93,054
$
73,936
26
%
Provision
for loan losses
33,096
31,956
4
%
Charge-offs
(30,890)
(28,642)
8
%
Recoveries
1,424
1,163
22
%
Balance
at end of period
$
96,684
$
78,413
23
%
Finance
receivables portfolio metrics:
Provision expense as percentage of originations (2)
32
%
38
%
Average
monthly net charge-off rate (3)
4.7
%
5.0
%
Delinquency rate (4)
19.4
%
19.2
%
(1)Includes
$0.1 million of provision reduction and $0.4 million of provision increase from intersegment transactions for the three months ended September 30, 2023 and 2022, respectively, related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores that are eliminated upon consolidation. Excluding the intersegment transactions, the provision for lease losses for the three months ended September 30, 2023 and 2022 totaled $39.7 million and $31.9 million, respectively.
(2)Calculated as provision for lease or loan losses as a percentage of the respective
gross transaction volume originated.
(3)Calculated as charge-offs, net of recoveries, as a percentage of the respective average earning asset balance before allowance for lease or loan losses (adjusted to exclude any fair value purchase accounting adjustments, as applicable).
(4)Calculated as the percentage of the respective contractual earning asset balance owed that is 1 to 89 days past due (the Company charges off leases and finance receivables when they are 90 days or more contractually past due).
(5)As a result of purchase accounting, AFF’s as reported allowance
for lease losses for the three months ended September 30, 2022 contains significant fair value adjustments. The adjusted amounts for the three months ended September 30, 2022 exclude these fair value purchase accounting adjustments. As a result of the significance of these accounting adjustments, the Company does not believe that the unadjusted leased merchandise portfolio metrics for the three months ended September 30, 2022 provide a useful comparison against the September 30, 2023 amounts.
Leased merchandise, before allowance for lease losses, increased 19% as of September 30, 2023 compared to September 30, 2022. On an adjusted basis, excluding the impacts of fair value purchase accounting, leased merchandise, before allowance for lease losses, increased 15% as of September 30, 2023 compared to September 30, 2022. This increase was primarily due to increased transaction volumes from new merchant locations added since September 30,
2022.
The allowance for lease losses increased 35% to $105.5 million as of September 30, 2023 compared to $78.0 million as of September 30, 2022. On an adjusted basis, excluding the impacts of fair value purchase accounting, the allowance for lease losses increased 23% as of September 30, 2023 compared to September 30, 2022. This increase was primarily due to the 8% increase in gross transaction volume and an increase in lease loss provisioning rates used during the third quarter of 2023 compared to the third quarter of 2022.
Leased merchandise income increased 20% to $189.4 million during the third
quarter of 2023 compared to $158.1 million for the third quarter of 2022, which was primarily due to the higher leased merchandise balances.
Depreciation of leased merchandise increased 20% to $104.2 million during the third quarter of 2023 compared to $86.7 million during the third quarter of 2022. On an adjusted basis, excluding the impacts of fair value purchase accounting, depreciation of leased merchandise increased 21%. The increase was primarily due to higher leased merchandise balances. As a percentage of leased merchandise income, depreciation of leased merchandise increased slightly from 54% during the third quarter of 2022 (adjusted to exclude purchase accounting adjustments) to 55% during the third quarter of 2023.
Provision for lease losses increased 23% to $39.6 million during the third
quarter of 2023 compared to $32.4 million for the third quarter of 2022, which was primarily due to the 8% increase in gross transaction volumes and an increase in lease loss provisioning rates used during the third quarter of 2023 compared to the third quarter of 2022 as a result of slightly higher net charge-off rates during the third quarter of 2023 compared to the third quarter of 2022 and slightly higher delinquency rates as of September 30, 2023 compared to September 30, 2022. As a percentage of gross transaction volume, the provision for lease losses increased from 24% during the third quarter of 2022 to 27% during the third quarter of 2023.
Retail Finance Operations
Finance receivables, before
allowance for loan losses, increased 10% as of September 30, 2023 compared to September 30, 2022. On an adjusted basis, excluding the impacts of fair value purchase accounting, finance receivables, before allowance for loan losses, increased 15% as of September 30, 2023 compared to September 30, 2022. This increase in the outstanding receivable balance was primarily due to increased transaction volumes from new merchant locations added since September 30, 2022.
The allowance for loan losses increased 23% to $96.7 million as of September 30, 2023 compared to $78.4 million as of September 30,
2022. This increase was primarily due to the 22% increase in gross transaction volume compared to the third quarter of 2022.
Interest and fees on finance receivables increased 26% to $61.4 million during the third quarter of 2023 compared to $48.8 million for the third quarter of 2022. On an adjusted basis, excluding the impacts of fair value purchase accounting, interest and fees on finance receivables increased 10%, which was primarily due to the higher finance receivable balances.
Provision for loan losses increased 4% to $33.1 million during the third quarter of 2023 compared to $32.0 million for the third quarter of 2022, which was primarily due to the 22% increase in gross transaction volumes, partially offset by a decrease in loan loss provisioning rates used during the third quarter of 2023
compared to the third quarter of 2022 as a result of slightly improved net charge-off rates during the third quarter of 2023 compared to the third quarter of 2022. As a percentage of gross transaction volume, the provision for loan losses decreased from 38% during the third quarter of 2022 to 32% during the third quarter of 2023.
