Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
FORWARD-LOOKING INFORMATIONCAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
Forward-Looking Information
This annual report contains forward-looking statements about the business, financial condition 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 and future plans. Forward-looking statements can also be identified by the fact these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.
These The forward-looking statements are madecontained in this annual report include, without limitation, statements related to provide the public with management’s current assessmentCompany’s expectations for its performance and growth in 2022, the anticipated benefits of the American First Finance (“AFF”) transaction, the anticipated impact of the transaction on the combined company’s business and future financial and operating results and the Company’s business. Althoughgoals, plans and projections with respect to its operations, financial position and business strategy.
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 annual report. Such factors may include, without limitation, risks associated with the Consumer Financial Protection Bureau (“CFPB”) lawsuit filed against the Company, including the incurrence of meaningful expenses, reputational damage, monetary damages and other penalties, risks relating to the AFF transaction, including the failure of the transaction to deliver the estimated value and benefits expected by the Company, the incurrence of unexpected future costs, liabilities or obligations as a result of the transaction, the effect of the transaction on the ability of the Company to retain and hire personnel and maintain relationships with retail partners, consumers and others with whom the Company and AFF do business, the ability of the Company to successfully integrate AFF’s operations, the ability of the Company to successfully implement its plans, forecasts and other expectations with respect to AFF’s business, risks related to the COVID-19 pandemic, which include risks and uncertainties related to the current unknown duration and regulatory developmentsseverity of the COVID-19 pandemic, the governmental responses that have been, and may in the future be, imposed in response to the pandemic, including stimulus programs which could adversely impact demand for pawn loans and AFF’s lease-to-own and retail finance products, potential changes in consumer behavior and shopping patterns which could impact demand for both the Company’s pawn loan, retail, lease-to-own and retail finance products, labor shortages and increased labor costs, inflation, a deterioration in the economic conditions in the United States and Latin America which potentially could have an impact on discretionary consumer spending, currency fluctuations, primarily involving the Mexican peso and those other risks discussed and described in (i) this annual report, including the risks described in Part I, Item IA, “Risk Factors” hereof, and (ii) the other reports filed with the SEC.SEC, including the Company’s Current Report on Form 8-K filed with the SEC on December 7, 2021. 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 annual report speak only as of the date of this annual report, and the Company expressly disclaims any obligation or undertaking to report any updates or revisions to any such statement to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which any such statement is based, except as required by law.
PART I
Item 1. Business
GeneralOverview
The CompanyFirstCash Holdings, Inc. and its wholly owned subsidiaries (together, the “Company”) is athe leading operator of retail-based pawn stores in the U.S. and Latin America. AsAmerica, and following its acquisition of American First Finance (“AFF”) on December 31, 2017, the Company had 2,111 locations, consisting of 1,112 stores in 26 U.S. states (including the District of Columbia), 953 stores in all 32 states in Mexico, 33 stores in Guatemala and 13 stores in El Salvador.
On September 1, 2016, the Company completed its merger with Cash America International, Inc. (“Cash America”17, 2021 (the “AFF Acquisition”), whereby Cash America merged with and intois a wholly owned subsidiaryleading provider of the Company (the “Merger”technology-driven, retail point-of-sale (“POS”). The accompanying audited consolidated results of operations for the year ended December 31, 2017 includes the results of operations for Cash America, while the comparable prior-year period includes the results of operations for Cash America for the period September 2, 2016 to December 31, 2016, affecting comparability of fiscal 2017 and 2016 amounts. payment solutions focused on serving credit-constrained consumers. See Note 3 of Notes to Consolidated Financial Statements for additional information about the Merger.AFF Acquisition.
With the AFF Acquisition, the Company now operates two business lines: pawn operations and retail POS payment solutions. Its 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 AFF operations in the U.S. and Puerto Rico.
The Company’s primary business isline continues to be the operation of large format, full-serviceretail pawn stores, also known as “pawnshops,” which makefocus on serving cash and credit-constrained consumers. Pawn stores help customers meet small short-term cash needs by providing non-recourse pawn loans secured by personaland buying merchandise directly from customers. Personal property, such as consumerjewelry, electronics, jewelry, power tools, household appliances, sporting goods and musical instruments. Theseinstruments, is pledged and held as collateral for the pawn loans over the typical 30-day term of the loan. Pawn stores also generate significant retail sales primarily from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers. In addition, some
The Company’s retail POS payment solutions business line consists solely of the Company’s pawn stores offer small unsecured consumer loans or credit services products. The Company’s strategy is to focusoperations of AFF, which focuses on growing itslease-to-own (“LTO”) products and facilitating other retail financing payment options across a large format, full-service pawn operationsnetwork of traditional and e-commerce merchant partners in all 50 states in the U.S., the District of Columbia and Latin America through new store openingsPuerto Rico. AFF’s retail partners provide consumer goods and strategic acquisition opportunities as they arise.services to their customers and use AFF’s LTO and retail finance solutions to facilitate payments on such transactions. As one of the largest omni-channel providers of “no credit required” payment options, AFF’s technology set provides consumers with seamless leasing and financing experiences in-store, online, in-cart and on mobile devices.
In addition to its pawn stores,connection with the completion of the AFF Acquisition, effective December 16, 2021, the Company operatescompleted a small numberholding company reorganization creating a new holding company, FirstCash Holdings, Inc. In connection with the reorganization, FirstCash Holdings, Inc. succeeded FirstCash, Inc. as the public company trading on Nasdaq under the ticker symbol “FCFS” and each outstanding share of stand-alone consumer finance storesFirstCash, Inc. was converted into an equivalent corresponding share of common stock in FirstCash Holdings, Inc., having the U.S.same designations, rights, powers and Mexico. These stores provide consumer financial services products including credit services, consumer loans and check cashing. The Company also offers check cashing services through franchised check cashing centers, for whichpreferences as the Company receives franchise fees. Beginning in fiscal 2018, the Company no longer offers fee-based check cashing services in its non-franchise stores. The Company considers the credit services and consumer loan products to be non-core, non-growth revenue streams, which the Company has deemphasized in recent years and represented approximately 4% of the Company’s total revenues for both of the years ended December 31, 2017 and 2016.
Revenue for the year ended December 31, 2017 was primarily generated from the Company’s pawn operations with 27% of total revenues derived from Latin America and 73% from the U.S. For additional historical information on the composition of revenues from the U.S. and Latin America, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”
The Company organizes its operations into two reportable segments: the U.S. operations segment and the Latin America operations segment. The U.S. operations segment consists of all pawn and consumer loan operations in the U.S. and the Latin America operations segment consists of all pawn and consumer loan operations in Latin America, which currently includes operations in Mexico, Guatemala and El Salvador. The Company intends to open its first stores in Colombia in 2018, which will be included in the Latin America operations segment.
The Company was formedcorresponding FirstCash, Inc. shares that were converted. FirstCash, Inc. now operates as a Texas corporation in July 1988. In April 1991, the Company reincorporated as a Delaware corporation. wholly-owned subsidiary of FirstCash Holdings, Inc.
The Company’s principal executive offices are located at 1600 West 7th Street, Fort Worth, Texas 76102, and its telephone number is (817) 335-1100. The Company’s primary websites are www.firstcash.com and www.americanfirstfinance.com.
Pawn IndustryOperations
Pawn stores are neighborhood-based retail storeslocations that buy and sell pre-owned consumer itemsproducts such as consumerjewelry, electronics, jewelry, power tools, appliances, sporting goods and musical instruments. Pawn stores also provide a quick and convenient source of small, secured consumer loans, also known as pawn loans, to unbanked, under-banked and credit-challengedcredit-constrained customers. ThesePawn loans are safe and affordable non-recourse loans for which the customer has no legal obligation to repay. The Company does not engage in post-default collection efforts, does not take legal actions against its customers for defaulted loans, does not ban its customers for nonpayment, nor does it report any negative credit information to credit reporting agencies, but rather, relies only on the resale of the pawn collateral for recovery. Pawnshop customers are typically value-conscious consumers and/or borrowers who are typically not effectively or efficiently served by traditional lenders such as banks, credit unions, credit card providers or other small loan providers. The Company’s pawn stores directly compete in both the specialty retail and consumer finance industries.
United States
The pawn industry in the U.S. is well established, with the highest concentration of pawn stores located in the Southeast, Midwest and Southwest regions of the country. The operation of pawn stores is governed primarily by state laws and accordingly, states that maintain regulations most conducive to profitable pawn operations have historically seen the greatest concentration of pawn stores. Management believes the U.S. pawn industry, although mature, remains highly fragmented. The two major publicly traded companies in the pawn industry, which includes the Company, currently operate approximately 1,600 of the estimated 12,000 to 14,000
Historically, competitor pawn stores in the U.S. The Company believes theLatin America have limited square footage and focus on providing loans collateralized by gold jewelry or small electronics. In contrast, a majority of pawnshops in the U.S. are owned by individuals operating five or fewer locations.
Mexico and Other Latin American Markets
Most of the Company’s pawn stores opened in Latin America are larger format, full-service stores similar to the U.S. stores, which lend on a wide array of collateral and have a larger retail sales floor. The majority of pawn stores in Latin America are much smaller than a typical U.S. pawn store, have limited retail space and often offer only pawn loans collateralized by gold jewelry or small consumer electronics. Accordingly, competition in Latin America forwith the Company’s largelarger format, full-service pawn stores is limited. A large percentage of the population in Mexico and other countries in Latin America areis unbanked or under-banked and havehas limited access to traditional consumer credit. The Company believes that there is significant opportunity for futurefurther expansion in Mexico and other Latin American countries due to the large potential consumer base and limited competition from other large format, full-service pawn store operators.
Business Strategy
TheCOVID-19 and U.S. government stimulus initiatives in response thereto significantly impacted the Company’s pawn business plan is to expand its operations by opening new (“de novo”) retail pawn locations, by acquiring existing pawnshopsbeginning in strategic markets and attempting to increase revenue and operating profits in its existing stores. In pursuing its business strategy, the Company seeks to establish clusters2020, which continued throughout much of several stores in specific geographic areas in order to achieve certain economies of scale relative to management and supervision, pricing and purchasing, information and accounting systems and marketing.
The Company has opened or acquired over 1,400 pawn stores in the last five fiscal years, including 815 stores as2021. For a resultmore detailed discussion of the Merger. Net store additions have grown at a compound annual store growth rateimpact of 21% over this period. The Company intends to open additional stores in locations where management believes appropriate demand and other favorable conditions exist. The following table details stores opened and acquired over the five year period ended December 31, 2017:
| | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | U.S. stores: | | | | | | | | | | | Merged Cash America locations | — |
| | 815 |
| | — |
| | — |
| | — |
| | New locations opened | 2 |
| | — |
| | — |
| | 8 |
| | 9 |
| | Locations acquired | 1 |
| | 3 |
| | 33 |
| | 25 |
| | 34 |
| | Total additions | 3 |
| | 818 |
| | 33 |
| | 33 |
| | 43 |
| | | | | | | | | | | | | Latin America stores: | | | | | | | | | | | New locations opened | 45 |
| | 41 |
| | 38 |
| | 31 |
| | 60 |
| | Locations acquired | 5 |
| | 179 |
| | 32 |
| | 47 |
| | 8 |
| | Total additions | 50 |
| | 220 |
| | 70 |
| | 78 |
| | 68 |
| | | | | | | | | | | | | Total: | | |
|
| |
|
| |
| |
| | Merged Cash America locations | — |
| | 815 |
| | — |
| | — |
| | — |
| | New locations opened | 47 |
| | 41 |
| | 38 |
| | 39 |
| | 69 |
| | Locations acquired | 6 |
| | 182 |
| | 65 |
| | 72 |
| | 42 |
| | Total additions | 53 |
| | 1,038 |
| | 103 |
| | 111 |
| | 111 |
|
For additional informationCOVID-19 on store count activity, see “—Locations and Operations” below.
New Store Openings
The Company plans to continue opening new pawn stores, primarily in Latin America, and to a much lesser extent in the U.S. The Company typically opens new stores in under-developed markets, especially where customer demographics are favorable and competition is limited or restricted. After a suitable location has been identified and a lease and the appropriate licenses are obtained, a new store can typically be open for business within six to twelve weeks. The investment required to open a new location includes store operating cash, inventory, funds for pawn and consumer loans, leasehold improvements, store fixtures, security systems, computer equipment and other start-up costs.
Acquisitions
Because of the fragmented nature of the pawn industry, the Company believes attractive acquisition opportunities will continue to arise from time to time in both Latin America and the U.S. Before making an acquisition, management assesses the demographic characteristics of the surrounding area, considers the number, proximity and size of competing stores, and researches state and local regulatory standards. Specific pawn store acquisition criteria include an evaluation of the volume of merchandise sales and pawn transactions, outstanding customer pawn loan balances, historical pawn yields, retail margins and redemption rates, the condition and quantity of inventory on hand, and location, condition and lease terms of the facility.
Enhance Productivity of Existing and Newly Opened Stores
The primary factors affecting the profitability of the Company’s existing store base are the volumeresults of operations see “Item 7. Management’s Discussion and gross profitAnalysis of merchandise sales, the volumeFinancial Condition and Results of and yield on customer loans and store expenses. To encourage customer traffic, which management believes is a key determinantOperations—Results of a store’s success, the Company has taken several steps to distinguish its stores and to make customers feel more comfortable. In addition to a clean and secure physical store facility, the stores’ exteriors typically display attractive and distinctive signage similar to those used by contemporary specialty retailers.Operations.”
The Company has employee-training programs that promote customer service, productivity and professionalism. The Company utilizes a proprietary computer information system that provides fully-integrated functionality to support point-of-sale retail operations, real-time merchandise valuations, loan-to-value calculations, inventory management, customer recordkeeping, loan management, compliance and control systems and employee compensation. Each store is connected on a real-time basis to a secure data center that houses the centralized databases and operating systems. The information systems provide management with the ability to continuously monitor store transactions and operating results. The Company completed the process of converting all Cash America stores to the Company’s proprietary computer information system during 2017.
The Company maintains a well-trained internal audit staff that conducts regular store visits to test compliance of financial and operational controls. Management believes the current operating and financial controls and systems are adequate for the Company’s existing store base and can accommodate reasonably foreseeable growth in the near term.
Services Offered by the CompanyCompany’s Pawn Operations
Pawn Merchandise Sales
The Company’s pawn merchandise sales are primarily retail sales to the general public from its pawn stores.store locations. The items the Company sellssold generally consist of pre-owned consumer products such as jewelry, electronics, jewelry, power tools, household appliances, sporting goods and musical instruments. The Company also melts certain quantities of scrap jewelry and sells the gold, silver and diamonds in the commodity markets. Total merchandiseMerchandise sales accounted for approximately 67%70% of the Company’s revenue during fiscal 2017.2021 or 52% on a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021.
The Company acquires pawn merchandiseMerchandise inventory is acquired primarily through forfeited pawn loan collateral and, to a lesser extent, through purchases of used goods directly from the general public. The Company also acquires limited quantities of new or refurbished general merchandise inventories directly from wholesalers and manufacturers. Merchandise acquired by the Company through forfeited pawn loan collateral is carried in inventory at the amount of the related pawn loan, exclusive of any accrued service fees. The Company also acquires limited quantities of new or refurbished general merchandise inventories directly from wholesalersfees, and manufacturers.purchased inventory is carried at cost.
The Company does not currently provide direct financing to customers for the purchase of merchandise in its merchandise,pawn stores, but does permit itsallow customers to purchase merchandise on an interest-free “layaway” plan. Should the customer fail to make a required payment pursuant to a layaway plan, the item is returned to inventory and all or a portion of previous payments are typically forfeited to the Company. InterimDeposits and interim payments from customers on layaway sales are recorded as deferred revenue and subsequently recorded as retail merchandise sales revenue when the merchandise is delivered to the customer upon receipt of final payment is received or when previous payments are forfeited to the Company. The Company anticipates it will provide AFF’s LTO payment option (as further described below) to retail customers in its U.S. pawn locations in the near future.
Retail sales are seasonally highest in the fourth quarter, associated with holiday shopping and, to a lesser extent, in the first quarter associated with tax refunds in the U.S.
Pawn Lending Activities
The Company’s pawn stores make pawn loans, which are typically small, short-term, secured loans, to its customers in order to help them meet instant or short-term cash needs. All pawn loans are collateralized by personal property such as consumerjewelry, electronics, jewelry, power tools, household appliances, sporting goods and musical instruments. Pawn loans are non-recourse loans and theThe pledged goods providecollateral provides the only security to the Company for the repayment of the loan. The Company does not investigate the creditworthiness of the borrower, primarily relying instead on the marketability and sales value of pledged goods as a basis for its credit decision. Pawn loans are non-recourse loans, and a customer does not have a legal obligation to repay a pawn loan. There is no collections process and the decision to not repay the loan will not affect the customer’s credit score.score with any credit reporting agency.
At the time a pawn loan transaction is entered into, an agreement or pawn contract, commonly referred to as a “pawn ticket,” is deliveredpresented to the borrower for signature that sets forth,includes, among other items, the borrower’s name and address of the pawnshop, the borrower’s name, the borrower’s identification number from his/her driver’s license or other government issued identification, date, identification andinformation, a description of the pledged goods, including applicable serial numbers, amount financed, pawn service fee, maturity date, total amount that must be paid to redeem the pledged goods on the maturity date and the annual percentage rate.
Pledged property is held through theThe term of the loan, unless thea pawn loan is paid earlier or renewed. The typical pawn loan term is generallytypically 30 days plus an additional grace period of 14 to 90 days, depending on geographicalgeographic markets and local or state regulations. Pawn loans may be either paid in full with accrued pawn loan fees and service charges or, where permitted by law, may be renewed or extended by the customer’s payment of accrued pawn loan fees and service charges. If a
pawn loan is not repaid prior tobefore the expiration of the grace period, the pawn collateral is forfeited to the Company and transferred to inventory at a value equal to the principal amount of the loan, exclusive of accrued service fees. Pledged property is held in a secured, non-public warehouse area of the pawn store for the term of the loan and the grace period, unless the loan is repaid earlier. The Company does not record pawn loan losses or charge-offs because the amount advanced becomes the carrying cost of the forfeited collateral that is to be recovered through the merchandise sales function described above.
The pawnPawn loan fees are typically calculated as a percentage of the pawn loan amount based on the size, duration and durationtype of collateral of the transactionpawn loan, and generally range from 4% to 25% per month, as permitted by applicable law. As required by applicable law, the amounts of these charges are disclosed to the customer on the pawn ticket. Pawn loan fees accounted for approximately 29%28% of the Company’s revenue during fiscal 2017.2021, or 21% on a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021.
The amount the Company is willing to finance for a pawn loan is primarily based on a percentage of the estimated retail value of the collateral. There are no minimum or maximum pawn loan to fair market value restrictions in connection with the Company’s lending activities. In order to estimate the value of the collateral, the Company utilizes its integrated proprietary computer informationpoint-of-sale and loan management system to recall recent selling prices of similar merchandise in its own stores. The basis for the Company’s determination of the retail value also includes such sources as precious metals spot markets, catalogs, blue books, online auction sites and retailer advertisements. These sources, together with the employees’ skills and experience in selling similar items of merchandise in particular stores, influence the determination of the estimated retail value of such items. The Company does not utilize a standard or mandated percentage of estimated retail value in determining the amount to be financed. Rather, the employee has the authority to set the percentage for a particular item and to determine the ratio of pawn amount to estimated sale value with the expectation that, if the item is forfeited to the pawnshop, its subsequent sale should yield a gross profit margin consistent with the Company’s historical experience. The recovery of the principal and realization of gross profit on sales of inventory is dependent on the Company’s initial assessment of the property’s estimated retail value. Improper assessment of the retail value of the collateral in the lending function can result in reduced marketability of the property resulting in a reduced gross profit margin.
The Company typically experiences seasonal growth in its pawn loan balances in the third and fourth quarters of the year following lower balances in the first two quarters of the year due to the heavytypical repayment of pawn loans associated with statutory bonuses received by customers in the fourth quarter in Mexico and with tax refund proceeds typically received by customers in the first quarter in the U.S.
Pawn Business Strategy
The Company’s business strategy is to continue growing pawn revenues and income by opening new (“de novo”) retail pawn locations, acquiring existing pawn stores in strategic markets and increasing revenue and operating profits in existing stores. Over the last five years, 1,021 pawn stores have been opened or acquired with the net store count growing at a compound annual store growth rate of 6% over this period. The Company intends to open or acquire additional stores in locations where management believes appropriate consumer demand and other favorable conditions exist. The following table details stores opened and acquired over the five-year period ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | U.S. pawn segment: | | | | | | | | | | | | | | | | | | | | | New locations opened | 1 | | | — | | | — | | | — | | | 2 | | | Locations acquired | 46 | | | 22 | | | 27 | | | 27 | | | 1 | | | Total additions | 47 | | | 22 | | | 27 | | | 27 | | | 3 | | | | | | | | | | | | | Latin America pawn segment: | | | | | | | | | | | | | | | | | | | | | New locations opened | 60 | | | 75 | | | 89 | | | 52 | | | 45 | | | Locations acquired | — | | | 40 | | | 163 | | | 366 | | | 5 | | | Total additions | 60 | | | 115 | | | 252 | | | 418 | | | 50 | | | | | | | | | | | | | Total: | | | | | | | | | | | | | | | | | | | | | New locations opened | 61 | | | 75 | | | 89 | | | 52 | | | 47 | | | Locations acquired | 46 | | | 62 | | | 190 | | | 393 | | | 6 | | | Total additions | 107 | | | 137 | | | 279 | | | 445 | | | 53 | |
For additional information on store count activity, see “Pawn Store Locations” below.
Credit Services and Consumer Loan ActivitiesNew Store Openings
As of December 31, 2017, the Company operated 44 stand-alone consumer loan locations in the U.S. and 28 stand-alone consumer loan locations in Mexico. In addition, 313 pawn locations in the U.S. and 49 pawn locations in Mexico also offer consumer loan products. Total revenues from consumer loan and credit services operations accounted for approximately 4% of total revenues in 2017.
The Company offers fee-based credit services organization programs (“CSO Programs”) to assist consumers in obtaining extensions of credit. The Company’s stand-alone consumer loan stores and select pawntypically opens new stores in under-served markets and neighborhoods, primarily in Latin America. After a suitable location has been identified and a lease and the statesappropriate licenses are obtained, a new store can typically be open for business within six to 12 weeks. The investment required to open a new location includes store operating cash, inventory, funds for pawn loans, leasehold improvements, store fixtures, security systems, computer equipment and other start-up costs.
Acquisitions
Due to the fragmented nature of Texas and Ohio offer the CSO Programs. The Company’s CSO Programs comply with the respective jurisdiction’s credit services organization act, credit access business law or a similar statute. Under the CSO Programs,pawn industry, the Company assists customersbelieves attractive acquisition opportunities will continue to arise in applying for a short-term extension of credit from independent, non-bank, consumer lending companies (the “Independent Lenders”)both Latin America and issues the Independent Lenders a guarantee for the repaymentU.S. Specific pawn store acquisition criteria include an evaluation of the extensionvolume of credit. merchandise sales and pawn transactions, outstanding customer pawn loan balances, historical pawn yields, merchandise sales margins, pawn loan redemption rates, the condition and quantity of inventory on hand, licensing restrictions or requirements, and the location, physical condition, and lease terms of the stores to be acquired.
Enhance Productivity of Existing and Newly Opened Stores
The Company also offers an automobile title lending product underprimary factors affecting the CSO Programs. Total credit services fees accounted for 2%profitability of the Company’s revenue during fiscal 2017.
The Company also offers small, unsecured consumerexisting store base are the volume and gross profit of merchandise sales, the volume of and yield on pawn loans to customers in various states within the U.S. and in Mexico.store operating expenses. To qualify forencourage customer traffic and repeat business, which management believes is a consumer loan,key determinant of a customer generally must have proof of steady income, residence and valid identification. At maturity, the customer typically returns to the store to pay off the loan and related fee with cash. If the customer fails to repay the loan,store’s success, the Company initiates collection procedures. These consumer loan fees accounted for 2% of the Company’s revenue during fiscal 2017.
The Company operates a stand-alone franchised based, check cashing business, operating under the “Mr. Payroll” brand. The Company receives franchise fees from each franchisee based on the gross revenue of check cashing services provided within the franchisee’s facility. Total revenue from franchise fees accounted for less than 1% of consolidated total revenue during fiscal 2017.
See additional discussion of the credit loss provision and related allowances/accruals in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”
Financial Information about Geographic Areas
Financial information regarding the Company’s revenue and long-lived assets by geographic areas is provided in Note 16 of Notes to Consolidated Financial Statements contained herein.
Locations and Operations
As of December 31, 2017, the Company had 2,111 store locations in 26 U.S. states (including the District of Columbia), 32 states in Mexico, Guatemala and El Salvador, which represents a net store-count increase of 1% over the number of stores at December 31, 2016. The Company also intends to open its first stores in Colombia in 2018.
The following table details store count activity for the twelve months ended December 31, 2017:
| | | | | | | | | | | | | | | | Consumer Loan Locations (2) | | | | | | Pawn Locations (1) | | | Total Locations | | U.S.: | | | | | | | | Total locations, beginning of period | | 1,085 |
| | 45 |
| | 1,130 |
| | New locations opened | | 2 |
| | — |
| | 2 |
| | Locations acquired | | 1 |
| | — |
| | 1 |
| | Locations closed or consolidated | | (20 | ) | | (1 | ) | | (21 | ) | | Total locations, end of period | | 1,068 |
| | 44 |
| | 1,112 |
| | | | | | | | | | Latin America: | | | | | | | | Total locations, beginning of period | | 927 |
| | 28 |
| | 955 |
| | New locations opened | | 45 |
| | — |
| | 45 |
| | Locations acquired | | 5 |
| | — |
| | 5 |
| | Locations closed or consolidated | | (6 | ) | | — |
| | (6 | ) | | Total locations, end of period | | 971 |
| | 28 |
| | 999 |
| | | | | | | | | | Total: | | | | | | | | Total locations, beginning of period | | 2,012 |
| | 73 |
| | 2,085 |
| | New locations opened | | 47 |
| | — |
| | 47 |
| | Locations acquired | | 6 |
| | — |
| | 6 |
| | Locations closed or consolidated | | (26 | ) | | (1 | ) | | (27 | ) | | Total locations, end of period | | 2,039 |
| | 72 |
| | 2,111 |
|
| | (1)
| At December 31, 2017, 313 of the U.S. pawn stores, which are primarily located in Texas and Ohio, also offered consumer loans or credit services products, while 49 Mexico pawn stores offered consumer loan products. |
| | (2)
| The Company’s U.S. free-standing consumer loan locations offer consumer loans and/or credit services products and are located in Ohio, Texas, California and limited markets in Mexico. The table does not include 62 check cashing locations operated by independent franchisees under franchising agreements with the Company. |
The Company maintains its primary administrative offices in Fort Worth, Texas and Monterrey, Mexico.
As of December 31, 2017, the Company’s stores were located in the following countries and states:
| | | | | | | | | | | | | | Consumer Loan Locations (1) | | Total Locations | | | Pawn Locations | | | | U.S.: | | | | | | | Texas | 388 |
| | 24 |
| | 412 |
| | Ohio | 110 |
| | 9 |
| | 119 |
| | Florida | 76 |
| | — |
| | 76 |
| | Georgia | 44 |
| | — |
| | 44 |
| | Tennessee | 43 |
| | — |
| | 43 |
| | North Carolina | 40 |
| | — |
| | 40 |
| | Indiana | 35 |
| | — |
| | 35 |
| | Arizona | 35 |
| | — |
| | 35 |
| | Washington | 33 |
| | — |
| | 33 |
| | Colorado | 30 |
| | — |
| | 30 |
| | Maryland | 28 |
| | — |
| | 28 |
| | Nevada | 27 |
| | — |
| | 27 |
| | South Carolina | 27 |
| | — |
| | 27 |
| | Kentucky | 26 |
| | — |
| | 26 |
| | Illinois | 25 |
| | — |
| | 25 |
| | Louisiana | 25 |
| | — |
| | 25 |
| | Missouri | 25 |
| | — |
| | 25 |
| | Oklahoma | 18 |
| | — |
| | 18 |
| | California | — |
| | 11 |
| | 11 |
| | Alabama | 8 |
| | — |
| | 8 |
| | Utah | 7 |
| | — |
| | 7 |
| | Alaska | 6 |
| | — |
| | 6 |
| | Virginia | 6 |
| | — |
| | 6 |
| | District of Columbia | 3 |
| | — |
| | 3 |
| | Wyoming | 2 |
| | — |
| | 2 |
| | Nebraska | 1 |
| | — |
| | 1 |
| | | 1,068 |
| | 44 |
| | 1,112 |
| | Mexico: | | | | | | | Estado de. Mexico (State of Mexico) | 108 |
| | — |
| | 108 |
| | Baja California | 78 |
| | 3 |
| | 81 |
| | Veracruz | 71 |
| | — |
| | 71 |
| | Nuevo Leon | 64 |
| | 2 |
| | 66 |
| | Jalisco | 59 |
| | 4 |
| | 63 |
| | Puebla | 56 |
| | 4 |
| | 60 |
| | Tamaulipas | 52 |
| | 3 |
| | 55 |
| | Chihuahua | 40 |
| | 2 |
| | 42 |
| | Coahuila | 41 |
| | — |
| | 41 |
| | Guanajuato | 35 |
| | 6 |
| | 41 |
| | Estado de Ciudad de Mexico (State of Mexico City) | 31 |
| | — |
| | 31 |
| | Sonora | 27 |
| | — |
| | 27 |
| | Guerrero | 26 |
| | — |
| | 26 |
|
| | | | | | | | | | | | | Consumer Loan Locations (1) | | Total Locations | | | Pawn Locations | | | | Mexico (continued): | | | | | | | Sinaloa | 24 |
| | — |
| | 24 |
| | Quintana Roo | 22 |
| | — |
| | 22 |
| | Michoacan | 17 |
| | — |
| | 17 |
| | Morelos | 17 |
| | — |
| | 17 |
| | Oaxaca | 17 |
| | — |
| | 17 |
| | Aguascalientes | 13 |
| | 3 |
| | 16 |
| | Durango | 15 |
| | — |
| | 15 |
| | Queretaro | 14 |
| | 1 |
| | 15 |
| | San Luis Potosi | 14 |
| | — |
| | 14 |
| | Hidalgo | 13 |
| | — |
| | 13 |
| | Baja California Sur | 10 |
| | — |
| | 10 |
| | Chiapas | 10 |
| | — |
| | 10 |
| | Tabasco | 10 |
| | — |
| | 10 |
| | Zacatecas | 10 |
| | — |
| | 10 |
| | Yucatan | 9 |
| | — |
| | 9 |
| | Campeche | 6 |
| | — |
| | 6 |
| | Tlaxcala | 6 |
| | — |
| | 6 |
| | Colima | 5 |
| | — |
| | 5 |
| | Nayarit | 5 |
| | — |
| | 5 |
| | | 925 |
| | 28 |
| | 953 |
| | | | | | | | | Guatemala | 33 |
| | — |
| | 33 |
| | | | | | | | | El Salvador | 13 |
| | — |
| | 13 |
| | | | | | | | | Total | 2,039 |
| | 72 |
| | 2,111 |
|
| | (1)
| The table does not include 62 U.S. check cashing locations operated by independent franchisees under franchising agreements with the Company. |
Pawn Store Operations
The typical Company pawn store is a freestanding building or part of a retail shopping center with adequate, well-lit parking. Management has established a standard store design intendedtaken several steps to distinguish its stores and to make customers feel more comfortable and secure. In addition to a clean and secure physical store facility, the Company’s stores from the competition. The design consists of a well-illuminated exterior withstores’ exteriors typically display attractive and distinctive signage and a layout similar to otherthat used by contemporary specialty retailers. The Company’s stores are typically open six to seven days a week from 9:00 a.m. to between 6:00 p.m. and 9:00 p.m.
The Company attempts to attract customers primarily through the pawn stores’ visibility and neighborhood presence. The Company uses seasonal promotions, special discounts for regular customers, prominent display of impulse purchase items such as consumer electronics, jewelry and power tools, tent and sidewalk sales, and a layaway purchasing plan to attract retail shoppers. The Company attempts to attract and retain pawn customers by lending a competitive percentage of the estimated sale value of items presented for pledge and by providing quick financing, renewal and redemption services in an appealing atmosphere.
Generally, each pawnshop employs a manager, one or two assistant managers, and between one and eight sales personnel, depending upon the size, sales volume and location of the store. The store manager is responsible for supervising personnel and assuring the store is managed in accordance with Company guidelines and established policies and procedures. Each manager reports to a district manager, who typically oversees four to seven store managers. District managers typically report to a regional manager who, in turn, typically report to a regional operations director. Regional operations directors report to a vice president of operations.
The Company believes the profitability of its pawnshops is dependent, among other factors, upon its employees’ skills and ability to engage in transactions that achieve optimum pawn yieldswith customers and merchandise sales margins, to be effective sales people and to provide prompt and courteous service. The Company has employee-training programs that promote customer service, productivity, professionalism and regulatory compliance. The Company’s computerproprietary point-of-sale and loan management system tracks certain key transactional performance measures, including pawn loan yields and merchandise sales margins, and permits a store manager or clerk to rapidlyinstantly recall the cost of an item in inventory and the date it was purchased, as well asincluding the prior transaction history of a particular customer. It also facilitates the timely valuation of goods by showing values assigned to similar goods. The Company has networked its stores to allow employees to more accurately determine the retail value of merchandise and to permit the Company’s headquarters to more efficiently monitor, in real time, each store’s operations, including merchandise sales, service charge revenue, pawnspawn loans written and redeemed and changes in inventory.
The Company trains its employees through direct instruction and on-the-job pawn and sales experience. New employees are introduced to the business through an orientation and training program that includes on-the-job training in lending practices, layaways, merchandise valuation and general administration of store operations. Certain experienced employees receive training and an introduction to the fundamentals of management to acquire the skills necessary to advance into management positions within the organization. Management training typically involves exposure to income maximization, recruitment, inventory control and cost efficiency. The Company maintains a performance-based compensation planwell-trained audit and loss prevention staff which conducts regular store visits to verify assets, loans and collateral, and test compliance with regulatory, financial and operational controls. Management believes the current operating and financial controls and systems are adequate for all store employees based on sales, gross profit and other performance criteria.
Credit Services and Consumer Loan Operations
Similar to the Company’s existing store base and can accommodate reasonably foreseeable growth in the near term.
Pawn Store Locations
The Company’s typical large format pawn store operations, the Company’s credit services and consumer loan locations are typicallyis a freestanding building or part of a retail strip shopping center with good visibility from a major street and easy accessdedicated available parking. The Company’s stores in Latin America tend to be smaller than its U.S. stores, located mostly in dense urban markets, which may not have dedicated parking. Management has established a standard store design intended to attract customers and distinguish the Company’s stores from the competition,competition.
As of December 31, 2021, the Company had 2,825 pawn store locations composed of 1,081 stores in 25 U.S. states and the District of Columbia, 1,656 stores in 32 states in Mexico, 60 stores in Guatemala, 15 stores in Colombia and 13 stores in El Salvador.
The following table details store count activity for the twelve months ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | U.S. | | Latin America | | Total | | Total locations, beginning of period | | 1,046 | | | 1,702 | | | 2,748 | | New locations opened (1) | | 1 | | | 60 | | | 61 | | | Locations acquired | | 46 | | | — | | | 46 | | | | | | | | | | | | | | | | Consolidation of existing pawn locations (2) | | (12) | | | (18) | | | (30) | | | | | | | | | | Total locations, end of period | | 1,081 | | | 1,744 | | | 2,825 | |
(1)In addition to new store openings, the Company strategically relocated five stores in the U.S. and two stores in Latin America during the twelve months ended December 31, 2021.
(2)Store consolidations were primarily acquired locations over the past five years which consistshave been combined with overlapping stores and for which the Company expects to maintain a significant portion of a well-illuminated exterior with distinctive signage. The interiors typically feature an ample lobby separated from employee work areas by glass teller windows. Thethe acquired customer base in the consolidated location.