Operating expenses decreased 4% to $33.6 million during the third quarter of 2023 compared to $35.1 million during the third quarter of 2022, which was primarily due to lower receivable acquisition costs and the realization of information technology cost synergies from the Company’s acquisition of AFF, partially offset by the 14% increase in gross transaction volumes. As a percentage of segment revenues, operating expenses decreased from 16% during the third quarter of 2022 (adjusted to exclude purchase accounting adjustments) to 13% during the third quarter of 2023.
The retail POS payment solutions segment pre-tax operating income for the third quarter of 2023 was $39.4 million compared to $20.1 million in the third quarter of 2022. The increase was primarily the result of fair value purchase accounting and increased segment income resulting from increases in net revenue and decreases in segment expenses. On an adjusted basis, excluding the impacts of fair value purchase accounting, segment pre-tax operating income for the third quarter of 2022 was $28.0 million.
Consolidated Results of Operations
The
following table reconciles pre-tax operating income of the Company’s U.S. pawn segment, Latin America pawn segment and retail POS payment solutions segment, discussed above, to consolidated net income for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 (dollars in thousands):
Three
Months Ended
September 30,
Increase /
2023
2022
(Decrease)
Consolidated Results of Operations
Segment
pre-tax operating income:
U.S. pawn
$
84,402
$
70,481
20
%
Latin America pawn
40,980
36,612
12
%
Retail
POS payment solutions (1)
39,449
20,091
96
%
Intersegment elimination (2)
(301)
(586)
(49)
%
Consolidated
segment pre-tax operating income
164,530
126,598
30
%
Corporate expenses and other income:
Administrative
expenses
45,056
36,951
22
%
Depreciation and amortization
14,772
14,824
—
%
Interest
expense
24,689
18,282
35
%
Interest income
(328)
(206)
59
%
(Gain) loss on foreign exchange
(286)
255
(212)
%
Merger
and acquisition expenses
3,387
733
362
%
Gain on revaluation of contingent acquisition consideration
—
(19,800)
(100)
%
Other
expenses (income), net
(384)
164
(334)
%
Total corporate expenses and other income
86,906
51,203
70
%
Income
before income taxes
77,624
75,395
3
%
Provision for income taxes
20,480
16,079
27
%
Net
income
$
57,144
$
59,316
(4)
%
(1)The AFF segment results for the three months ended September 30, 2022 are significantly impacted by certain purchase accounting adjustments, as noted in the retail POS payment solutions segment results of operations above. Adjusted retail POS payment solutions segment pre-tax operating income, excluding such purchase
accounting adjustments, was $28.0 million for the three months ended September 30, 2022.
(2)Represents the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores. For further detail, see Note 10 of Notes to Consolidated Financial Statements.
Administrative expenses increased 22% to $45.1 million during the third quarter of 2023 compared to $37.0 million in the third quarter of 2022, primarily due to increased incentive compensation expense, the increase in pawn store count, including recent acquisitions, and a 15% change in the average value of the Mexican peso resulting in higher U.S. dollar translated administrative expenses in Latin America. As a percentage of revenue, administrative expenses increased from 5% during the third quarter of 2022 to 6% during the third quarter of 2023.
Interest
expense increased 35% to $24.7 million during the third quarter of 2023 compared to $18.3 million in the third quarter of 2022, primarily due to both higher floating interest rates and increased amounts outstanding on the Company’s unsecured bank credit facilities. See Note 8 of Notes to Consolidated Financial Statements and “Liquidity and Capital Resources.”
Merger and acquisition expenses increased 362% to $3.4 million during the third quarter of 2023 compared to $0.7 million in the third quarter of 2022, due to timing of acquisition activity.
The Company recognized a gain on revaluation of contingent acquisition consideration
of $19.8 million during the third quarter of 2022 as a result of a decrease in the liability for the estimated fair value of contingent consideration related to the AFF acquisition. See Note 5 of Notes to Consolidated Financial Statements.
Consolidated effective income tax rates for the third quarter of 2023 and 2022 were 26.4% and 21.3%, respectively. The increase in the effective tax rate was primarily due to a $1.0 million permanent domestic tax benefit recognized in the third quarter of 2022 related to the $19.8 million gain on revaluation of certain contingent consideration related to the AFF acquisition, as described above, and a decreased foreign permanent tax benefit recorded in the third quarter of 2023 compared to the third quarter of 2022, related to a decreased inflation index adjustment allowed in Mexico as a result of moderating inflation in Mexico.
The following table presents segment pre-tax operating income and other operating metrics of the U.S. pawn segment for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 (dollars in thousands). Operating expenses
include salary and benefit expenses of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.
U.S. retail merchandise sales increased 2% to $610.5 million during the nine months ended September 30, 2023 compared to $596.2 million for the nine months ended September 30, 2022. Same-store retail sales decreased 2% during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in total retail sales was primarily due to sales contributions from acquired stores, whereas the decrease in same-store retail sales was primarily due to lower than normal inventory levels in these locations during the nine months ended September 30, 2023 compared to the nine months ended September 30,
2022. During the nine months ended September 30, 2023, the gross profit margin on retail merchandise sales in the U.S. was 43% compared to a margin of 41% during the nine months ended September 30, 2022 reflecting continued demand for value-priced, pre-owned merchandise and low levels of aged inventory.
U.S. pawn loan fees increased 15% to $315.7 million during the nine months ended September 30, 2023 compared to $274.3 million for the nine months ended September 30, 2022. Same-store pawn fees increased 11% during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in total and same-store pawn loan fees was primarily due to higher average pawn receivables and increased portfolio yield
driven by slightly improved customer redemption rates.
Segment Expenses
U.S. store operating expenses increased 10% to $331.9 million during the nine months ended September 30, 2023 compared to $302.6 million during the nine months ended September 30, 2022 while same-store operating expenses increased 5% compared with the prior-year period. The increase in total operating expenses was primarily due to acquired stores and the increase in same-store operating expenses, which was primarily due to inflationary increases in wages and certain other operating costs and increased store-level incentive compensation driven by increased net revenues and segment profit, during the nine months ended September 30,
2023 compared to the nine months ended September 30, 2022.
Segment Pre-Tax Operating Income
The U.S. segment pre-tax operating income for the nine months ended September 30, 2023 was $237.8 million, which generated a pre-tax segment operating margin of 24% compared to $207.6 million and 23% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected an improved net revenue margin partially offset by the increase in segment expenses.
Latin American segment pre-tax operating income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 benefited from a 12% 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 and other operating metrics of the Latin America pawn segment for the nine months ended September 30,
2023 compared to the nine months ended September 30, 2022 (dollars in thousands). Operating expenses include salary and benefit expenses of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.
Latin America retail merchandise sales increased 23% (9% on a constant currency basis) to $378.3 million during the nine months ended September 30, 2023 compared to $308.4 million for the nine months ended September 30, 2022. Same-store retail sales increased 22% (8% on a constant currency basis) during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in total and same-store
retail sales was primarily due to greater demand for value-priced consumer goods, with such demand believed to be driven in part by inflationary pressures on the Company’s customers and the impact of increases in government-mandated minimum wage and benefit programs in Mexico benefiting many cash-constrained consumers. The gross profit margin on retail merchandise sales was 35% during the nine months ended September 30, 2023 and 36% during the nine months ended September 30, 2022.
Pawn Lending Operations
Latin America pawn loan fees increased 20% (6% on a constant currency basis) to $164.6 million during the nine months
ended September 30, 2023 compared to $137.3 million for the nine months ended September 30, 2022. Same-store pawn fees also increased 20% (6% on a constant currency basis) during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in total and same-store constant currency pawn loan fees was primarily due to improved pawn yields.
Segment Expenses
Operating expenses increased 27% (13% on a constant currency basis) to $179.2 million during the nine months ended September 30, 2023 compared to $141.6 million
during the nine months ended September 30, 2022. Same-store operating expenses increased 25% (12% on a constant currency basis) compared to the prior-year period. The increase in total and same-store operating expenses was primarily driven by general inflationary impacts and increases in the federally mandated minimum wage and other required benefit programs.
Segment Pre-Tax Operating Income
The segment pre-tax operating income for the nine months ended September 30, 2023 was $111.5 million, which generated a pre-tax segment operating margin of 19% compared to $99.4 million and 21% in the prior year, respectively. The increase in the segment pre-tax operating income reflected an increase in net revenue
partially offset by an increase in segment expenses, which caused a decrease in the segment pre-tax operating margin.
The following table presents segment pre-tax operating income of the retail POS payment solutions segment for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 (dollars in thousands):
(1)As a result
of purchase accounting, AFF’s as reported amounts for the nine months ended September 30, 2022 contain significant fair value adjustments. The adjusted amounts for the nine months ended September 30, 2022 exclude these fair value purchase accounting adjustments.
The following table provides a detail of gross transaction volumes originated during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 (in thousands):
The following table details the changes in the allowance for lease and loan losses and other portfolio metrics for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 (in thousands):
Adjusted
(5)
Nine Months
Ended
Nine
Months Ended
September 30,
September 30,
Increase /
2022
Increase
2023
2022
(Decrease)
(Non-GAAP)
(Non-GAAP)
Allowance
for lease losses:
Balance at beginning of period
$
79,576
$
5,442
1,362
%
$
66,968
19
%
Provision
for lease losses (1)
141,854
110,205
29
%
110,205
29
%
Charge-offs
(120,966)
(40,872)
196
%
(94,788)
28
%
Recoveries
5,008
3,245
54
%
3,245
54
%
Balance
at end of period
$
105,472
$
78,020
35
%
$
85,630
23
%
Leased
merchandise portfolio metrics:
Provision expense as percentage of originations (2)
31
%
30
%
Average
monthly net charge-off rate (3)
5.3
%
4.8
%
Delinquency rate (4)
21.1
%
18.9
%
Allowance
for loan losses:
Balance at beginning of period
$
84,833
$
75,574
12
%
Provision
for loan losses
90,571
83,453
9
%
Charge-offs
(83,281)
(84,629)
(2)
%
Recoveries
4,561
4,015
14
%
Balance
at end of period
$
96,684
$
78,413
23
%
Finance
receivables portfolio metrics:
Provision rate (2)
30
%
35
%
Average
monthly net charge-off rate (3)
4.4
%
4.5
%
Delinquency rate (4)
19.4
%
19.2
%
(1)Includes
$0.2 million and $0.4 million of provision increase from intersegment transactions for the nine months ended September 30, 2023 and 2022, respectively, related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores that are eliminated upon consolidation. Excluding the intersegment transactions, the provision for lease losses for the nine months ended September 30, 2023 and 2022 totaled $141.7 million and $109.8 million, respectively.