As of December 31, 2021, the Company’s credit servicespawn stores were located in the following countries and consumer loan locations are typically open six to seven days a week from 9:00 a.m. to between 6:00 p.m. and 9:00 p.m.states:
| | | | | | | | | | | | | | | | Number of Locations | | U.S. | | Latin America | | Texas | 447 | | | Mexico: | | | Florida | 87 | | | Estado de. Mexico (State of Mexico) | 215 | | | Ohio | 63 | | | Veracruz | 208 | | | North Carolina | 50 | | | Puebla | 118 | | | Tennessee | 49 | | | Tamaulipas | 97 | | | Georgia | 43 | | | Baja California | 84 | | | Washington | 31 | | | Jalisco | 78 | | | Louisiana | 29 | | | Nuevo Leon | 77 | | | Maryland | 29 | | | Estado de Ciudad de Mexico (State of Mexico City) | 65 | | | Arizona | 27 | | | Chiapas | 64 | | | Nevada | 27 | | | Oaxaca | 56 | | | South Carolina | 27 | | | Coahuila | 49 | | | Colorado | 26 | | | Tabasco | 49 | | | Illinois | 25 | | | Guanajuato | 46 | | | Kentucky | 24 | | | Hidalgo | 46 | | | Indiana | 23 | | | Chihuahua | 45 | | | Missouri | 23 | | | Sonora | 41 | | | Oklahoma | 17 | | | Quintana Roo | 34 | | | Alabama | 9 | | | Sinaloa | 31 | | | Alaska | 6 | | | Michoacan | 26 | | | Utah | 6 | | | Morelos | 26 | | | Virginia | 6 | | | Guerrero | 25 | | | District of Columbia | 3 | | | San Luis Potosi | 22 | | | Mississippi | 2 | | | Aguascalientes | 21 | | | Nebraska | 1 | | | Durango | 20 | | | Wyoming | 1 | | | Campeche | 18 | | | U.S. total | 1,081 | | | Queretaro | 18 | | | | | Zacatecas | 17 | | | | | Yucatan | 16 | | | | | Tlaxcala | 13 | | | | | Baja California Sur | 12 | | | | | Colima | 10 | | | | | Nayarit | 9 | | | | | | 1,656 | | | | | | | | | | Guatemala | 60 | | | | | | | | | | Colombia | 15 | | | | | | | | | | El Salvador | 13 | | | | | | | | | | Latin America total | 1,744 | |
Competition
Pawn Operations Competitive Environment
The Company encounters significant competition in connection with all aspects of its businesspawn operations. These competitive conditions may adversely affect the Company’s pawn revenue and profitability and its ability to expand.expand and execute its pawn business strategy. The Company believes the primary elements of competition in the businesses in which it operatespawn industry are store location, customer service, the ability to lend competitive amounts on pawn loans customer service and management of store employees.to sell popular retail merchandise at competitive prices. In addition, the Company competes with other lenders and retailers to attract and retain employees with competitive compensation programs. Many of the competitors have significantly greater size, financial institutions, such as banksresources and consumer finance companies, which generally lend on an unsecured as well as a secured basis. Other lenders may and do lend money on terms more favorablehuman capital than those offered by the Company. Many of these financial institutions have greater financial resources than the Company in which to compete for consumer loans.
The Company’s pawnretail business competes primarily with other pawn store operators, other specialty consumer finance operators, rent-to-own stores and specialty consumer goods retailers. Management believes the pawn industry remains highly fragmented with an estimated 12,000 to 14,000 total pawnshops in the U.S. and 6,500 to 8,000 pawnshops in Mexico. Including the Company, there are two publicly-held, U.S.-based pawnshop operators, both of which have pawn operations in the U.S., Mexico, Guatemala and El Salvador. Of these two, the Company had the most pawn stores and the largest market capitalization as of December 31, 2017, and believes it is the largest public or private operator of large format, full-service pawn stores in the U.S. and Mexico. The pawnshop and other specialty consumer finance industries are characterized by a large number of independent owner-operators, some of whom own and operate multiple locations.
In both its U.S. and Latin American retail pawn operations, the Company’s competitors include numerous retail and wholesale merchants, including jewelry stores, rent-to-own stores,operators, discount retail stores, “second-hand” stores, consumer electronics stores, other specialty retailers, online retailers, online auction sites, online classified advertising sites and other pawnshops. Competitive factors in the Company’s retail operations include the ability to provide the customer with a variety of merchandise items at attractive prices. Many
The Company’s pawn lending business competes primarily with other pawn store operators and other specialty consumer finance operators, including online lenders. The pawnshop and other specialty consumer finance industries are characterized by a large number of independent owner-operators, some of whom own and operate multiple locations. In addition, the Company competes with other non-pawn lenders, such as banks and consumer finance companies, which generally lend on an unsecured as well as a secured basis. Other lenders may and do lend money on terms more favorable than those offered by the Company.
Management believes the pawn industry remains highly fragmented with an estimated 12,000 to 14,000 total pawnshops in the U.S. and 7,000 to 8,000 pawnshops in Mexico. Including the Company, there are two publicly-held, U.S.-based pawnshop operators, both of which have pawn operations in the U.S., Mexico, Guatemala and El Salvador. Of these two, the Company has the higher store count and the largest market capitalization as of December 31, 2021, and the Company believes it is the largest public or private operator of large format, full-service pawn stores in the U.S. and Mexico.
Retail POS Payment Solutions Operations
On December 17, 2021, the Company completed the AFF Acquisition, resulting in AFF becoming a wholly owned subsidiary of and new business line for the Company. AFF facilitates customized LTO and retail finance programs to its merchant partners that allows those merchant partners to complete sales by providing their customers with an attractive retail POS payment solution. Customers can apply for AFF’s products online or through their mobile devices and complete the process electronically or in person at one of AFF’s merchant partner locations. AFF primarily serves customers who are credit-constrained who may not qualify for prime or near prime retail payment options. On a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021, AFF would have accounted for 27% of the Company’s total revenues during 2021.
Products Offered by AFF
AFF’s merchant partners provide financing of consumer goods and services to their customers using one of AFF’s retail competitors have significantly greater sizePOS payment options, including an LTO product, a merchant-based retail installment sales agreement (“RISA”) or a bank-originated installment loan to facilitate payments on such transactions. The merchant partners generally choose a single solution from one of these three available options to offer to their customers at a given location. The merchant’s selection of the appropriate retail POS payment option depends upon which payment options are allowable under applicable state law, whether AFF’s bank partner makes loans in the state where the merchant is located and financial resources thanby the Company.products or services offered by the merchant. The majority of AFF’s originations are facilitated with the LTO product, with retailers of tangible personal property most commonly using the LTO product. The RISA and bank-originated products are more commonly offered in situations where services are being offered by the merchant. Each of these retail POS payment options is subject to AFF’s (or AFF’s partner bank’s) proprietary technology-driven decisioning process as further described below. AFF’s ability to customize the technology and offer a choice between retail POS payment options gives its merchant partners the advantage of flexibility.
The following is a description of the three primary retail POS payment options offered by AFF:
•LTO - LTO transactions involve the purchase by AFF of tangible personal property directly from the merchant partner and a subsequent lease of that merchandise by AFF to the customer. The customer has the right to acquire ownership of the leased merchandise either through an early buyout option, another early purchase option after the early buyout option expires, or through payment of all required lease payments. To take advantage of the early buyout option, the customer generally has between 90 and 105 days to pay the cash price of the leased merchandise, plus a nominal early
buyout fee. The customer can still utilize an early purchase option after the 90 to 105-day period and obtain ownership early, while also saving money, by paying a certain percentage of the remaining lease payments (usually established by applicable state law). The customer can also obtain ownership of the merchandise by simply paying all of the remaining lease payments as they become due. Conversely, the customer has the right to cancel the lease at any time by returning the merchandise and making all scheduled payments due through the minimum lease holding period, which is typically 60 days. Leased merchandise contracts can typically be renewed for between six to 24 months. AFF offers the LTO retail POS payment option to merchant partners in 44 U.S. states, the District of Columbia and Puerto Rico and it accounted for 64% of AFF’s total revenues for the full year ended December 31, 2021 on a pro forma basis.
•RISA - The RISA transaction involves the purchase of either tangible personal property or services from the merchant partner by the customer. The customer enters into a RISA with the merchant and AFF subsequently purchases the RISA from the merchant partner and services the account through the end of the contractual term. The customer can take advantage of an early payoff discount whereby the customer generally has between 90 and 105 days to pay the original principal amount, plus a nominal early payoff discount fee (equal to or less than the accrued interest charges), without incurring any additional interest charges. RISA finance receivables typically have a term ranging from six to 24 months, and when utilized for the purchase of tangible personal property, are generally secured by such tangible personal property. AFF facilitates the RISA retail POS payment option with merchant partners in 20 U.S. states and it accounted for 18% of AFF’s total revenues for the full year ended December 31, 2021 on a pro forma basis.
•Bank-originated installment loans - The customer enters into an installment loan directly with FinWise Bank (the “Bank”) for the purchase of a good or service from the merchant partner. After origination of the loan by the Bank, AFF purchases the rights to the cash flows of the loan from the Bank, but does not purchase the loan itself. AFF then assumes responsibility for sub-servicing the loan on behalf of the Bank for the remaining term of the loan. The customer can take advantage of an early payoff discount, whereby the customer generally has between 90 and 105 days to pay the original principal amount (including any origination fee) without paying any interest charges. Bank-originated loans typically have a term ranging from six to 24 months and can be either secured by tangible personal property or unsecured. Approximately 28% of these loans are not related to the purchase of property or services but rather are loans with cash proceeds issued directly to the customer. The bank-originated installment loan retail POS payment option is made available to merchant partners in 34 U.S. states and it accounted for 18% of AFF’s total revenues for the full year ended December 31, 2021 on a pro forma basis.
Decisioning Process
AFF has made substantial investments in the development of its unique and proprietary decisioning platform that is customizable to individual merchants and/or merchandise categories. The platform is supported by an experienced and robust data science team that use data analytics to continually improve the performance of the decisioning platform. This proprietary decisioning platform is used to determine whether a particular applicant meets AFF’s (or the Bank’s as applicable) LTO, RISA or loan qualifications for a particular amount. The sophisticated algorithms consider external and internal data points beyond traditional credit scores, allowing AFF or the Bank to approve customers that do not have a credit score. Over 90% of AFF applications submitted are automatically decisioned within 10 seconds on average, creating a highly efficient, scalable model.
While the Bank partner utilizes AFF’s technology platform to process and evaluate consumer applications originated by the Bank, all credit underwriting and approval criteria used by the Bank to underwrite the loans are provided and approved by the Bank.
Servicing & Collections Process
The amount of a customer’s contractual periodic payment (i.e., weekly, bi-weekly, semi-monthly, or monthly) is generally based on a customer's pay frequency and the term of the contract. Customer payments are typically processed through automated clearing house payments or debits to the customer’s payment card (e.g., through a Visa or MasterCard network). Consumers can choose between scheduling automated payments to process on their accounts or make manual, non-recurring payments on each due date. If a payment attempt is unsuccessful, collection activities are managed through AFF’s call centers and/or AFF’s network of third-party debt collection agencies. The call center contacts customers through several communication channels to encourage the customer to keep their lease, RISA or loan current and discuss all available payment options. See “Item 1. Business—Government Regulation” for further information about applicable collections laws AFF is subject to.
Customer Service
AFF believes its strong focus on building a positive relationship with the customer and ensuring high levels of customer satisfaction generates repeat customer business and long-lasting relationships with its merchant partners. This focus on customer service begins on day one with a phone call or email from AFF’s customer service team to welcome new customers to AFF, answer any questions they may have about their new account and confirm they are aware of their repayment schedule. Existing customers have access to AFF’s customer service team at all times to answer questions about their lease, RISA or loan or to provide comments or complaints about merchant partners. For those customers that utilize AFF’s LTO solution and wish to cancel their lease, AFF’s customer service team can also assist with the cancellation process.
AFF has also made significant investments to make the application process for its LTO, RISA or loan products user-friendly for its customers. AFF customers can apply for the AFF products via text-2-apply, QR codes, web applications on merchant websites, merchant portal applications, in-cart plug-in experiences and third-party waterfall applications. Upon submission of an application, AFF’s platform typically communicates a decision within seconds, providing a near immediate response to the customer. The customer then purchases goods or services using one of AFF’s retail POS payment options and makes scheduled payments, which can be managed by the customer via phone or online.
Merchant Relationships
AFF believes that its highly customizable LTO, RISA and loan products offer significant value to merchant partners. AFF’s products can help drive further sales for these merchants by helping these merchants reach credit-constrained customers through the offer of AFF’s financing solutions. AFF also constantly monitors consumer preferences and trends to ensure that the solutions offered through their merchant partners are aligned with the needs of the merchant partner and its customers.
AFF markets to new merchants through various channels including field sales representatives, national sales, independent sales representatives, buying groups, AFF’s website and strategic integrations via waterfall lending platforms. AFF takes great care in adding quality merchant partners that meet AFF’s high standards. To assure this quality, each prospective merchant goes through a rigorous vetting and approval process. Once a merchant partner is approved, they must sign a merchant agreement that identifies the roles and responsibilities of both the merchant and AFF. Merchants also receive appropriate training so they can properly represent AFF’s retail POS payment solutions to their customers and ensure regulatory compliance.
Existing merchant partners are subject to regular monitoring. AFF’s monitoring procedures are designed to identify merchant partners that do not meet AFF’s merchant standards. Merchant partners are subject to suspension and/or termination if, based upon the results of AFF’s monitoring, they are found to be out of compliance with the merchant agreement, have low lease or loan quality performance, have elevated customer complaint volume or fail to comply with applicable law.
AFF currently has a large network of over 6,500 active retail merchant partner stores and e-commerce platforms offering its leasing and financing products. Those merchant partners offer a wide array of goods and services spanning 26 vertical channels. The following table shows the percentage of AFF's pro forma 2021 originations attributable to these vertical channels:
| | | | | | | | | | | | | Year Ended December 31, 2021 | | Furniture | | 61 | % | | | Automotive | | 15 | % | | | Jewelry | | 5 | % | | | Other | | 19 | % | | | Total | | 100 | % | |
A significant portion of AFF’s revenue is concentrated with its top merchant partners. While this concentration has provided AFF with opportunities for growth, the increasing size and importance of individual merchant partners creates a certain degree of exposure to potential transaction volume loss. On a pro forma basis, after giving effect to the AFF Acquisition as if it had closed on January 1, 2021, AFF’s top five merchant partners accounted for an aggregate of 16% of combined pro forma 2021 revenues. For a discussion of the risks associated with the possible loss of one of AFF’s top merchant partners or a significant reduction in transaction volumes with one of its top merchant partners, refer to “Item 1A. Risk Factors.”
Retail POS Payment Solutions Business Strategy
AFF’s business model is primarily driven by a scalable technology-based platform that does not require significant increases in operating overhead to support incremental origination growth. Thus, AFF generally achieves more operating leverage as transaction volume grows. Additionally, AFF does not have any of the costs associated with operating physical stores, the personnel needed to operate physical store locations, or any of the costs associated with buying, storing and shipping inventory.
AFF’s business strategy is to continue building market share through additional expansion of both its brick-and-mortar and online merchant base, while increasing customer utilization rates by continuous improvement and enhancement of its omni-channel user experience. AFF continues to expand on its digital marketing and search engine optimization strategies to harvest more consumer searches and to drive quality repeat customers back to its merchant partners. With an ongoing focus toward improving application conversion rates combined with an enhanced risk segmentation of its applications, AFF believes that it has numerous opportunities to gain additional market share and expand its large and fast-growing merchant and customer base to achieve greater levels of revenue and profitability.
Expand Utilization with Existing Merchant Partners and Customers
AFF strives to be the preferred provider of retail POS payment solutions in all of its merchant partner locations. AFF will continue to promote and build relationships with existing customers and merchants and believes there is an opportunity to increase the share of existing merchants’ overall transaction volumes. AFF has made, and intends to continue to make, investments in its marketing team to drive awareness of AFF’s products at its merchant partners to increase utilization and encourage repeat business through increased marketing directly to AFF’s customers.
Pursue New Merchant Partners
AFF believes there are many more untapped traditional and e-commerce merchants providing goods and services to customers that could benefit from offering AFF’s retail POS payment solutions. Utilizing its dedicated national, regional and local sales teams, AFF will continue to pursue and add new merchant partners.
Increase E-Commerce Transaction Volume
AFF currently derives the majority of its transaction volume through traditional brick-and-mortar retail partners. With the continued growth of e-commerce, AFF believes there is significant opportunity to grow transaction volume through increased e-commerce penetration, both at existing e-commerce merchant partners and with new e-commerce merchants. AFF believes its customizable decisioning platform and customer experience is highly scalable for e-commerce retailers and provides these retailers with compelling financing solutions for credit-constrained consumers. AFF has made, and intends to continue to make, investments in its sales team to help capture these e-commerce opportunities.
Continue Enhancement of Proprietary Decisioning Platform
AFF employs a dedicated data science team to develop, monitor and effectively manage its proprietary data analytics and decisioning platform. As it continues to generate originations, the transaction volume is expected to increase AFF’s internal customer and transactional data set available for analysis, thereby improving the effectiveness of AFF’s decisioning model. As its dedicated data science team continues to further analyze both internal and external data, the Company believes there is room for continued improvement to the decisioning model that would allow for a greater percentage of applicants being approved, thereby increasing originations, while also becoming more effective in predicting the ability of its applicants to repay their lease, RISA or loan, thereby reducing charge-offs.
Retail POS Payment Solutions Competitive Environment
AFF’s retail POS payment solutions business competes with national, regional and local LTO stores, virtual LTO companies, rental stores that do not offer their customers a purchase option and various other types of consumer finance companies that may enable customers to shop at traditional or online retailers on credit. In addition, banks and consumer finance companies are developing POS payment products and services designed to compete for the credit-constrained customer. AFF also competes with traditional and e-commerce retailers and traditional and online sellers of new and used merchandise for customers desiring to purchase merchandise for cash or on credit. Competition is based primarily on product selection and availability, customer service, store location and lease and loan terms.
Intellectual Property
The Company relies on a combination of copyright,trademarks, trade secret, trademark,dress, trade secrets, proprietary software, website domain names and other rights, including confidentiality procedures and contractual provisions, to protect its proprietary technology, processes and other intellectual property.
The Company’s competitors may develop products that are similar to its technology, such as the Company’s proprietary point of sale software.pawn point-of-sale and loan management software, AFF’s proprietary lease, financing and loan management software, AFF’s proprietary decisioning platform and other developed technology. The Company enters into agreements with its employees, consultants and partners, and through these and other writtenconfidentiality or non-compete agreements, the Company attempts to control access to and distribution of its software, documentation and other proprietary technology and information. Despite the Company’s efforts to protect its proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute its intellectual property rights or technology or otherwise develop a productproducts with the same functionality as its solution.solutions. Policing all unauthorized use of the Company’s intellectual property rights is nearly impossible. The Company cannot be certain that the steps it has taken or will take in the future will prevent misappropriations of its technology or intellectual property rights.
“FirstCash,
Environmental, Social and Governance (ESG)
Pawnshops are neighborhood-based stores which contribute to the modern “circular economy.” “First Cash,”“First Cash Pawn,” “Cash America” Each of the Company’s 2,825 pawn locations provide a quick and “Cashland” convenient source of small, non-recourse pawn loans and a neighborhood-based market for consumers to buy and resell pre-owned and popular consumer products in a safe environment. The Company is committed to environmental sustainability, providing customers with rapid access to capital and operating its business in a manner that results in a positive impact on its employees, communities and the environment. Environmental Sustainability
The Company’s pawn business extends the lifecycle and utilization of popular consumer products. Most of the Company’s merchandise inventories are registered trademarkspre-owned items sourced directly from local customers in each store’s immediate geographic neighborhood. In effect, the Company operates a large consumer product recycling business by acquiring pre-owned items, including unwanted or unneeded jewelry, electronics, tools, appliances, sporting goods and musical instruments from individual customers and resells them to other customers desiring such products within the same neighborhood. By being a large reseller of pre-owned items, the Company believes it extends the life of these products and helps reduce demand for newly manufactured and distributed products, thereby reducing carbon emissions and water usage, resulting in a positive impact to the environment.
The Company estimates that it resold approximately 11 million used or pre-owned consumer product items in its pawn stores during 2021, with a commercial value of approximately $1.1 billion. In addition, the Company recycles significant volumes of precious metals and diamonds whereby unwanted or broken jewelry is collected and melted/processed by the Company and then resold as a commodity for future commercial use. During 2021, the Company estimates that it recycled over 38,000 ounces of gold and over 19,000 carats of diamonds with a combined market value of approximately $57.2 million. This process helps reduce demand for mined precious metals and diamonds, thereby reducing carbon emissions and water usage.
Unlike most brick-and-mortar or online retailers, the Company does not rely on supply chains or manufacturing of its inventories as it sources the majority of its inventory from forfeited pawn loan collateral and merchandise purchased directly from customers. Accordingly, the Company does not own, operate or contract for any manufacturing, supply chain, warehousing or distribution facilities to support its pawn operations. Almost all retail sales and pawn loans are made to customers who live or work within a tight geographic radius of the Company’s stores, and only a very small percentage of sales require delivery service. The Company does not own, lease or operate any long-haul trucks to support its 2,825 pawn locations and, other than operating small storefront locations which are typically 5,000 square feet or less, the Company’s operations leave a limited carbon footprint compared to manufacturers and retailers selling new merchandise with extensive supply chain and distribution channels. The Company is working to further reduce energy consumption by retrofitting buildings with LED lighting and reducing corporate travel by utilizing remote work and meeting technologies.
Pawn Loans Offer Safe Lending Solutions in Underserved Communities
It is estimated by multiple studies and surveys that approximately 25% of U.S. households remain unbanked or under-banked. In Latin America, the number of unbanked or under-banked consumers can be as much as 75% of the population in countries such as Mexico. As a result, the majority of the Company’s customers have limited access to traditional forms of credit or capital. The Company contributes to its communities by providing these customers with instant access to capital through very small, non-recourse pawn loans or buying merchandise from its customers. The average credit provided by the Company’s pawn business to a customer is $222 in the U.S. “First Cash,” “First Cash Empeño y Joyeria,” “Cash Ya,” “Cash & Go,” “CA,” “Cash America,” “Presta Max,” “Realice Empeños,” “Empeños Mexicanos” and “Maxi Prenda” are registered trademarks $77 in Latin America. Other significant trade names usedTraditional lenders such as banks, credit unions, credit card providers or other small loan providers do not efficiently or effectively offer micro credit products of this size.
Obtaining a pawn loan is simple, requiring only a valid government ID and an item of personal property owned by the customer. The Company does not investigate the creditworthiness of a pawn customer, nor does it matter if the customer has defaulted on a previous pawn loan with the Company. Unlike most credit products, pawn customers are not required to have a bank account, a good credit history or the ability to document their level of income. The process of obtaining a pawn loan is extremely fast, generally taking 15 minutes or less. Loans are funded immediately by giving customers cash.
Pawn loans are highly transparent and responsible products. They are regulated, safe and affordable non-recourse loans for which the customer has no legal obligation to repay. All terms are provided in short, easy to read contracts that allow the Company’s customers to make well-informed decisions before taking out a loan.
Pawn loans differ from most other forms of small dollar lending because the Company does not engage in any post-default collection efforts on delinquent loans, does not take legal actions against its customers for defaulted loans, does not ban its customers for nonpayment, nor does it issue any negative credit information to external credit agencies but rather, relies only on the resale of the pawn collateral for recovery.
The Company promotes a strong corporate culture which emphasizes ethics, accountability and treating customers fairly. This culture is supported by a governance framework with board level oversight of the Company's compliance and internal audit functions and includes the following:
•The Company’s lending operations are licensed and supervised in every jurisdiction in which the Company operates, and it is subject to regular regulatory exams in almost all of these jurisdictions. •A formal compliance management system is maintained by the Company in all markets in which it operates. •A “single point of contact” issue resolution function is available to all customers. •Strict data privacy and protection policies are maintained for personal information of customers and employees.
Focus on Social and Corporate Responsibility
The Company has significant operations in Mexico, where the U.S.majority of its employees and abroadcustomers reside. Accordingly, the Company has focused significant time and resources on corporate and social responsibility initiatives in supporting disadvantaged people who live and work in this market.
The Company is certified as an Empresa Socialmente Responsable (“ESR”), or a socially responsible company, in Mexico under the XII Latin American Meeting of Corporate Social Responsibility Framework. This ESR certification is granted to companies that meet a series of criteria that generally cover the economic, social and environmental sustainability of its operations, which include First Cash Advance, Famous Pawn, Fast Cash Pawn & Gold Center, King Pawn, Mister Money Pawn, Money Man Pawn, Valu + Pawn, Dan’s Discount Jewelry & Pawn, Quick Cash Pawn, Atomic Pawn, Loftis Jewelry & Pawnbrokers, Regent Pawn & Jewelry, Smart Pawn, Piazza Jewelry & Pawn, David’s Pawn Shop, Sharp Mart, Lakelands Pawn & Gun, Cash America Pawn, SuperPawn, Cash America Payday Advance, Mr. Payrollcorporate ethics, good governance, the quality of life of the Company’s employees and American Trade & Loan.a proven commitment to the betterment of the community where it operates, including the care and preservation of the environment.
The Company has also established relationships and supports certain foundations and social programs in Mexico, which provide internships, reading initiatives and recycling programs for disadvantaged citizens. Franchises
Human Capital Resources
In managing its human capital resources, the Company aims to attract a qualified and diverse workforce through an inclusive and accessible recruiting process that utilizes online recruiting platforms, campus outreach, internships and job fairs. The workforce of the Company’s pawn business is composed primarily of employees who work on an hourly basis. The AFF business also relies on customer service personnel that are also primarily hourly employees. In order to increase retention among its hourly employees, the Company is focused on providing competitive and attractive wages and benefits, which includes a store-level profit-sharing program for its pawn store employees and extensive training and advancement opportunities as well as fostering a diverse, safe, healthy and secure workplace.
The Company believes that it complies with all applicable state, local and international laws governing nondiscrimination in employment in jurisdictions in which the Company operates. All applicants and employees are treated with the same high level of respect regardless of their gender, ethnicity, religion, national origin, age, marital status, political affiliation, sexual orientation, gender identity, disability or protected veteran status.
Employee Profile and Diversity
As of December 31, 2017,2021, the Company had 62 unconsolidated franchised check cashing locationsapproximately 17,000 employees across five countries (the U.S., Mexico, Guatemala, Colombia and El Salvador). The Company employed approximately 6,400 employees in the U.S. operating under its “Mr. Payroll” brand. Eachas of December 31, 2021, including approximately 800 persons employed in executive, supervisory, administrative and accounting functions. None of the Company’s unconsolidated franchised check cashing locations is subject to a franchise agreement that is negotiated individually with each franchisee.U.S. employees are covered by collective bargaining agreements. The franchiseCompany employed approximately 10,500 employees in Latin America as of December 31, 2021, including approximately 900 persons employed in executive, supervisory, administrative and accounting functions. The Company’s Mexico employees are covered by labor agreements have varying durations.as required under Mexico’s Federal Labor Law. None of the Company’s other Latin American employees are covered by collective bargaining agreements.
13 Governmental Regulation
Global Gender Demographics
General
Among the Company’s global workforce as of December 31, 2021, 56% identify as women and 44% as men. In management positions for the Company’s global operations, 53% identify as women and 47% as men as of December 31, 2021.
U.S. Race and Ethnicity Demographics
Of all U.S. employees as of December 31, 2021, 48% identify as Hispanic, 17% as Black, 1% as Asian, 4% as two or more races or Other and 30% as White. Among managers in the Company’s U.S. operations, 47% identify as Hispanic, 14% as Black, 1% as Asian, 3% as two or more races or Other and 35% as White as of December 31, 2021.
Employee Empowerment
The Company is committed to creating a safe, trusted and diverse environment in which its employees can thrive. Its employees’ wages are typically above the minimum wage standards in each country in which it operates. The Company also believes in fairly compensating its employees by providing the ability to share in the Company’s profitability. For example, the majority of the Company’s front-line, store-based employees participate in a non-qualified profit sharing program which pays up to 8% of the gross profit an employee personally produced through assigned customer service activities.
The Company also provides its employees with extensive training and advancement opportunities, demonstrated by its long history of employee advancement and promotion from within the organization. The Company maintains robust consumer compliance, anti-money laundering and anti-bribery training programs and requires its managers to adhere to a labor compliance program that meets or exceeds the standards established for coercion and harassment, discrimination and restrictions to freedom of association. The Company’s locations provide a safe, comfortable and healthy work environment and maintain compliance with all occupational safety, wage and hour laws and other workplace regulations.
Health and Safety
The Company is committed to the health, safety and wellness of its employees. The Company provides its employees and their families with access to a variety of flexible and convenient health and wellness programs, including benefits that provide protection and security so they can have peace of mind concerning events that may require time away from work or that impact their financial well-being, that support their physical and mental health by providing tools and resources to help them improve or maintain their health status and encourage engagement in healthy behaviors, and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.
The operation of the Company’s stores is critically dependent on the ability of customers and employees to safely conduct transactions at each location. The COVID-19 pandemic presented unprecedented challenges in many parts of the Company’s business and operations, including with respect to keeping employees safe. Accordingly, the Company developed and implemented new procedures and protocols to minimize the risk to the health and safety of its employees while allowing the Company to continue to operate its pawnshops and serve its customers. The Company implemented social distancing and mask-wearing protocols in its stores and corporate offices, remote working for its corporate employees, provided additional cleaning supplies to facilitate the sanitation of high traffic areas, installed plexiglass dividers at store point-of-sale counters and prohibited all domestic and international non-essential travel for all employees, among other things. The Company continues to actively monitor its COVID-19 safety protocols and updates these protocols to respond to the current situation in its specific geographies.
The Company has consistently been able to meet customers’ demands for its products, while at the same time making the necessary investments to ensure that the Company prioritizes the health, safety and welfare of its employees. In addition, during the pandemic, the Company has prioritized the welfare of its employees by maintaining their paid employment status. To date, no employees in the U.S. or Mexico markets have been terminated, laid off or furloughed without pay as a direct result of the pandemic.
Governmental Regulation
General Overview
The Company’s pawn, LTO and retail finance businesses are subject to significant regulation of its pawn, consumer loan and general business operations in all of the jurisdictions in which it operates. These regulations are implemented through various laws, regulations, ordinances and regulatory pronouncements from federal, state and municipal governmental entities in the U.S. and Latin America. These regulatory bodies often have broad discretionary authority over the establishment, interpretationAmerica, all of which are constantly evolving and enforcement of such regulations. These regulations are subject to change, sometimes significantly, as a result of political, economic or social trends, events and media perception.
The Company is subject to specific laws, regulations and ordinances primarily concerning its pawn and consumer lending operations. Manypotentially significant changes. These statutes and regulations prescribe, among other things, the general terms of the Company’s pawn and consumer loan agreements, including maximum service fees and/or interest rates that may be charged and collected and mandatory consumer disclosures. In many municipal, statedisclosures, as well as maximum interest rates/finance charges or leasing fees (as applicable), consumer disclosures, contractual terms and federal jurisdictions, in bothother matters directly related to the U.S. and countries in Latin America, theCompany’s retail POS payments solutions platform activities. The Company mustis also required to obtain and maintain regulatory operating licenses and comply with regular or frequent regulatory reporting and registration requirements, including reportingrequirements. In general, the regulatory regimes to which the Company are subject are increasingly focused on consumer finance companies serving credit-constrained customers and recordingany of pawn loans, pawned collateral, used merchandise purchased fromthese agencies or authorities may propose and adopt new regulations, or interpret existing regulations, in a manner that could result in significant adverse changes in the general public, retail sales activities, firearm transactions, export, import and transfer of merchandise, and currency transactions, among other things.
In both the U.S. and Latin America, certain elected officials, regulators, consumer advocacy groups and the media have advocatedregulatory landscape for governmental action to further restrict or even prohibit pawn transactions or small consumer loans, such as payday advances and credit services products. The elected officials, regulators, consumer groups and media typically focus on the aggregated cost to a consumer for pawn and consumer loans, which is typically higher than the interest generally charged by banks, credit unions and credit card issuers to a more creditworthy consumer. They also focus on affordability issuesbusinesses such as the borrower’s ability to repay such loans, real or perceived patterns of sustained or cyclical usage of such lending products and consumer loan collection practices perceived to be unfair or abusive. The elected officials, regulators, consumer groups and media often characterize pawn and payday lending activities as unfair or potentially abusive to consumers. During the last few years, legislation, ordinances and edicts (on federal, state and municipal levels) have been introduced or enacted to prohibit, restrict or further regulate pawn and related transactions, including acceptance of pawn collateral and used merchandise in general or, from certain individuals, sales of such merchandise in general or specific categories such as firearms, payday loans, consumer loans, credit services and related service fees on these products.Company’s. In addition, public officials and regulatory authorities, including lawthe current presidential administration has taken a more aggressive enforcement in various levelsstance against consumer finance companies serving credit-constrained customers like the Company.
For a discussion of government in the U.S. and countries in Latin America have and will likely continue to make edicts, proposals or public statements concerning new or expanded regulations that would prohibit or further restrict pawn and consumer lending activities or other related pawn transactions.
The Company is subject to numerous other types of regulations including, but not limited to, regulationsrisks related to securities and exchange activities, including financial reporting and internal controls processes, data protection and privacy, tax compliance, health and safety, labor and employment practices, import/export activities, real estate transactions, electronic banking, credit card transactions, marketing, advertising and other general business activities.
There can be no assurance that the current political domestic and international climate, including additional local, state or federal statutes, regulations or edicts will not affect or be enacted or that existing laws and regulations will not be amended, decreed or interpreted at some future date that could prohibit or limit the ability of the Company to profitably operate any or all of its services. For example, such regulations could restrict the ability of the Company to offer pawn loans, consumer loans and credit services, significantly decrease the interest rates or service fees for such lending activities, prohibit or more stringently regulate the acceptance of pawn collateral or buying used merchandise and the sale, exportation or importation of such pawn merchandise, or processing of consumer loan transactions through the banking system, any of which could have a material adverse effect on the Company’s operationsregulatory environment, see “Item 1A. Risk Factors—Regulatory, Legislative and financial condition. If legislative, regulatory or other arbitrary actions or interpretations are taken at a federal, state or local level in the U.S. or countries in Latin America which negatively affect the pawn, consumer loan or credit services industries where the Company has a significant number of stores, those actions could have a material adverse effect on the Company’s business operations. There can be no assurance that such regulatory action at any jurisdiction level will not be enacted, or that existing laws and regulations will not be amended, decreed or interpreted in such a way which could have a material adverse effect on the Company’s operations and financial condition.Legal Risks.”
U.S. Federal Regulations
The U.S. government and its agencies have significant regulatory authority over consumer financial services activities. In recent years, additional legislationthe Company’s activities and regulations have been enacted or proposed which has increased or could continueits business is subject to increase regulationa variety of federal laws, including but not limited to the consumer finance industry. These regulationsfollowing:
Federal Trade Commission (“FTC”) Act and restrictions are or may be specific to pawn, credit services and consumer loan/payday advance operations.
The Consumer Financial Protection Bureau (the “CFPB”), created by Title X of the Dodd FrankDodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) - The FTC and the Consumer Financial Protection Bureau (the “Dodd-Frank Act”“CFPB”), regulate advertising, marketing of and practices related to financial products and services. The FTC is charged with preventing, investigating and remediating unfair or deceptive acts or practices and false or misleading advertisements, and the CFPB is charged with preventing unfair, deceptive or abusive acts or practices. The CFPB has broad regulatory, supervisory and enforcement powers over most non-bank providers of consumer credit. The CFPB’s powers include explicit supervisory authority to examine and require registration ofcertain providers of consumer financial products and services, including providers of secured and unsecured consumer loans, such as the Company,services. The CFPB also has the authority to adopt rules describing specified actsissue civil investigative demands and practices as being “unfair,” “deceptive,” “abusive” and hence “unlawful,” and the authority to impose recordkeeping obligations and promulgate additional compliance requirements.
Over the years, the CFPB has systematically gathered data related to all aspects of the consumer loan industry and its impact on consumers. The CFPB continues to use its Short-Term, Small-Dollar Lending Procedures, the field guide CFPB examiners use when examining small-dollar lenders like the Company. The CFPB’s examination authority permits examiners to inspect the Company’s books and records and ask questions about its business and its practices. The examination procedures include, among other things, specific modules for examining marketing activities, loan application and origination activities, payment processing activities and sustained use by consumers, collections and collection practices, defaults, consumer reporting and third-party or vendor relationships.
In addition to the Dodd-Frank Act’s grant of regulatory and supervisory powers to the CFPB, the Dodd-Frank Act gives the CFPB authority to pursue administrative proceedings or litigation for actual or perceived violations of federal consumer laws (including the CFPB’s own rules). In these proceedings, the CFPB can seek consent orders, confidential memorandums of understandings, obtain cease and desist orders (which can include orders for redisclosure, restitution or rescission of contracts, as well as affirmative or injunctive relief) and monetary penalties ranging from $5,000 per day for certainpenalties. The Company was recently named as a defendant in a lawsuit brought by the CFPB alleging violations of federal consumer laws to $25,000 per day for reckless violations, and $1,000,000 per day for knowing or intentional violations. Also, wherethe Military Lending Act (“MLA”) as discussed elsewhere herein. For a company has been found to have violated consumer laws,discussion of the Dodd-Frank Act (in addition to similar state consumer laws) empowers state attorneys general and state regulators to bring administrative or civil actions seeking the same equitable relief availablerisks to the Company’s business related to CFPB in addition to state-led enforcement actionsregulation, see “Item 1A. Risk Factors—Regulatory, Legislative and consent orders. If the CFPB or one or more state officials believe that the Company has violated any of the applicable laws or regulations, they could exercise their enforcement powers in ways that could have a material adverse effect on the Company or its business.Legal Risks and General Economic and Market Risks.”