(2)Calculated as provision for lease or loan losses as a percentage of the respective gross transaction volume
originated.
(3)Calculated as charge-offs, net of recoveries, as a percentage of the respective average earning asset balance before allowance for lease or loan losses (adjusted to exclude any fair value purchase accounting adjustments, as applicable).
(4)Calculated as the percentage of the respective contractual earning asset balance owed that is 1 to 89 days past due (the Company charges off leases and finance receivables when they are 90 days or more contractually past due).
(5)As a result of purchase accounting, AFF’s as reported allowance for lease losses for
the nine months ended September 30, 2022 contains significant fair value adjustments. The adjusted amounts for the nine months ended September 30, 2022 exclude these fair value purchase accounting adjustments. As a result of the significance of these accounting adjustments, the Company does not believe that the unadjusted leased merchandise portfolio metrics for the nine months ended September 30, 2022 provide a useful comparison against the September 30, 2023 amounts.
Leased merchandise income increased 23% to $562.6 million during the nine months ended September 30, 2023 compared to $455.7 million for the nine months ended September 30, 2022, which was primarily due to the higher leased merchandise balances.
Depreciation of leased merchandise increased 18% to $309.4 million during the nine months ended September 30, 2023 compared to $263.0 million during the nine months ended September 30,
2022. On an adjusted basis, excluding the impacts of fair value purchase accounting, depreciation of leased merchandise increased 21%. The increase was primarily due to higher leased merchandise balances. As a percentage of leased merchandise income, depreciation of leased merchandise decreased slightly from 56% during the nine months ended September 30, 2022 (adjusted to exclude purchase accounting adjustments) to 55% during the nine months ended September 30, 2023.
Provision for lease losses increased 29% to $141.9 million during the nine months ended September 30, 2023 compared to $110.2 million for the nine months ended September 30, 2022, which was primarily due to the 22% increase
in gross transaction volumes and an increase in lease loss provisioning rates used during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 as a result of slightly higher net charge-off rates during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 and slightly higher delinquency rates as of September 30, 2023 compared to September 30, 2022. As a percentage of gross transaction volume, the provision for lease losses increased from 30% during the nine months ended September 30, 2022 to 31% during the nine months ended September 30,
2023.
Retail Finance Operations
Interest and fees on finance receivables increased 29% to $174.2 million during the nine months ended September 30, 2023 compared to $135.0 million for the nine months ended September 30, 2022. On an adjusted basis, excluding the impacts of fair value purchase accounting, interest and fees on finance receivables increased 3%. The increase was primarily due to timing of transaction volume originations in 2022 resulting in a decline in the average finance receivable balance during most of 2022.
Provision for loan losses increased 9% to $90.6 million during the nine months ended September 30,
2023 compared to $83.5 million for the nine months ended September 30, 2022, which was primarily due to the 27% increase in gross transaction volumes, partially offset by a decrease in loan loss provisioning rates used during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 as a result of slightly improved net charge-off rates during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. As a percentage of gross transaction volume, the provision for loan losses decreased from 35% during the nine months ended September 30, 2022 to 30% during the nine months ended September 30,
2023.
Segment Expenses
Operating expenses increased 9% to $104.3 million during the nine months ended September 30, 2023 compared to $95.3 million during the nine months ended September 30, 2022, which was primarily due to the 24% increase in gross transaction volumes, partially offset by lower receivable acquisition costs and the realization of information technology cost synergies from the Company’s acquisition of AFF. As a percentage of segment revenues, operating expenses decreased from 15% during the nine months ended September 30, 2022 (adjusted to exclude purchase accounting
adjustments) to 14% during the nine months ended September 30, 2023.
Segment Pre-Tax Operating Income
The retail POS payment solutions segment pre-tax operating income for the nine months ended September 30, 2023 was $88.5 million compared to $36.7 million in the nine months ended September 30, 2022. The increase was primarily the result of fair value purchase accounting and increased segment income resulting from increases in net revenue partially offset by the increase in segment expenses. On an adjusted basis, excluding the impacts of fair value purchase accounting, segment pre-tax operating income for the nine months ended September 30,
2022 was $78.3 million.
The following table reconciles
pre-tax operating income of the Company’s U.S. pawn segment, Latin America pawn segment and retail POS payment solutions segment, discussed above, to consolidated net income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 (dollars in thousands):
Nine
Months Ended
September 30,
Increase /
2023
2022
(Decrease)
Consolidated Results of Operations
Segment
pre-tax operating income:
U.S. operations
$
237,836
$
207,632
15
%
Latin America pawn
111,544
99,375
12
%
Retail
POS payment solutions (1)
88,477
36,695
141
%
Intersegment eliminations (2)
(561)
(586)
(4)
%
Consolidated
segment pre-tax operating income
437,296
343,116
27
%
Corporate expenses and other income:
Administrative
expenses
124,428
110,882
12
%
Depreciation and amortization
44,598
44,558
—
%
Interest
expense
66,657
50,749
31
%
Interest income
(1,253)
(1,104)
13
%
Gain
on foreign exchange
(1,905)
(198)
862
%
Merger and acquisition expenses
3,670
1,712
114
%
Gain
on revaluation of contingent acquisition consideration
—
(82,789)
(100)
%
Other expenses (income), net
(260)
(2,721)
(90)
%
Total
corporate expenses and other income
235,935
121,089
95
%
Income before income taxes
201,361
222,027
(9)
%
Provision
for income taxes
51,649
48,598
6
%
Net income
$
149,712
$
173,429
(14)
%
(1)The
AFF segment results for the nine months ended September 30, 2022 are significantly impacted by certain purchase accounting adjustments, as noted in the retail POS payment solutions segment results of operations above. Adjusted retail POS payment solutions segment pre-tax operating income, excluding such purchase accounting adjustments, was $78.3 million for the nine months ended September 30, 2022.
(2)Represents the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores. For further detail, see Note 10 of Notes to Consolidated Financial Statements.
Administrative expenses increased 12% to $124.4 million during the nine months ended September 30, 2023 compared to $110.9 million during the nine months ended September 30, 2022, primarily due to increased incentive compensation expense, the increase in pawn store count, including recent acquisitions, and a 12% change in the average value of the Mexican peso resulting in higher U.S. dollar translated administrative expenses in Latin America. As a percentage of revenue, administrative expenses decreased from 6% during the nine months
ended September 30, 2022 to 5% during the nine months ended September 30, 2023.
Interest expense increased 31% to $66.7 million during the nine months ended September 30, 2023 compared to $50.7 million for the nine months ended September 30, 2022, primarily due to both higher floating interest rates and increased amounts outstanding on the Company’s unsecured bank credit facilities. See Note 8 of Notes to Consolidated Financial Statements and “Liquidity and Capital Resources.”
Merger and acquisition expenses increased
114% to $3.7 million during the nine months ended September 30, 2023 compared to $1.7 million for the nine months ended September 30, 2022, due to timing of acquisition activity in the third quarter of 2023.
The Company recognized a gain on revaluation of contingent acquisition consideration of $82.8 million during the nine months ended September 30, 2022 as a result of a decrease in the liability for the estimated fair value of certain contingent consideration related to the AFF acquisition. See Note 5 of Notes to Consolidated Financial Statements.
Consolidated effective
income tax rates for the nine months ended September 30, 2023 and 2022 were 25.7% and 21.9%, respectively. The increase in the effective tax rate was primarily due to a $4.3 million permanent domestic tax benefit recognized in the nine months ended September 30, 2022 related to the $82.8 million gain on revaluation of certain contingent consideration related to the AFF acquisition, as described above, and a decreased foreign permanent tax benefit recorded in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, related to a decreased inflation index adjustment allowed in Mexico as a result of moderating inflation.
LIQUIDITY
AND CAPITAL RESOURCES
Material Capital Requirements
The Company’s primary capital requirements include:
•Expand pawn operations through growth of pawn receivables and inventories in existing stores, new store openings, strategic acquisitions of pawn stores and purchases of underlying real estate at existing locations;
•Expand retail POS payment solutions operations through growth of the business generated from new and existing merchant partners; and
•Return capital to shareholders through
dividends and stock repurchases.
Other material capital requirements include operating expenses (see Note 4 of Notes to Consolidated Financial Statements regarding operating lease commitments), maintenance capital expenditures related to its facilities, technology platforms, general corporate operating activities, income tax payments and debt service, among others. Net interest expense is expected to increase in 2023 compared to 2022 due to increased borrowings primarily to fund recent acquisitions and higher floating interest rates on the borrowings under the revolving credit facilities. The Company believes that net cash provided by operating activities and available and unused funds under its revolving unsecured credit facilities will be adequate to meet its liquidity and capital needs for these items
over the next 12 months and also in the longer-term beyond the next 12 months.
The
Company intends to continue expansion of its pawn operations through new store openings and acquisitions.
For 2023, the Company has opened 57 new (“de novo”) stores in total through September 30, 2023 and for the full year of 2023 expects to add approximately 65 total new locations. Future store openings are subject to the Company’s ability to identify locations in markets with attractive demographics, available real estate with favorable leases and limited competition.
During the nine months ended September 30, 2023, the
Company acquired 83 pawn stores in the U.S. and acquired two pawn licenses to open pawn stores in the state of Nevada for a cumulative purchase price of $168.1 million, net of cash acquired and subject to future post-closing adjustments. The Company evaluates potential acquisitions based upon growth potential, purchase price, available liquidity, strategic fit and quality of management personnel, among other factors.
Although viewed by management as a discretionary expenditure not required to operate its pawn stores, the Company may continue to strategically purchase real estate from its landlords at existing stores or in conjunction with pawn store acquisitions as opportunities arise at reasonable valuations. The
Company purchased the real estate at 24 store locations, primarily from landlords at existing stores, for a cumulative purchase price of $46.7 million during the nine months ended September 30, 2023.
Expand Retail POS Payment Solutions Operations
AFF expects to expand its business primarily by promoting and expanding relationships with both new and existing customers and retail merchant partners. In addition, AFF has made, and intends to continue to make, investments in its customer and merchant support operations and facilities, its technology platforms and its proprietary decisioning platforms and processes. In addition to utilizing cash flows generated from its own operations to fund expected 2023 growth, AFF has access to the additional sources of liquidity
described below if needed to fund further expansion activities.
Return of Capital to Shareholders
In October 2023, the Company’s Board of Directors declared a $0.35 per share fourth quarter cash dividend on common shares outstanding, or an aggregate of $15.8 million based on the September 30, 2023 share count, to be paid on November 30, 2023 to stockholders of record as of November 15, 2023. While the Company currently expects to continue the payment of quarterly cash dividends, the amount,
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, debt covenant restrictions and other relevant factors.