On July 11, 2017, the CFPB issued a final rule on consumer arbitration agreements banning waiver of class action in pre-dispute arbitration clauses (the “Arbitration Rule”) with an effective date of March 2019. The rule, as written, would have prohibited financial services companies, including the Company, from using arbitration clauses that ban consumers from participating in class actions. On July 25, 2017, the House of Representatives voted to repeal the Arbitration Rule using the Congressional Review Act (the “CRA”) and on October 24, 2017, the Senate also voted to repeal the Arbitration Rule under the CRA. Congress’ override and repeal of the Arbitration Rule was signed by the President on November 1, 2017. The congressional repeal prevents the measure from returning to legislative consideration for the next five years. The Arbitration Rule was also legally challenged by various industry trades and groups seeking declaratory and injunctive relief and challenging the constitutionality and legality of the Arbitration Rule and the CFPB, among other things (the “Arbitration Lawsuit”). The CRA repeal likely makes the Arbitration Lawsuit moot unless the plaintiffs continue to pursue additional relief or declaration that the CFPB is unconstitutional.
On October 5, 2017, the CFPB released its small-dollar loan rule (the “SDL Rule”)., which was subsequently revised on July 7, 2020. Traditional possessory, non-recourse pawn loans are not covered under the SDL Rule. The SDL Rule technically became effective on January 16, 2018, but theredoes, however, define consumer loan products, both short-term loans and installment loans offered by the Company before June 30, 2020, as loans covered under the rule. The SDL Rule also defines some of the RISA transactions that AFF purchases and some of the installment loans that AFF sub-services as loans covered under the rule.
Electronic Fund Transfer Act (“EFTA”) - The EFTA and its implementing Regulation, Regulation E, is no practical effect until April 2018a consumer protection law affecting electronic fund transfers, including one-time and recurring preauthorized transactions.Consumers with whom the Company conducts business may elect to repay through the use of electronic funds transfers, requiring the Company to obtain the appropriate authorization from the consumer to enter into such transactions.The EFTA imposes certain disclosure and practice restriction requirements upon the Company, and at the earliest,same time grants certain rights to consumers.
MLA - The MLA requires the provision of certain disclosures at certain times and most of the SDL Rule’s provisions do not become effective until July 2019. However, on January 16, 2018, the CFPB announced that it intends “to engage in a rulemaking process so that the Bureau may reconsider the payday rule.” The outcome of this announcement is unclear but it is possible that the CFPB could amend portions of the SDL Rule before it takes effect and avoid having Congress repeal the SDL Rule using the CRA. If the SDL Rule takes effect, lenders, like the Company, will be required,restricts, among other things, the interest rate and other terms that can be offered to determine whether consumers have the ability to repayactive military personnel and their loans before issuing certain short-term small dollar, payday and auto title loans, verification by thedependents on most types of consumer of certain debts and verification through outside sources by lenders of certain debts, mandatory cooling off periods and restrictions on collection practices. Importantly, the SDL Rule does not apply to non-recourse pawn loans. If the CFPB fails to amend the perceived problematic portions of the SDL Rule, it is likely that the SDL Rule will be subject to legislative challenges and trade association litigation. If the SDL Rule remains effective in its current form, the small dollar lending industry will experience a significant regulatory change. While the SDL Rule has been finalized, it is still not certain whether it will take effect, and to what extent it will impact the Company since the CFPB (under new leadership appointed by the President) issued a formal statement notifying the public that it intends to engage in a “rulemaking process” to reconsider the rule. While the SDL Rule currently requires consumer lenders to register with the CFPB by April 16, 2018, the CFPB formally notified the public that it will entertain waiver requests from lenders to avoid this registration requirement. The SDL Rule may also be repealed under the Congressional Review Act. A resolution was introduced in the House of Representatives on December 1, 2017 to begin the process of repealing the rule, and it is currently pending in the House Financial Services Committee.
The Company believes that the SDL Rule (even in its current form) will not directly impact the vast majority of its pawn products, which comprise approximately 96% of its total revenues. On a consolidated basis, the Company expects consumer loan revenue for the year ending December 31, 2018 to account for approximately 3.5% of the Company’s consolidated total revenue.
In July 2015, the U.S. Department of Defense published a finalized set of additional requirements and restrictions under the Military Lending Act (“MLA Rule”).credit. The MLA Rule (and rules previously adopted thereunder) have preventedcaps the Company from offering its pawn services and its short-term unsecured credit productsinterest rate that may be offered to members of the military or their dependents because none of the Company’s products carry a covered borrower to a 36% military annual percentage rate of 36% or less.(“MAPR”), which includes certain fees such as application fees, participation fees and fees for add-on products. The MLA Rule, which went into effect on October 3, 2016, amended requirements for its “safe harbor” (making covered member attestation insufficient on its own to comply withalso requires certain disclosures and prohibits certain terms, such as mandatory arbitration, if a dispute arises concerning the “safe harbor” provisionconsumer credit product. The MLA covers overdraft lines of the MLA Rule)credit, pawn loans and expanded the scope of thecertain vehicle-secured and unsecured credit products covered byand restricts the MLACompany’s ability to include certain non-purchase money loans secured by personal property, including pawn loans, or vehiclesoffer its products to military personnel and certain unsecured installment loan productstheir dependents to the extent any such products
have a military annual percentage rateMAPR greater than 36%. Under the MLA Rule, the Company is unableFailure to offer any of its current credit products, including pawn loans, to members of the U.S. military or their dependents. While the Company does not believe that active members of the U.S. military or their dependents comprise a significant percentage of the historical customer base in most locations, compliancecomply with the MLA Rule, includingmay limit the Company’s ability to collect principal, interest, and fees from borrowers and may result in civil and criminal liability that could harm its safe harbor provisions,business. Compliance with the MLA is complex, increases compliance risks and related costs and limits the potential customer base of the Company. The Company was recently named as a defendant in a lawsuit brought by the CFPB alleging violations of the MLA as discussed elsewhere herein.
In additionServicemembers Civil Relief Act (“SCRA”) - The federal SCRA and similar state laws apply to certain transactions between the federal lawsCompany and frameworks already governing the financial industry, the U.S. Justice Department (“DOJ” or “Department of Justice”), in conjunction with federal banking regulators, began an initiative in 2013 (“Operation Choke Point”) which was directed at banksservicemembers called to active duty in the U.S.United States military as defined within the SCRA, and may include reservists and members of the National Guard. The SCRA limits the rate of interest a covered servicemember may be charged, including certain fees, as well as the actions that do business with payment processors, payday lenders, pawn operators and other companies believed tocan be at higher risk for fraud and money laundering. Ittaken while the consumer is believed the intent of this initiative was to restricta covered servicemember, including limitations on the ability of banks to provide financial services to companies in the targeted industries. In January 2015, the Federal Deposit Insurance Corporation (the “FDIC”) issued a publication encouraging banks to take a risk-based approach in assessing individual customer relationships, rather than declining to provide banking services to entire categories of customers without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk. While many believe this publication effectively ended Operation Choke Point, the Company continues to experience difficulty in securing new banking servicesmaintain legal action and maintaining existing banking services in certain markets. There can be no assurance that Operation Choke Point and its subsequent effects will not pose a further threat to the Company’s ability to access credit, maintain bank accounts and treasury services, process payday lending transactions or obtain other banking services needed to operate efficiently and profitably.default judgments.
In connection with pawn transactions and credit services/consumer loan transactions, the Company must comply with the various disclosure requirements under the Federal Truth in Lending Act (and Federal Reserve(“TILA”) - TILA and its implementing regulations known as Regulation Z promulgated thereunder)require creditors to deliver disclosures to borrowers during the life cycle of a loan, including when publishing certain advertisements, at application, at account opening and at consummation. The requirements may vary based upon product type (e.g., open-end versus closed end credit products), as well as the timing and nature of certain events (e.g., post-consummation events). These disclosures include, among other things, the total amount of the finance charges and annualized percentage rate of the charges associated with pawn transactions, consumer loanrate.
Anti-money laundering and credit services transactions.
economic sanctions - The credit services/consumer loan business is also subject to various laws, rules and guidelines relating to the procedures and disclosures needed for debiting a debtor’s checking account for amounts due via an automated clearing house (“ACH”) transaction. Additionally, the Company is subject to certain provisions of the Federal Fair Debt Collection PracticesUSA PATRIOT Act (“FDCPA”) and applicable state collection laws when conducting its collection activities.
Under the Bank Secrecy Act the U.S. Department of the Treasury (the “Treasury Department”) regulates transactions involving currency in an amount greater than $10,000 and the purchase of monetary instruments for cash in amounts from $3,000 to $10,000under which it must be recorded. In general, financial institutions, including the Company, must report each deposit, withdrawal, exchange of currency or other payment or transfer, whether by, through or to the financial institution, that involves currency in an amount greater than $10,000 during a specific period. In addition, multiple related currency transactions must be treated as single transactions if the financial institution has knowledge that the transactions are by, or on behalf of, any one person and result in either cash in or cash out totaling more than $10,000 during any one business day or over a certain time period.
Under the USA PATRIOT Act passed by Congress in 2001 and revised in 2006, the Company is required to maintain an anti-money laundering compliance program. The program must include (1) the developmentcovering certain of internal policies, procedures and controls, (2) the designation of a compliance officer, (3) an ongoing employee-training program, and (4) a review function to test the program.its business activities.
The Gramm-Leach-Bliley Act requires(“GLBA”) - The Company is subject to various federal and state laws and regulations relating to privacy and security of consumers’ nonpublic personal information. Under these laws, including the GLBA and Regulation P promulgated thereunder, the Company to generally protect the confidentiality of its customers’ nonpublic personal information and tomust disclose to its customers its privacy policy and practices, including those regardingpolicies relating to the sharing the customers’of nonpublic personal information with third parties. Such disclosure mustThe Company may also be maderequired to customers atprovide an opt-out to certain sharing. The GLBA and other laws also require the timeCompany to safeguard personal information. The FTC regulates the customer relationship is established, at least annually thereafter, and if there is a change insafeguarding requirements of the Company’s privacy policy. In addition, theGLBA for non-bank lenders through its Safeguard Rules.
Fair Credit Reporting Act (“FCRA”) - The Company is subject to strict document retentionthe FCRA and destruction policies.
its implementing regulation known as Regulation V, as both a user of consumer reports and a furnisher of consumer credit information to credit reporting agencies. The federal Equal Credit Opportunity Act (“ECOA”) prohibits discrimination against anyFCRA regulates the use of consumer reports and reporting of information to credit applicant onreporting agencies. Specifically, the basisFCRA establishes requirements that apply to the use of any protected category,“consumer reports” and similar data, including certain notifications to consumers, including when an adverse action, such as race, color, religion, national origin, sex, marital status, or age,a loan declination, is based on information contained in a consumer report. The Company only obtains and requiresuses consumer reports subject to the permissible purpose requirements under the FCRA, which also permits the Company to notify credit applicantsshare its experiential information, information obtained from consumer reporting agencies and other customer information with affiliates. The Company complies with notice and opt out requirements for prescreen solicitations and for certain information sharing under the FCRA, and conducts reasonable investigations of disputes as applicable. The Company also has implemented an identity theft prevention program to fulfill the requirements of the Company’s consumer loan products of any action taken onRed Flags Regulations and Guidelines issued under the individual’s credit application. The Company must provide a loan applicant a Notice of Adverse Action (“NOAA”) when the Company denies an application for credit. The NOAA must inform the applicant of (1) the action taken regarding the credit application, (2) a statement of the ECOA’s prohibition on discrimination, (3) the name and address of both the creditor and the federal agency that monitors compliance with the ECOA, and (4) the applicant’s right to learn the specific reasons for the denial of credit and the contact information for the parties the applicant can contact to obtain those reasons. The Company provides NOAA letters and maintains records of all such letters as required by the ECOA and its regulations.
The Company’s consumer loan products are also subject to the Fair Credit Reporting Act, which requires the Company to provide certain information to customers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency and to respond to consumers who inquire regarding any adverse reporting submitted by the Company to the consumer reporting agencies.
The Company’s advertising and marketing activities, in general, are subject to additional federal laws and regulations administered by the Federal Trade Commission and the CFPB which prohibit unfair or deceptive acts or practices and false or misleading advertisements.
The federal Fair and Accurate Credit Transactions Act (“FACTA”(the “FACTA”) requires the Company to adopt written guidance and procedures for detecting, mitigating, preventing and responding appropriately to identity theft and to adopt various employee policies, procedures, and provide employee training and materials that address the importance of protecting nonpublic personal information and aid the Company in detecting and responding to suspicious activity, including suspicious activity which may suggest a possible identity theft red flag, as appropriate..
Anti-corruption - The Company is subject to the U.S. Foreign Corrupt Practices Act (“FCPA”(the “FCPA”) and other similar laws thatin other jurisdictions which generally prohibit improper paymentscompanies and their agents or offers ofintermediaries from making improper payments to foreign governments and their officials and political parties by U.S. persons and issuers (as defined by the statute) for the purpose of obtaining or retaining business. It is the Company’s policy to maintain safeguards to discourage these practices by its employees and follow Company standards of conduct for itskeeping business throughout the U.S. and Latin America,
including the prohibition of any direct or indirect payment or transfer of Company funds or assets to suppliers, vendors, or government officials in the form of bribes, kickbacks and/or other illegal payoffs.benefits.
Brady Handgun Violence Prevention Act (“Brady Act”) - Each U.S. pawn store location that handles pawned firearms or buys and sells firearms must comply with the Brady Handgun Violence Prevention Act (the “Brady Act”).Act. The Brady Act requires that federally licensed firearms dealers conduct a background check in connection with any dispositionreleasing, selling or otherwise disposing of handguns.firearms. In addition, the Company must also comply with various state law provisions and the regulations of the U.S. Department of Justice-Bureau of Alcohol, Tobacco and Firearms that require each pawn lending location dealing in guns to obtain a Federal Firearm License (“FFL”) and maintain a permanent written record of all receipts and dispositions of firearms. As
Telephone Consumer Protection Act - The Company is also subject to the Telephone Consumer Protection Act and its implementing regulations (together, the “TCPA”) and the regulations of December 31, 2017, the Federal Communications Commission. The TCPA regulates the delivery of live and prerecorded telemarketing calls, non-marketing calls to cell phones through the use of an automated telephone dialing system, fax advertisements and text messages. For example, under the TCPA, it is unlawful to make many of these types of communications without the prior consent of the recipient. The TCPA also established a federal do-not-call registry with the Telemarketing Sales Rule. The Company had 695 locations inmaintains policies and procedures reasonably designed to comply with the U.S. with an active FFL.TCPA.
U.S. State and Local Regulations
Pawn Business - The Company operates pawn stores in 25 U.S. states (includingand the District of Columbia),Columbia, all of which have licensing and/or fee regulations on pawnshop operations.operations and employees, and are subject to regular state level regulatory audits. In general, state statutes and regulations establish licensing requirements for pawnbrokers and may regulate various aspects of pawn transactions, including the purchase and sale of merchandise, service charges, interest rates, the content and form of the pawn transaction agreement and the length of time a pawnbroker must hold a purchased item or forfeited pawn before it is made available for sale. Additionally, these statutes and regulations in various jurisdictions restrict or prohibit the Company from transferring and/or relocating its pawn licenses and restrict or prohibit the issuance of new licenses. The Company’s fee structures are at or below the applicable rate ceilings adopted by each of these states. The Company offers its pawn and retail customers an interest free layaway plan which complies with applicable state laws. In addition, the Company is in compliance with the net asset requirements in states where it is required to maintain certain levels of liquid assets for each pawn store it operates in the applicable state. Failure to observe a state’s legal requirements for pawn brokering could result, among other things, in loss of pawn licenses, fines, refunds, and other civil or criminal proceedings.
Many of the Company’s pawn locations are also subject to local ordinances that require, among other things, local permits, licenses, record keeping requirements and procedures, reporting of daily transactions, and adherence to local law enforcement “do not buy lists”“do-not-buy-lists” by checking law enforcement created databases. Specifically, under some county and municipal ordinances, pawn stores must provide local law enforcement agencies with reports of all daily
AFF Business - In addition to federal regulatory oversight, currently, nearly every state specifically regulates LTO transactions involving pawns and over-the-counter merchandise purchases. These daily transaction reports are designed to provide local law enforcement officials with a detailed description of the merchandise involved, including serial numbers, if any, or other specific identifying information, including the name and address of the customer obtained from a valid identification card and photographs of the customers and/or merchandise in certain jurisdictions. Goods held to secure pawns or goods purchased may be subject to mandatory holding periods before they can be resold by the Company. If pawned or purchased merchandise is determined to belong to an owner other than the borrower or seller, it may be subject to confiscation by police for recovery by the rightful owners. Historically, the Company has not found the volume of the confiscations or claims to have a material adverse effect upon results of operations. The Company does not maintain insurance to cover the costs of returning merchandise to its rightful owners but historically has benefited from civil and criminal restitution efforts.
The Company operates its consumer loan business in 12 states which are regulated under a variety of enablingvia state statutes and subject to various local rules, regulations and ordinances.regulations. This includes states in which the POS payments platform operates through existing merchant partners. The scope of these regulations,state LTO regulation, including thepermissible rental rates, fees and terms, ofvaries from state to state. Some states require specific disclosures, mandate or prohibit certain terms and limit the Company’s consumer loan products and services, varies by state, county and city. These laws generally define the services that the Company can provide to consumers and require the Company to provide a contract to the customer outlining the Company’s services and thetotal cost of those services to the customer. During fiscal 2017, the Company’s consumer loanownership and credit services fee revenue represented approximately 4% of the Company’s overall revenues.
The states with lawsfees that specifically regulate the Company’s consumer loan products and services typically limit the principal amount of a consumer loan and set maximum fees or interest rates that customers may be charged. Most state LTO laws require LTO companies to disclose to their customers the total number of payments, total amount and timing of all payments to acquire ownership of an item, any other charges that may be imposed and miscellaneous other items. The more restrictive state LTO laws limit the retail price for an item, limit the total cost of ownership that a customer may be required to pay to obtain ownership of an item, or regulate the "cost-of-rental" amount that lease-to-own companies may charge on lease-to-own transactions, generally defining "cost-of-rental" as lease fees paid in excess of the "retail" price of the goods. Where licensing or registration is required, the Company is subject to extensive state rules, licensing and examination. Failure to comply with these requirements may result in, among other things, refunds of excess charges, monetary penalties, revocation of required licenses, voiding of leases and other administrative enforcement actions.
Some states also limitspecifically regulate via statutes and regulations the RISA transactions that AFF purchases from merchants. The scope of state RISA regulation varies from state to state. Most state RISA laws require certain consumer-facing disclosures. Some state RISA laws require AFF, as a customer’s abilitypurchaser of RISA transactions, to renewobtain a short-term consumer loanlicense or file a registration or notification with the applicable state regulator. Where licensing or registration is required, AFF is subject to extensive state rules, licensing and require various disclosuresexamination. Failure to consumers. State statutes often specify minimumcomply with these requirements may result in, among other things, refunds of excess charges, monetary penalties, revocation of required licenses, voiding of RISA transactions and maximum maturity dates for consumerother administrative enforcement actions.
In addition, from time to time, state regulatory agencies and state attorneys general have directed investigations or regulatory initiatives toward the Company’s industry, or toward certain companies within the industry. For example, on January 6, 2022, AFF received a subpoena from the New Jersey Attorney General’s office requesting information related to AFF’s partnership with the Bank and the bank loans and,with New Jersey consumers that AFF sub-services. AFF is in some cases, specify mandatory cooling-off periods between transactions. the process of providing the requested documents.
Mexico Regulations
The Company’s collection activities regarding past due amounts are subject to consumer protection laws and state regulations relating to debt collection practices. Also, some states require the Company to report loan activity to state-wide databases and restrict the number and/or principal amount of loans a consumer may have outstanding at any particular time or over the course of a particular period of time, typically twelve months. In addition, these laws may require additional disclosures to consumers and may require the Company to be registered with the jurisdiction and/or be bonded.
As a credit services organizationpawn business in certain jurisdictions, the Company assists customers in applying for a short-term extension of credit from the Independent Lenders and issues the Independent Lenders a guarantee for the repayment of the extension of credit. When a consumer executes a credit services agreement with the Company, the customer agrees to pay a fee to the Company if the Independent Lenders approve the extension of credit, and the Company agrees to guarantee the customer’s obligation to repay the
extension of credit received by the customer from the Independent Lenders if the customer fails to do so. The credit services organization must give a consumer the right to cancel the credit services agreement without penalty within three days after the agreementMexico is signed. In addition, credit services locations generally must be registered as a credit services organization and are subject to various other jurisdictionalfederal, state and local regulatory regimes affecting the pawn industry, as well as general business regulations and requirements.
Local rules, regulations and ordinances vary widely from county to county or city to city. While many of the local rules and regulations relate primarily to zoning and land use restrictions, certain cities have restrictive regulations specific to pawn and consumer loan products. Additionally, local jurisdictions’ efforts to regulate or restrict the terms of pawn, consumer loan and credit services products will likely continue to increase.
It is expected that additional legislation and/or regulations relating to pawn transactions, credit services, installment loans and other consumer loan products will be proposed in several state legislatures and/or city councils where the Company has pawn, consumer loan products and credit services operations. Though the Company cannot accurately predict the scope, extent and nature of future regulations, it is likely that such legislation may address the maximum allowable interest rates on loans, significantly restrict the ability of customers to obtain such loans by limiting the maximum number of consecutive loan transactions that may be provided to a customer, and/or limiting the total loans a customer may have outstanding at any point in time. Any or all of these changes could make offering these products less profitable and could restrict or even eliminate the availability of consumer loan, pawn transactions and credit services products in some or all of the states or localities in which the Company offers such products.
Many local government entities prohibit or restrict pawn and other consumer finance and check cashing activities through zoning ordinances, which can significantly limit the ability of the Company to move, expand, remodel or relocate store locations, and in some cases cause existing stores to be closed. In some jurisdictions, check cashing companies or money transmission agents are required to meet minimum bonding or capital requirements and are subject to record-keeping requirements. Consequently, the Company has de-emphasized its consumer loan business over the last few years and will likely continue to do so in the future,areas of tax compliance, customs, consumer protections, anti-money laundering, public safety and beginning in fiscal 2018, the Company no longer offers fee-based check cashing services in its non-franchised stores.employment matters, among others, by various federal, state and local governmental agencies.
Procuraduria Federal del Consumidor (“PROFECO”) - The Company cannot currently assess the likelihood of any other proposed legislation, regulations or amendments, such as those described above, which could be enacted. However, if such legislation or regulations were enacted in certain jurisdictions, it could have a materially adverse impact on the revenue and profitability of the Company.
Mexico Federal Regulations
Federal lawCompany’s pawn business in Mexico provides for administrative regulation of the pawnshop industryis regulated by the Federal Consumer Protection Bureau (“PROFECO”),PROFECO, Mexico’s primary federal consumer protection agency, which requires the Company to annually register its pawn stores, approve the pawn contracts and disclose the interest rate and fees charged on pawn and consumer loan transactions. In addition, the pawnshop and consumer finance industries in Mexico are subject to various general business regulations in the areas of tax compliance, customs, consumer protections, money laundering, public safety and employment matters, among others, by various federal, state and local governmental agencies.
PROFECO regulates the form and non-financial terms of pawn contracts and defines certain operating standards and procedures for pawnshops, including retail operations, consumer disclosures and establishes reporting requirements. In January 2013, federal legislation conveyed additional regulatory authority to PROFECO regarding the pawn industryrequirements and the national registration process. The 2013 legislation requires all pawn businesses and itstheir owners to register annually with and be approved by PROFECO in order to legally operate. In addition, all operators must comply with additional customer notice and disclosure provisions, bonding and insurance requirements to insure against loss or insolvency, reporting of certain types of suspicious transactions, and reporting to state law enforcement officials of certain transactions (or series of transactions) or suspicious transactions on a monthly basis to states’ attorneys general offices. PROFECO continues to modify its process and procedures regarding its annual registration requirements and the Company has complied and complies in all material respects with this process and registration requirements as administered by PROFECO. There are significant fines and sanctions, including license revocation and operating suspensions, for failure to register and/or comply with PROFECO’s rules and regulations.
Effective in November 2013, the federal government of Mexico enacted
Anti-Money Laundering - Mexico’s anti-money laundering regulations, The Federal Law for the Prevention and Identification of Transactions with Funds From Illegal Sources, (“Anti-Money Laundering Law”),which requires monthly reporting of certain transactions (or series of transactions) exceeding certain monetary limits, imposed stricterimposes strict maintenance of customer identification records and controls, and requires reporting of all foreign (non-Mexican) customer transactions. This law affects all industries in Mexico and is intended to detect commercial activities arising from illicit or ill-gotten means though bilateral cooperation between Mexico’s Ministry of Finance and Public Credit (“Hacienda”), and all of Mexico’s various states’ attorneys general offices (“PGR”). This law restricts the use of cash in certain transactions associated with high-value assets, and limits, to the extent possible, money laundering activities protected by the anonymity that cash transactions provide. The law
empowers Hacienda to oversee and enforce these regulations and to follow up on the information received from other agencies in Mexico and abroad. Relevant aspects of the law specifically affecting the pawn industry include monthly reporting by the Company to Hacienda and the PGR on “vulnerable activities,” which encompass the sale of jewelry, precious metals and watches exceeding $60,769 Mexican pesos, individually, and retail and pawn transactions (of cash or credit) exceeding $121,161 Mexican pesos, in aggregate. There are significant fines and sanctions for failure to comply with the Anti-Money Laundering Law.
In January 2012, thePrivacy Laws - Mexico’s Federal Personal Information Protection Act (“Mexico Privacy Law”) went into effect, which requires companies to protect their customers’ personal information, among other things. Specifically, the Mexico Privacy Law requires that the Company create and maintain a privacy policy and inform its customers whether the Company shares the customer’s personal information with third parties or transfers personal information to third parties. It also requires public posting (both on-line and in-store) of the Company’s privacy policy, which includes a process for the customer to revoke any previous consent granted to the Company for the use of the customer’s personal information, or limit the use or disclosure of such information.
Mexico State and Local Regulations
Certain state and local governmental entities in Mexico also regulate pawn other consumer finance and retail businesses through state laws and local zoning and permitting ordinances. For example, in certain states where the Company has significant or concentrated operations, the states have enacted legislation or implemented regulations which require items such as special state operating permits for pawn stores, certification of pawn employees trained in valuation of merchandise, stricterstrict customer identification controls, collateral ownership certifications and/or detailed and specified transactional reporting of customers and operations. Certain other states have proposed similar legislation but have not yet enacted such legislation. Additionally,Furthermore, certain municipalities in Mexico have attempted to curtailfurther regulate or limit the operation of new and existing pawn stores through additional local business licensing, permittingsuch as operating licenses, signage permits and safety permits, in addition to reporting requirements.requirements and the enactment of transaction taxes on certain pawn transactions. State and local agencies, including local and state police officials, often have unlimited and discretionary authority to suspend store operations pending an investigation of suspicious pawn transactions or resolution of actual or alleged regulatory, licensing and permitting issues.
Other Latin American Federal and Local Regulations
Similar to Mexico, certain federal, department and local governmental entities in Guatemala, Colombia and El Salvador also regulate the pawn industry other consumer finance (including consumer lending and disclosures) and retail and commercial businesses. Certain federal laws and local zoning and permitting ordinances require basic commercial business licenses and signage permits. Operating in these countries also subjects the Company to other types of regulations including, but not limited to, regulations related to commercialization of merchandise, financial reporting, privacy and data protection, tax compliance, customs, labor and employment practices, real estate transactions, anti-money laundering, commercial and electronic banking restrictions, or cancellations, credit card transactions, marketing, advertising and other general business activities. Like Mexico, department agencies, including local and state police officials, have unlimited and discretionary authority in their application of their rules and requirements.
As the scope of the Company’s international operations increases, the Company may face additional administrative and regulatory costs in operating and managing its business. In addition, unexpected changes, arbitrary or adverse court decisions, adverse action by financial regulators, aggressive public officials or regulators attacking the Company’s business models, administrative interpretations of federal or local requirements or legislation, or public remarks by elected officials could negatively impact the Company’s operations and profitability.
Employees
The Company had almost 17,000 employees as of December 31, 2017, including approximately 1,200 persons employed in executive, supervisory, administrative and accounting functions. None of the Company’s employees are covered by collective bargaining agreements. The Company considers its employee relations to be satisfactory.
Insurance
The Company maintains property all-risk coverage and liability insurance for each of its locations in amounts management believes to be adequate. The Company maintains workers’ compensation or employer’s indemnification insurance in states in which the Company operates.
FirstCash Website
The Company’s primary website is at websites are www.firstcash.comand www.americanfirstfinance.com. The Company makes available, free of charge, at its corporate website, its annual reportAnnual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after they are electronically filed with the Securities and Exchange Commission (“SEC”). The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.
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 below. These factors are not intended to be an all-encompassing list of risks and uncertainties and are not the only risks and uncertainties facing the Company. Additional risks not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition or results of operations in future periods.
Risk Factor Summary
Risks Related to the Company’s Strategy, Business and IndustryOperations
•The Company faces significant competition from banks, credit unions, internet-based lenders, point-of-sale consumer finance companies, other short-term consumer lenders, governmental entities and other organizations offering similar financial services and retail products to those offered by the Company. •A decrease in demand for the Company’s products and services and the failure of the Company to adapt to such decreases could adversely affect the Company’s results of operations. •The Company’s future success is largely dependent upon the ability of its management team to successfully execute its business strategy and drive organic growth. •The inability to successfully identify attractive acquisition targets, realize administrative and operational synergies and integrate completed acquisitions could adversely affect results. •The Company depends on its senior management and hiring, training and retaining an adequate number of qualified employees to run its businesses. •Security breaches, cyber attacks or fraudulent activity could result in damage to the Company’s operations or lead to reputational damage and expose the Company to significant liabilities. •The Company’s businesses are typically subject to seasonality, which causes the Company’s revenues and operating cash flows to fluctuate. •The Company’s financial position and results of operations may fluctuate significantly due to fluctuations in currency exchange rates in Latin American markets.
•Changes impacting international trade and corporate tax and other related regulatory provisions may have an adverse effect on the Company’s financial condition and results of operations.
Risks Related to the Company’s Regulatory, Legislative and Legal Environment
•The Company derives significant revenue, earningsis the subject of a lawsuit initiated by the CFPB alleging violations of the MLA and cash flow from operations in Latin America, where business operations are transacted in Mexican pesos and Guatemalan quetzales. Thethe Company’sexposure to currency exchange rate fluctuations results primarily from the translation exposure associated predecessor company’s consent order with the preparation of the Company’s consolidated financial statements, as well as from transaction exposure associated with transactions and assets and liabilities denominated in currencies other than the respective subsidiary’s functional currency. While the Company’s consolidated financial statements are reported in U.S. dollars, the financial statements of the Company’s Latin American subsidiaries are prepared using their respective functional currency and translated into U.S. dollars by applying appropriate exchange rates. As a result, fluctuations in the exchange rate of the U.S. dollar relative to the Latin American currencies could cause significant fluctuations in the value of the Company’s assets, liabilities, stockholders’ equity and operating results. In addition, while expenses with respect to foreign operations are generally denominated in the same currency as corresponding sales, the Company has transaction exposure to the extent expenditures are incurred in currencies other than the respective subsidiary’s functional currency. The costs of doing business in foreign jurisdictions also may increase as a result of adverse currency rate fluctuations. In addition, changes in currency rates could negatively affect customer demand, especially in Latin America and in U.S. stores located along the Mexican border. The average value of the Mexican peso to the U.S. dollar exchange rate for fiscal 2017 was 18.9 to 1, compared to 18.7 to 1 in fiscal 2016 and 15.8 to 1 in fiscal 2015. The average value of the Guatemalan quetzal to the U.S. dollar exchange rate for fiscal 2017 was 7.4 to 1, compared to 7.6 to 1 in fiscal 2016 and 7.7 to 1 in fiscal 2015. The Company also has operations in El Salvador where the reporting and functional currency is the U.S. dollar.CFPB.
•The Company’s products and services are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations in both the U.S. and Latin America. If changes in regulations affecting the Company’s pawn, credit servicesAmerica and consumer loan businesses create increased restrictions, or have the effect of prohibiting loans in the jurisdictions where the Company offers these products, such regulations could materially impair or reduce the Company’s pawn, credit services and consumer loan businesses and limit its expansion into new markets.
The Company’s products and services are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations in both the U.S. and Latin America. The Company faces the riskfinance companies that restrictions or limitations on loan products, loan amounts, loan yields, loan fees and customer acceptance of loan products resulting from the enactment, change, or interpretation of laws and regulations in the U.S. or Latin America could have a negative effect on the Company’s business activities. Both consumer loans, including vehicle title loans, and, to a lesser extent, pawn transactions and buy/sell agreements, have come under increased scrutiny and increasingly restrictive regulation in recent years. Other enacted or recently proposed regulatory activity may limit the number of loans that customers may receive or have outstanding and require the Company to offer an extended payment plan to its customers, and regulations adopted by some states require that all borrowers of certain loan products be listed on a database, limit the yield on pawn or consumer loans and limit the number of such loans borrowers may have outstanding. Certain consumer advocacy groups and federal and state legislators have also asserted that laws and regulations should be tightened so as to severely limit, if not eliminate, the availability of pawn transactions, buy/sell agreements, consumer loans and credit services products to consumers. It is difficult to assess the likelihood of the enactment of any unfavorable
federal or state legislation or local ordinances, and there can be no assurance that additional legislative or regulatory initiatives will not be enacted that would severely restrict, prohibit, or eliminate the Company’s ability to offer certain products and services.
In Latin America, restrictions and regulations affecting pawn, buy/sell and consumer loan industries, including licensing restrictions, customer identification requirements, suspicious activity reporting, disclosure requirements and limits on interest rates, loan service fees, or other fees have been and continue to be proposed from time to time. Adoption of such federal, state or local regulation or legislation in the U.S. and Latin America could restrict, or even eliminate, the availability of pawn transactions, buy/sell agreements and consumer loans at some or all of the Company’s locations, which would adversely affect the Company’s operations and financial condition.
The extent of the impact of any future legislative or regulatory changes will depend on the political climate, the nature of the legislative or regulatory change, the jurisdictions to which the new or modified laws would apply, and the amount of business the Company does in that jurisdiction. Moreover, similar actions by states or foreign countries in which the Company does not currently operate could limit its opportunities to pursue its growth strategies. A more detailed discussion of the regulatory environment and current developments and risks to the Company is provided in “Business—Governmental Regulation.”
Media reports, statements made by regulators and elected officials and public perception in general of pawnshop and consumer loan operations, including payday advances or pawn transactions, as being predatory or abusive could materially adversely affect the Company’s pawn, consumer loan and credit services businesses. In recent years, consumer advocacy groups and some media reports, in both the U.S. and Latin America, have advocated governmental action to prohibit or place severe restrictions on consumer loans, including payday advances and pawn services.
Reports and statements made by consumer advocacy groups, members of the media, regulators and elected officials often focus on the annual or monthly cost to a consumer of consumer loans and pawn transactions, which are generally higher than the interest typically charged by banks toserve credit-constrained consumers, with better credit histories. These reports and statements typically characterize pawn and/or consumer loans as predatory or abusive or focus on alleged instances of pawn operators purchasing or accepting stolen property as pawn collateral. If the negative characterization of these types of transactions becomes increasingly accepted by consumers, demand for pawn and/or consumer loan products could significantly decrease, which could materially affect the Company’s results of operations and financial condition. Additionally, if the negative characterization of these types of transactions becomes increasingly accepted by legislators and regulators, the Company could become subject to more restrictive laws and regulations that could have a material adverse effect on the Company’s financial condition and results of operations.
The CFPB has regulatory, supervisory and enforcement powers over providers of consumer financial products and services in the U.S., and it could exercise its enforcement powers in ways that could have a material adverse effect on the Company’s business and financial results.
The CFPB has been exercising its supervisory review over certain non-bank providers of consumer financial products and services, including providers of consumer loans and certain title pawn loans such as the Company. The CFPB’s examination authority permits CFPB examiners to inspect the books and records of providers of short-term, small dollar lenders, such as the Company, and ask questions about their business practices. The CFPB’s examination procedures include specific modules for examining marketing activities, loan application and origination activities, payment processing activities, sustained use by consumers, collection practices, accounts in default and consumer reporting activities as well as third-party relationships. As a result of these examinations of non-bank providers of consumer credit, the Company could be required to change its practices or procedures, whether as a result of another party being examined or as a result of an examination of the Company, or could be subject to monetary penalties, which could adversely affect the Company. Under certain circumstances, the CFPB may also be able to exercise regulatory authority over providers of pawn services through its rule making authority.
For example, on July 11, 2017, the CFPB issued the Arbitration Rule banning waiver of class action in pre-dispute arbitration clauses with an effective date of March 2019. The rule, as written, would have prohibited financial services companies, including the Company, from using arbitration clauses that ban consumers from participating in class actions. However, the Arbitration Rule was repealed by Congress and the repeal was signed by the President on November 1, 2017. The congressional repeal prevents the measure from returning to legislative consideration for the next five years.
Another example is the SDL Rule released by the CFPB on October 5, 2017. The SDL Rule technically became effective on January 16, 2018, but there is no practical effect until April 2018, at the earliest, with most of the SDL Rule’s provisions becoming effective July 2019. On January 16, 2018, however, the CFPB announced that it intends “to engage in a rulemaking process so that the Bureau may reconsider the payday rule.” The outcome of this announcement is unclear, but it is possible that the CFPB could amend portions of the SDL Rule before it takes effect. If the SDL Rule takes effect, lenders, like the Company, will likely be required, among other things, to determine whether consumers have the ability to repay their loans before issuing certain short-
term small dollar, payday and auto title loans, obtain verification from the consumer of certain debts and verification through outside sources by lenders of certain debts, implement mandatory cooling off periods and increase restrictions on collection practices. The SDL Rule defines the Company’s consumer loan products, both short-term loans, and installment loans, as loans coveredface increasing regulatory scrutiny under the rule, but the vast majority of the Company’s pawn loans are not covered by the rule. If the SDL Rule remains effective in its current form, the small dollar lending industry will experience a significantpresidential administration and regulatory change. While the SDL Rule has been finalized, it is still not certain whether it will take effect, and to what extent it will impact the Company since the CFPB issued a formal statement notifying the public that it intends to engage in a “rulemaking process” to reconsider the rule. The Company continues to review the SDL Rule to determine its potential impact on the Company’s consumer loan portfolio if the rule is not repealed or otherwise revised. On a consolidated basis, the Company expects consumer loan revenue for the year ending December 31, 2018 to account for approximately 3.5% of the Company’s consolidated total revenue.environment.
In addition to having the authority to obtain monetary penalties for violations of applicable federal consumer financial laws (including the CFPB’s own rules), the CFPB can require remediation of practices, including through memorandums of understanding and consent orders, pursue administrative proceedings or litigation and obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief). Also, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the Dodd-Frank Act, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy violations of state law. If the CFPB or one or more state attorneys general or state regulators believe that the Company has violated any of the applicable laws or regulations or any consent orders or memorandums of understanding instituted by the CFPB or state regulators against the Company, they could exercise their enforcement powers in ways that could have a material adverse effect on the Company’s business and financial results.
See “Business—Government Regulation” for a further discussion of the regulatory authority of the CFPB.
PROFECO has regulatory, supervisory and enforcement powers over pawn operators in Mexico, and it could exercise its enforcement powers in ways that could have a material adverse effect on the Company’s business and financial results.
Federal law in Mexico provides for administrative regulation of the pawnshop industry by PROFECO, Mexico’s primary federal consumer protection agency. PROFECO requires all pawn operators like the Company to register its pawn stores, pawn contracts and to disclose the interest rate and fees charged on pawn and consumer loan transactions. PROFECO also regulates the form and non-financial terms of pawn contracts and defines certain operating standards and procedures for pawnshops and establishes reporting requirements.
In January 2013, federal legislation conveyed additional regulatory authority to PROFECO regarding the pawn industry and national registration process. The 2013 legislation requires all pawn businesses and their owners to annually register with and be approved by PROFECO in order to legally operate. In addition, all operators must comply with additional customer notice and disclosure provisions, bonding requirements to insure against loss or insolvency, reporting of certain types of suspicious transactions and monthly reporting to state law enforcement officials of certain transactions (or series of transactions). There are significant fines and sanctions, including operating suspensions, for failure to register and/or comply with PROFECO’s rules and regulations. PROFECO continues to modify its process and procedures regarding its annual registration requirements and the Company has complied and complies in all material respects with this process and registration requirements as administered by PROFECO.
•The adoption of new laws or regulations or adverse changes in, or the interpretation or enforcement of, existing laws or regulations affecting the Company’s products and services could adversely affect its financial condition and operating results. Governments at the national, state and local levels, may seek to impose new laws, regulatory restrictions•If AFF’s originating bank partner model is successfully challenged or licensing requirements that affect the Company’s products or servicesdeemed impermissible, it offers, the terms on which it may offer them, and the disclosure, compliance and reporting obligations it must fulfill in connection with its business. They may also interpret or enforce existing requirements in new ways that could restrict the Company’s ability to continue its current methods of operation or to expand operations, impose significant additional compliance costs, and could have a material adverse effect on the Company’s financial condition and results of operations. In some cases these measures could even directly prohibit some or all of the Company’s current business activities in certain jurisdictions, or render them unprofitable and/or impractical to continue.
In July 2015, the U.S. Department of Defense published the MLA Rule. The MLA Rule (and rules previously adopted thereunder) have prevented the Company from offering its pawn services and short-term unsecured credit products to members of the military or their dependents because none of the Company’s products carry a military annual percentage rate of 36% or less. The MLA Rule, which went into effect on October 3, 2016, amended requirements for its “safe harbor” (making covered member attestation insufficient on its own to comply with the “safe harbor” provision of the MLA Rule) and expanded the scope of the credit products covered by the MLA to include certain non-purchase money loans secured by personal property, including pawn loans, or vehicles
and certain unsecured installment loan products to the extent any such products have a military annual percentage rate greater than 36%. Under the MLA Rule, the Company is unable to offer any of its current credit products, including pawn loans, to members of the U.S. military or their dependents. While the Company does not believe that active members of the U.S. military or their dependents comprise a significant percentage of the historical customer base in most locations, compliance with the MLA Rule, including its safe harbor provisions, is complex, increases compliance risks and related costs and limits the potential customer base of the Company.
Declines in commodity market prices of gold and other precious metals and diamonds could negatively affect the Company’s profits.
The Company’s profitability could be adversely impacted by commodity market fluctuations. As of December 31, 2017, approximately 56% of the Company’s pawn loans were collateralized with jewelry, which is primarily gold, and 51% of its inventories consisted of jewelry, which is also primarily gold. The Company sells significant quantities of gold, other precious metals and diamonds acquired through collateral forfeitures or direct purchases from customers. A significant and sustained decline in gold and/or other precious metal and diamond prices could result in decreased merchandise sales and related margins, decreased inventory valuations and sub-standard collateralization of outstanding pawn loans. In addition, a significant decline in market prices could result in a lower balance of pawn loans outstanding for the Company, as customers would receive lower loan amounts for individual pieces of jewelry or other gold items. For a detailed discussion of the impact of a decline in market prices on wholesale scrap jewelry sales, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Risks and uncertainties related to the Company’s foreign operations could negatively impact the Company’s operating results.
As of December 31, 2017, the Company had 999 store locations in Latin America, including 953 in Mexico, 33 in Guatemala and 13 in El Salvador. The Company plans to open additional stores in Latin America, including stores in Colombia beginning in 2018. Doing business in each of these countries, and in Latin America generally, involves increased risks related to geo-political events, political instability, corruption, economic volatility, drug cartel and gang-related violence, social and ethnic unrest including riots and looting, enforcement of property rights, governmental regulations, tax policies, banking policies or restrictions, foreign investment policies, public safety and security, anti-money laundering regulations and import/export regulations among others. As in many developing markets, there are also uncertainties as to how both local law and U.S. federal law is applied, including areas involving commercial transactions and foreign investment. As a result, actions or events could occur in Mexico, Guatemala or El Salvador that are beyond the Company’s control, which could restrict or eliminate the Company’s ability to operate some or all of its locations in these countries or significantly reduce customer traffic, product demand and the expected profitability of such operations.
Changes impacting U.S. international trade and corporate tax provisions may have an adverse effect on the Company’s financial condition and results of operations.
Because international operations increase the complexity of an organization, the Company may face additional administrative costs in managing its business. In addition, most countries typically impose additional burdens on non-domestic companies through the use of local regulations, tariffs, labor controls and other federal or state requirements or legislation. As the Company derives significant revenue, earnings and cash flow from operations in Latin America, primarily in Mexico, there are some inherent risks regarding the overall stability of the trading relationship between Mexico and the U.S. and the burdens imposed thereon by any changes to (or the adoption of new) regulations, tariffs or other federal or state legislation. Specifically, the Company has significant exposure to fluctuations and devaluations of the Mexican peso and the health of the Mexican economy, which, in each case, may be negatively impacted by changes in U.S. trade treaties (such as the North American Free Trade Agreement (“NAFTA”)) and corporate tax policy, including the imposition of a tax on imports from countries with which the U.S. runs a trade deficit, which includes countries such as Mexico. In particular, the current president has indicated that NAFTA and future import taxes are under scrutiny by his administration and that NAFTA may be renegotiated and new import taxes imposed with respect to imports from Mexico and other countries in which the U.S. runs a trade deficit. Additionally, the reduction of the U.S. corporate tax rate, to a rate which is substantially below the corporate rate in Mexico, could create unforeseen risks. In some cases, there have been negative reactions to the enacted and/or proposed policies as expressed in the media and by politicians in Mexico, which could potentially negatively impact U.S. companies operating in Mexico. While the Company engages in limited cross-border transactions other than those involving scrap jewelry sales, any such changes in regulations, trade treaties, corporate tax policy, import taxes or adverse court or administrative interpretations of the foregoing could adversely and significantly affect the Mexican economy and ultimately the Mexican peso, which could adversely and significantly affect the Company’s financial position and results of the Company’s Latin America operations.
The Company’s allowance for credit losses for credit services and consumer loans may not be sufficient to cover actual credit losses, which could adversely affect its financial condition and operating results.
The Company offers fee-based CSO Programs through which the Company assists customers in applying for short-term extensions of credit from Independent Lenders. The Company’s stand-alone consumer loan stores and select pawn stores in the states of Texas and Ohio offer the CSO Programs. When an extension of credit is granted, the Company provides a guarantee to the Independent Lenders for the repayment of the customer’s extension of credit. The Company records the estimated fair value of the guarantee liability in accrued liabilities. The Company also has customer loans arising from its consumer loan operations. The Company is required to recognize losses resulting from the inability of credit services and consumer loan customers and/or borrowers to repay such receivables or loans. The Company maintains an allowance for credit losses in an attempt to cover credit losses inherent in its consumer loan operations. Additional credit losses will likely occur in the future and may occur at a rate greater than the Company has experienced to date. The allowance for credit losses is based primarily upon historical credit loss experience, with consideration given to delinquency levels, collateral values, economic conditions and underwriting and collection practices. This evaluation is inherently subjective, as it requires estimates of material factors that may be susceptible to significant change, especially in the event of a change in the governmental regulations that affect the Company’s ability to generate new loans or collect outstanding loans. If the Company’s assumptions and judgments provefound to be incorrect, its current allowance may not be sufficientin violation of licensing, interest rate limit, lending or brokering laws and adjustments may be necessary to allowface penalties, fines, litigation or regulatory enforcement.
•Media reports, statements made by regulators and elected officials and public perception in general of pawnshops, LTO and retail finance products for different economic conditionscredit-constrained consumers as being predatory or adverse developments in its loan portfolio, whichabusive could adversely affect its financial condition and operating results.
The failure or inability of third-parties who provide products, services or support to the Company to maintain their products, services or support could disrupt Company operations or result in a loss of revenue.
TheCompany’s credit services operations depend, in part, on the willingness and ability of the Independent Lenders to make extensions of credit to its customers. The loss of the relationship with these lenders, and an inability to replace them with new lenders, or the failure of the lenders to fund new extensions of credit and to maintain volumes, quality and consistency in its loan programs could cause the Company to lose customers and substantially decrease the revenue and earnings of the Company’s credit services business. In addition, the Company’s lending, pawn retail, scrap jewelry and cash management operations are dependent upon the Company’s ability to maintain retail banking relationships with commercial banks. Recent actions by federal regulators in the U.S. and other Latin American countries where the Company operates have caused many commercial banks, including certain banks used by the Company, to cease offering such services to the Company and other companies in the Company’s industry. The Company also relies significantly on outside vendors to provide services such as financial transaction processing (including foreign exchange), utilities, store security, armored transport, precious metal smelting, data and voice networks, and other information technology products and services. The failure or inability of any of these third-party lenders, financial institutions or vendors to provide such services could limit the Company’s ability to grow its business and could increase the Company’s costs of doing business, which could adversely affect the Company’s operations if the Company is unable to timely replace them with comparable service providers at a comparable cost.
An inability to disburse consumer loan proceeds or collect consumer loan payments through the ACH system would materially adversely affect the Company’s consumer loan business.businesses.
The Company’s consumer loan businesses, including loans made through•Current and future litigation or regulatory proceedings, both in the CSO Programs, depend all or in part on the ACH system to collect amounts due to the Company by withdrawing funds from its customers’ bank accounts when the Company has obtained written authorization to do so from its customers. The Company’s ACH transactions are processed by banks,U.S. and if these banks cease to provide ACH processing services to the Company, the Company would have to materially alter, or possibly discontinue, some or all of its credit services and consumer loan business if alternative ACH processors are not available.
It was reported that actions by the Department of Justice, the FDIC and certain state regulators appear to be discouraging banks, non-bank providers, and ACH payment processors from providing access to the ACH system (e.g. debiting/crediting consumer accounts) for certain short-term consumer loan providers that they believe are operating illegally. The heightened regulatory scrutiny by the Department of Justice, the FDIC and other state and federal regulators has the potential to cause banks and ACH payment processors to cease doing business with consumer lenders who are operating legally, without regard to whether that lender is complying with applicable laws, simply to avoid the risk of heightened scrutiny or even unwarranted litigation. In addition, the National Automated Clearing House Association (“NACHA”) adopted certain operating rules that govern the use of the ACH system (“Rules”). Changes to the Rules were effective in 2015 and 2016. For example, some of the Rules add more options for which NACHA may begin an initial investigation or enforcement proceeding when an entity originates an excessive number of unauthorized entries. This could result in increased investigations of originator activity, and could ultimately result in fines passed on to those originators. Other portions of the Rules establish acceptable guidelines for certain returns of an originator. Return rates that exceed these guidelines may trigger an inquiry and review process by NACHA and the engagement of an industry review panel to evaluate the facts behind an originator's ACH activity. The evaluation could also result in a Rules violation or a Rules
enforcement proceeding. Lastly, the NACHA Rules now formally define the types of entries that may be reinitiated, and those that are prohibited from reinitiation, among other notable changes.
There can be no assurance the Company’s access to the ACH system will not be impaired as a result of this heightened scrutiny or the NACHA rule amendments. If this access is impaired, the Company’s consumer loan business could be materially adversely affected and the Company may find it difficult or impossible to continue some or all of its credit services and consumer loan business, whichLatin America, could have a material adverse effect on the Company’s business, prospects, and results of operations and financial condition.
•The sale and pawning of firearms, ammunition and certain related accessories is subject to current and potential regulation.
Increased competition from banks, credit unions, internet-based lenders, other short-term consumer lenders, and other entities offering similar financial services, as well as retail businesses that offer products and services offered by the Company, could adversely affect the Company’s results of operations.
The Company’s principal competitors are other pawnshops, consumer loan companies, internet-based lenders, consumer finance companies, rent-to-own stores, retail finance programs, payroll lenders, banks, credit unions and other financial institutions that serve the Company’s primary cost conscious and underbanked customer base. Many other financial institutions or other businesses that do not now offer products or services directed toward the Company’s traditional customer base, many of whom may be much larger than the Company, could begin doing so. Significant increases in the number and size of competitors for the Company’s business could result in a decrease in the number of consumer loans or pawn transactions that the Company writes, resulting in lower levels of revenue and earnings in these categories. Furthermore, the Company has many competitors to its retail operations, such as retailers of new merchandise, retailers of pre-owned merchandise, other pawnshops, thrift shops, online retailers, online classified advertising sites and online auction sites. Increased competition or aggressive marketing and pricing practices by these competitors could result in decreased revenue, margins and turnover rates in the Company’s retail operations. In Mexico, the Company competes directly with certain pawn stores owned by government affiliated or sponsored non-profit foundations. The government could take actions that would harm the Company’s ability to compete in the Mexico market.
A sustained deterioration of economic conditions or an economic crisis could reduce demand or profitability for the Company’s products and services and increase credit losses which would result in reduced earnings.
The Company’s business and financial results may be adversely impacted by sustained unfavorable economic conditions or unfavorable economic conditions associated with a global or regional economic crisis which, in either case, include adverse changes in interest or tax rates, effects of government initiatives to manage economic conditions and increased volatility of commodity markets and foreign currency exchange rates. Specifically, a sustained or rapid deterioration in the economy could cause deterioration in the performance of the Company’s loan portfolios and in consumer or market demand for pre-owned merchandise or gold such as that sold in the Company’s pawnshops. A sustained deterioration in the economy could reduce the demand and resale value of pre-owned merchandise and reduce the amount that the Company could effectively lend on an item of collateral. Such reductions could adversely affect pawn book balances, pawn redemption rates, inventory balances, inventory mixes, sales volumes and gross profit margins. An economic slowdown also could result in a decrease in loan demand and an increase in loan defaults on consumer loan and credit services products. During such a slowdown, the Company could be required to tighten its underwriting standards, which would reduce consumer loan balances and related revenue and credit services fees, and could face more difficulty in collecting defaulted consumer loans, which could lead to an increase in loan losses. As consumer loans and credit services customers generally have to be employed to qualify for a loan or extension of credit, an increase in the unemployment rate would reduce the number of potential customers.
A decrease in demand for the Company’s products and services and the failure of the Company to adapt to such decreases could adversely affect the Company’s results of operations.
Although the Company actively manages its products and service offerings to ensure that such offerings meet the needs and preferences of its customer base, the demand for a particular product or service may decrease due to a variety of factors, including many that the Company may not be able to anticipate or respond to in a timely manner, such as the availability and pricing of competing products, changes in customers’ financial conditions as a result of changes in unemployment levels, fuel prices or other events, real or perceived loss of consumer confidence or regulatory restrictions that increase or reduce customer access to particular products. Should the Company fail to adapt to a significant change in its customers’ demand for, or regulatory access to, its products, the Company’s revenue could decrease significantly. Even if the Company does make adaptations, customers may resist or may reject products whose adaptations make them less attractive or less available. In any event, the effect of any product change on the results of the Company’s business may not be fully ascertainable until the change has been in effect for some time. In particular, the Company has changed, and will continue to change, some of the consumer loan products and services it offers due to regulatory developments. Demand may also fluctuate by geographic region. The current geographic concentration of the Company’s stores creates exposure to local economies and regional downturns (see “—Item 1. Business—Locations and Operations” for store
concentration by state). As a result,Risks Related to the AFF Acquisition and Business
•The Company may fail to realize all of the anticipated benefits of the AFF Acquisition, or those benefits may take longer to realize than expected. The Company may also encounter significant difficulties in integrating the AFF business. •The AFF business is currently more susceptibledependent on merchant partners for its transaction volume and its growth is primarily driven by its ability to regional conditions than the operationsattract additional merchants and retain and grow its relationships with its existing merchant partners. •The AFF business derives a significant portion of more geographically diversified competitors, and the Company is vulnerable to economic downturns in those regions. Any unforeseen events or circumstances that negatively affect these areas could materially adversely affect the Company’s revenues and profitability.
Changes in the capital markets or the Company’s financial condition could reduce availabilityits revenue from several top merchant partners. The loss of capital on favorable terms, if at all.
The Company has, in the past, accessed the debt capital markets to refinance existing debt obligations and to obtain capital to finance growth. Efficient access to these markets is critical to the Company’s ongoing financial success. However, the Company’s future access to the debt capital markets could become restricted due to a variety of factors, including a deterioration of the Company’s earnings, cash flows, balance sheet quality, regulatory restrictions, fines, or orders or other regulatory action causing reputational harm, or overall business or industry prospects, a significant deterioration in the stateplatform support from one or more of the capital markets, including impacts of inflation or rising interest rates or a negative bias toward the Company’s industry by market participants. Inability to access the credit markets on acceptable terms, if at all,these top merchant partners could have a material adverse effect on the Company’sAFF business.
•The AFF business relies extensively on its proprietary decisioning platform and if such platform is not effective, it could have a material impact on the AFF business and its financial condition and abilityresults of operations. •If the AFF business is unable to fund future growth.collect on its leases, RISAs and bank loans, the performance of its lease and loan portfolio would be adversely affected.
Risks Related to Tax and Financial Matters
•The Company'sCompany’s existing and future levels of indebtedness and any potential earnout payments payable in connection with the AFF Acquisition could adversely affect its financial health, its ability to obtain financing in the future, its ability to react to changes in its business and its ability to fulfill its obligations under such indebtedness.
•Declines in commodity market prices of gold, other precious metals and diamonds could negatively affect the Company’s profits.
As•Unexpected changes in both domestic and foreign tax laws and policies could negatively impact the Company’s operating results.
Risks Related to Economic and Market Environment
•The COVID-19 pandemic has adversely impacted, and may materially and adversely impact in future periods, the Company’s business and results of December 31, 2017,operations. •A sustained deterioration of economic conditions or an economic crisis and government actions taken to limit the impact of such an economic crisis could reduce demand or profitability for the Company’s products and services which would result in reduced earnings. •The price of the Company’s common stock has fluctuated substantially over the past several months and may continue to fluctuate substantially in the future.
Strategic and Business Risks
Increased competition from other pawnshops, point-of-sale consumer finance companies, other short-term consumer lenders, governmental entities and other organizations offering similar financial services and retail products offered by the Company could adversely affect the Company’s results of operations.
The Company’s principal competitors are other pawnshops, branch-based consumer loan or finance companies, internet-based lenders, LTO stores, point-of-sale, LTO and consumer finance providers, banks, credit unions and various other types of consumer finance companies that serve the Company’s primarily credit-constrained customer base. In addition, banks and consumer finance companies are developing retail POS payment products and services designed to compete for the credit-constrained customer, many of which have greater financial resources and brand recognition than the Company. Significant increases in the number and size of competitors for the Company’s business could result in a decrease in the number of the Company’s pawn transactions or in AFF’s transaction volumes, resulting in lower levels of revenue and earnings.
Furthermore, the Company’s retail pawn operations have many competitors, such as retailers of new and pre-owned merchandise, other pawnshops, thrift shops, online retailers of new and pre-owned merchandise, online classified advertising sites, social media platforms and online auction sites. Many consumers view these competitors as a safer, more price competitive or convenient option for acquiring similar products to what the Company sells. AFF also competes with many of these retailers for consumers desiring to purchase lower cost merchandise for cash or on credit.
In Mexico, the Company’s pawn stores also compete directly with government sponsored or affiliated non-profit foundations operating pawn stores. The Mexican government could take regulatory or administrative actions that would harm the Company’s ability to compete profitably in the Mexico market.
Increased competition or aggressive marketing and pricing practices by these competitors could result in decreased revenue, margins and inventory turnover rates in the Company’s retail operations.
A decrease in demand for the Company’s products and services and the failure of the Company to adapt to such decreases could adversely affect the Company’s results of operations.
Although the Company actively manages its product and service offerings to ensure that such offerings meet the needs and preferences of its customer base and merchant partners, in the case of the AFF business, the demand for a particular product or service may decrease due to a variety of factors, including many that the Company's 5.375% senior notes issuedCompany may not be able to control, anticipate or respond to in May 2017 (“Notes”)a timely manner, such as the availability and pricing of competing products or technology, changes in customers’ financial conditions as a result of changes in unemployment levels, declines in consumer spending habits related to general economic conditions, inflation, public health and safety issues, fuel prices, interest rates, government sponsored economic stimulus programs, social welfare or benefit programs, real or perceived loss of consumer confidence or regulatory restrictions that increase or reduce customer access to particular products. The AFF business also competes in an industry that is subject to significant technological change and disruption and AFF’s ability to meet the needs of both merchants and consumers is dependent on its ability to adequately adapt and respond to these changes.
The Company’s retail sales depend in large part on sufficient inventory levels driven primarily by forfeited collateral on pawn loans. If demand for pawn loans decreases, inventory levels typically decline, which can have a material adverse impact on retail sales.
Should the Company fail to adapt to a significant change in its customers’ demand for, or regular access to, its products, the Company’s revenue could decrease significantly. Even if the Company makes adaptations, its customers or merchants may resist or may reject products or services whose adaptations make them less attractive or less available. In any event, the effect of any product or service change on the results of the Company’s business may not be fully ascertainable until the change has been in effect for some time.
The Company’s organic growth is subject to external factors and other circumstances over which it has limited control or that are beyond its control. These factors and circumstances could adversely affect the Company’s ability to grow.
The success of the Company’s organic expansion strategy is subject to numerous external factors, including regulatory restrictions, general economic conditions and acceptance of the Company’s products. With respect to the Company’s pawn business, organic growth is largely driven by the ability to increase the productivity of its existing stores and successfully open new stores, which new store openings are impacted by the availability of sites with favorable customer demographics, limited competition from other pawn stores, community acceptance, suitable lease terms, its ability to attract, train and retain qualified associates and management personnel, the ability to obtain required government permits and licenses and the ability to complete construction and obtain utilities in a timely manner. With respect to the AFF business, organic growth is largely driven by the ability of AFF to expand its network of merchant partners, increase utilization of its products at its merchant partners and improve its technology to support increased growth, meet the needs of its merchants and consumers and make effective approval decisions with respect to its products. Some of these factors are beyond the Company’s control. The failure to execute the Company’s organic expansion strategy would adversely affect the Company’s ability to expand its business and could materially adversely affect its business, prospects, results of operations and financial condition.
The inability to successfully identify attractive acquisition targets, realize administrative and operational synergies and integrate completed acquisitions could adversely affect results.
The Company has historically grown, in large part, through strategic acquisitions, and the Company’s current credit facility,strategy is to continue to pursue attractive acquisition opportunities if and when they become available. The success of an acquisition is subject to numerous internal and external factors, such as competition rules, the ability to consolidate information technology and accounting functions, the management of additional sales, administrative, operations and management personnel, overall management of a larger organization, competitive market forces, and general economic and regulatory factors. It is possible that the integration process could result in unrealized administrative and operational synergies, the loss of key employees, the disruption of ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect the Company’s ability to maintain relationships with customers, employees, or other third-parties or the Company’s ability to achieve the anticipated benefits of such acquisitions and could harm its financial performance. Furthermore, future acquisitions may be in jurisdictions in which the Company had outstanding principal indebtednessdoes not currently operate or in lines of $407.0 million and availability of $287.9 million under its credit facility. The Company's level of indebtedness could: make it more difficult for it to satisfy its obligations with respect to the Notes and its other indebtedness, resulting in possible defaults on and acceleration of such indebtedness;
require it to dedicate a substantial portion of its cash flow from operations to the payment of principal and interest on its indebtedness, thereby reducing the availability of such cash flows to fund working capital, acquisitions,business that are new store openings, capital expenditures and other general corporate purposes;
limit its ability to obtain additional financing for working capital, acquisitions, new store openings, capital expenditures, debt service requirements and other general corporate purposes;
limit its ability to refinance indebtedness or cause the associated costs of such refinancing to increase;
restrict the ability of its subsidiaries to pay dividends or otherwise transfer assets to the Company, which could limitmake the successful consummation and integration of any such acquisitions more difficult. Attractive acquisition targets may also become increasingly scarce in future periods or in jurisdictions the Company would like to expand its operations in. Failure to successfully integrate an acquisition
could have an adverse effect on the Company’s business, results of operations and financial condition, and failure to successfully identify attractive acquisition targets and complete such acquisitions on favorable terms could have an adverse effect on the Company’s growth. Additionally, any acquisition has the risk that the Company may not realize a return on the acquisition or the Company’s investment.
The Company’s future success is largely dependent upon the ability of its management team to successfully execute its business strategy.
The Company’s future success, including its ability to achieve its growth and profitability goals, is dependent on the ability of its management team to execute on its long-term business strategy, which requires them to, among other things, make required paymentsthings: (1) pursue organic growth by opening new pawn stores and expanding AFF’s network of merchant partners, (2) identify attractive acquisition opportunities, close on such acquisitions on favorable terms and successfully integrate acquired businesses, (3) encourage and improve customer traffic at its pawn stores and the utilization of AFF’s products with its existing merchant partners, (4) improve the customer experience at its pawn stores and for AFF’s merchant partners and customers, (5) enhance productivity of its pawn stores, including through investments in technology, (6) control expenses in line with their current projections, (7) keep pace with technological change and improve the Company’s proprietary pawn point-of-sale and loan management system and AFF’s proprietary lease and loan management system and decisioning platform, and (8) effectively maintain its compliance programs and respond to regulatory developments and changes that impact its business. Failure of management to execute its business strategy could negatively impact the Company’s business, growth prospects, financial condition or results of operations. Further, if the Company’s growth is not effectively managed, the Company’s business, financial condition, results of operations and future prospects could be negatively affected, and the Company may not be able to continue to implement its business strategy and successfully conduct its operations.
Operational Risks
The Company depends on its debt;senior management and may not be able to retain those employees or recruit additional qualified personnel.
The Company depends on its senior management to execute its business strategy and oversee its operations. The Company’s senior management team has significant pawn industry experience in both Latin America and the United States as well as public company experience, which the Company believes is unique in the pawn industry. Furthermore, the addition of AFF’s senior management team following the AFF Acquisition, provides the Company with significant experience with retail POS payment solutions for credit-constrained customers. The loss of services of any of the members of the Company’s senior management could adversely affect the Company’s business until a suitable replacement can be found, if at all. There may be a limited number of persons with the requisite skills to serve in these positions, and the Company cannot ensure that it would be able to identify or employ such qualified personnel on acceptable terms. Furthermore, a significant increase in the costs to retain any members of the Company’s senior management could adversely affect the Company’s business and operations.
The Company depends on hiring, training and retaining an adequate number of qualified employees to run its businesses.
The Company’s pawn business relies heavily on retail employees who work on an hourly basis and AFF relies heavily on sales, information technology, data science and customer service employees. The Company must attract, train, and retain a large number of employees, while at the same time controlling labor costs. In particular, the Company’s in-store positions have historically had high turnover rates, which can lead to increased training, retention and other costs and impair the overall customer service and efficiencies at the Company’s pawn stores. There has also been an increase in labor shortages and competition for employees, especially with respect to the Company’s hourly in-store employees, including from retailers and the restaurant industries. The Company also faces meaningful competition for AFF’s salesforce, information technology, call center and data science teams. The lack of availability of adequate employees or the Company’s inability to attract and retain qualified employees, or an increase in wages and benefits to current employees could adversely affect its business, results of operations, cash flows and financial condition.
Furthermore, federal, state or local legislated increases in the minimum wage, as well as increases in additional labor cost components such as employee benefit costs, workers’ compensation insurance rates, compliance costs, fines and, in Mexico, costs associated with labor agreements, unions and profit sharing requirements, would increase the Company's vulnerability to general adverse economic and industry conditions, including interest rate fluctuations (because a portion of its borrowings are at variable rates of interest); and place the Company at a competitive disadvantage compared to other companies with proportionately less debt or comparable debt at more favorable interest rates who, as a result, may be better positioned to withstand economic downturns.
Any of the foregoing impacts of the Company's level of indebtednessCompany’s labor costs, which could have a material adverse effect on its business, financial condition andprospects, results of operations.operations and financial condition.
The Company’s business depends on the uninterrupted operation of the Company’s facilities, systems and business functions, including its information technology and other business systems, and the Company reliesreliance on other companies to provide key components of its business systems.
The Company’s business depends highly upon its employees’ ability to perform, in an efficient and uninterrupted fashion, necessary business functions such as operating, managing and securing its retail locations, technical support centers, call centers, security monitoring, treasury and accounting functions and other administrative support functions. Additionally, the Company’s storefront operations depend on the efficiency and reliability of the Company’s proprietary pawn point-of-sale and loan management system.system and AFF depends on its systems to process its transaction volume and effectively decision and service its customers. Furthermore, third-parties provide a number of key components necessary to the Company’s business functions and systems. Any problems caused by these third-parties could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business. A shut-down of or inability to access the facilities in which the Company’s storefront point-of-sale and loan management system and other technology infrastructure are based, such asthese systems due to a power outage, a securitycyber-security breach or attack, a breakdown or failure of one or more of its information technology, telecommunications or other systems, a cyber attack, or sustained or repeated disruptions of such systems could significantly impair its ability to perform such functions on a timely basis and could result in a deterioration of the Company’s ability to perform efficient storefront lending and merchandise disposition activities,its day-to-day operations, provide customer service perform collection activities, or perform other necessary business functions.
Furthermore, third parties provide a number of the key components necessary to the Company’s business functions and systems. While the Company has carefully selected these third party vendors and has ongoing programs to review these vendors and assess risk, the Company does not control their actions. Any problems caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, regulatory restrictions, fines, or orders or other regulatory action causing reputational harm, failure of a vendor to provide services for any reason or poor performance of services, could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business. Financial or operational difficulties of a third-party vendor could also hurt its operations if those difficulties interfere with the vendor's ability to serve the Company. Furthermore, the Company’s vendors could also be sources of operational and information security risk to the Company, including from breakdowns or failures of their own systems or capacity constraints. Replacing these third-party vendors could also create significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to the Company’s business operations.
Security breaches, cyber attacks or fraudulent activity could result in damage to the Company’s operations or lead to reputational damage and expose the Company to significant liabilities.
An important component of the Company’s business involves collection, storage, use, disclosure, processing, transfer and other handling of a wide variety of sensitive, regulated and/or confidential information, including personally identifiable information, for various purposes in its business. The Company has historically maintained minimal personal information with respect to its pawn transactions (primarily name, address and date of birth). However, AFF obtains additional personal information, including social security numbers, dates of birth, bank account and payment card information and data from consumer reporting agencies (including credit report information), increasing the potential risk of unauthorized access to such confidential information. The Company is under constant threat of loss due to the velocity and sophistication of security breaches and cyber attacks. These security incidents and cyber attacks may be in the form of computer hacking, acts of vandalism or theft, malware, computer viruses or other malicious codes, phishing, employee error or malfeasance, catastrophes or unforeseen events or other cyber-attacks. A security breach of the Company’s computer systems, or those of the Company’s third partythird-party service providers, including as a result of cyber attacks, could cause loss of Company assets, interrupt or damage its operations or harm its reputation. In addition, the Company could be subject to liability if confidential customer or employee information is misappropriated from its computer systems. Any compromise of security, including security breaches perpetrated on persons with whom the Company has commercial relationships, that results in the unauthorized access to or use of personal information or the unauthorized access to or use of confidential employee, customer, supplier or Company information, could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to the Company’s reputation, and a loss of confidence of the Company’s customers, vendors and others, which could harm its business and operations. Any compromise of security could deter people from entering into transactions that involve transmitting confidential information to the Company’s systems and could harm relationships with the Company’s suppliers, which could have a material adverse effect on the Company’s business. Actual or anticipated cyber attacks may cause the Company to incur substantial costs, including costs to prevent future attacks and investigate actual attacks, deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. Despite the Company’s implementation of significant security measures, including the use of encryption and authentication technology to provide security and authentication to effective secure transmission of confidential information, these systems may still be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third partiesthird-parties or similar disruptive problems. The Company may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber attacks.
Most of the Company’s customers provide personal information in three ways: (1) when conducting a pawn transaction or selling merchandise, (2) during a consumer loan transaction (when personal and bank account information is necessary for approving this transaction), and (3) when conducting a retail purchase whereby a customer’s payment method is via a credit card, debit card or check. Whileattacks. Moreover, the Company has implementedmay be unable to anticipate cyber attacks, react in a timely manner, or implement adequate preventative or remedial measures. Although the Company monitors its systems and processesin order to protect againstdetect security breaches or instances of unauthorized access to or use of such personalconfidential information, there is no guarantee that these procedures are adequateits monitoring efforts will be effective. While the Company has not experienced any material losses relating to safeguard against allcyber attacks or other information security breaches or misuse of the information. Furthermore,to date, the Company relies on encryption and authentication technology to provide securityAFF have been the subject of attempted hacking and authentication to effectively secure transmission of confidential information, including customer bank account, credit card informationcyber attacks and other personal information. However, there iscan be no guaranteeassurance that these systems or processes will address all of the cyber threats that continue to evolve.
In addition, many of the third parties who provide products, services, or support to the Company could also experience any ofwill not suffer significant losses or reputational harm in the above cyber risks or security breaches, which could impact the Company’s customers and its business and could result in a loss of customers, suppliers or revenue.future.
Lastly,Additionally, the regulatory environment related to information security and data collection, andretention, use and privacy is increasingly rigorous, with new and constantly changing requirements applicable to the Company’s business, and compliance with those requirements could result in additional costs. These costs, associated with information security, such as increased investment in technology or investigative expenses, the costs of compliance with privacy laws, and fines, penalties and costs incurred to prevent or remediate information security or cyber breaches. Furthermore, federal and state regulators and many federal and state laws and regulations require notice of any data security breaches that involve personal information. These mandatory disclosures regarding a security breach are
costly to implement and often lead to widespread negative publicity, which may cause consumers to lose confidence in the effectiveness of the Company’s data security measures. Any security breach suffered by the Company or its vendors, any unauthorized, accidental, or unlawful access or loss of data, or the perception that any such event has occurred, could result in a disruption to the Company’s operations, litigation, an obligation to notify regulators and affected individuals, the triggering of indemnification and other contractual obligations, regulatory investigations, government fines and penalties, reputational damage, and loss of customers and ecosystem partners, and its business could be substantialmaterially and adversely impactaffected.
Lastly, the Company’s cyber and other insurance policies carry retention and coverage limits which may not be adequate to reimburse for losses caused by security breaches, and the Company may not be able to collect fully, if at all, under these insurance policies.
Because the Company maintains a significant supply of cash, loan collateral and inventories in its pawn stores and certain processing centers, the Company may be subject to employee and third-party robberies, riots, looting, burglaries and thefts. The Company also may be subject to liability as a result of crimes at its pawn stores.