During the nine months ended September 30, 2023, the Company repurchased a total of 1,248,000 shares of common stock at an aggregate cost of $114.4 million and an average cost per share of $91.58. The aggregate cost and average cost per share does not include the effect of the 1% excise tax on certain share repurchases enacted under the inflation Reduction
Act of 2022. The Company incurred $1.1 million of excise taxes during the nine months ended September 30, 2023. During the nine months ended September 30, 2022, the Company repurchased 2,035,000 shares of common stock at an aggregate cost of $144.7 million and an average cost per share of $71.12.
All repurchases during the nine months ended September 30, 2023 were conducted under the Company’s $100.0 million share repurchase program authorized in April 2022 and the $100.0 million share
repurchase program authorized in October 2022 and such repurchases complete the authorizations under these programs. In July 2023, the Company’s Board of Directors authorized a new common stock repurchase program for up to $200.0 million of the Company’s outstanding common stock, of which the entire $200.0 million is currently remaining. While the Company intends to continue repurchases under its active share repurchase program, future share repurchases are subject to a variety of factors, including, but not limited to, the level of cash balances, liquidity needs, including funding acquisitions, credit availability, debt covenant restrictions, general business and economic conditions, regulatory requirements, the market
price of the Company’s stock, dividend policy and the availability of alternative investment opportunities.
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 enter into interest rate hedge transactions, such as interest rate swap agreements. As of September 30, 2023, the Company’s primary sources of liquidity were $86.5 million in cash and cash equivalents and $60.9 million of available and unused funds under the Company’s revolving unsecured credit facilities, subject to certain financial covenants (see Note 8 of Notes to Consolidated Financial Statements).
The Company had working capital of $917.3 million as of September 30, 2023.
On October 18, 2023, the Company amended its domestic Credit Facility. The total lender commitment under the amended facility, which is provided by a group of twelve commercial banks, was increased by $50.0 million, from $590.0 million to $640.0 million. The amended credit facility remains unsecured and all other terms remained unchanged. In addition, in August 2023, the Company renewed and extended into 2027, the Mexico Credit Facility in the amount of $600.0
million Mexican pesos.
The Company’s cash and cash equivalents as of September 30, 2023 included $24.1 million held by its foreign subsidiaries. These cash balances, which are primarily held in Mexican pesos, are associated with foreign earnings the Company has asserted are indefinitely reinvested and which the Company primarily plans to use to support its continued growth plans outside the U.S. through funding of capital expenditures, acquisitions, operating expenses or other similar cash needs
of the Company’s foreign operations.
The Company’s liquidity is affected by a number of factors, including changes in general customer traffic and demand, pawn loan balances, loan-to-value ratios, collection of pawn fees, merchandise sales, inventory levels, LTO merchandise, finance receivable balances, collection of lease and finance receivable payments, seasonality, operating expenses, administrative expenses, expenses related to merger and acquisition activities, litigation-related expenses, tax rates, gold prices, foreign currency exchange rates and the pace of new pawn store expansion and acquisitions. Additionally, a prolonged reduction in earnings and EBITDA could limit the
Company’s future ability to fully borrow on its credit facilities under current leverage covenants. Regulatory developments affecting the Company’s operations may also impact profitability and liquidity. See “Regulatory Developments.”
If needed, the Company could seek to raise additional funds from a variety of sources, including, but not limited to, repatriation of excess cash held in Latin America, the sale of assets, reductions in operating expenses, capital expenditures and dividends, the forbearance or deferral of operating expenses, the issuance of debt or equity securities, utilizing other structured financing arrangements, the leveraging of currently unencumbered real estate owned by the
Company 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, which accounts for 48% of total inventory, give the Company flexibility to quickly increase cash flow if necessary.
Cash Flows and Liquidity Metrics
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):
Net cash provided by operating activities decreased $8.8 million, or 3%, from $325.8 million for the nine months ended September 30, 2022 to $317.0 million for the nine months ended September 30, 2023, as a decrease in net income of $23.7 million was partially offset by net changes in certain non-cash adjustments to reconcile net income to operating cash flow and net changes in other operating assets and liabilities (as detailed in the consolidated statements of cash flows).
Cash
Flow Used in Investing Activities
Net cash used in investing activities increased $170.4 million, or 71%, from $238.7 million for the nine months ended September 30, 2022 to $409.2 million for the nine months ended September 30, 2023. Cash flows from investing activities are utilized primarily to fund acquisitions, purchase of furniture, fixtures, equipment and improvements, which includes capital expenditures for improvements to existing stores and for new pawn store openings and other corporate assets, and discretionary purchases of store real property. In addition, cash flows related to the funding of new pawn loans, net of cash repayments and recovery of principal through the sale of inventories acquired from forfeiture of pawn collateral and changes in net finance receivables, are
included in investing activities. The Company paid $46.7 million for furniture, fixtures, equipment and improvements and $46.7 million for discretionary pawn store real property purchases during the nine months ended September 30, 2023 compared to $29.6 million and $77.7 million in the prior-year period, respectively. The Company paid $168.4 million in cash related to pawn store acquisitions during the nine months ended September 30, 2023 compared to $7.1 million during the nine months ended September 30, 2022. The Company funded a net increase in pawn loans of $59.4 million
during the nine months ended September 30, 2023 and $74.7 million during the nine months ended September 30, 2022. The Company funded a net increase in finance receivables of $88.0 million during the nine months ended September 30, 2023 and $49.6 million during the nine months ended September 30, 2022.