The Company’s business requires it to maintain a significant supply of cash, loan collateral and inventories, including gold and other precious metals, in most of its pawn stores and certain corporate locations. As a result, the Company is subject to the risk of employee and third-party robberies, riots, looting, burglaries and thefts. Although the Company has implemented various programs in an effort to reduce these risks and utilizes various security measures at its facilities, there can be no assurance that robberies, riots, looting, burglaries and thefts will not occur. Robberies, riots, looting, burglaries and thefts could lead to losses and shortages and could adversely affect the Company’s business, prospects, results of operations and financial condition. The Company maintains a program of insurance coverage for various types of property, casualty and other risks. However, the insurance program generally has large deductibles and may not be adequate to cover all such losses. The Company could also experience liability or adverse publicity arising from such crimes. Any such event may have a material and adverse effect on the Company’s business, prospects, results of operations and financial condition.
If the Company is unable to protect its intellectual property rights, its ability to compete could be negatively impacted.
The success of the Company’s business depends to a certain extent upon the value associated with its intellectual property rights, including its proprietary, internally developed point-of-sale and loan management system that is in use in its pawn stores and its proprietary decisioning technology that is used by the AFF business. The Company relies on a combination of trademarks, trade dress, trade secrets, proprietary software, website domain names and other rights, including confidentiality procedures and contractual provisions to protect its proprietary technology, processes and other intellectual property. While the Company intends to vigorously protect its trademarks and proprietary systems against infringement, it may not be successful. In addition, the laws of certain foreign countries may not protect intellectual property rights to the same extent as the laws of the U.S. The costs required to protect the Company’s intellectual property rights and trademarks could be substantial.
The Company’s businesses are typically subject to seasonality, which causes the Company’s revenues and operating cash flows to fluctuate and may adversely affect the Company’s ability to borrow on its unsecured credit facilities, service its debt obligations and fund its operations.
The Company’s U.S. pawn business typically experiences reduced demand in the first and second quarters as a result of its customers’ receipt of federal tax refund checks typically in February of each year while demand typically increases during the third and fourth quarters. The AFF business experiences significantly higher originations in the fourth quarter associated with holiday shopping, which also generally positively impacts retail sales in the Company’s pawn stores in the fourth quarter, and reduced demand in the first and second quarters as retail expenditures are generally lower in these quarters. Typically, the Company’s pawn business experiences seasonal growth of service fees in the third and fourth quarter of each year due to loan balance growth. Service fees generally decline in the first and second quarter of each year due to the typical repayment of pawn loans associated with statutory bonuses received by customers in the fourth quarter in Mexico and with tax refund proceeds typically received by customers in the first quarter in the U.S.
This seasonality requires the Company to manage its cash flows over the course of the year. If a governmental authority were to pursue economic stimulus actions or issue additional tax refunds, tax credits or other statutory payments at other times during the year, such actions could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition during these periods. If the Company’s revenues were to fall substantially below what it would normally expect during certain periods, the Company’s annual financial results, its ability to borrow on its unsecured credit facilities, and its ability to service its debt obligations or fund its operations, including originations for the AFF business, could be adversely affected.
The failure or inability of third-parties who provide products, services or support to the Company to maintain their products, services or support could disrupt Company operations or result in a loss of revenue.
The Company’s operations and cash management are dependent upon the Company’s ability to maintain retail banking services, treasury management services and borrowing relationships with commercial banks. Actions by federal regulators in the U.S. and other Latin American countries where the Company operates have caused many commercial banks, including certain banks used by the Company, to cease offering such services to the Company and other businesses in the pawn, LTO and consumer finance industries. The Company also relies significantly on outside vendors to provide services related to financial transaction processing (including credit and debit card processors), utilities, store security, armored transport, precious metal smelting, data and voice networks and other information technology products and services. The failure or inability of any of these third-party financial institutions or vendors to provide such services could limit the Company’s ability to grow its business and could increase the Company’s costs of doing business, which could adversely affect the Company’s operations if the Company is unable to timely replace them with comparable service providers at a comparable cost.
Regulators and payment processors are scrutinizing certain consumer finance companies’ access to the Automated Clearing House (“ACH”) system to disburse and collect proceeds and repayments for consumer finance products, and any interruption or limitation on the Company’s ability to access this critical system would materially adversely affect its business.
It has been reported that actions, referred to as Operation Choke Point, by the U.S. Department of Justice (the “Justice Department”) the Federal Deposit Insurance Corporation (the “FDIC”) and certain state regulators appear to be intended to discourage banks and ACH payment processors from providing access to the ACH system for certain lenders that they believe are operating illegally, cutting off their access to the ACH system to either debit or credit customer accounts (or both).
In the past, this heightened regulatory scrutiny by the Justice Department, the FDIC and other regulators has caused some banks and ACH payment processors to cease doing business with consumer finance companies who are operating legally, without regard to whether those companies are complying with applicable laws, simply to avoid the risk of heightened scrutiny or even litigation. These actions have reduced the number of banks and payment processors who provide ACH payment processing services and could conceivably make it increasingly difficult to find banking partners and payment processors in the future and/or lead to significantly increased costs for these services. Furthermore, the Company also relies on credit card companies and payment processors for a significant portion of its retail sales as well as payments on its pawn loans, LTO, RISA and bank loan products. These companies may decide to cease doing business with the Company due to regulatory or reputational concerns. If the Company is unable to maintain access to needed services on favorable terms, the Company would have to materially alter, or possibly discontinue, some or all of its business if alternative processors are not available.
Regulatory, Legislative and Legal Risks
The Company is the subject of a lawsuit initiated by the CFPB alleging violations of the MLA and the Company’s predecessor company’s 2013 CFPB consent order and a purported securities class action.
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 MLA. The CFPB also alleges that FirstCash, Inc. violated a 2013 CFPB order against its predecessor company that, among other things, required the predecessor company to cease and desist from further MLA violations. The CFPB is seeking an injunction, redress for affected borrowers and a civil money penalty. While the Company intends to vigorously defend itself against the allegations in the case, it cannot predict or determine the timing or final outcome of this matter, or the effect that any adverse determinations from the lawsuit may have on the Company. An unfavorable determination in the lawsuit could result in the payment of substantial monetary damages, which could have a material effect on the Company’s business, results of operations or financial condition. The Company may also be required to modify its business practices in the event of an unfavorable determination in the lawsuit, which could impact demand for its products and customer satisfaction. Further, the legal costs associated with the lawsuit, which may not be covered by insurance, and the amount of time required to be spent by management and the Board of Directors on this matter, even if the Company is ultimately successful, could have a material effect on its business, financial condition and results of operations. Furthermore, due to the impact of the announcement of the CFPB’s action on the Company’s stock price, the Company has become subject to a purported securities class action related to the CFPB’s lawsuit and may become subject to further related litigation. An unfavorable result in these matters could also have a material impact on the Company’s financial condition and results of operations.
The Company’s products and services are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations in both the U.S. and Latin America. If changes in regulations affecting the Company’s pawn business or the AFF business create increased restrictions, or have the effect of prohibiting pawn loans or POS payment products in the jurisdictions where the Company currently operates, such regulations could materially impair or reduce the Company’s business and limit its expansion into new markets.
The Company’s products and services are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations in both the U.S. and Latin America. Federal and state regulatory authorities are increasingly focused on consumer finance and retail POS payment products for credit-constrained consumers such as those offered by the Company. The Company faces the risk that restrictions or limitations on pawn loans and retail POS payment products resulting from the enactment, change, interpretation or enforcement of laws and regulations in the U.S. or Latin America could have a negative effect on the Company’s business activities. In addition, certain consumer advocacy groups, federal, state and local legislators and governmental agencies have also asserted that rules, laws and regulations should be tightened so as to severely limit, if not eliminate, the availability of pawn transactions, POS payment products and buy/sell agreements to consumers. Moreover, the Company expects the current presidential administration to devote substantial attention to consumer protection matters, including more aggressive enforcement actions, and, as a result, businesses transacting with credit-constrained consumers could be held to higher standards of monitoring, disclosure and reporting, regardless of whether new laws or regulations governing the Company’s industry are adopted. It is difficult to assess the likelihood of the enactment of any unfavorable federal or state legislation or local ordinances, and there can be no assurance that additional legislative, administrative or regulatory initiatives will not be enacted that would severely restrict, prohibit, or eliminate the Company’s ability to offer certain products and services.
In particular, with respect to the Company’s pawn business, restrictions and regulations such as licensing requirements for pawn stores and their employees, customer identification requirements, suspicious activity reporting, disclosure requirements and limits on interest rates, loan service fees, or other fees have been and continue to be proposed. Adoption of such federal, state or local regulation or legislation in the U.S. and Latin America could restrict, or even eliminate, the availability of pawn transactions and buy/sell agreements at some or all of the Company’s locations, which would adversely affect the Company’s operations and financial condition.
In addition, certain aspects of the AFF business, such as the content of its advertising and other disclosures to customers about transactions, its collection practices, the manner in which AFF contacts its customers, the decisioning process regarding whether to enter into a transaction with a potential customer, its credit reporting practices and the manner in which it processes and stores certain customer, employee and other information are subject to federal and state laws and regulatory oversight. These applicable state and federal privacy laws will require AFF to design, implement and maintain different types of privacy- and access-related compliance controls and programs simultaneously in multiple states, thereby further increasing the complexity and cost of compliance.
Moreover, certain states limit the total amount or rate of finance charge that AFF may charge a customer in order for the customer to achieve ownership of the leased merchandise at the end of the lease term. Additional states may elect to implement similar limits or states with existing limits may elect to further lower the total cost that AFF may charge a customer to achieve ownership of the leased merchandise at the end of the lease term, which could have an adverse effect on the Company’s results of operation and financial condition.
The complexity of the political and regulatory environment in which the Company operates and the related cost of compliance are both increasing due to the changing political landscape, additional legal and regulatory requirements, the Company’s ongoing expansion into new markets and the fact that foreign laws occasionally are vague or conflict with domestic laws. In addition to potential damage to the Company’s reputation and brand, failure to comply with applicable federal, state and local laws and regulations such as those outlined elsewhere in these risk factors may result in the Company being subject to claims, lawsuits, fines and adverse publicity that could have a material adverse effect on its business, results of operations and financial condition.
The FTC and the CFPB have regulatory, supervisory and enforcement powers over providers of consumer financial products and services in the U.S., and each could exercise its enforcement powers in ways that could have a material adverse effect on the Company’s business and financial results.
The FTC is charged with preventing unfair or deceptive acts or practices and false or misleading advertisements, and the CFPB is charged with preventing unfair, deceptive or abusive acts or practices. To this end, the FTC and CFPB have been exercising their supervisory and investigative powers over certain non-bank providers of consumer financial products and services. In particular, both the FTC and CFPB have the authority to issue civil investigative demands and pursue administrative proceedings or litigation for actual or perceived violations of some federal consumer laws. In these proceedings, the FTC can seek consent orders, confidential memorandums of understandings, cease and desist orders (which can include orders for redisclosure, restitution or rescission of contracts, as well as affirmative or injunctive relief) and monetary penalties. The CFPB’s examination authority permits its examiners to inspect the books and records of providers of short-term, small dollar loans and ask questions about their business practices. As a result of these examinations of non-bank providers of consumer credit, the Company could be subject to specific enforcement action, including monetary penalties, which could adversely affect the Company.
Also, where a company is alleged to have violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the Dodd-Frank Act, the Dodd-Frank Act empowers state attorneys general and certain state regulators to bring civil actions to remedy alleged violations of law. If the CFPB or one or more state attorneys general or state regulators believe that the Company has violated any of the applicable laws or regulations or any consent orders or confidential memorandums of understanding against or with the Company, they could exercise their enforcement powers in ways that could have a material adverse effect on the Company’s business and financial results. Furthermore, under the current presidential administration, the CFPB has been more aggressive in their exercise of the enforcement powers making it more likely, as evidenced by the CFPB’s action against the Company related to alleged violations of the MLA, that future enforcement actions will be brought against consumer finance companies providing services and products to credit-constrained customers.
See “Item 1. Business—Government Regulation” for a further discussion of the regulatory authority of the CFPB.
The FDIC has issued examination guidance affecting AFF’s unaffiliated third-party lender and these or subsequent new rules and regulations could have a significant impact on AFF’s products originated by the Bank.
The installment loans are originated by the Bank using technology and marketing services provided by AFF. The Bank is supervised and examined by both the state of Utah, which charters the Bank, and the FDIC. If the FDIC or the Utah Department of Financial Institutions considers any aspect of the products originated by the Bank to be inconsistent with its guidance, the Bank may be required to alter or discontinue the product.
On July 29, 2016, the board of directors of the FDIC released examination guidance relating to third-party lending, which, if finalized, would apply to all FDIC-supervised institutions that engage in third-party lending programs, including certain bank products. The proposed guidance elaborates on previously-issued agency guidance on managing third-party risks and specifically addresses third-party lending arrangements where an FDIC-supervised institution relies on a third party to perform a significant aspect of the lending process. The types of relationships that would be covered by the guidance include (but are not limited to) relationships for originating loans on behalf of, through or jointly with third-parties, or using platforms developed by third parties. If adopted as proposed, the guidance would result in increased supervisory attention of institutions that engage in significant lending activities through third-parties, including at least one examination every 12 months, as well as supervisory expectations for a third-party lending risk management program and third-party lending policies that contain certain minimum requirements, such as self-imposed limits as a percentage of total capital for each third-party lending relationship and for the overall loan program, relative to origination volumes, credit exposures (including pipeline risk), growth, loan types, and acceptable credit quality. While the guidance has never formally been adopted, it is the Company’s understanding that the FDIC has relied upon it in its examination of third-party lending arrangements.
If AFF’s originating bank partner model is successfully challenged or deemed impermissible, it could be found to be in violation of licensing, interest rate limit, lending or brokering laws and face penalties, fines, litigation or regulatory enforcement.
Loans originated through the Bank’s program would have accounted for 5% of the Company’s total revenues during 2021 on a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021. AFF relies on its originating bank partner model to comply with various federal, state and other laws. If the legal structure underlying AFF’s relationship with the Bank was successfully challenged, it may be found to be in violation of state licensing requirements and state laws regulating interest rates. For example, AFF is currently responding to a subpoena from the New Jersey Attorney General related to its partner bank’s loan product, and in the state of New Mexico there is pending legislation which would effectively prohibit AFF’s use of the bank partner model in that state. Such bank loan products in New Jersey and New Mexico would have accounted for less than 1% of the Company’s total revenues during 2021 on a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021. In the event of such a challenge or if its arrangements with the Bank were to end for any reason, AFF would need to find and rely on an alternative bank relationship, rely on existing state licenses, obtain new state licenses, pursue a federal bank charter, offer consumer loans and/or be subject to the interest rate limitations of certain states.
AFF could be subject to litigation, whether private or governmental, or administrative action regarding the above claims. The potential consequences of an adverse determination could include the inability to collect loans at the interest rates contracted for, licensing violations, the loans being found to be unenforceable or void, or the reduction of interest or principal, or other penalties or damages. Third-party purchasers of loans facilitated through AFF’s platform also may be subject to scrutiny or similar litigation, whether based upon the inability to rely upon the “valid when made” doctrine or because a party other than the Bank is deemed the true lender.
The adoption of new laws or regulations or adverse changes in, or the interpretation or enforcement of, existing laws or regulations affecting the Company’s products and services could adversely affect its financial condition and operating results.
Governments, including agencies at the national, state and local levels, may seek to enforce or impose new laws, regulatory restrictions, licensing requirements or taxes that affect the Company’s products or services it offers, the terms on which it may offer them, and the disclosure, compliance and reporting obligations it must fulfill in connection with its business. They may also interpret or enforce existing requirements in new ways that could restrict the Company’s ability to continue its current methods of operation or to expand operations, impose significant additional compliance costs, and could have a material adverse effect on the Company’s financial condition and results of operations. In some cases, these measures could even directly prohibit some or all of the Company’s current business activities in certain jurisdictions, or render them unprofitable and/or impractical to continue.
Media reports, statements made by regulators and elected officials and public perception in general of pawnshops, LTO and retail finance products for credit-constrained consumers as being predatory or abusive could materially adversely affect the Company’s businesses. In recent years, consumer advocacy groups and some media reports, in both the U.S. and Latin America, have advocated governmental action to prohibit or place severe restrictions on the Company’s products and services.
Reports and statements made by consumer advocacy groups, members of the media, regulators and elected officials often focus on the annual or monthly cost to a consumer of pawn, LTO and certain retail finance transactions, which are higher than the interest typically charged by banks to consumers with better credit histories. These reports and statements typically characterize these products as predatory or abusive and often focus on alleged instances of pawn operators purchasing or accepting stolen property as pawn collateral. If the negative characterization of the Company’s businesses becomes increasingly accepted by consumers, demand for its products could significantly decrease, which could materially affect the Company’s results of operations and financial condition. Additionally, if the negative characterization of these types of transactions becomes increasingly accepted by legislators and regulators, the Company could become subject to more restrictive laws and regulations that could have a material adverse effect on the Company’s financial condition and results of operations. Furthermore, any negative public perception of pawnshops generally would also likely have a material negative impact on the Company’s retail operations, including reducing the number of consumers willing to shop at the Company’s stores.
Judicial or administrative decisions, CFPB rule-making, or amendments to the Federal Arbitration Act (the “FAA”) or new legislation could render the arbitration agreements the Company uses illegal or unenforceable.
The Company includes dispute arbitration provisions for its employees and in many of its customer loanpawn, LTO and pawnretail finance agreements. These provisions are designed to allow the Company to resolve any employee or customer disputes through individual arbitration rather than in court. The Company’s arbitration provisions explicitly provide that all arbitrations will be conducted on an individual and not on a class or collective basis. Thus, the Company’s arbitration agreements, if enforced, have the effect of mitigating class and collective action liability. The Company’s arbitration agreements do not have any impact on regulatory enforcement proceedings. The Company takes the position that the
FAA requires enforcement, in accordance with the terms of its arbitration agreements, of class and collective action waivers of the type the Company uses, particularly now that the CFPB’s Arbitration Rule was officially repealed in November 2017.
In the past, however,However, a number of state and federal circuit courts including the California and Nevada Supreme Courts, and the National Labor Relations Board have concluded that arbitration agreements with consumer class action waivers are “unconscionable” and hence unenforceable, particularly where a small dollar amount is in controversy on an individual basis. In April 2011, however, the U.S. Supreme Court ruled in a 5-4 decision in AT&T Mobility v. Concepcion that the FAA preempts state laws that would otherwise invalidate consumer arbitration agreements with class action waivers. In December 2015, the Supreme Court in a 6-3 decision in DIRECTV, Inc. v. Imburgia upheld DIRECTV’s service agreement that included a binding arbitration provision with a class action waiver, and declared that the arbitration clause at issue was governed by the FAA. The Company’s arbitration agreements differ in some respects from the agreement at issue in Concepcion and DIRECTV and some courts have continued, in the aftermath of Concepcion, to find reasons to rule that arbitration agreements are unenforceable.
In light of conflicting court decisions and potential future CFPB rulemaking,Therefore, it is possible that the Company’s consumer arbitration agreements will be rendered unenforceable. Additionally, Congress has considered legislation that would generally limit or prohibit mandatory dispute arbitration in certain consumer contracts, and it has adopted such prohibitions with respect to certain mortgage loans and certain consumer loans to active-duty members of the military and their dependents.
Any judicial or administrative decision, federal legislation or CFPBagency rule that would impair the Company’s ability to enter into and enforce consumer arbitration agreements with class action waivers, could significantly increase the Company’s exposure to class action litigation as well as litigation in plaintiff friendly jurisdictions. Such litigation could have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company is subject to goodwill impairment risk.
At December 31, 2017, the Company had $831.1 million of goodwill on its consolidated balance sheet, all of which represents assets capitalized in connection with the Company’s acquisitions and business combinations. Accounting for goodwill requires significant management estimates and judgment. Management performs periodic reviews of the carrying value of goodwill to determine whether events and circumstances indicate that an impairment in value may have occurred. A variety of factors could cause the carrying value of goodwill to become impaired. A write-down of the carrying value of goodwill could result in a non-cash charge, which could have an adverse effect on the Company’s results of operations.
The Company depends on its senior management and may not be able to retain those employees or recruit additional qualified personnel.
The Company depends on its senior management. The loss of services of any of the members of the Company’s senior management could adversely affect the Company’s business until a suitable replacement can be found. There may be a limited number of persons with the requisite skills to serve in these positions, and the Company cannot ensure that it would be able to identify or employ such qualified personnel on acceptable terms.
The inability to successfully identify attractive acquisition targets, realize administrative and operational synergies and integrate completed acquisitions could adversely affect results.
The Company has historically grown, in part, through strategic acquisitions, including its Merger with Cash America and its Maxi Prenda acquisition, both in 2016, and its acquisition of six stores during 2017. The Company’s strategy is to continue to pursue attractive acquisition opportunities if and when they become available. The success of an acquisition is subject to numerous internal and external factors, such as competition rules, the ability to consolidate information technology and accounting functions, the management of additional sales, administrative, operations and management personnel, overall management of a larger organization, competitive market forces, and general economic factors. It is possible that the integration process could result in unrealized administrative and operational synergies, the loss of key employees, the disruption of ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect the Company’s ability to maintain relationships with customers, employees, or other third-parties or the Company’s ability to achieve the anticipated benefits of such acquisitions and could harm its financial performance. Furthermore, future acquisitions may be in jurisdictions in which the Company does not currently operate in, which could make the successful consummation and integration of any such acquisitions more difficult. Failure to successfully integrate an acquisition could have an adverse effect on the Company’s business, results of operations and financial condition and failure to successfully identify attractive acquisition targets and complete such acquisitions could have an adverse effect on the Company’s growth. Additionally, any acquisition has the risk that the Company may not realize a return on the acquisition or the Company’s investment. In particular, the Company continues to integrate the Cash America businesses and stores, which if such integration is not successful, could
result in the benefits of the Merger not being fully realized and adversely impact the performance of the legacy Cash America stores.
Current and future litigation or regulatory proceedings, both in the U.S. and Latin America, could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition.
The Company or its subsidiaries has been, is, or may bebecome involved in the future, in lawsuits, regulatory or administrative proceedings, examinations, investigations, consent orders, memorandums of understanding, oraudits, other actions arising in the ordinary course of business, including those related to consumer financial protection, federal or state wage and hour laws, product liability, unclaimed property, employment, personal injury and other matters that could cause it to incur substantial expenditures and generate adverse publicity. In particular, the Company may be involved in lawsuits or regulatory actions related to consumer finance and protection, employment, marketing, unclaimed property, competition matters, and other matters, including class action lawsuits brought against it for alleged violations of the Fair Labor Standards Act, state wage and hour laws, state or federal advertising laws, consumer protection, lending unclaimed property and other laws. The consequences of defending proceedings or an adverse ruling in any current or future litigation, judicial or administrative proceeding, including consent orders or memorandums of understanding, could cause the Company to incur substantial legal fees, to have to refund fees and/or interest collected, refund the principal amount of advances, pay treble or other multiple damages, pay monetary penalties, fines, and/or modify or terminate the Company’s operations in particular states or countries. Defense or filing of any lawsuit or administrative proceeding, even if successful, could require substantial time, resources, and attention of the Company’s management and could require the expenditure of significant amounts for legal fees and other related costs. Settlement of lawsuits or administrative proceedings may also result in significant payments and modifications to the Company’s operations. Due to the inherent uncertainties of litigation, administrative proceedings and other claims, the Company cannot accurately predict the ultimate outcome of any such matters.
Adverse court and administrative interpretations or enforcement of the various laws and regulations under which the Company operates could require the Company to alter the products that it offers or cease doing business in the jurisdiction where the court, state or federal agency interpretation and enforcement is applicable. The Company is also subject to regulatory proceedings, and the Company could suffer losses from interpretations and enforcement of state or federal laws in those regulatory proceedings, even if it is not a party to those proceedings. Any of these events could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition and could impair the Company’s ability to continue current operations. Besides regulation specific to consumer lending, which is discussed previously, the Company’s pawn, credit services and consumer loan businesses are subject to other federal, state and local regulations, tax laws and import/export laws, including but not limited to the Dodd-Frank Act, Unfair Deceptive or Abusive Acts and Practices, Federal Truth in Lending Act and Regulation Z adopted thereunder, Fair Debt Collections Practices Act, Military Lending Act, Bank Secrecy Act, Money Laundering Suppression Act of 1994, USA PATRIOT Act, Gramm-Leach-Bliley Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Electronic Funds Transfer Act, Fair and Accurate Credit Transactions Act, Foreign Corrupt Practices Act and the Brady Handgun Violence Prevention Act. In addition, the Company’s marketing efforts and the representations the Company makes about its products and services are subject to federal and state unfair and deceptive practice statutes, including the Federal Trade Commission Act and analogous state statutes under which the Federal Trade Commission, state attorneys general or private plaintiffs may bring legal actions. If the Company is found to have engaged in an unfair and deceptive practice, it could have a material adverse effect on its business, prospects, results of operations and financial condition.
The Company sells products manufactured by third parties, some of which may be defective. Many such products are manufactured overseas in countries which may utilize quality control standards that vary from those legally allowed or commonly accepted in the U.S., which may increase the Company’s risk that such products may be defective. If any products that the Company sells were to cause physical injury or injury to property, the injured party or parties could bring claims against the Company as the retailer of the products based upon strict product liability. In addition, the Company’s products are subject to the federal Consumer Product Safety Act and the Consumer Product Safety Improvement Act, which empower the Consumer Product Safety Commission to protect consumers from hazardous products. The Consumer Product Safety Commission has the authority to exclude from the market and recall certain consumer products that are found to be hazardous. Similar laws exist in some states and cities in the U.S. If the Company fails to comply with government and industry safety standards, the Company may be subject to claims, lawsuits, product recalls, fines and negative publicity that could have a material adverse effect on its business, prospects, results of operations and financial condition.
Some of the Company’s U.S. stores sell firearms, ammunition and certain related accessories, which may be associated with an increased risk of injury and related lawsuits. The Company may incur losses due to lawsuits relating to its performance of background checks on firearms purchases as mandated by state and federal law or the improper use of firearms sold by the Company, including lawsuits by individuals, municipalities or other organizations attempting to recover damages or costs from firearms retailers relating to the misuse of firearms. Commencement of such lawsuits against the Company could have a material adverse effect on its business, prospects, results of operations and financial condition.
The Company is also subject to similar applicable laws and regulations in Latin America. For example, Mexico’s Anti-Money Laundering Law, which requires monthly reporting of certain transactions (or series of transactions) exceeding monetary limits, and require stricter maintenance of customer identification records and controls, and reporting of all foreign (non-Mexican) customer transactions. Guatemala and El Salvador also have similar reporting requirements. The Company is also subject to the terms and enforcement of the Mexico Privacy Law, which requires companies to protect their customers’ personal information, among other things including mandatory disclosures.
Certain state and local governmental entities in Latin America also regulate pawn, other consumer finance and retail businesses through state laws and local zoning and permitting ordinances. State and local agencies, including local police authorities, often have unlimited, broad and discretionary authority to interpret and apply laws, and suspend store operations pending investigation of suspicious pawn transactions and resolution of actual or alleged regulatory, licensing and permitting issues, among other issues.
Compliance with applicable laws and regulations is costly, can affect operating results and may result in operational restrictions. The Company’s failure to comply with applicable laws and regulations could subject it to regulatory enforcement actions, result in the assessment against the Company of civil, monetary, criminal or other penalties, require the Company to abandon operations or certain product offerings, refund interest or fees, result in a determination that certain loans are not collectible, result in a revocation of licenses, or cause damage to its reputation, brands and customer relationships, any of which could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition.
The sale and ownershippawning of firearms, ammunition and certain related accessories is subject to current and potential regulation, which could have a material adverse effect on the Company’s reputation, business, prospects, results of operations and financial condition.
Because the Company accepts firearms as pawn collateral and buys and sells firearms, ammunition and certain related accessories in many U.S. locations, the Company is required to comply with federal, state and local laws and regulations pertaining to the pawning, purchase, storage, transfer and sale of such products, and the Company is subject to reputational harm if a customer purchases or pawns a firearm that is later used in a deadly shooting. These laws and regulations require the Company, among other things, to ensure that each pawn location offering firearms has its FFL, that all purchasers of firearms are subjected to a pre-sale background check, to record the details of each firearm sale on appropriate government-issued forms, to record each receipt or transfer of a firearm and to maintain these records for a specified period of time. The Company is also required to timely respond to traces of firearms by law enforcement agencies.
Over the past several years, the purchase, sale and ownership of firearms, ammunition and certain related accessories has been the subject of increased media scrutiny and federal, state and local regulation. The media scrutiny and regulatory efforts are likely to continue in the Company’s current markets and other markets into which the Company may expand. If enacted, new laws and regulations could limit the types of licenses, firearms, ammunition and certain related accessories that the Company is permitted to purchase and sell and could impose new restrictions and requirements on the manner in which the Company pawns, offers, purchases and sells these products. If the Company fails to comply with existing or newly enacted laws and regulations relating to the purchase and sale of firearms, ammunition and certain related accessories, its licenses to sell or maintain inventory of firearms at its stores may be suspended or revoked,products, which could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition. In addition, new laws
Furthermore, the Company may incur losses and regulations impactingreputational damage due to lawsuits relating to its performance of background checks on firearms purchases as mandated by state and federal law, the ownershipselling of firearms and ammunition could cause a decline inor the demand for and salesimproper use of firearms sold by the Company’s products, which could materially adversely impact its revenue and profitability. Complying with increased regulationCompany, including lawsuits by individuals, municipalities, state or federal agencies or other organizations attempting to recover damages or costs from firearms retailers relating to the sale or misuse of firearms. Furthermore, if any firearms ammunitionsold by the Company are used in the commitment of any crimes or mass shootings, it could result in significant adverse media attention against the Company and certain related accessorieshave a material adverse impact on the reputation of the Company. Commencement of such lawsuits or any adverse media attention against the Company could be costly.have a material adverse effect on its business, reputation, prospects, results of operations and financial condition.
The Company is subject to the FCPA, anti-money laundering laws and other anti-corruption laws, and the Company’s failure to comply with these anti-corruption laws could result in penalties that could have a material adverse effect on its business, results of operations and financial condition.
The Company is subject to the FCPA, which generally prohibits companies and their agents or intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. The Company is also subject to anti-money laundering laws in both the United States and Latin America and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the Patriot Act. Furthermore, AFF is required under its agreements with its originating bank partner to maintain an enterprise-wide program designed to enable it to comply with all applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the Patriot Act. Although the Company has policies and procedures designed to ensure that it, its employees, agents, and intermediaries comply with the FCPA, anti-money laundering laws and other anti-corruptionsimilar laws and regulations, there can be no assurance that such policies or procedures will work effectively all of the time or protect the Company against liability for actions taken by its employees, agents, and intermediaries with respect to its business or any businesses that it may acquire. In the event the Company believes, or has reason to believe, its employees, agents, or intermediaries have or may have violated applicable anti-corruption laws in the jurisdiction in which it operates, including the FCPA, the Company may be required to investigate or have a third partythird-party investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. The Company’s continued operation and expansion outside the U.S., especially in Latin America, could increase the risk, perceived or otherwise, of such violations in the future.
If the Company is found to have violated the FCPA, anti-money laundering laws or other similar laws, governing the conduct of business with government entities (including local laws), the Company may be subject to criminal and civil penalties and other remedial measures, which could have an adverse effect on its business, results of operations, financial condition, and financial condition.relationship with regulators and the Bank. Investigation of any potential or perceived violations of the FCPA, anti-money laundering laws or other anti-corruptionsimilar laws by U.S.
or foreign authorities could harm the Company’s reputation and could have a material adverse effect on its business, results of operations and financial condition.
Failure to maintain certain criteria required by state and local regulatory bodies could result in fines or the loss of the Company’s licenses to conduct business.
Most states and many local jurisdictions both in the U.S. and in Latin America in which the Company operates as well as the federal governments in Latin America, require registration and licenses of stores and employees to conduct the Company’s business. These states or their respective regulatory bodies have established criteria the Company must meet in order to obtain, maintain, and renew those licenses. For example, many ofIn addition, the AFF business is also subject to certain states’ laws which regulate and require licensing, registration, notice filing or other approval by parties that engage in certain activity regarding consumer finance transactions, including facilitating and assisting
such transactions in certain circumstances. Furthermore, certain states in which the Company operates require it to meetand localities have also adopted laws requiring licensing, registration, notice filing, or exceed certain operational, advertising, disclosure,other approval for consumer debt collection and recordkeeping requirements and to maintain a minimum amount of net worth or equity. servicing, and/or purchasing or selling consumer loans. From time to time, the Company is subject to audits in thesevarious states to ensure it is meeting the applicable requirements to maintain these licenses. the applicable licenses and registrations.
Failure to meet thesethe Company’s legal compliance requirements could result in varioussubstantial fines and penalties, or store closures, which could includethe temporary or permanent suspension of operations, the revocation of existing licenses and/or the denial of new and renewal licensing requests. The Company cannot guarantee future license applications or renewals will be granted. If the Company were to lose any of its licenses to conduct its business, it could result in the temporary or permanent closure of stores and/or cessation of AFF’s consumer lending activities, any of which could adversely affect the Company’s business, results of operations and cash flows.
Foreign Operations Risks
The complexityCompany’s financial position and results of operations may fluctuate significantly due to fluctuations in currency exchange rates in Latin American markets.
The Company derives significant revenue, earnings and cash flow from operations in Latin America, where business operations are transacted in Mexican pesos, Guatemalan quetzales and Colombian pesos. The Company’s exposure to currency exchange rate fluctuations results primarily from the translation exposure associated with the preparation of the Company’s consolidated financial statements, as well as from transaction exposure associated with transactions and assets and liabilities denominated in currencies other than the respective subsidiaries’ functional currencies. While the Company’s consolidated financial statements are reported in U.S. dollars, the financial statements of the Company’s Latin American subsidiaries are prepared using their respective functional currency and translated into U.S. dollars by applying appropriate exchange rates. As a result, fluctuations in the exchange rate of the U.S. dollar relative to the Latin American currencies could cause significant fluctuations in the value of the Company’s assets, liabilities, stockholders’ equity and operating results. In addition, while expenses with respect to foreign operations are generally denominated in the same currency as corresponding sales, the Company has transaction exposure to the extent expenditures are incurred in currencies other than the respective subsidiaries’ functional currencies. The costs of doing business in foreign jurisdictions also may increase as a result of adverse currency rate fluctuations. In addition, changes in currency rates could negatively affect customer demand, especially in Latin America and in U.S. stores located near the Mexican border. For a detailed discussion of the impact of fluctuations in currency exchange rates, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Risks and uncertainties related to the Company’s foreign operations could negatively impact the Company’s operating results.
As of December 31, 2021, the Company had 1,744 store locations in Latin America, including 1,656 in Mexico, 60 in Guatemala, 15 in Colombia and 13 in El Salvador, and the Company plans to open additional stores in Latin America in the future. In addition, AFF owns a customer service call center operating in Jamaica and utilizes third-party call center services located in the Dominican Republic and Mexico. Doing business in each of these countries involves increased risks related to geo-political events, political instability, corruption, economic volatility, property crime, drug cartel and gang-related violence, social and ethnic unrest including riots and looting, enforcement of property rights, governmental regulations, tax policies, banking policies or restrictions, foreign investment policies, public safety, health and security, anti-money laundering regulations, interest rate regulation and import/export regulations among others. As in many developing markets, there are also uncertainties as to how both local law and U.S. federal law is applied, including areas involving commercial transactions and foreign investment. As a result, actions or events could occur in these foreign countries that are beyond the Company’s control, which could restrict or eliminate the Company’s ability to operate some or all of its locations in these countries or significantly reduce customer traffic, product demand and the expected profitability of such operations.
Changes impacting international trade and corporate tax and other related regulatory environmentprovisions may have an adverse effect on the Company’s financial condition and results of operations.
Many of the foreign countries in which the Company operates impose costs on non-domestic companies through the use of local regulations, tariffs, labor controls and other federal or state requirements or legislation. As the Company derives significant revenue, earnings and cash flow from operations in Latin America, primarily in Mexico, there are some inherent risks regarding the overall stability of the trading relationship between Mexico and the relatedU.S. and the burdens imposed thereon by any changes to (or the adoption of new) regulations, tariffs or other federal or state legislation. Specifically, the Company has significant exposure to fluctuations and devaluations of the Mexican peso and the health of the Mexican economy, which, in each case, may be negatively impacted by changes in U.S. trade treaties, including the United States-Mexico-Canada
Agreement and corporate tax policy. In some cases, there have been negative reactions to the enacted and/or proposed policies as expressed in the media and by politicians in Mexico, which could potentially negatively impact U.S. companies operating in Mexico. In particular, there is continued uncertainty around Mexico’s current federal administration and how the policies as applied by its administration, including conducting aggressive corporate tax and other regulatory audits, adverse government discretion, and support of increased employee minimum wages, profit sharing and benefit programs, may impact U.S. companies doing business in Mexico generally and pawn and consumer finance companies in particular. While the Company engages in limited cross-border transactions other than those involving scrap jewelry sales, any such changes in regulations, trade treaties, corporate tax policy, import taxes or adverse court or administrative interpretations of the foregoing could adversely and significantly affect the Mexican economy and ultimately the Mexican peso, which could adversely and significantly affect the Company’s financial position and results of the Company’s Latin America pawn operations.
Risks Related to the AFF Acquisition
The Company may fail to realize all of the anticipated benefits of the AFF Acquisition or those benefits may take longer to realize than expected. The Company may also encounter significant difficulties in integrating the AFF business.
The Company’s ability to realize the anticipated benefits of the AFF Acquisition depends, to a large extent, on its ability to integrate the AFF business, which is a complex, costly and time-consuming process, and for the AFF business to achieve its projected growth rates. AFF also represents a new line of business for the Company, which increases the complexity and challenges of the integration process as compared to the Company’s pawn acquisitions. As a result of the AFF Acquisition, the Company must devote significant management attention and resources to integrate the business practices and operations of the Company and AFF. The integration process may disrupt the Company’s business and, if implemented ineffectively, could restrict the realization of the full expected benefits. The failure to meet the challenges involved in the integration process and to realize the anticipated benefits of the AFF Acquisition could cause an interruption of, or a loss of momentum in, the Company’s operations and could adversely affect its business, financial condition and results of operations.
In addition, the integration of the AFF business may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customers and other business relationships, and diversion of management’s attention. Additional integration challenges include:
•difficulties in integrating and managing a new line of business with different products, including those with credit risk, retail merchant partners and additional regulatory risks; •diversion of management’s attention to integration matters; •difficulties in achieving anticipated synergies, business opportunities and growth prospects from the AFF Acquisition; •difficulties in the integration of operations and systems; •difficulties in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures; •difficulties in managing the expanded operations of a significantly larger and more complex company; •challenges in keeping existing merchant partners and obtaining new merchant partners; •challenges in retaining and assimilating key personnel; •the impact of potential liabilities the Company may be inheriting from AFF; •difficulty addressing possible differences in corporate culture and management philosophies; and •a potential deterioration of the Company’s credit ratings.
Many of these factors are outside of the Company’s control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could adversely affect the Company’s business, financial condition and results of operations and result in the Company becoming subject to litigation. In addition, even if the AFF business is integrated successfully, the full anticipated benefits of the AFF Acquisition may not be realized, including the synergies, cost savings or sales or growth opportunities that are anticipated. These benefits may not be achieved within the anticipated time frame, or at all. Further, additional unanticipated costs may be incurred in the integration process. All of compliancethese factors could cause reductions in the Company’s earnings per share, decrease or delay the expected accretive effect of the AFF Acquisition and negatively impact the price of shares of its common stock. As a result, it cannot be assured that the AFF Acquisition will result in the realization of the full anticipated benefits.
The AFF Acquisition may not be accretive and may cause dilution of the Company’s adjusted earnings per share, which may negatively affect the market price of the Company’s common stock.
The Company anticipates that the AFF Acquisition will be accretive to stockholders on an adjusted earnings per share basis. This expectation is based on currently available net revenue and operating expense estimates, which may materially change. The Company could also encounter additional transaction and integration-related costs or other factors such as the failure to realize all of the benefits anticipated in the AFF Acquisition. All of these factors could cause dilution of the Company’s adjusted earnings per share or decrease or delay the expected accretive effect of the AFF Acquisition and cause a decrease in the market value of the Company’s common stock.
Failure to retain key employees could diminish the anticipated benefits of the AFF Acquisition.
The success of the AFF Acquisition will depend in large part upon the ability of the Company to retain personnel critical to the AFF business. Employees may experience uncertainty about their future roles or apprehension about joining a larger and public company. The corporate cultures may also differ, and some Company or AFF employees may choose not to remain with the Company. If the Company is unable to retain Company or AFF personnel that are both increasingcritical to the Company’s operations, the Company could experience disrupted operations, loss of customers, key information, expertise and know how, or unanticipated hiring and training costs, especially given that the Company’s existing management team has limited experience operating a line of business similar to the AFF business. In addition, the loss of key personnel could diminish the anticipated benefits of the AFF Acquisition that are actually achieved by the Company.
The Company may be required to make earnout payments to the AFF sellers if certain conditions are met, including if the AFF business achieves earnout thresholds and if the Company’s stock price does not reach certain levels and, as a result, the Company’s financial position may be adversely impacted if it is required to make such payments.
In connection with the AFF Acquisition, the Company may be required to make earnout payments in the form of cash and/or shares of the Company’s common stock to the sellers of the AFF business as described below:
•The sellers of the AFF business are entitled to receive up to an additional $300.0 million of consideration pursuant to an earnout if the AFF business achieves certain adjusted EBITDA targets following the closing of the AFF Acquisition (the “Earnout Consideration”). In particular, the earnout provides the seller parties the right to receive up to $250.0 million of additional consideration if the AFF business achieves certain adjusted EBITDA targets for the period consisting of the fourth quarter of 2021 through the end of 2022 and up to $50.0 million if the AFF business achieves certain adjusted EBITDA targets for the first half of 2023. The Earnout Consideration is payable in cash or, at the Company’s discretion and subject to obtaining any required stockholder approvals under the NASDAQ rules for such issuance, in shares of the Company’s common stock. •The sellers of the AFF business are entitled to received up to $75.0 million of additional consideration in the event that the highest average stock price of the shares of the Company’s common stock being issued to the seller parties pursuant to that certain Business Combination Agreement, by and among the Company, AFF and the other parties thereto, dated October 27, 2021 (the “Acquisition Agreement”), for any 10-day period from the date of that certain Amendment to the Acquisition Agreement, dated as of December 6, 2021 (the “Amendment”), through February 28, 2023 (the “Highest Average Stock Price”) is less than $86.25 (the “Reference Price”). In the event that the Highest Average Stock Price is less than the Reference Price, then the AFF sellers shall be entitled to an amount equal to such difference multiplied by the number of shares issued to the AFF sellers as stock consideration (approximately 8.05 million shares), with such amount capped at $75.0 million. •In addition, the Amendment provided for a fixed $25.0 million working capital payment payable at the end of 2022.
If any of these earnout thresholds or stock price conditions are met, the Company may not have sufficient cash reserves to pay the cash amount due to the changing political landscape, additional legal and regulatory requirements,AFF sellers. If the Company’s ongoing expansion into new marketsCompany is able to pay these cash amounts, the payment may impede its ability to fund other aspects of its business, which would adversely affect its operating results and the factprice of its common stock and senior unsecured notes.
Additional Risks Related to the AFF Business
If AFF is unable to attract additional merchants and retain and grow its relationships with its existing merchant partners, its business, results of operations, financial condition and future prospects would be materially and adversely affected.
AFF’s continued success is dependent on its ability to maintain and expand its merchant partner base and the volume of transactions from these merchants in order to grow revenue on its platform. Its ability to retain and grow its relationships with its merchant partners depends on the willingness of merchants to partner with AFF. The attractiveness of AFF’s platform to merchants depends upon, among other things, the size of its consumer base, its brand and reputation, the amount of merchant premium, discounts or profit share paid or received by AFF, its ability to sustain its value proposition to merchants for customer acquisition by demonstrating higher conversion at checkout, the attractiveness to merchants of AFF’s technology and data-driven platform, services and products offered by competitors, and its ability to perform under, and maintain, its merchant agreements. It’s also important that foreignAFF partner with merchants with growing sales across a diverse mix of retail channels to mitigate risk associated with changing consumer spending behavior, economic conditions and other factors that may affect a particular type of merchant or industry. Additionally, AFF’s agreements with its merchant partners are generally terminable for convenience.
If AFF is not able to retain its existing merchant partners, attract additional merchants and expand revenue and volume of transactions from existing merchants, it will not be able to continue to grow its business and its business, results of operations, financial condition and future prospects would be materially and adversely affected.
AFF derives a significant portion of its revenue from several top merchant partners. The loss of business from one or more of these top merchant partners could have a material adverse effect on the AFF business.
Historically, AFF has relied on a limited number of merchant partners for a significant portion of its total revenues and transaction volume. On a pro forma basis after giving effect to the AFF Acquisition as if it had closed on January 1, 2021, AFF’s top five merchant partners accounted for an aggregate of 16% of combined pro forma 2021 revenues and future revenues and transaction volume of AFF may be similarly concentrated. The loss of any of these top merchant partners or groups of merchant partners for any reason, or a change of relationship with any of AFF’s key merchant partners could adversely affect the results of operations of the AFF business.
Additionally, mergers or consolidations among AFF’s top merchant partners could reduce the number of merchant partners and could adversely affect AFF’s revenues. In particular, if AFF’s merchant partners are acquired by entities that are not also AFF’s merchant partners, that do not use its solutions or that have more favorable contract terms with a competitor and choose to discontinue, reduce or change the terms of their use of AFF’s solutions, the AFF business and its operating results could be materially and adversely affected.
AFF’s transaction volume is dependent on the support of its platform by its merchant partners.
AFF depends on its merchants to drive transaction volume by supporting its platform over alternative payment options for credit-constrained customers and prominently presenting AFF’s platform as an attractive payment option for these customers. The degree to which these merchants successfully integrate the AFF platform into their website or in their store, such as by prominently featuring its platform on their websites or in their stores, has a material impact on AFF’s transaction volume. The failure by AFF’s merchants to effectively present, integrate, and support its platform would have a material and adverse effect on AFF’s originations and, as a result, on its business, results of operations, financial condition and future prospects.
Furthermore, AFF relies on these merchants to comply with all applicable laws occasionallyand regulations associated with the LTO, RISA and bank loan products offered by AFF. As part of this process, merchants are vaguegenerally contractually required to comply with AFF’s policies, procedures, marketing materials, and training materials. In the event that a merchant or conflictmerchant employee fails to adequately and correctly describe the terms and conditions of the lease, RISA or bank loan product, the merchant and/or AFF may be subject to consumer complaints and/or lawsuits.
AFF’s bank loan product is offered pursuant to its agreement with domesticthe Bank and such agreement is non-exclusive, short-term in duration and subject to termination by the Bank partner upon the occurrence of certain events. If that agreement is terminated and AFF is unable to either replace the commitments of the Bank or substitute its other products for the bank loan product, its business, results of operations, financial condition, and future prospects may be materially affected.
AFF serves as a marketer, service provider and sub-servicer of loans originated by a Utah chartered state bank. Under this arrangement, AFF purchases a portion of the cash flows originated by the Bank and sub-services the loans thereafter. AFF does not originate or ultimately control the pricing or functionality of the loans. The Bank makes all key decisions regarding the marketing, underwriting, product features and pricing. AFF generates revenues through the loans and through marketing and sub-servicing fees paid by the Bank. If the Bank were to change its pricing, underwriting or marketing of the loans in a way that decreases revenues or increases losses, then the profitability of each loan could be reduced. Loans originated through the Bank’s program represent a material amount of AFF’s total origination volume. AFF’s bank loan product relies on the Bank originating the loans that are facilitated through AFF’s platform and complying with various federal, state and other laws. The loan program agreement has an initial term that expires during the third quarter of 2023, which automatically renews once for an additional three year term unless either party provides notice of non-renewal prior to the end of any such term. In addition, to potential damageupon the occurrence of certain early termination events, either AFF or the Bank may terminate the loan program agreement immediately upon written notice to the Company’s reputation and brand,other party. The Bank could decide not to work with AFF for any reason, could make working with AFF cost-prohibitive or could decide to enter into an exclusive or more favorable relationship with one or more of AFF’s competitors. If the Bank were to suspend, limit or cease its operations, or if AFF’s relationship with the Bank were to otherwise terminate for any reason (including, but not limited to, its failure to comply with applicable federal,regulatory actions), AFF would need to implement a substantially similar arrangement with another bank, obtain additional state licenses or curtail its offering of a direct to consumer loan product through its platform. If AFF needs to enter into alternative arrangements with a different bank to replace its existing arrangements, it may not be able to negotiate a comparable alternative arrangement in a timely manner or at all. If AFF is unable to enter into an alternative arrangement with different banks to fully replace or supplement its relationship with the Bank, AFF would potentially need to cease offering its bank loan product or other direct to consumer installment loans. In the event that AFF’s relationship with the Bank were terminated and local lawsit is unable to substitute another one of its products at the merchants that utilize such bank loan products, its business, results of operations, financial condition and regulationsfuture prospects may be materially affected.
AFF’s transaction volume is dependent on sales at its merchant partners and any decline in such sales or interruptions, inventory shortages and other factors affecting the supply chains of AFF’s merchant partners could have a material and adverse effect on AFF’s results of operations, financial condition and future prospects.
AFF depends on sales at its merchant partners to drive its transaction volume. If AFF’s merchant partners experience a general decline in sales it could negatively impact AFF’s transaction volume. Any extended supply chain interruptions, inventory shortages or other operational disruptions affecting any of its merchant partners could have a material adverse impact on AFF’s transaction volume and results of operations. AFF depends on its merchant partners’ abilities to deliver products to customers at the right time and in the right quantities. Accordingly, it is important for these merchant partners to maintain optimal levels of inventory and respond rapidly to shifting demands. The disruption to, or inefficiency in, supply chain networks may have an adverse impact on AFF’s operations in the near term, but if such interruptions were to continue, could potentially have a more material adverse impact on its results of operations, financial condition and future prospects.
AFF’s business relies extensively on its proprietary decisioning platform and if such platform is not effective it could have a material impact on AFF’s business, financial condition and results of operations.
AFF’s business is largely predicated on the effectiveness of its proprietary decisioning platform and model and AFF relies extensively on this platform for LTO, RISA and bank loan decisioning. AFF’s platform relies heavily on AFF’s modeling and analytics as well as information provided by applicants and third-party data providers and credit reporting agencies. To the extent that applicants provide inaccurate or unverifiable information or data from third-party providers is incomplete or inaccurate, then AFF’s platform will not be able to perform effectively, which could result in wrong or sub-optimal decisions with respect to applicants. AFF’s data providers could also stop providing data, provide untimely, incorrect or incomplete data, or increase the costs for their data for a variety of reasons, including security or regulatory concerns or for competitive reasons. If AFF were to lose access to this external data or if such access is restricted or becomes more expensive, it could have a material effect on AFF’s business. Furthermore, the models underlying AFF’s decisioning platform may prove in practice to be less predictive than AFF expects for a variety of reasons, including as a result of errors in constructing, interpreting or using the models or the use of inaccurate assumptions (including failures to update assumptions appropriately or in a timely manner). The potential errors or inaccuracies in AFF’s decisioning platform and models may be material and effect a significant number of transactions, which could have a material and adverse effect on AFF’s business.
If AFF is unable to collect on its leases, RISAs and bank loans, the performance of its lease and loan portfolio would be adversely affected.
AFF’s ability to collect scheduled payments under its leases, RISAs and bank loans is dependent on its customers’ continuing financial stability, and consequently, collections can be adversely affected by a number of factors, including general economic conditions, inflationary impacts and individual factors such as those outlined abovejob loss, divorce, death, illness, personal bankruptcy and customer fraud. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and debtor relief laws, may limit the amount that can be recovered on AFF’s leases, RISAs and bank loans. Federal, state or other restrictions could impair the ability of AFF or the third-party collection services utilized by AFF to collect amounts owed and due on the leases and loans facilitated through its platform. Furthermore, AFF relies on its proprietary decisioning platform to decision its LTO, RISA and bank loan products and customizes this technology to individual merchants and merchandise categories. There is no guarantee that this technology or platform will be effective in making decisions that minimize credit losses. Furthermore, the platform relies on an experienced data science team. In the event the platform is not effective or cannot be supported at the required levels, AFF could experience increased credit losses.
If AFF is unable to fully collect on its leases, RISAs and bank loans, the performance of its lease and loan portfolio will be adversely affected, which could result in additional provisions for lease and loan losses and loss of revenue, cash flow and profitability.
Accounting, Tax and Financial Risks
The Company’s existing and future levels of indebtedness and any potential earnout payments payable in connection with the AFF Acquisition could adversely affect its financial health, its ability to obtain financing in the future, its ability to react to changes in its business and its ability to fulfill its obligations under such indebtedness.
As of December 31, 2021, including the Company's senior unsecured notes and the Company’s unsecured credit facilities, the Company beinghad outstanding principal indebtedness of $1,309.0 million and availability of $267.0 million under its unsecured credit facilities, subject to claims, lawsuits, finescertain financial covenants. The Company's level of indebtedness and amounts owed pursuant to potential earnout payments resulting from the AFF Acquisition could:
•make it more difficult for it to satisfy its obligations with respect to the Company’s senior unsecured notes and its other indebtedness, resulting in possible defaults on and acceleration of such indebtedness; •require it to dedicate a substantial portion of its cash flow from operations to the payment of principal and interest on its indebtedness, thereby reducing the availability of such cash flows to fund originations in the AFF business, working capital, acquisitions, new store openings, capital expenditures and other general corporate purposes; •limit its ability to obtain additional financing for working capital, financing originations from the AFF business, acquisitions, new store openings, capital expenditures, debt service requirements and other general corporate purposes; •limit its ability to refinance indebtedness or cause the associated costs of such refinancing to increase; •restrict the ability of its subsidiaries to pay dividends or otherwise transfer assets to the Company, which could limit its ability to, among other things, make required payments on its debt; •increase the Company’s vulnerability to general adverse publicity thateconomic and industry conditions, including interest rate fluctuations (because a portion of its borrowings are at variable rates of interest); and •place the Company at a competitive disadvantage compared to other companies with proportionately less debt or comparable debt at more favorable interest rates who, as a result, may be better positioned to withstand economic downturns.
Any of the foregoing impacts of the Company’s level of indebtedness could have a material adverse effect on its business, financial condition and results of operations.
Furthermore, the Company has, in the past, accessed the debt capital markets to refinance existing debt obligations and to obtain capital to finance growth. However, the Company’s future access to the debt capital markets could become restricted due to a variety of factors, including a deterioration of the Company’s performance or financial condition, overall industry prospects or changes in debt capital markets or the economy generally. Inability to access the credit markets on acceptable terms, if at all, could have a material adverse effect on the Company’s financial condition and ability to fund future growth.
Additionally, the Company’s debt instruments include certain affirmative and negative covenants that require the Company to comply with certain financial covenants and impose restrictions on the Company’s financial and business operations, including limitations on liens, indebtedness, fundamental changes, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the
nature of the Company’s business. A failure to comply with the covenants contained in the Company’s debt instruments could result in an event of default or an acceleration of debt under its debt instruments. In addition, the Company’s debt instruments contain cross-default provisions that could result in its debt being declared immediately due and payable under a number of debt instruments, even if the Company defaults on only one debt instrument. In such event, it is possible that the Company would not be able to satisfy its obligations under all of such accelerated indebtedness simultaneously.
Determining the AFF business’ allowance for lease and loan losses requires many assumptions and complex analyses. If the estimates prove incorrect, the AFF business may incur net charge-offs in excess of its reserves, or may be required to increase its provision for lease and loan losses, either of which would adversely affect the Company’s results of operations.
The Company’s ability to measure and report its financial position and results of operations is influenced by the need to estimate the impact or outcome of future events on the basis of information available at the time of the issuance of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from the judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. Management has processes in place to monitor these judgments and assumptions, but these processes may not ensure that the judgments and assumptions are correct.
The Company maintains an allowance for lease and loan losses at a level sufficient to cover estimated lifetime losses expected to be incurred in the lease and loan portfolio. This estimate is highly dependent upon the reasonableness of its assumptions and the predictability of the relationships that drive the results of its valuation methodologies. The Company performs a quantitative analysis to compute historical losses to estimate the allowance for lease and loan losses. Lease and loan loss experience, first payment default histories, contractual delinquency of lease and loan receivables and management’s judgement are factors used in assessing the overall adequacy of the allowance and the resulting provision for lease and loan losses. Changes in estimates and assumptions can significantly affect the allowance and provision for lease and loan losses. It is possible that the Company will experience lease and loan losses that are different from its current estimates. If the Company’s estimates and assumptions prove incorrect and its allowance for lease and loan losses are insufficient, it may incur net charge-offs in excess of its reserves, or it could be required to increase its provision for lease and loan losses, either of which would adversely affect its results of operations.
The Company is subject to goodwill impairment risk.
At December 31, 2021, the Company had $1,536.2 million of goodwill on its consolidated balance sheet, all of which represents assets capitalized in connection with the Company’s acquisitions and business combinations. Accounting for goodwill requires significant management estimates and judgment. Management performs periodic reviews of the carrying value of goodwill to determine whether events and circumstances indicate that an impairment in value may have occurred. A variety of factors could cause the carrying value of goodwill to become impaired. A write-down of the carrying value of goodwill could result in a non-cash charge, which could have an adverse effect on the Company’s results of operations.
Declines in commodity market prices of gold, other precious metals and diamonds could negatively affect the Company’s profits.
The Company’s profitability could be adversely impacted by commodity market fluctuations. As of December 31, 2021, approximately 57% of the Company’s pawn loans were collateralized with jewelry, which is primarily gold, and 49% of its inventories consisted of jewelry, which is also primarily gold. The Company sells significant quantities of gold, other precious metals and diamonds acquired through collateral forfeitures or direct purchases from customers. A significant and sustained decline in gold and/or other precious metal and diamond prices could result in decreased merchandise sales and related margins, decreased inventory valuations and sub-standard collateralization of outstanding pawn loans. In addition, a significant decline in market prices could result in a lower balance of pawn loans outstanding for the Company, as customers would receive lower loan amounts for individual pieces of jewelry or other gold items. For a detailed discussion of the impact of a decline in market prices on wholesale scrap jewelry sales, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Unexpected changes in both domestic and foreign tax laws and policies could negatively impact the Company’s operating results.
The Company’s financial results may be negatively impacted by changes in domestic or foreign tax laws, administrative interpretations of such laws and enforcement of policies, including, but not limited to, an increase in statutory tax rates, changes in allowable expense deductions, or the imposition of new withholding requirements on repatriation of foreign earnings.
The application of indirect taxes, such as sales tax, is a complex and evolving issue, particularly with respect to the LTO industry generally and AFF’s virtual and e-commerce LTO businesses more specifically. Failure to comply with such tax provisions or a successful assertion by a jurisdiction requiring AFF to collect taxes in a location or for transactions where AFF presently does not, could result in substantial tax liabilities, including for past sales and leases, as well as penalties and interest. In addition, if the tax authorities in jurisdictions where AFF is already subject to sales tax or other indirect tax obligations were to successfully challenge AFF’s positions, AFF’s tax liability could increase substantially.
General Economic and Market Risks
The COVID-19 pandemic has adversely impacted, and will likely continue to adversely impact, the Company’s business and results of operations.
The COVID-19 pandemic has and may continue to adversely affect consumer traffic and demand for pawn loans and AFF’s retail finance products and has, and may continue to have, a material adverse effect on the Company’s results of operations. The extent to which COVID-19 continues to impact the Company’s operations, results of operations, liquidity and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak (including the possibility of further surges or variants of concern of the virus), the efficacy of the vaccination programs in the jurisdictions in which the Company operates, supply chain disruptions, rising inflation and labor costs, its ability to maintain sufficient qualified personnel due to labor shortages, employee illness, quarantine, willingness to return to work, vaccine and/or testing mandates, face-coverings and other safety requirements, or travel and other restrictions, and the actions taken by governments, businesses and individuals to contain the impact of COVID-19, as well as further actions taken to limit the resulting economic impact. These factors may adversely impact consumer, business, and government spending as well as customer demand for pawn loans and the Company’s retail finance products on an ongoing basis, each of which could adversely impact its business and operations.
While the Company saw positive results in the second half of 2021 despite the challenges raised by the COVID-19 environment, there remains uncertainty regarding how COVID-19 and general economic conditions will impact the Company’s business and operations in future periods. Nevertheless, COVID-19 continues to present a material uncertainty which could adversely affect the Company’s results of operations, financial condition and cash flows in the future.
A sustained deterioration of economic conditions or an economic crisis and government actions taken to limit the impact of such an economic crisis could reduce demand or profitability for the Company’s products and services which would result in reduced earnings.
The Company’s business and financial results may be adversely impacted by sustained unfavorable economic conditions or unfavorable economic conditions associated with a global or regional economic crisis which, in either case, include unemployment, declining personal income and consumer sentiment, inflation, adverse changes in interest or tax rates, effects of government initiatives to manage economic conditions and increased volatility of commodity markets and foreign currency exchange rates. Specifically, a sustained or rapid deterioration in the economy, along with the potential enactment of government stimulus programs to attempt to limit such economic deterioration, could adversely impact the performance of the Company’s pawn loan and AFF’s lease and loan portfolio and consumer or market demand for discretionary consumer goods and services weakening demand for AFF’s products and also demand for pre-owned merchandise or gold sold in the Company’s pawnshops. A sustained deterioration in the economy could also reduce the demand and resale value of pre-owned merchandise and reduce the amount that the Company could effectively lend on an item of collateral. Such reductions could adversely affect pawn loan balances, pawn redemption rates, inventory balances, inventory mixes, sales volumes and gross profit margins.
Furthermore, economic conditions and demand may also fluctuate by geographic region. The current geographic concentration of the Company’s pawn stores and AFF’s merchant partners creates exposure to local economies and politics, and regional downturns. As a result, the Company’s business is currently more susceptible to regional conditions than the operations of more geographically diversified specialty finance companies, and the Company is vulnerable to economic downturns or changing political landscapes in those regions. Any unforeseen events or circumstances that negatively affect these areas could materially adversely affect the Company’s revenues and profitability.
The price of the Company’s common stock has fluctuated substantially over the past several months and may continue to fluctuate substantially in the future.
The Company’s stock price has been, and may continue to be, subject to significant fluctuations, and has decreased significantly in recent months from historical trading levels as a result of a variety of factors, including the announcement of the acquisition of AFF, the CFPB’s action against the Company and other factors, some of which are beyond the Company’s control. The Company may fail to meet the expectations of its stockholders or securities analysts at some point in the future, and its stock price could decline further as a result. This volatility may prevent investors from being able to sell their common stock at or above the price they paid for their common stock.
In addition, the stock markets in general have experienced volatility recently that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of the Company’s common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Due to the impact of the announcement of the CFPB’s action on the Company’s stock price, the Company has become subject to a purported securities class action related to the CFPB’s lawsuit and may become subject to further litigation. An unfavorable result in these matters could have a material impact on the Company’s financial condition and results of operations.
Inclement weather, natural disasters or health epidemics can adversely impact the Company’s operating results.
The occurrence of weather events and natural disasters such as rain, cold weather, snow, wind, storms, hurricanes, earthquakes, volcanic eruptions, or health epidemics in the Company’s markets could adversely affect consumer traffic, retail sales, pawn loan and pawn redemption activities and LTO, RISA and installment loan originations and have a material adverse effect on the Company’s results of operations. In addition, the Company may incur property, casualty or other losses not covered by insurance. Losses not covered by insurance could be substantial and may increase the Company’s expenses, which could harm the Company’s results of operations and financial condition.
Adverse real estate market fluctuations and/or the inability to renew and extend store operating leases could affect the Company’s profits.
The Company leases most of its pawn store locations. Many of the store leases, especially in Latin America, include annual rent escalations tied to the local consumer price index. A significant rise in real estate prices or real property taxes could also result in an increase in store lease costs as the Company opens new locations and renews leases for existing locations, thereby negatively impacting the Company’s results of operations. The Company also owns certain developed and undeveloped real estate, which could be impacted by adverse market fluctuations. In addition, the inability of the Company to renew, extend or replace expiring store leases could have an adverse effect on the Company’s results of operations.
The Company’s lending business is somewhat seasonal, which causes the Company’s revenues and operating cash flows to fluctuate and may adversely affect the Company’s ability to service its debt obligations.
The Company’s U.S. lending business typically experiences reduced demand in the first and second quarters as a result of its customers’ receipt of federal tax refund checks typically in February of each year. Demand for the Company’s U.S. lending services is generally greatest during the third and fourth quarters. Also, retail sales are seasonally higher in the fourth quarter associated with holiday shopping. Typically, the Company experiences seasonal growth of service fees in the third and fourth quarter of each year due to loan balance growth. Service fees generally decline in the first and second quarter of each year after the heavy repayment period of pawn loans in Latin America associated with statutory bonuses received by customers in the fourth quarter. This seasonality requires the Company to manage its cash flows over the course of the year. If a governmental authority were to pursue economic stimulus actions or issue additional tax refunds, tax credits or other statutory payments at other times during the year, such actions could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition during these periods. If the Company’s revenues were to fall substantially below what it would normally expect during certain periods, the Company’s annual financial results and its ability to service its debt obligations could be adversely affected.
Inclement weather, natural disasters or health epidemics can adversely impact the Company’s operating results.
The occurrence of weather events such as rain, cold weather, snow, wind, storms, hurricanes, earthquakes, volcanic eruptions, or other natural disasters or health epidemics in the Company’s markets could adversely affect consumer traffic, retail sales and loan origination or collection activities at the Company’s stores and have a material adverse effect on the Company’s results of operations. In addition, the Company may incur property, casualty or other losses not covered by insurance. The Company maintains a program of insurance coverage for various types of property, casualty and other risks. The types and amounts of insurance that the Company obtains vary from time to time, depending on availability, cost and management’s decisions with respect to risk retention. The Company’s insurance policies are subject to deductibles and exclusions that result in the Company’s retention of a level of risk
on a self-insurance basis. Losses not covered by insurance could be substantial and may increase the Company’s expenses, which could harm the Company’s results of operations and financial condition.
The Company’s growth is subject to external factors and other circumstances over which it has limited control or that are beyond its control. These factors and circumstances could adversely affect the Company’s ability to grow through the opening of new store locations.
The success of the Company’s expansion strategy is subject to numerous external factors, such as the availability of sites with favorable customer demographics, limited competition, acceptable regulatory restrictions and landscape, political or community acceptance, suitable lease terms, its ability to attract, train and retain qualified associates and management personnel, the ability to obtain required government permits and licenses and the ability to identify attractive acquisition targets and complete such acquisitions. Some of these factors are beyond the Company’s control. The failure to execute the Company’s expansion strategy would adversely affect the Company’s ability to expand its business and could materially adversely affect its business, prospects, results of operations and financial condition.
The Company’s reported results require the judgment of management, and the Company could be subject to risks associated with these judgments or could be adversely affected by the implementation of new, or changes in the interpretation of existing, accounting principles or financial reporting requirements.
The preparation of the Company’s financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. In addition, the Company prepares its financial statements in accordance with generally accepted accounting principles (“GAAP”), and GAAP and its interpretations are subject to change over time. If new rules or interpretations of existing rules require the Company to change its financial reporting, the Company’s results of operations and financial condition could be materially adversely affected, and the Company could be required to restate historical financial reporting.
Unexpected changes in both domestic and foreign tax rates could negatively impact the Company’s operating results.
While the Company expects the recently enacted significant tax reform in the United States to have a positive impact on the Company’s net income, the Company is continuing to evaluate the impact of the tax reform on the Company’s business and such impact is uncertain. Furthermore, the Company’s financial results may be negatively impacted should tax rates in the U.S. and in Latin America be increased in the future or otherwise adversely affected by changes in allowable expense deductions, or as a result of the imposition of new withholding requirements on repatriation of foreign earnings.
Certain tax positions taken by the Company require the judgment of management and could be challenged by federal taxing authorities in the U.S. and Latin America.
Management’s judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. Management’s judgment is also required in evaluating whether tax benefits meet the more-likely-than-not threshold for recognition under ASC 740-10-25, Income Taxes.
If the Company is unable to protect its intellectual property rights, its ability to compete could be negatively impacted.
The success of the Company’s business depends to a certain extent upon the value associated with its intellectual property rights, including its proprietary, internally developed point-of-sale and loan management system that is in use in all of its stores. The Company uses the trademarks “FirstCash,” “First Cash,” “First Cash Pawn,” “Cash America,” “Cashland,” “First Cash Empeño y Joyeria,” “Cash Ya,” “Cash & Go,” “CA,” “Presta Max,” “Realice Empeños,” “Empeños Mexicanos” and “Maxi Prenda” along with numerous other trade names as described herein. The Company relies on a combination of copyright, trade secret, trademark, and other rights, as well as confidentiality procedures and contractual provisions to protect its proprietary technology, processes and other intellectual property. While the Company intends to vigorously protect its trademarks and proprietary point of sale systems against infringement, it may not be successful. In addition, the laws of certain foreign countries may not protect intellectual property rights to the same extent as the laws of the U.S. The costs required to protect the Company’s intellectual property rights and trademarks could be substantial.
Because the Company maintains a significant supply of cash, loan collateral and inventories in its stores, the Company may be subject to employee and third-party robberies, riots, looting, burglaries and thefts. The Company also may be subject to liability as a result of crimes at its stores.
The Company’s business requires it to maintain a significant supply of cash, loan collateral and inventories in most of its stores. As a result, the Company is subject to the risk of riots, looting, robberies, burglaries and thefts. Although the Company has implemented various programs in an effort to reduce these risks, maintains insurance coverage for riots, looting, robberies, burglaries and thefts and utilizes various security measures at its facilities, there can be no assurance that riots, looting, robberies, burglaries and thefts will not occur. The extent of the Company’s cash, loan collateral and inventory losses or shortages could increase as it expands the nature and scope of its products and services. Riots, looting, robberies, burglaries and thefts could lead to losses and shortages and could adversely affect the Company’s business, prospects, results of operations and financial condition. It is also possible that violent crimes such as riots, assaults and armed robberies may be committed at the Company’s stores. The Company could experience liability or adverse publicity arising from such crimes. For example, the Company may be liable if an employee, customer, guard or bystander suffers bodily injury or other harm. Any such event may have a material adverse effect on the Company’s business, prospects, results of operations and financial condition.
If the Merger does not qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code, the former Cash America shareholders may be required to pay substantial U.S. federal income taxes.
Although the Company intends that the Merger qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code, it is possible that the Internal Revenue Service (“IRS”) may assert that the Merger fails to qualify as such. If the IRS were to be successful in any such contention or if for any other reason the Merger were to fail to qualify as a “reorganization,” each former Cash America shareholder would recognize a gain or loss with respect to all such shareholder’s shares of Cash America’s common stock based on the difference between (i) the former Cash America shareholders’ tax basis in such shares and (ii) the aggregate cash and the fair market value of the Company common stock received.
The CFPB issued a consent order with respect to Cash America, and any noncompliance could have a material adverse effect.
On November 20, 2013, Cash America consented to the issuance of a consent order by the CFPB pursuant to which it agreed, without admitting or denying any of the facts or conclusions made by the CFPB from its 2012 review of Cash America’s consumer loan business, including self-disclosed issues, to pay a civil money penalty of $5.0 million and to set aside $8.0 million for a period of 180 days to fund any further payments to eligible Ohio customers (the “Ohio Reimbursement Program”), collectively, the “Consent Order.” The Company likely remains subject to certain obligations of the Consent Order, including ensuring compliance with federal consumer financial laws and consumer compliance management system. However, certain restrictions and obligations expired on November 20, 2016. In addition, Cash America’s former subsidiary, Enova International, Inc. (“Enova”), also remains subject to the Consent Order because it was part of Cash America when it was issued. The Company cannot assure that Enova has complied or will continue to comply with the Consent Order now that it is a separate publicly traded company. If Enova does not comply with the Consent Order, the Company could be held liable for Enova’s noncompliance. Any noncompliance with the Consent Order, continuing obligations or similar orders or agreements from other regulators could lead to further regulatory penalties and could have a material adverse effect on the Company’s business.
The Company could be responsible for U.S. federal and state income tax liabilities that relate to the spin-off by Cash America of Enova, in November 2014 (the “Enova Spin-off”).
The Enova Spin-off was conditioned on the receipt of an opinion of tax counsel that the Enova Spin-off will be treated as a transaction that is tax-free for U.S. federal income tax purposes under Section 355(a) of the Internal Revenue Code. An opinion of tax counsel is not binding on the IRS. Accordingly, the IRS may reach conclusions with respect to the Enova Spin-off that are different from the conclusions reached in the opinion. The opinion was based on certain factual statements and representations made by Cash America, which, if incomplete or untrue in any material respect, could alter tax counsel’s conclusions. In addition, Cash America received a private letter ruling from the IRS to the effect that the then retention by Cash America of up to 20% of Enova’s stock will not be in pursuant to a plan having as one of its principal purposes the avoidance of U.S. federal income tax within the meaning of Section 355(a)(1)(D)(ii) of the Internal Revenue Code. The private letter ruling does not address any other tax issues related to the Enova Spin-off. Notwithstanding the private letter ruling, the IRS could determine on audit that the retention of the Enova stock was in pursuant to a plan having as one of its principal purposes the avoidance of U.S. federal income tax if it determines that any of the facts, assumptions, representations or undertakings that Cash America or Enova have made or provided to the IRS are not correct. If the retention is in pursuant to a plan having as one of its principal purposes the avoidance of U.S. federal income tax, then the distribution could ultimately be determined to be taxable, and the Company would recognize a gain in an amount equal to the excess of the fair market value of shares of Enova’s common stock distributed to Cash America’s shareholders on the distribution date over Cash America’s tax basis in such shares of Enova’s common stock. In addition, Cash
America agreed to certain actions in connection with the private letter ruling, such as disposing of the Enova common stock by September 15, 2017. All of the shares held by the Company as of the Merger date were sold in open market transactions at an average price of $10.40 per share, with the final sales completed on December 6, 2016.