Cash Flow Provided by Financing Activities
Net cash provided by financing activities increased $166.3 million, or 155%, from net cash used in financing activities of $107.6 million for the nine months ended September 30,
2022 to net cash provided by financing activities of $58.7 million for the nine months ended September 30, 2023. Net borrowings on the credit facilities were $222.9 million during the nine months ended September 30, 2023 compared to net borrowings of $79.0 million during the nine months ended September 30, 2022. The Company funded $115.5 million for share repurchases and paid dividends of $46.1 million during the nine months ended September 30, 2023, compared to funding $140.4 million of share repurchases and dividends paid of $44.4 million during the nine months ended September 30, 2022. In addition, the
Company paid withholding taxes on net share settlements of restricted stock awards during the nine months ended September 30, 2023 of $2.5 million.
REGULATORY DEVELOPMENTS
The Company’s pawn, LTO and retail finance businesses are subject to significant regulation 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 2022 Annual
Report on Form 10-K filed with the SEC on February 6, 2023 and in subsequent documents filed with the SEC.
There have been no other material changes in regulatory developments directly affecting the Company since December 31, 2022.
The Company uses certain financial calculations such as adjusted net income, adjusted diluted earnings per share, EBITDA, adjusted EBITDA, free cash flow, adjusted free cash flow, adjusted retail POS payment solutions segment metrics and constant currency results 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 under the 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 core operating performance and 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 these non-GAAP financial measures 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,
the non-GAAP financial measures, as presented, may not be comparable to other similarly-titled measures of other companies.
While acquisitions are an important part of the Company’s overall strategy, the Company has adjusted the applicable financial calculations to exclude merger and acquisition expenses, including the Company’s transaction expenses incurred in connection with its acquisition of AFF and the impacts of purchase accounting with respect to the AFF acquisition, in order to allow more accurate comparisons of the financial results to prior periods. In addition, the
Company does not consider these merger and acquisition expenses to be related to the organic operations of the acquired businesses or its continuing operations, and such expenses are generally not relevant to assessing or estimating the long-term performance of the acquired businesses. Merger and 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 the consolidation of technology systems and corporate facilities, among others.
The Company has certain leases in Mexico which are denominated in U.S. dollars. The lease
liability of these U.S.-dollar-denominated leases, which is considered a monetary liability, is remeasured into Mexican pesos using current period exchange rates, resulting in the recognition of foreign currency exchange gains or losses. The Company has adjusted the applicable financial measures to exclude these remeasurement gains or losses (i) because they are non-cash, non-operating items that could create volatility in the Company’s consolidated results of operations due to the magnitude of the end of period lease liability being remeasured and (ii) to improve comparability of current periods presented with prior periods.
In conjunction with the Cash America merger in 2016, the
Company recorded certain lease intangibles related to above- or below-market lease liabilities of Cash America, which are included in the operating lease right of use asset on the consolidated balance sheets. As the Company continues to opportunistically purchase real estate from landlords at certain Cash America stores, the associated lease intangible, if any, is written off and gain or loss is recognized. The Company has adjusted the applicable financial measures to exclude these gains or losses given the variability in size and timing of these transactions and because they are non-cash, non-operating gains or losses. The Company believes this improves comparability of operating results for current periods presented
with prior periods.
Adjusted Net Income and Adjusted Diluted Earnings Per Share
Management believes
the presentation of adjusted net income and adjusted diluted earnings per share 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 net income and diluted earnings per share calculated in accordance with GAAP to adjusted net income and adjusted diluted earnings per share, which are shown net of tax (in thousands, except per share amounts):
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):
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 as a starting point in the calculation of the consolidated total debt ratio as defined in the Company’s senior unsecured notes. The following table provides a reconciliation of net income to EBITDA and adjusted EBITDA (in thousands):
Non-cash
foreign currency loss (gain) related to lease liability
632
359
(1,673)
(350)
(2,652)
(72)
AFF
purchase accounting adjustments (1)
—
7,950
—
41,594
8,760
87,956
Gain
on revaluation of contingent acquisition consideration
—
(19,800)
—
(82,789)
(26,760)
(100,660)
Other
expenses (income), net
(384)
164
(260)
(2,721)
(270)
(3,412)
Adjusted
EBITDA
$
132,985
$
108,848
$
350,028
$
306,613
$
480,759
$
408,902
(1)Excludes
$14.1 million, $42.7 million and $56.9 million of amortization expense related to identifiable intangible assets as a result of the AFF acquisition for the three months, nine months and trailing twelve months ended September 30, 2023, respectively, which is included in the add back of depreciation and amortization to net income used to calculate EBITDA. Excludes $14.2 million, $42.5 million and $44.6 million of amortization expense related to identifiable intangible assets as a result of the AFF acquisition for the three months, nine months and trailing twelve months ended September 30, 2022, respectively, which is included in the add back of depreciation and amortization to net income used to calculate EBITDA.