While the Company believes that the Merger did not and will not adversely impact the tax-free status of the Enova Spin-off, it is possible that the IRS could assert that the Merger should result in the Enova Spin-off being treated as a taxable transaction for U.S. federal income tax purposes. If the IRS were to be successful in any contention that the Enova Spin-off should be treated as a taxable transaction or, if for any other reason, the Company were to take actions that would cause the Enova Spin-off to be treated as a taxable transaction, the Company could be subject to significant tax liabilities. In addition, in accordance with a tax matters agreement entered into between Cash America and Enova in connection with the Enova Spin-off, the Company could be subject to liability for any tax liabilities incurred by Enova or Enova’s shareholders if the Merger were to cause the Enova Spin-off to be deemed taxable.
In connection with the Enova Spin-off, Enova and Cash America agreed to indemnify each other for certain liabilities; if the Company is required to act on these indemnities to Enova, it may need to divert cash to meet those obligations, and Enova’s indemnity could be insufficient or Enova could be unable to satisfy its indemnification obligations.
Pursuant to a separation and distribution agreement and certain other agreements that Cash America entered into with Enova at the time of the Enova Spin-off, including a tax matters agreement, Enova agreed to indemnify Cash America for certain liabilities that could be related to tax, regulatory, litigation or other liabilities, and Cash America agreed to indemnify Enova for certain similar liabilities, in each case for uncapped amounts. In addition, the tax matters agreement prohibits Enova from taking any action or failing to take any action that could reasonably be expected to cause the Enova Spin-off to be taxable or to jeopardize the conclusions of the private letter ruling obtained in connection with the Enova Spin-off or opinions of counsel received by Cash America or Enova. Indemnities that Cash America may be required to provide Enova are not subject to any cap, may be significant and could negatively impact the Company’s results of operations and financial condition, particularly indemnities relating to actions that could impact the tax-free nature of the distribution. Third parties could also seek to hold the Company responsible for any of the liabilities that Enova has agreed to assume. Further, the indemnity from Enova could be insufficient to protect the Company against the full amount of such liabilities, or Enova may be unable to fully satisfy its indemnification obligations. Moreover, even if the Company ultimately succeeds in recovering from Enova any amounts for which it is held liable, the Company may be temporarily required to bear these losses and could suffer reputational risks if the losses are related to regulatory, litigation or other matters.
A discussion of certain other market risks is covered in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
While the Company generally leases its pawnshop locations, the Company also purchases real estate for its pawnshop locations as opportunities arise at prices that the Company believes are attractive, whether through store acquisitions or through purchases from its landlords at existing stores. As of December 31, 2017,2021, the Company owned the real estate and buildings for 67254 of its pawn stores, and owned five other parcels of real estate, including theits Company’s corporate headquarters building in Fort Worth, Texas. The Company’s strategy is generally to lease, rather than purchase, space for its pawnshopTexas and consumer loan locations, unless the Company finds what it believes is a superior location at an attractive price. office building in Dallas, Texas.
As of December 31, 2017,2021, the Company leased 2,0722,590 pawn store locations that were open or were in the process of opening. Leased facilities are generally leased for a term of three to five years with one or more options to renew. A majority of the store leases can be terminated early upon an adverse change in law which negatively affects the store’s profitability. The Company’s leases expire on dates ranging between 20182022 and 2045. All store leases provide for specified periodic rental payments ranging from approximately $1,000 to $25,000 per month as of December 31, 2017.2021. For more information about the Company’s pawn store locations, see “—Item“Item 1. Business—Locations and Operations.Pawn Store Locations.”
The following table details material corporate locations leased by the Company (dollars in thousands):
| | | | | | | | | | | | | Description | | Location | | Square Footage | | Lease Expiration Date | | Monthly Rental Payment | | Administrative operations | | Monterrey, Mexico | | 15,000 | | December 31, 2019 | | $ | 14 |
| | Administrative operations | | Fort Worth, Texas | | 24,000 | | July 31, 2021 | | $ | 10 |
| | Administrative operations | | Cincinnati, Ohio | | 10,000 | | April 30, 2019 | | $ | 10 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Description | | Location | | Square Footage | | Lease Expiration Date | | Monthly Rental Payment | | Administrative offices | | Dallas, Texas | | 37,000 | | September 30, 2022 | | $ | 45 | | | Administrative offices | | Monterrey, Mexico | | 15,000 | | December 31, 2024 | | 18 | | | Administrative offices | | Mexico City, Mexico | | 8,000 | | March 31, 2024 | | 18 | |
Most leases require the Company to maintain the property and pay the cost of insurance and property taxes. The Company believes termination of any particular lease would not have a material adverse effect on the Company’s operations. The Company believes the facilities currently owned and leased by it as pawn stores and consumer loan stores are suitable for such purposes. The Companypurpose and considers its equipment, furniture and fixtures to be in good condition.
Item 3. Legal Proceedings
The description of the shareholder securities class action lawsuit, CFPB lawsuit and other lawsuits contained in Note 13 - Commitments and Contingencies of Notes to Consolidated Financial Statements contained in Part IV, Item 15 of this report is incorporated to this Part I, Item 3 by reference.
The Company is also a defendant in certain routine litigation matters and regulatory actions encountered in the ordinary course of its business. Certain of these matters are covered to an extent by insurance. In the opinion of management, the resolution of these matters is not expected to have a material adverse effect on the Company’s financial position, results of operations or liquidity.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
General Market Information
The Company’s common stock is quoted on the New York Stock ExchangeNasdaq Global Select Market (“NYSE”Nasdaq”) under the symbol “FCFS.” In connection with the closing of the Merger, shares of First Cash ceased trading on the NASDAQ Global Select Market at the close of trading on September 1, 2016 and began trading on the NYSE under the stock symbol “FCFS” on September 2, 2016.
The following table sets forth the quarterly high and low sales prices per share for the common stock during fiscal 2017 and 2016, as reported by the NYSE and NASDAQ Global Select Market, and cash dividends declared and paid per share during fiscal 2017 and 2016:
| | | | | | | | | | | | | | | | | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | 2017 | | | | | | | | | High | $ | 49.60 |
| | $ | 59.35 |
| | $ | 63.60 |
| | $ | 68.60 |
| | Low | 48.10 |
| | 58.50 |
| | 62.90 |
| | 67.75 |
| | Cash dividends declared and paid | 0.19 |
| | 0.19 |
| | 0.19 |
| | 0.20 |
| | | | | | | | | | | 2016 | | | | | | | | | High | $ | 46.72 |
| | $ | 53.67 |
| | $ | 53.95 |
| | $ | 53.25 |
| | Low | 29.64 |
| | 43.11 |
| | 44.94 |
| | 44.60 |
| | Cash dividends declared and paid | 0.125 |
| | 0.125 |
| | 0.125 |
| | 0.19 |
|
On February 12, 2018,14, 2022, there were approximately 292231 stockholders of record of the Company’s common stock.
The dividend and earnings retention policies are reviewed by the Board of Directors of the Company from time to time in light of, among other things, the Company’s earnings, cash flows, financial position and debt covenant restrictions. In January 2018,February 2022, the Company’s Board of Directors approveddeclared a plan to increase the annual dividend to $0.88$0.30 per share or $0.22 per share quarterly, beginning in the first quarter of 2018. The declared $0.22 first quarter cash dividend on common shares outstanding, or an aggregate of $10.3$14.5 million based on the December 31, 20172021 share counts, willcount, to be paid on February 28, 20182022 to stockholders of record as of February 14, 2018.21, 2022. 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, expected liquidity, debt covenant restrictions and other relevant factors including the impact of COVID-19.
Issuer Purchases of Equity Securities
In January 2015, the Company’s Board of Directors authorized a common stock repurchase program for up to 2,000,000 shares of the Company’s outstanding common stock. During the first quarter of 2017,2021, the Company repurchased 228,000 sharesa total of its common stock at an aggregate cost of $10.0 million and an average cost per share of $43.94. In May 2017, the Company’s Board of Directors authorized a new common stock repurchase program for up to $100.0 million of the Company’s outstanding common stock. The new share repurchase program replaced the Company’s prior share repurchase plan, which was terminated in May 2017.
Under the May 2017 stock repurchase program, the Company has repurchased 1,388,000 shares of its common stock at an aggregate cost of $83.0 million and an average cost per share of $59.80 and $17.0 million remained available for repurchases as of December 31, 2017. On January 31, 2018, the Company completed the May 2017 stock repurchase program after repurchasing 239,000688,000 shares of common stock at an aggregate cost of $17.0 million. The Company did not repurchase any$49.6 million and an average cost per share of its$72.10, and during 2020, repurchased 1,427,000 shares in 2016 as it suspended its share repurchase program in 2016 due to the Merger.
In October 2017, the Company’s Board of Directors authorized an additional common stock repurchase program for up to $100.0at an aggregate cost of $107.0 million and an average cost per share of the Company’s outstanding common stock, which became effective on January 31, 2018 upon completion of the May 2017 stock repurchase program.$74.96. The Company intends to continue repurchases under its active share repurchase program, in 2018including through open market transactions under trading plans in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act of 1934, as amended, subject to a variety of factors, including, but not limited to, the level of cash balances, credit availability, debt covenant restrictions, general business conditions, regulatory requirements, the market price of the Company’s stock, the dividend policy, and the availability of alternative investment opportunities.opportunities, including acquisitions, and the impact of COVID-19.
The following table provides the information with respect to purchases made by the Company of shares of its common stock during each month the programs werea share repurchase program was in effect during fiscal 2017 (inthe three months ended December 31, 2021 (dollars in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | Total Number Of Shares Purchased | | Average Price Paid Per Share | | Total Number Of Shares Purchased As Part Of Publicly Announced Plans | | Maximum Number Of Shares That May Yet Be Purchased Under The Plans | | Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans | | January 1 through January 31, 2017 | | — |
| | $ | — |
| | — |
| | 1,148 |
| | (2) | | February 1 through February 28, 2017 | | 228 |
| | 43.94 |
| | 228 |
| | 920 |
| | (2) | | March 1 through March 31, 2017 | | — |
| | — |
| | — |
| | 920 |
| | (2) | | April 1 through April 30, 2017 | | — |
| | — |
| | — |
| | 920 |
| | (2) | | May 1 through May 31, 2017 | | — |
| | — |
| | — |
| | (1) | | $ | 100,000 |
| | June 1 through June 30, 2017 | | 290 |
| | 56.06 |
| | 290 |
| | (1) | | 83,731 |
| | July 1 through July 31, 2017 | | 292 |
| | 58.21 |
| | 292 |
| | (1) | | 66,733 |
| | August 1 through August 31, 2017 | | 269 |
| | 58.53 |
| | 269 |
| | (1) | | 50,989 |
| | September 1 through September 30, 2017 | | 103 |
| | 58.22 |
| | 103 |
| | (1) | | 44,970 |
| | October 1 through October 31, 2017 | | 161 |
| | 60.30 |
| | 161 |
| | (1) | | 35,267 |
| | November 1 through November 30, 2017 | | 70 |
| | 66.03 |
| | 70 |
| | (1) | | 30,658 |
| | December 1 through December 31, 2017 | | 203 |
| | 67.37 |
| | 203 |
| | (1) | | 16,991 |
| | Total | | 1,616 |
| | $ | 57.56 |
| | 1,616 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1)
| | Total
Number
Of Shares
Purchased | | Average
Price
Paid
Per Share | | Total Number Of
Shares Purchased
As Part Of Publicly
Announced Plans | | | | Approximate Dollar Value Of Shares That May Yet Be Purchased Under The 2,000,000 share repurchase program was terminated in May 2017.Plans |
| | (2)
| The $100.0 million repurchase program was initiated in May 2017. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | October 1 through October 31, 2021 | | — | | | $ | — | | | — | | | | | $ | 72,217 | | | November 1 through November 30, 2021 | | — | | | — | | | — | | | | | 72,217 | | | December 1 through December 31, 2021 | | — | | | — | | | — | | | | | 72,217 | | | Total | | — | | | — | | | — | | | | | |
The following table provides purchases made by the Company of shares of its common stock under each share repurchase program in effect during 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Plan Authorization Date | | Plan Completion Date | | Dollar Amount Authorized | | Shares Purchased in 2021 | | Dollar Amount Purchased in 2021 | | Remaining Dollar Amount Authorized For Future Purchases | | January 28, 2020 | | May 4, 2021 | | $ | 100,000 | | | 318,000 | | | $ | 21,827 | | | $ | — | | | January 27, 2021 | | Currently active | | 100,000 | | | 370,000 | | | 27,783 | | | 72,217 | | | Total | | | | | | 688,000 | | | $ | 49,610 | | | $ | 72,217 | |
Performance Graph
The graph set forth below compares the cumulative total stockholder return on the common stock of the Company for the period from December 31, 20122016 through December 31, 2017,2021, with the cumulative total return on the Standard & Poor’s (“S&P 600 Small Cap&P”) MidCap 400 Index and the Russell 2000 Index, representing broad-based equity market indexes, and the S&P 600 Small Cap Consumer FinanceMidCap 400 Financials Index and the S&P 600 Small Cap Specialty StoresMidCap 400 Consumer Discretionary Index, representing industry-based indexes, over the same period (assuming the investment of $100 on December 31, 20122016 and assuming the reinvestment of all dividends on the date paid). The Company has previously included a peer group index, however believes the comparison to the above mentioned industry-based indexes is a more applicable comparison. As a result, the performance graph below no longer includesdoes not include a peer group index. Note that historic performance is not necessarily indicative of future performance.
 
Item 6. Selected Financial Data[Reserved]
The information below should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and related notes thereto in “Item 8. Financial Statements and Supplementary Data.” The information below is derived from and qualified by reference to the Company’s audited financial statements for each of the five years ended December 31, 2017.
| | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | | (in thousands, except per share amounts and location counts) | Income Statement Data (1): | | | | | | | | | | | Revenue: | | | | | | | | | | | Retail merchandise sales | $ | 1,051,099 |
| | $ | 669,131 |
| | $ | 449,296 |
| | $ | 428,182 |
| | $ | 367,187 |
| | Pawn loan fees | 510,905 |
| | 312,757 |
| | 195,448 |
| | 199,357 |
| | 181,555 |
| | Wholesale scrap jewelry sales | 140,842 |
| | 62,638 |
| | 32,055 |
| | 48,589 |
| | 68,325 |
| | Consumer loan and credit services fees | 76,976 |
| | 43,851 |
| | 27,803 |
| | 36,749 |
| | 43,781 |
| | Total revenue | 1,779,822 |
| | 1,088,377 |
| | 704,602 |
| | 712,877 |
| | 660,848 |
| | | | | | | | | | | | | Cost of revenue: | | | | | | | | | | | Cost of retail merchandise sold | 679,703 |
| | 418,556 |
| | 278,631 |
| | 261,673 |
| | 221,361 |
| | Cost of wholesale scrap jewelry sold | 132,794 |
| | 53,025 |
| | 27,628 |
| | 41,044 |
| | 58,545 |
| | Consumer loan and credit services loss provision | 19,819 |
| | 11,993 |
| | 7,159 |
| | 9,287 |
| | 11,368 |
| | Total cost of revenue | 832,316 |
| | 483,574 |
| | 313,418 |
| | 312,004 |
| | 291,274 |
| | | | | | | | | | | | | Net revenue | 947,506 |
| | 604,803 |
| | 391,184 |
| | 400,873 |
| | 369,574 |
| | | | | | | | | | | | | Expenses and other income: | | | | | | | | | | | Store operating expenses | 551,874 |
| | 328,014 |
| | 207,572 |
| | 198,986 |
| | 181,321 |
| | Administrative expenses | 122,473 |
| | 96,537 |
| | 51,883 |
| | 53,588 |
| | 47,180 |
| | Depreciation and amortization | 55,233 |
| | 31,865 |
| | 17,939 |
| | 17,476 |
| | 15,361 |
| | Interest expense, net | 22,438 |
| | 19,569 |
| | 15,321 |
| | 12,845 |
| | 3,170 |
| | Merger and other acquisition expenses | 9,062 |
| | 36,670 |
| | 2,875 |
| | 998 |
| | 2,350 |
| | Loss on extinguishment of debt | 14,114 |
| | — |
| | — |
| | — |
| | — |
| | Net gain on sale of common stock of Enova | — |
| | (1,299 | ) | | — |
| | — |
| | — |
| | Goodwill impairment - U.S. consumer loan operations | — |
| | — |
| | 7,913 |
| | — |
| | — |
| | Total expenses and other income | 775,194 |
| | 511,356 |
| | 303,503 |
| | 283,893 |
| | 249,382 |
| | | | | | | | | | | | | Income from continuing operations before income taxes | 172,312 |
| | 93,447 |
| | 87,681 |
| | 116,980 |
| | 120,192 |
| | | | | | | | | | | | | Provision for income taxes | 28,420 |
| | 33,320 |
| | 26,971 |
| | 31,542 |
| | 35,713 |
| | | | | | | | | | | | | Income from continuing operations | 143,892 |
| | 60,127 |
| | 60,710 |
| | 85,438 |
| | 84,479 |
| | | | | | | | | | | | | Loss from discontinued operations, net of tax | — |
| | — |
| | — |
| | (272 | ) | | (633 | ) | | Net income | $ | 143,892 |
| | $ | 60,127 |
| | $ | 60,710 |
| | $ | 85,166 |
| | $ | 83,846 |
| | | | | | | | | | | | | Dividends declared per common share | $ | 0.77 |
| | $ | 0.565 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | Income Statement Data (Continued) (1): | | | | | | | | | | | Net income per share: | | | | | | | | | | | Basic: | | | | | | | | | | | Income from continuing operations | $ | 3.01 |
| | $ | 1.72 |
| | $ | 2.16 |
| | $ | 2.98 |
| | $ | 2.91 |
| | Net income | 3.01 |
| | 1.72 |
| | 2.16 |
| | 2.97 |
| | 2.89 |
| | Diluted: | | | | | | | | | | | Income from continuing operations | 3.00 |
| | 1.72 |
| | 2.14 |
| | 2.94 |
| | 2.86 |
| | Net income | 3.00 |
| | 1.72 |
| | 2.14 |
| | 2.93 |
| | 2.84 |
| | | | | | | | | | | | | Balance Sheet Data: | | | | | | | | | | | Inventories | $ | 276,771 |
| | $ | 330,683 |
| | $ | 93,458 |
| | $ | 91,088 |
| | $ | 77,793 |
| | Pawn loans | 344,748 |
| | 350,506 |
| | 117,601 |
| | 118,536 |
| | 115,234 |
| | Net working capital | 721,626 |
| | 748,507 |
| | 279,259 |
| | 258,194 |
| | 236,417 |
| Total assets | 2,062,784 |
| | 2,145,203 |
| | 752,895 |
| | 711,880 |
| | 660,999 |
| | Long-term liabilities | 466,880 |
| | 551,589 |
| | 275,338 |
| | 234,880 |
| | 201,889 |
| | Total liabilities | 587,451 |
| | 695,217 |
| | 321,513 |
| | 277,439 |
| | 250,650 |
| | Stockholders’ equity | 1,475,333 |
| | 1,449,986 |
| | 431,382 |
| | 434,441 |
| | 410,349 |
| | | | | | | | | | | | | Statement of Cash Flows Data: | | | | | | | | | | | Net cash flows provided by (used in): | | | | | | | | | | | Operating activities | $ | 220,357 |
| | $ | 96,854 |
| | $ | 92,749 |
| | $ | 97,679 |
| | $ | 106,718 |
| | Investing activities | 1,397 |
| | (25,967 | ) | | (71,676 | ) | | (85,366 | ) | | (140,726 | ) | | Financing activities | (197,506 | ) | | (58,713 | ) | | 9,127 |
| | (9,098 | ) | | 54,644 |
| | | | | | | | | | | | | Location Counts: | | | | | | | | | | | Pawn stores | 2,039 |
| | 2,012 |
| | 1,005 |
| | 912 |
| | 821 |
| | Credit services/consumer loan stores | 72 |
| | 73 |
| | 70 |
| | 93 |
| | 85 |
| | | 2,111 |
| | 2,085 |
| | 1,075 |
| | 1,005 |
| | 906 |
|
| | (1)
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Non-GAAP Financial Information—Adjusted Net Income and Adjusted Net Income Per Share” for additional information about certain 2017, 2016 and 2015 income and expense items that affected the Company’s consolidated income from operations, income before income taxes, net income and net income per share. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General On September 1, 2016,December 17, 2021, the Company completed its Merger with Cash America, whereby Cash America merged with and intothe acquisition of AFF, which is a wholly owned subsidiary of the Company. The accompanying audited results of operations for the year ended December 31, 2017 includes the results of operations for Cash America while the comparable prior-year period includes the results of operations for Cash America for the period September 2, 2016 to December 31, 2016, affecting comparability of fiscal 2017 and 2016 amounts.leading technology-driven retail POS payments platform primarily focused on providing LTO products. See Note 3 of Notes to Consolidated Financial Statements for additional information about the Merger.AFF Acquisition.
With the AFF Acquisition, the Company now operates two business lines: pawn operations and retail POS payment solutions. Its business lines are organized into three reportable segments. The Company is a leading operatorU.S. pawn segment consists of retail-basedall pawn stores with over 2,100 store locationsoperations in the U.S. and the Latin America. 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. Financial information regarding the Company’s revenue and long-lived assets by geographic areas is provided in Note 17 of Notes to Consolidated Financial Statements.
The Company’s primary business line continues to be the operation of retail pawn stores, also known as “pawnshops,” which focus on serving cash and credit-constrained consumers. 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 significant retail sales primarily from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers.
The stores also offer pawn loans to help customers meet small short-term cash needs. Personal property, such asCompany’s retail POS payment solutions business line consists solely of the operations of AFF, which focuses on providing LTO and retail financing payment options across a large network of traditional and e-commerce retail merchant partners in all 50 states in the U.S., the District of Columbia and Puerto Rico. AFF’s retail partnerships provide consumer electronics, jewelry, power tools, household appliances, sporting goods and musical instrumentsservices to their shoppers and use AFF’s LTO and retail finance solutions to facilitate payments on such transactions. As one of the largest omni-channel providers of “no credit required” payment options, AFF’s technology set provides its merchant partners with seamless leasing and financing experiences in-store, online, in-cart and on mobile devices.
Business operations in Mexico, Guatemala and Colombia are transacted in Mexican pesos, Guatemalan quetzales and Colombian pesos. The Company also has operations in El Salvador where the reporting and functional currency is pledged as collateralthe U.S. dollar. The following table provides exchange rates for the pawn loansMexican peso, Guatemalan quetzal and held byColombian peso for the Company over the term of the loan plus a stated gracecurrent and prior-year periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2019 | | | Rate | | % Change
Over Prior-
Year Period
Favorable /
(Unfavorable) | | Rate | | % Change
Over Prior-
Year Period
Favorable /
(Unfavorable) | | Rate | | Mexican peso / U.S. dollar exchange rate: | | | | | | | | | | | | | | | | End-of-period | | 20.6 | | | (4) | % | | | 19.9 | | | (6) | % | | | 18.8 | | Twelve months ended | | 20.3 | | | 6 | % | | | 21.5 | | | (11) | % | | | 19.3 | | | | | | | | | | | | | | | | | Guatemalan quetzal / U.S. dollar exchange rate: | | | | | | | | | | | | | | | | End-of-period | | 7.7 | | | 1 | % | | | 7.8 | | | (1) | % | | | 7.7 | | Twelve months ended | | 7.7 | | | — | % | | | 7.7 | | | — | % | | | 7.7 | | | | | | | | | | | | | | | | | Colombian peso / U.S. dollar exchange rate: | | | | | | | | | | | | | | | | End-of-period | | 3,981 | | | (16) | % | | | 3,433 | | | (5) | % | | | 3,277 | | Twelve months ended | | 3,742 | | | (1) | % | | | 3,693 | | | (13) | % | | | 3,280 |
period. In addition, someThe Company’s management reviews and analyzes operating results in Latin America on a constant currency basis because the Company believes this better represents the Company’s underlying business trends. Constant currency results are non-GAAP financial measures, which exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates. The wholesale scrap jewelry sales in Latin America are priced and settled in U.S. dollars, and are not affected by foreign currency translation, as are a small percentage of the Company’s pawn stores offer consumer loans or credit services products. The Company’s strategy is to focus on growing its retail-based pawn operations in the U.S.operating and Latin America through new store openings and strategic acquisition opportunities as they arise. Pawn operations accounted for approximately 96% of the Company’s consolidated revenue during fiscal 2017 and 2016.
The Company organizes its operations into two reportable segments. The U.S. operations segment consists of all pawn and consumer loan operations in the U.S. and the Latin America operations segment consists of all pawn and consumer loan operationsadministrative expenses in Latin America, which currently includes operationsare billed and paid in Mexico, Guatemala and El Salvador.
The Company recognizes pawn loan fee revenueU.S. dollars. Amounts presented on a constant-yieldconstant currency basis over the lifeare denoted as such. See “Non-GAAP Financial Information” for additional discussion of the pawn loan for all pawn loans of which the Company deems collection to be probable based on historical redemption statistics. If a pawn loan is not repaid prior to the expiration of the loan term, including any extension or grace period, if applicable, the property is forfeited to the Company and transferred to inventory at a value equal to the principal amount of the loan, exclusive of accrued pawn fee revenue. The Company records merchandise sales revenue at the time of the sale and presents merchandise sales net of any sales or value-added taxes collected. The Company does not provide direct financing to customers for the purchase of its merchandise, but does permit its customers to purchase merchandise on an interest-free layaway plan. Should the customer fail to make a required payment pursuant to a layaway plan, the previous payments are typically forfeited to the Company. Interim payments from customers on layaway sales are recorded as deferred revenue and subsequently recorded as income during the period in which final payment is received or when previous payments are forfeited to the Company. Some jewelry is processed at third-party facilities and the precious metal and diamond content is sold at either prevailing market commodity prices or a previously agreed upon price with a commodity buyer. The Company records revenue from these wholesale scrap jewelry transactions when a price has been agreed upon and the Company ships the commodity to the buyer.constant currency operating results.
The Company operates a small number of stand-alone consumer finance stores in the U.S. and Mexico. These stores provide consumer financial services products including credit services, consumer loans and check cashing. In addition, 362 of the Company’s pawn stores also offer credit services and/or consumer loans as an ancillary product, which products have been deemphasized by the Company in recent years due to regulatory constraints and increased internet based competition for such products. Beginning in fiscal 2018, the Company no longer offers fee-based check cashing services in its non-franchised stores. Consumer loan and credit services revenue accounted for approximately 4% of consolidated revenue for fiscal 2017 and 2016.
The Company recognizes service fee income on consumer loan transactions on a constant-yield basis over the life of the loan and recognizes credit services fees ratably over the life of the extension of credit made by the Independent Lenders. Changes in the valuation reserve on consumer loans and credit services transactions are charged or credited to the consumer loan credit loss provision. The credit loss provision associated with the Company’s CSO Programs and consumer loans is based primarily upon historical credit loss experience, with consideration given to recent credit loss trends, delinquency rates, economic conditions and management’s expectations of future credit losses.
Stores included in the same-store calculations presented in this annual report are those stores that were opened or acquired prior to the beginning of the prior-year comparative fiscal period and remained open through the end of the reporting period. Also included are stores that were relocated during the year within a specified distance serving the same market where there is not a significant change in store size and where there is not a significant overlap or gap in timing between the opening of the new store and the closing of the existing store. Unless otherwise noted, same-store calculations exclude the results of the merged Cash America stores. Legacy Cash America same-store calculations refer to Cash America stores that were opened prior to the beginning of the prior-year comparative fiscal period (although not then owned by the Company) and remained open through the end of the reporting period.
Operating expenses consist of all items directly related to the operation of the Company’s stores, including salaries and related payroll costs, rent, utilities, facilities maintenance, advertising, property taxes, licenses, supplies and security. Administrative expenses consist of items relating to the operation of the corporate offices, including the compensation and benefit costs of corporate management, area supervisors and other operations management personnel, collection operations and personnel, accounting and administrative costs, information technology costs, liability and casualty insurance, outside legal and accounting fees and stockholder-related expenses. Merger and other acquisition expenses primarily include incremental costs directly associated with the Merger and integration of Cash America, including professional fees, legal expenses, severance, retention and other employee-related costs, accelerated vesting of certain equity compensation awards, contract breakage costs and costs related to consolidation of technology systems and corporate facilities.
The following table details income statement items as a percent of total revenue and other operating metrics:
| | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | Revenue: | | | | | | | Retail merchandise sales | 59.1 | % | | 61.5 | % | | 63.8 | % | | Pawn loan fees | 28.7 |
| | 28.7 |
| | 27.7 |
| | Wholesale scrap jewelry sales | 7.9 |
| | 5.8 |
| | 4.5 |
| | Consumer loan and credit services fees | 4.3 |
| | 4.0 |
| | 4.0 |
| | | | | | | | | Cost of revenue: | | | | | | | Cost of retail merchandise sold | 38.2 |
| | 38.4 |
| | 39.6 |
| | Cost of wholesale scrap jewelry sold | 7.5 |
| | 4.9 |
| | 3.9 |
| | Consumer loan and credit services loss provision | 1.1 |
| | 1.1 |
| | 1.0 |
| | | | | | | | | Net revenue | 53.2 |
| | 55.6 |
| | 55.5 |
| | | | | | | | | Expenses and other income: | | | | | | | Store operating expenses | 31.0 |
| | 30.1 |
| | 29.5 |
| | Administrative expenses | 6.9 |
| | 8.9 |
| | 7.4 |
| | Depreciation and amortization | 3.1 |
| | 2.9 |
| | 2.5 |
| | Interest expense, net | 1.2 |
| | 1.8 |
| | 2.2 |
| | Merger and other acquisition expenses | 0.5 |
| | 3.4 |
| | 0.4 |
| | Loss on extinguishment of debt | 0.8 |
| | — |
| | — |
| | Net gain on sale of common stock of Enova | — |
| | (0.1 | ) | | — |
| | Goodwill impairment - U.S. consumer loan operations | — |
| | — |
| | 1.1 |
| | | | | | | | | Income before income taxes | 9.7 |
| | 8.6 |
| | 12.4 |
| | Provision for income taxes | 1.6 |
| | 3.1 |
| | 3.8 |
| | Net income | 8.1 |
| | 5.5 |
| | 8.6 |
| | | | | | | | | Retail merchandise sales gross profit margin | 35.3 | % | | 37.4 | % | | 38.0 | % | Pre-tax operating margin (1) | 20.3 |
| | 23.2 |
| | 23.9 |
|
(1) Pre-tax operating profit is an amount equal to net revenues less store operating expenses less store depreciation expense.
Critical Accounting PoliciesEstimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, related revenue and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. Such estimates, assumptions and judgments are subject to a number of risks and uncertainties, which may cause actual results to differ materially from the Company’s estimates.
The significantcritical accounting policies and estimates that could have a significant impact on the Company’s results of operations are described in Note 2 of Notes to Consolidated Financial Statements. The Company believes are the mostfollowing critical to aidaccounting policies describe the more significant judgments and estimates used in fully understanding and evaluatingthe preparation of its reportedconsolidated financial results include the following:statements.
CustomerPawn loans and revenue recognition - Receivables on the balance sheet consist of pawn loans and consumer loans. Pawn loans are collateralizedsecured by pledgedthe customer’s pledge of tangible personal property, which the Company holds during the term of the loan. If a pawn loan defaults, the Company relies on the sale of the pawned property to recover the principal amount of an unpaid pawn loan, plus a stated grace period.yield on the investment, as the Company’s pawn loans are non-recourse against the customer. The Company accrues pawn loan fee revenue on a constant-yield basis over the life of the pawn loan for all pawns for which the Company deems collection to be probable based on historical pawn redemption statistics. The typicalstatistics, which is included in accounts receivable, net in the accompanying consolidated balance sheets. If the pawn loan is not repaid prior to the expiration of the pawn loan term, is generally 30 days plus an additionalincluding any extension or grace period, of 14 to 90 days depending on geographical markets and local regulations. Pawn loans may be either paid in full with accrued pawn loan fees and service charges or, where permitted by law, may be renewed
or extended by the customer’s payment of accrued pawn loan fees and service charges. If the pawn is not repaid upon expiration of the grace period,if applicable, the principal amount loaned becomes the inventory carrying value of the forfeited collateral, which is typically recovered through sales of the forfeited items at prices well above the carrying value.
The Company’s pawn merchandise sales are primarily retail sales to the general public in its pawn stores. The Company acquireshas determined no allowance related to credit losses on pawn loans is required as the fair value of the pledged collateral is significantly in excess of the pawn loan amount.
Pawn inventories and revenue recognition - Pawn inventories represent merchandise inventory throughacquired from forfeited pawn loans and through purchases of used goodsmerchandise purchased directly from the general public. The Company also retails limited quantities of new or refurbished merchandise obtained directly from wholesalers and manufacturers. Pawn inventories from forfeited pawn loans are recorded at the amount of the pawn principal on the unredeemed goods, exclusive of accrued interest. Pawn inventories purchased directly from customers, wholesalers and manufacturers are recorded at cost. The cost of pawn inventories is determined on the specific identification method. Pawn inventories are stated at the lower of cost or net realizable value and, accordingly, valuation allowances are established if pawn inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. Management has evaluated pawn inventories and determined that a valuation allowance is not necessary.
The Company’s merchandise sales are primarily retail sales to the general public in its pawn stores. The Company records sales revenue at the time of the sale. The Company presents merchandise sales net of any sales or value-added taxes collected. The Company does not provide direct financing to customers for the purchase of its merchandise, but does permit its customers to purchase merchandise on an interest-free layaway plan. Should the customer fail to make a required payment pursuant to a layaway plan, the previous payments are typically forfeited to the Company. Interim payments from customers on layaway sales are recorded as deferred revenue and subsequently recorded as retail merchandise sales revenue when the final payment is received or when previous payments are forfeited to the Company. Some jewelry inventory is melted and processed at third-party facilities and the precious metal and diamond content is sold at either prevailing market commodity prices or a previously agreed upon price with a commodity buyer. The Company records revenue from these wholesale scrap jewelry transactions when a price has been agreed upon and the Company ships the precious metalscommodity to the buyer.
Leased merchandise and revenue recognition - The Company accrues consumer loan service fees on a constant-yield basis overprovides merchandise, consisting primarily of furniture and mattresses, appliances, jewelry, electronics and automotive products, to customers of its merchant partners for lease under certain terms agreed to by the termcustomer. The customer has the right to acquire the title either through an early buyout option or through payment of all required lease payments. The Company maintains ownership of the consumer loan. Consumer loans have terms thatleased merchandise until all payment obligations are satisfied under the lease agreement. The customer has the right to cancel the lease at any time by returning the merchandise and making all scheduled payments due through the minimum lease holding period, which is typically range from 760 days. Leased merchandise contracts can typically be renewed for between six to 365 days.24 months. Leased merchandise is stated at depreciated cost. The Company recognizes credit services fees ratablydepreciates leased merchandise over the life of the extensionlease, and assumes no salvage value. Depreciation is accelerated upon an early buyout. All of credit made by the Independent Lenders. The extensionsCompany’s leased merchandise represents on-lease merchandise and all leases are operating leases.
Lease income is recognized over the lease term and is recorded net of credit made byany sales taxes collected. Charges for late fees and insufficient fund fees are recognized as income when collected. Initial direct costs related to the Independent LendersCompanyʼs lease agreements are added to credit services customers typically have termsthe basis of 7the leased property and recognized over the lease term in proportion to 365 days.
Credit loss provisions -the recognition of lease income. The Company has determined no allowance relatedtypically charges the customer a non-refundable processing fee at lease inception and may also receive a discount from or pay a premium to credit losses on pawn loans is requiredcertain merchant partners for leases originated at their locations, which are deferred and amortized using the straight-line method as adjustments to lease income over the fair valuecontractual life of the pledged collateralrelated leased merchandise. Unamortized fees, discounts and premiums are recognized in full upon early buyout or charge-off.
The Company accrues for lease income earned but not yet collected as accrued rent receivable, which is significantlyincluded in accounts receivable, net in the accompanying consolidated balance sheets. Alternatively, lease payments received in excess of the pawn loan amount.amount earned are recognized as deferred revenue, which is included in customer deposits and prepayments in the accompanying consolidated balance sheets. Customer payments are first applied to applicable sales tax and scheduled lease payments, then applied to any uncollected fees, such as late fees and insufficient fund fees. The Company maintainscollects sales taxes on behalf of the customer and remits all applicable sales taxes collected to the respective jurisdiction.
Provision for lease losses - The Company records a provision for lease losses on an allowance for creditmethod, which estimates the leased merchandise losses on consumer loans on an aggregate basis at a level it considers sufficient to cover estimated losses inincurred but not yet identified by management as of the collectionend of its consumer loans.the accounting period. The allowance for creditlease losses is based primarily upon historical credit loss experience with consideration given to recent creditand forecasted business trends including, but not limited to, loss trends, and changes in loan characteristics (e.g., average amount financed and term), delinquency levels, collateral values, economic conditions, underwriting and collection practices.