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 furniture, fixtures, equipment and improvements and net fundings/repayments of pawn loan and finance receivables, which are considered to be operating in nature by the Company but are
included in cash flow from investing activities. Adjusted free cash flow is defined as free cash flow adjusted for merger and 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 additional measures 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, that 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):
Purchases of furniture, fixtures, equipment and improvements
(18,375)
(9,944)
(46,723)
(29,630)
(52,679)
(40,044)
Free
cash flow
2,510
20,557
122,894
171,827
263,616
238,320
Merger and acquisition expenses paid, net of tax benefit
2,605
564
2,818
1,317
4,379
12,239
Adjusted
free cash flow
$
5,115
$
21,121
$
125,712
$
173,144
$
267,995
$
250,559
(1)Includes
the funding of new loans net of cash repayments and recovery of principal through the sale of inventories acquired from forfeiture of pawn collateral.
Management believes the presentation of certain retail POS payment solutions segment metrics, adjusted to exclude the impacts of purchase accounting, provides investors with greater transparency and provides a more complete understanding of AFF’s financial performance and prospects for the future by excluding the impacts of purchase accounting, which management believes is non-operating in nature and not representative of AFF’s core operating performance. See the retail POS payment solutions segment tables in “Results of Operations” above for additional reconciliation of certain amounts adjusted to exclude the impacts of purchase accounting to as reported GAAP amounts.
Additionally, the following table provides reconciliations of total revenue and total net
revenue, presented in accordance with GAAP, to adjusted total revenue and adjusted net revenue, which excludes the impacts of purchase accounting (in thousands):
(1)As a result of purchase accounting, AFF’s as reported amounts for the three and nine months ended September 30, 2022 contain significant fair value adjustments. The adjusted
amounts for the three and nine months ended September 30, 2022 exclude these fair value purchase accounting adjustments.
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 transacted in local currencies in Mexico, Guatemala and Colombia. The
Company also has operations in El Salvador, where the reporting and functional currency is the U.S. dollar.
The Company believes constant currency results provide 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. See the Latin America pawn segment tables in “Results of Operations” above for additional reconciliation of certain constant currency amounts to as reported GAAP amounts.
The
following table provides exchange rates for the Mexican peso, Guatemalan quetzal and Colombian peso for the current and prior-year periods:
September 30,
Favorable /
2023
2022
(Unfavorable)
Mexican
peso / U.S. dollar exchange rate:
End-of-period
17.6
20.3
13
%
Three months ended
17.1
20.2
15
%
Nine
months ended
17.8
20.3
12
%
Guatemalan quetzal / U.S. dollar exchange rate:
End-of-period
7.9
7.9
—
%
Three
months ended
7.9
7.8
(1)
%
Nine months ended
7.8
7.7
(1)
%
Colombian
peso / U.S. dollar exchange rate:
End-of-period
4,054
4,532
11
%
Three months ended
4,048
4,375
7
%
Nine
months ended
4,413
4,068
(8)
%
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 2022 Annual Report on Form 10-K. The impact of current-year fluctuations in 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, 2022.
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 Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2023 (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 September 30, 2023 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.
See Note 9 - Commitments and Contingencies of Notes to Consolidated Financial Statements contained in Part I, Item 1 of this report which is incorporated to this Part II, Item 1 by reference.
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 2022 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 2022 Annual Report on Form 10-K. There have been no material changes in the Company’s risk factors from
those in Part I, Item 1A, “Risk Factors” of the Company’s 2022 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about purchases made by the Company of shares of its common stock during the three months ended September 30, 2023 (dollars in thousands, except per share amounts):
Total Number Of
Shares Purchased
Average
Price
Paid
Per Share (1)
Total Number Of
Shares Purchased
As Part Of Publicly
Announced Plans (2)
Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans (1) (2)
(1)The
Inflation Reduction Act of 2022, which was enacted into law on August 16, 2022, imposed a nondeductible 1% excise tax on the net value of certain stock repurchases made after December 31, 2022. During the three months ended September 30, 2023, the Company reflected the applicable excise tax in treasury stock as part of the cost basis of the stock repurchased and recorded a corresponding liability for the excise taxes payable in accrued expenses and other liabilities on the consolidated balance sheet. All dollar amounts presented exclude such excise taxes.
(2)On October 27, 2022, the
Company’s board of directors authorized the repurchases of an aggregate of $100.0 million of its shares of common stock. During July 2023, the Company repurchased a total of 95,000 shares of common stock at an aggregate cost of $8.8 million and an average cost per share of $92.79, which completed the share repurchase program authorized in October 2022. In July 2023, the Company’s Board of Directors authorized an additional common stock repurchase program for up to $200.0 million of the Company’s outstanding common stock, of which the entire $200.0 million is currently remaining.
iOn iAugust 10,
2023, iRandel G. Owen, iDirector, iadopted a written plan for the sale of up to i2,000
shares of the Company’s common stock that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act of 1934. The plan will expire on iNovember 8, 2024, or on any earlier date on which all of the shares have been sold./
iOn
iAugust 22, 2023, iR. Douglas Orr, iExecutive Vice President and Chief Financial Officer, iadopted
a written plan for the sale of up to i42,000 shares of the Company’s common stock that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act of 1934. The plan will expire on iFebruary 28, 2025, or
on any earlier date on which all of the shares have been sold./
iDuring the three months ended September 30, 2023, none of our directors or officers iadopted or iterminated
a “non-Rule 10b5-1 trading arrangement” (as defined in Item 408 of Regulation S-K)./
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
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.