The Company charges off leased merchandise when a lease is 90 days or more contractually past due. If an account is deemed to be uncollectible prior to this date, the Company will charge off the leased merchandise at the point in time it is deemed uncollectible.
Finance receivables and revenue recognition - The Company purchases and services retail finance receivables, the term of which typically range from six to 24 months, directly from its merchant partners or from its bank partner. The Company has a partnership with a Utah state-chartered bank that requires the Company to purchase the rights to the cash flows associated with finance receivables marketed to retail consumers on the bank’s behalf. The bank establishes the underwriting criteria for the finance receivables originated by the bank.
Interest income is recognized using the interest method over the life of the finance receivable for all loans for which the Company deems collection to be probable based on historical loan redemption statistics and stops accruing interest upon charge-off. Charges for late fees and insufficient fund fees are recognized as income when collected. The Company receives an origination fee on newly purchased bank loans and may receive a discount from or pay a premium to certain merchant partners for finance receivables purchased from them, which are deferred and amortized using the interest method as adjustments to yield over the contractual life of the related finance receivable. Unamortized origination fees, discounts and premiums are recognized in full upon early payoff or charge-off.
The Company offers customers an early payoff discount on most of its finance receivables whereby the customer has between 90 and 105 days to pay the full principal balance without incurring any interest charge. If the borrower does not pay the full principal balance prior to the expiration of the early payoff discount period, interest charges are applied retroactively to the inception date of the loan. The Company accrues interest income during the early payoff discount period but records a reserve for loans expected to pay the full principal balance prior to the expiration of the early payoff discount period based on historical payment patterns.
Provision for loan losses - Expected lifetime losses on finance receivables are recognized upon loan purchase, which requires the Company to make its best estimate of probable lifetime losses at the time of purchase. The Company segments its finance receivable portfolio into pools of receivables with similar risk characteristics which include loan product and monthly origination vintage and evaluates each pool for impairment.
The Company calculates the allowance for loan losses based on historical loss information and incorporates observable and forecasted economic conditions over a reasonable and supportable forecast period covering the full contractual life of finance receivables. Incorporating observable and forecasted economic conditions could have a material impact on the measurement of the allowance to the extent that forecasted economic conditions change significantly. The Company may also consider other qualitative factors to address recent and forecasted business trends in estimating the allowance, as necessary, including, but not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices. The allowance for creditloan losses is periodically reviewed by management with any changes reflected in current operations.maintained at a level considered appropriate to cover expected lifetime losses on the finance receivable portfolio, and the appropriateness of the allowance is evaluated at each period end.
The Company fully reserves or charges off consumer loans oncefinance receivables when a receivable is 90 days or more contractually past due. If an account is deemed to be uncollectible prior to this date, the loan has been classified as delinquent for 60 days. Short-term loans are considered delinquent when paymentCompany will charge off the finance receivable at the point in time it is deemed uncollectible.
Business combinations - Business combination accounting requires the Company to determine the fair value of an amount dueall assets acquired, including identifiable intangible assets, liabilities assumed and contingent consideration issued in a business combination. The total consideration of the acquisition is not madeallocated to the assets and liabilities in amounts equal to the estimated fair value of each asset and liability as of the due date. Installment loans are considered delinquent when a customer misses two payments. If a loanacquisition date, and any remaining acquisition consideration is estimated to be uncollectible before it is fully reserved, it is charged off at that point. Recoveries on loans previously charged to the allowance, including the saleclassified as goodwill. This allocation process requires extensive use of delinquent loans to unaffiliated third parties, are credited to the allowance when collected or when sold to a third party. The Company generally does not accrue interest on delinquent consumer loans. In addition, delinquent consumer loans generally may not be renewed,estimates and if, during its attempt to collect on a delinquent consumer loan,assumptions. When appropriate, the Company allows additional time for payment through a payment plan or a promiseutilizes independent valuation experts to pay, it is still considered delinquent. Generally, all payments received are first applied against accrued but unpaid interestadvise and fees and then against the principal balance of the loan.
Under the CSO Programs, the Company assists customersassist in applying for a short-term extension of credit from Independent Lenders and issues the Independent Lenders a guarantee for the repayment of the extension of credit. The Company is required to recognize, at the inception of the guarantee, a liability fordetermining the fair value of the obligation undertaken by issuingassets acquired and liabilities assumed in connection with a business acquisition, in determining appropriate amortization methods and periods for identified intangible assets and in determining the guarantee. According tofair value of contingent consideration, which is reviewed at each subsequent reporting period with changes in the guarantee, if the borrower defaults on the extension of credit, the Company will pay the Independent Lenders the principal, accrued interest, insufficient funds and late fee, if applicable, all of which the Company records as a component of its credit loss provision. The Company is entitled to seek recovery, directly from its customers, of the amounts it pays the Independent Lenders in performing under the guarantees. The Company records the estimated fair value of the liabilitycontingent consideration recognized in accrued liabilities. The estimated fair valuethe consolidated statement of the liability is periodically reviewed by management with any changes reflected in current operations.income. See Note 3 and Note 6 of Notes to Consolidated Financial Statements.
Inventories - Inventories represent merchandise acquired from forfeited pawns and merchandise purchased directly from the general public. The Company also retails limited quantities of new or refurbished merchandise obtained directly from wholesalers and manufacturers. Inventories from forfeited pawns are recorded at the amount of the pawn principal on the unredeemed goods, exclusive of accrued interest. Inventories purchased directly from customers, wholesalers and manufacturers are recorded at cost. The cost of inventories is determined on the specific identification method. Inventories are stated at the lower of cost or net realizable value and, accordingly, inventory valuation allowances are established, if necessary, when inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. Management has evaluated inventories and determined that a valuation allowance is not necessary.
Goodwill and other indefinite-lived intangible assets - Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination. The Company performs its goodwill impairment assessment annually as of December 31, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s reporting units, which are tested for impairment, are U.S. operations andpawn, Latin America operations.pawn and retail POS payment solutions. The Company assesses goodwill for impairment at a reporting unit level by first assessing a range of qualitative factors, including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company’s products and services, regulatory and political developments, entity specific factors, such as strategy and changes in key personnel, and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company proceeds to the two-step impairment testing methodology. As described in “—ResultsSee Note 14 of Operations—Goodwill Impairment—U.S. Consumer Loan Operations” below, the Company recorded a goodwill impairment charge of $7.9 million during 2015.Notes to Consolidated Financial Statements.
The Company’s other material indefinite-lived intangible assets consist of certain trade names and pawn licenses and franchise agreements related to a check-cashing operation.licenses. The Company performs its indefinite-lived intangible asset impairment assessment annually as of December 31, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unitan indefinite-lived intangible asset below its carrying amount. The Company determined there was no impairment asSee Note 14 of December 31, 2017 and 2016.Notes to Consolidated Financial Statements.
Foreign currency transactions - The Company has significant operations in Latin America, where in Mexico and Guatemala the functional currency is the Mexican peso and Guatemalan quetzal, respectively. Accordingly, the assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each balance sheet date, and the resulting adjustments are accumulated in other comprehensive income (loss) as a separate component of stockholders’ equity. Revenues and expenses are translated at the average exchange rates occurring during the respective fiscal period. Prior to translation, U.S. dollar-denominated transactions of the foreign subsidiaries are remeasured into their functional currency using current rates of exchange for monetary assets and liabilities and historical rates of exchange for non-monetary assets and liabilities. Gains and losses from remeasurement of dollar-denominated monetary assets and liabilities in Mexico and Guatemala are included in store operating expenses. Deferred taxes are not currently provided on cumulative foreign currency translation adjustments as the Company indefinitely reinvests earnings of its foreign subsidiaries. The Company also has operations in El Salvador where the reporting and functional currency is the U.S. dollar.
Results of Operations
Constant Currency2021 Consolidated Operating Results Highlights
The following table sets forth revenue, net income, diluted earnings per share, adjusted net income, adjusted diluted earnings per share, EBITDA and adjusted EBITDA for the year ended December 31, 2021 as compared to the year ended December 31, 2020 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | As Reported (GAAP) | | Adjusted (Non-GAAP) | | | 2021 | | 2020 | | 2021 | | 2020 | | Revenue | | $ | 1,698,965 | | | $ | 1,631,284 | | | $ | 1,698,965 | | | $ | 1,631,284 | | | Net income | | $ | 124,909 | | | $ | 106,579 | | | $ | 161,479 | | | $ | 125,153 | | | Diluted earnings per share | | $ | 3.04 | | | $ | 2.56 | | | $ | 3.94 | | | $ | 3.01 | | | EBITDA (non-GAAP measure) | | $ | 244,098 | | | $ | 213,608 | | | $ | 289,631 | | | $ | 236,974 | | | Weighted-average diluted shares | | 41,024 | | | 41,600 | | | 41,024 | | | 41,600 | |
See “Non-GAAP Financial Information—Adjusted Net Income and Adjusted Diluted Earnings Per Share and —Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA” below.
The following charts present net income, adjusted net income, diluted earnings per share, adjusted diluted earnings per share, EBITDA, adjusted EBITDA and earning assets, which consist of pawn loans, finance receivables, inventories and leased merchandise, as of and for the years ended December 31, 2021, 2020 and 2019 (in millions, except per share amounts): * Non-GAAP financial measures. See “Non-GAAP Financial Information” for additional discussion of non-GAAP financial measures.
Operating Results for the Twelve Months Ended December 31, 2021 Compared to the Twelve Months Ended December 31, 2020
The COVID-19 pandemic continues to impact numerous aspects of the Company’s business and the continuing long-term impact to its business remains unknown. The extent to which COVID-19 continues to impact the Company’s operations, results of operations, liquidity and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the unknown duration and severity of the COVID-19 pandemic, which may be impacted by variants of concern and the efficacy and adoption rate of the COVID-19 vaccines in the jurisdictions in which the Company operates. In addition, changes in economic conditions and consumer spending, rising inflation, and the actions taken to limit the economic impact of COVID-19, such as government stimulus and other transfer programs, have and may continue to have a material adverse impact on demand for pawn loans in future periods. Moreover, safety protocols, staffing constraints and supply chain delays continue to impact operations and traffic counts for many retailers, which include the Company’s pawn stores and many of AFF’s retail merchant partners.
The following tables and related discussion set forth key operating and financial data for the Company’s operations by reporting segment as of and for the years ended December 31, 2021 and 2020. For similar operating and financial data and discussion of the Company’s 2020 results compared to its 2019 results, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 1, 2021.
Stores included in the same-store calculations presented in the U.S. pawn segment and Latin America pawn segment sections below are those stores that were opened or acquired prior to the beginning of the prior-year comparative period and remained open through the end of the reporting period. Also included are stores that were relocated during the applicable period within a specified distance serving the same market where there is not a significant change in store size and where there is not a significant overlap or gap in timing between the opening of the new store and the closing of the existing store.
U.S. Pawn Segment
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 December 31, 2021 as compared to December 31, 2020 (dollars in thousands, except as otherwise noted):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | | | 2021 | | 2020 | | Increase | | U.S. Pawn Segment | | | | | | | | | | | Earning assets: | | | | | | | | | | | Pawn loans | $ | 256,311 | | | $ | 220,391 | | | | 16 | % | | | Inventories | | 197,486 | | | | 136,109 | | | | 45 | % | | | | | | | | | | | | | $ | 453,797 | | | $ | 356,500 | | | | 27 | % | | | | | | | | | | | | | Average outstanding pawn loan amount (in ones) | $ | 222 | | | $ | 198 | | | | 12 | % | | | | | | | | | | | | | Composition of pawn collateral: | | | | | | | | | | | General merchandise | 34 | % | | 33 | % | | | | | | Jewelry | 66 | % | | 67 | % | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | Composition of inventories: | | | | | | | | | | | General merchandise | 45 | % | | 46 | % | | | | | | Jewelry | 55 | % | | 54 | % | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | Percentage of inventory aged greater than one year | 1 | % | | 2 | % | | | | | | | | | | | | | | | | Inventory turnover (trailing twelve months cost of merchandise sales divided by average inventories) | 2.8 times | | 3.2 times | | | | |
The following table presents segment pre-tax operating income and other operating metrics of the U.S. pawn segment for the year ended December 31, 2021 as compared to the year ended December 31, 2020 (dollars in thousands). Operating expenses include salary and benefit expense of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended | | | | | | December 31, | | Increase / | | 2021 | | 2020 | | (Decrease) | | U.S. Pawn Segment | | | | | | | | | | | Revenue: | | | | | | | | | | | Retail merchandise sales | $ | 742,374 | | | $ | 720,281 | | | | 3 | % | | | Pawn loan fees | | 305,350 | | | | 310,437 | | | | (2) | % | | | Wholesale scrap jewelry sales | | 27,163 | | | | 45,405 | | | | (40) | % | | Interest and fees on finance receivables (1) | | — | | | | 2,016 | | | | (100) | % | | | Total revenue | | 1,074,887 | | | | 1,078,139 | | | | — | % | | | | | | | | | | | | | Cost of revenue: | | | | | | | | | | | Cost of retail merchandise sold | | 416,039 | | | | 415,938 | | | | — | % | | | Cost of wholesale scrap jewelry sold | | 22,886 | | | | 39,584 | | | | (42) | % | | Provision for loan losses (1) | | — | | | | (488) | | | | 100 | % | | | Total cost of revenue | | 438,925 | | | | 455,034 | | | | (4) | % | | | | | | | | | | | | | Net revenue | | 635,962 | | | | 623,105 | | | | 2 | % | | | | | | | | | | | | | Segment expenses: | | | | | | | | | | | Operating expenses | | 380,895 | | | | 396,627 | | | | (4) | % | | | Depreciation and amortization | | 22,234 | | | | 21,743 | | | | 2 | % | | | Total segment expenses | | 403,129 | | | | 418,370 | | | | (4) | % | | | | | | | | | | | | | Segment pre-tax operating income | $ | 232,833 | | | $ | 204,735 | | | | 14 | % | | | | | | | | | | | | | Operating metrics: | | | | | | | | | | | Retail merchandise sales margin | 44 | % | | 42 | % | | | | | | | | | | | | | | Net revenue margin | 59 | % | | 58 | % | | | | | | Segment pre-tax operating margin | 22 | % | | 19 | % | | | | |
(1)Effective June 30, 2020, the Company’s U.S. pawn segment ceased offering an unsecured consumer loan product.
Retail Merchandise Sales Operations
U.S. retail merchandise sales increased 3% to $742.4 million during 2021 compared to $720.3 million for 2020. Same-store retail sales were flat during 2021 compared to 2020. The gross profit margin on retail merchandise sales in the U.S. was 44% during 2021 compared to a margin of 42% during 2020. The increase in margin was primarily a result of continued retail demand for value-priced pre-owned merchandise, increased buying of merchandise directly from customers and lower levels of aged inventory, which limited the need for normal discounting.
U.S. inventories increased 45% from $136.1 million at December 31, 2020 to $197.5 million at December 31, 2021. The increase was primarily due to the lower than normal inventory balances at December 31, 2020 due to the impacts of the COVID-19 pandemic. Inventories aged greater than one year in the U.S. were 1% at December 31, 2021 compared to 2% at December 31, 2020.
Pawn Lending Operations
U.S. pawn loan receivables as of December 31, 2021 increased 16% in total and 13% on a same-store basis compared to December 31, 2020. The increase in total and same-store pawn receivables was primarily due to the continued recovery in pawn lending demand during 2021 to pre-pandemic levels as the economy reopened and government stimulus programs were curtailed.
U.S. pawn loan fees decreased 2% to $305.4 million during 2021 compared to $310.4 million for 2020. Same-store pawn fees decreased 4% during 2021 compared to 2020. The decline in total and same-store pawn loan fees was primarily due to the significantly lower than normal beginning pawn loan levels, partially offset by the continued recovery in pawn loan demand towards pre-pandemic levels during 2021.
Segment Expenses and Segment Pre-Tax Operating Income
U.S. store operating expenses decreased 4% to $380.9 million during 2021 compared to $396.6 million during 2020 and same-store operating expenses decreased 6% compared with the prior-year period. The decrease in total and same-store operating expenses was primarily due to reduced staffing levels and other cost saving initiatives in response to COVID-19, partially offset by increased store-level incentive compensation driven by increased revenues towards the latter part of 2021.
The U.S. segment pre-tax operating income for 2021 was $232.8 million, which generated a pre-tax segment operating margin of 22% compared to $204.7 million and 19% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected an increase in gross profit from retail sales and a decrease in operating expenses, partially offset by a slight decrease in pawn loan fees, gross profit from scrap sales and net revenue from consumer loan and credit services products as a result of discontinuing consumer lending operations in U.S. pawn stores in 2020.
Latin America Pawn Segment
The Company’s management reviews and analyzes certain operating results in Latin America on a constant currency basis because the Company believes this better represents the Company’s underlying business trends. Constant currency results are non-GAAP financial measures, which exclude the effects of foreign currency translation and are calculated by translating current yearcurrent-year results at prior yearprior-year average exchange rates. The wholesale scrap jewelry generatedsales in Latin America is soldare priced and settled in U.S. dollars and is thereforeare not affected by foreign currency translation. Atranslation, as are a small percentage of the operating and administrative expenses in Latin America, that are also billed and paid in U.S. dollars which are not affecteddollars.
Latin American results of operations for 2021 compared to 2020 were impacted by foreign currency translation.
Business operationsa 6% favorable change in Mexico and Guatemala are transacted inthe average value of the Mexican pesos and Guatemalan quetzales, respectively. The Company also has operations in El Salvador where the reporting and functional currency ispeso compared to the U.S. dollar. The following table provides exchange rates fortranslated value of Latin American earning assets as of December 31, 2021 compared to December 31, 2020 was also impacted by a 4% unfavorable change in the end-of-period value of the Mexican peso and Guatemalan quetzal for the current and prior year periods:
| | | | | | | | | | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | | | Rate | | % Change Over Prior Year Period Favorable / (Unfavorable) | | Rate | | % Change Over Prior Year Period Favorable / (Unfavorable) | | Rate | | Mexican peso / U.S. dollar exchange rate: | | | | | | | | | | | | | | | | End-of-period | | 19.7 | | | 5 | % | | | 20.7 | | | (20 | )% | | | 17.2 | | Twelve months ended | | 18.9 | | | (1 | )% | | | 18.7 | | | (18 | )% | | | 15.8 | | | | | | | | | | | | | | | | | | Guatemalan quetzal / U.S. dollar exchange rate: | | | | | | | | | | | | | | | | End-of-period | | 7.3 | | | 3 | % | | | 7.5 | | | 1 | % | | | 7.6 | | Twelve months ended | | 7.4 | | | 3 | % | | | 7.6 | | | 1 | % | | | 7.7 |
Amounts presented on a constant currency basis are denoted as such. See “—Non-GAAP Financial Information” for additional discussion of constant currency operating results.
Operating Results for the Twelve Months Ended December 31, 2017 Comparedcompared to the Twelve Months Ended December 31, 2016U.S. dollar.
U.S. Operations Segment
The following table details earning assets, which consist of pawn loans consumer loans, net and inventories as well as other earning asset metrics of the U.S. operationsLatin America pawn segment as of December 31, 20172021 as compared to December 31, 20162020 (dollars in thousands, except as otherwise noted):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Constant Currency Basis | | | | | | | | | | | | As of | | | | | | | | | | | | | | | | December 31, | | | | As of December 31, | | Increase / | | 2021 | | Increase | | | 2021 | | 2020 | | (Decrease) | | (Non-GAAP) | | (Non-GAAP) | | Latin America Pawn Segment | | | | | | | | | | | | | | | | | Earning assets: | | | | | | | | | | | | | | | | | Pawn loans | $ | 91,662 | | | $ | 87,840 | | | | 4 | % | | | $ | 94,420 | | | | 7 | % | | | Inventories | | 65,825 | | | | 54,243 | | | | 21 | % | | | 67,821 | | | | 25 | % | | | | | | | | | | | | | | | | | | | $ | 157,487 | | | $ | 142,083 | | | | 11 | % | | | $ | 162,241 | | | | 14 | % | | | | | | | | | | | | | | | | | | | Average outstanding pawn loan amount (in ones) | $ | 77 | | | $ | 78 | | | | (1) | % | | | $ | 79 | | | | 1 | % | | | | | | | | | | | | | | | | | | | Composition of pawn collateral: | | | | | | | | | | | | | | | | | General merchandise | 67 | % | | 64 | % | | | | | | | | | | | | Jewelry | 33 | % | | 36 | % | | | | | | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Composition of inventories: | | | | | | | | | | | | | | | | | General merchandise | 68 | % | | 56 | % | | | | | | | | | | | | Jewelry | 32 | % | | 44 | % | | | | | | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of inventory aged greater than one year | 1 | % | | 2 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Inventory turnover (trailing twelve months cost of merchandise sales divided by average inventories) | 4.2 times | | 4.3 times | | | | | | | | | | |
| | | | | | | | | | | | | | | | Balance at December 31, | | Increase / | | | 2017 | | 2016 | | (Decrease) | | U.S. Operations Segment | | | | | | | | | | | Earning assets: | | | | | | | | | | | Pawn loans | $ | 276,570 |
| | $ | 293,392 |
| | | (6 | )% | | Consumer loans, net (1) | | 23,179 |
| | | 28,847 |
| | | (20 | )% | | | Inventories | | 216,739 |
| | | 282,860 |
| | | (23 | )% | | | | $ | 516,488 |
| | $ | 605,099 |
| | | (15 | )% | | | | | | | | | | | | | | Average outstanding pawn loan amount (in ones) | $ | 162 |
| | $ | 152 |
| | | 7 | % | | | | | | | | | | | | | | Composition of pawn collateral: | | | | | | | | | | | General merchandise | 34 | % | | 36 | % | | | | | | Jewelry | 66 | % | | 64 | % | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | Composition of inventories: | | | | | | | | | | | General merchandise | 42 | % | | 47 | % | | | | | | Jewelry | 58 | % | | 53 | % | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | Percentage of inventory aged greater than one year | 6 | % | | 11 | % | | | | |
| | (1)
| Does not include the off-balance sheet principal portion of active CSO extensions of credit made by independent third-party lenders. These amounts, net of the Company’s estimated fair value of its liability for guaranteeing the extensions of credit, totaled $9.3 million and $12.1 million as of December 31, 2017 and 2016, respectively. |
The following table presents segment pre-tax operating income and other operating metrics of the U.S. operationsLatin America pawn segment for the fiscal year ended December 31, 20172021 as compared to the fiscal year ended December 31, 20162020 (dollars in thousands). Store operatingOperating expenses include salary and benefit expense of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Constant Currency Basis | | | | | | | | | Year Ended | | | | Year Ended | | | | | | December 31, | | Increase / | | December 31, | | Increase / | | 2021 | | (Decrease) | | | 2021 | | 2020 | | (Decrease) | | (Non-GAAP) | | (Non-GAAP) | | Latin America Pawn Segment | | | | | | | | | | | | | | | | | Revenue: | | | | | | | | | | | | | | | | | Retail merchandise sales | $ | 391,875 | | | $ | 355,237 | | | | 10 | % | | | $ | 371,033 | | | | 4 | % | | | Pawn loan fees | | 170,432 | | | | 147,080 | | | | 16 | % | | | 161,336 | | | | 10 | % | | | Wholesale scrap jewelry sales | | 30,027 | | | | 50,828 | | | | (41) | % | | | 30,027 | | | | (41) | % | | | | | | | | | | | | | | | | | | | Total revenue | | 592,334 | | | | 553,145 | | | | 7 | % | | | 562,396 | | | | 2 | % | | | | | | | | | | | | | | | | | | | Cost of revenue: | | | | | | | | | | | | | | | | | Cost of retail merchandise sold | | 247,425 | | | | 225,149 | | | | 10 | % | | | 234,308 | | | | 4 | % | | | Cost of wholesale scrap jewelry sold | | 26,243 | | | | 39,962 | | | | (34) | % | | | 24,837 | | | | (38) | % | | | | | | | | | | | | | | | | | | | Total cost of revenue | | 273,668 | | | | 265,111 | | | | 3 | % | | | 259,145 | | | | (2) | % | | | | | | | | | | | | | | | | | | | Net revenue | | 318,666 | | | | 288,034 | | | | 11 | % | | | 303,251 | | | | 5 | % | | | | | | | | | | | | | | | | | | | Segment expenses: | | | | | | | | | | | | | | | | | Operating expenses | | 179,020 | | | | 165,531 | | | | 8 | % | | | 170,108 | | | | 3 | % | | | Depreciation and amortization | | 17,834 | | | | 15,816 | | | | 13 | % | | | 17,005 | | | | 8 | % | | | Total segment expenses | | 196,854 | | | | 181,347 | | | | 9 | % | | | 187,113 | | | | 3 | % | | | | | | | | | | | | | | | | | | | Segment pre-tax operating income | $ | 121,812 | | | $ | 106,687 | | | | 14 | % | | | $ | 116,138 | | | | 9 | % | | | | | | | | | | | | | | | | | | | Operating metrics: | | | | | | | | | | | | | | | | | Retail merchandise sales margin | 37 | % | | 37 | % | | | | | 37 | % | | | | | | | | | | | | | | | | | | | Net revenue margin | 54 | % | | 52 | % | | | | | 54 | % | | | | | | Segment pre-tax operating margin | 21 | % | | 19 | % | | | | | 21 | % | | | | |
| | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | 2017 | | 2016 | | Increase | | U.S. Operations Segment | | | | | | | | | | Revenue: | | | | | | | | | | Retail merchandise sales | | $ | 717,490 |
| | $ | 386,026 |
| | | 86 | % | | | Pawn loan fees | | 380,596 |
| | 195,883 |
| | | 94 | % | | | Wholesale scrap jewelry sales | | 119,197 |
| | 47,680 |
| | | 150 | % | | | Consumer loan and credit services fees | | 75,209 |
| | 41,922 |
| | | 79 | % | | | Total revenue | | 1,292,492 |
| | 671,511 |
| | | 92 | % | | | | | | | | | | | | | Cost of revenue: | | | | | | | | | | Cost of retail merchandise sold | | 468,527 |
| | 241,086 |
| | | 94 | % | | | Cost of wholesale scrap jewelry sold | | 112,467 |
| | 41,357 |
| | | 172 | % | | | Consumer loan and credit services loss provision | | 19,431 |
| | 11,494 |
| | | 69 | % | | | Total cost of revenue | | 600,425 |
| | 293,937 |
| | | 104 | % | | | | | | | | | | | | | Net revenue | | 692,067 |
| | 377,574 |
| | | 83 | % | | | | | | | | | | | | | Segment expenses: | | | | | | | | | | Store operating expenses | | 423,214 |
| | 215,227 |
| | | 97 | % | | | Depreciation and amortization | | 24,073 |
| | 13,618 |
| | | 77 | % | | | Total segment expenses | | 447,287 |
| | 228,845 |
| | | 95 | % | | | | | | | | | | | | | Segment pre-tax operating income | | $ | 244,780 |
| | $ | 148,729 |
| | | 65 | % | |
Retail Merchandise Sales Operations
U.S. retail merchandise salesLatin America inventories increased 86%21% (25% on a constant currency basis) from $54.2 million at December 31, 2020 to $717.5$65.8 million during fiscal 2017 compared to $386.0 million for fiscal 2016.at December 31, 2021. The increase was primarily due to fiscal 2016 only including the results of operations for Cash America for the period September 2, 2016 to December 31, 2016 (“Cash America 2016 Partial Period”), as the Merger was completed on September 1, 2016. Same-store retail sales decreased 1% in legacy First Cash stores and decreased 4% in legacy Cash America stores during fiscal 2017 compared to fiscal 2016. Gross profit margin on retail merchandise sales in the U.S. was 35% during fiscal 2017 compared to a margin of 38% during fiscal 2016, reflecting the impact of historically lower margins in the Cash America stores and a focus during 2017 on liquidating agedthan normal inventory items in the Cash America stores.
U.S. inventories decreased 23% from $282.9 millionbalances at December 31, 20162020 due to $216.7 million at December 31, 2017. The decrease was primarily a resultthe impacts of focused liquidation of aged inventories though promotional discounts and jewelry scrapping.the COVID-19 pandemic. Inventories aged greater than one year in the U.S.Latin America were 6% overall and 7% and 5% in the legacy Cash America stores and legacy First Cash U.S. stores, respectively.
Pawn Lending Operations
U.S. pawn loan fees increased 94% totaling $380.6 million during fiscal 2017 compared to $195.9 million for fiscal 2016. The increase was primarily due to the Cash America 2016 Partial Period. Legacy First Cash same-store pawn loan fees increased 4%, while legacy Cash America same-store pawn loan fees decreased 9% during fiscal 2017 compared to fiscal 2016. Pawn loan receivables in the U.S. as of1% at December 31, 2017 decreased 6% compared to2021 and 2% at December 31, 2016 and decreased 7% on a same-store basis. Legacy First Cash same-store pawn receivables increased 6%, while legacy Cash America same-store pawn receivables decreased 10% as of December 31, 2017 compared to December 31, 2016. The decline in legacy Cash America same-store pawn2020.
receivables and pawn loan fees was primarily due to the expected impact of reducing the holding period on delinquent pawn loans, optimizing loan-to-value ratios and to a lesser extent, the impact of Hurricane Harvey on pawn receivables in coastal Texas markets.
Wholesale Scrap Jewelry Operations
U.S. wholesale scrap jewelry revenue, consisting primarily of gold sales, increased 150% to $119.2 million during fiscal 2017 compared to $47.7 million during fiscal 2016. The increase in wholesale scrap jewelry revenue was primarily due to the Cash America 2016 Partial Period and an increase in volume due to the clearing of aged inventory in the Cash America stores. The scrap gross profit margin in the U.S. was 6% compared to the prior-year margin of 13%, primarily as a result of the typically higher cost basis in scrap jewelry sold by the Cash America stores. Scrap jewelry profits accounted for 1% of U.S. net revenue (gross profit) for fiscal 2017 compared to 2% in fiscal 2016.
Consumer Lending Operations
Service fees from U.S. consumer loans and credit services transactions (collectively, consumer lending operations) increased 79% to $75.2 million during fiscal 2017 compared to $41.9 million for fiscal 2016. The increase in fees was due to the Cash America 2016 Partial Period. Excluding the increase due to the Cash America 2016 Partial Period, consumer loan and credit services fees decreased 31% as the Company continues to de-emphasize consumer lending operations in light of increasing internet-based competition and regulatory constraints. Revenues from consumer lending operations comprised 6% of total U.S. revenue during fiscal 2017 and 2016.
Segment Expenses and Segment Pre-Tax Operating Income
U.S. store operating expenses increased 97% to $423.2 million during fiscal 2017 compared to $215.2 million during fiscal 2016, primarily as a result of the Merger. Same-store operating expenses increased 2% and decreased 3% in the legacy First Cash and Cash America stores, respectively, compared with the prior-year period.
U.S. store depreciation and amortization increased 77% to $24.1 million during fiscal 2017 compared to $13.6 million during fiscal 2016, primarily as a result of the Merger.
The U.S. segment pre-tax operating income for fiscal 2017 was $244.8 million, which generated a pre-tax segment operating margin of 19% compared to $148.7 million and 22% in the prior year, respectively. The decline in the segment pre-tax operating margin was primarily due to historically lower operating margins in the Cash America stores and a focus during 2017 on liquidating aged inventory levels in Cash America stores, resulting in lower gross profit margins on retail merchandise sales.
Latin America Operations Segment
The following table details earning assets, which consist of pawn loans, consumer loans, net and inventories as well as other earning asset metrics of the Latin America operations segment as of December 31, 2017 as compared to December 31, 2016 (dollars in thousands, except as otherwise noted):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Constant Currency Basis | | | | | | | | | | | | | | Balance at | | | | | | | | | | | | | | | | | December 31, | | Increase / | | | Balance at December 31, | | Increase / | | 2017 | | (Decrease) | | | 2017 | | 2016 | | (Decrease) | | (Non-GAAP) | | (Non-GAAP) | | Latin America Operations Segment | | | | | | | | | | | | | | | | | Earning assets: | | | | | | | | | | | | | | | | | Pawn loans | $ | 68,178 |
| | $ | 57,114 |
| | | 19 | % | | | $ | 65,238 |
| | | 14 | % | | | Consumer loans, net | | 343 |
| | | 357 |
| | | (4 | )% | | | 328 |
| | | (8 | )% | | | Inventories | | 60,032 |
| | | 47,823 |
| | | 26 | % | | | 57,400 |
| | | 20 | % | | | | $ | 128,553 |
| | $ | 105,294 |
| | | 22 | % | | | $ | 122,966 |
| | | 17 | % | | | | | | | | | | | | | | | | | | | | Average outstanding pawn loan amount (in ones) | $ | 64 |
| | $ | 58 |
| | | 10 | % | | | $ | 61 |
| | | 5 | % | | | | | | | | | | | | | | | | | | | | Composition of pawn collateral: | | | | | | | | | | | | | | | | | General merchandise | 80 | % | | 80 | % | | | | | | | | | | | | Jewelry | 20 | % | | 20 | % | | | | | | | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Composition of inventories: | | | | | | | | | | | | | | | | | General merchandise | 75 | % | | 76 | % | | | | | | | | | | | | Jewelry | 25 | % | | 24 | % | | | | | | | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of inventory aged greater than one year | 1 | % | | 1 | % | | | | | | | | | | |
The following table presents segment pre-tax operating income of the Latin America operations segment for the fiscal year ended December 31, 2017 as compared to the fiscal year ended December 31, 2016 (dollars in thousands). Store operating expenses include salary and benefit expense of store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the stores.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Constant Currency Basis | | | | | | | | | | Year Ended | | | | | | | | | | | | December 31, | | Increase / | | | | Year Ended December 31, | | Increase / | | 2017 | | (Decrease) | | | | 2017 | | 2016 | | (Decrease) | | (Non-GAAP) | | (Non-GAAP) | | Latin America Operations Segment | | | | | | | | | | | | | | | | Revenue: | | | | | | | | | | | | | | | | Retail merchandise sales | | $ | 333,609 |
| | $ | 283,105 |
| | | 18 | % | | | $ | 338,009 |
| | | 19 | % | | | Pawn loan fees | | 130,309 |
| | 116,874 |
| | | 11 | % | | | 131,972 |
| | | 13 | % | | | Wholesale scrap jewelry sales | | 21,645 |
| | 14,958 |
| | | 45 | % | | | 21,645 |
| | | 45 | % | | | Consumer loan and credit services fees | | 1,767 |
| | 1,929 |
| | | (8 | )% | | | 1,793 |
| | | (7 | )% | | | Total revenue | | 487,330 |
| | 416,866 |
| | | 17 | % | | | 493,419 |
| | | 18 | % | | | | | | | | | | | | | | | | | | | Cost of revenue: | | | | | | | | | | | | | | | | Cost of retail merchandise sold | | 211,176 |
| | 177,470 |
| | | 19 | % | | | 213,925 |
| | | 21 | % | | | Cost of wholesale scrap jewelry sold | | 20,327 |
| | 11,668 |
| | | 74 | % | | | 20,568 |
| | | 76 | % | | | Consumer loan and credit services loss provision | | 388 |
| | 499 |
| | | (22 | )% | | | 394 |
| | | (21 | )% | | | Total cost of revenue | | 231,891 |
| | 189,637 |
| | | 22 | % | | | 234,887 |
| | | 24 | % | | | | | | | | | | | | | | | | | | | Net revenue | | 255,439 |
| | 227,229 |
| | | 12 | % | | | 258,532 |
| | | 14 | % | | | | | | | | | | | | | | | | | | | Segment expenses: | | | | | | | | | | | | | | | | Store operating expenses | | 128,660 |
| | 112,787 |
| | | 14 | % | | | 130,154 |
| | | 15 | % | | | Depreciation and amortization | | 10,311 |
| | 10,429 |
| | | (1 | )% | | | 10,432 |
| | | — | % | | | Total segment expenses | | 138,971 |
| | 123,216 |
| | | 13 | % | | | 140,586 |
| | | 14 | % | | | | | | | | | | | | | | | | | | | Segment pre-tax operating income | | $ | 116,468 |
| | $ | 104,013 |
| | | 12 | % | | | $ | 117,946 |
| | | 13 | % | |
Retail Merchandise Sales Operations
Latin America retail merchandise sales increased 18% (19%10% (4% on a constant currency basis) to $333.6$391.9 million during fiscal 20172021 compared to $283.1$355.2 million for fiscal 2016. The increase was primarily due to an 11% increase (12%2020. Same-store retail sales increased 8% (2% on a constant currency basis) in same-store retail sales driven by strong retail demand trends, a 47% increase (50% on a constant currency basis) in retail sales in the 166 Maxi Prenda stores located in Mexico (acquired on January 6, 2016 and therefore not included in the same-store figure above) driven by operating synergies as a result of the utilization of the Company’s proprietary IT platform and best practice retailing strategies, and the maturation of existing stores.. The gross profit margin on retail merchandise sales was 37% during fiscal 20172021 and 2016.2020.
Inventories in Pawn Lending Operations
Latin America pawn loan receivables increased 26% (20%4% (7% on a constant currency basis) from $47.8 million atas of December 31, 20162021 compared to $60.0 million at December 31, 2017. Increased inventory levels in the Maxi Prenda stores, which historically carried lower inventory balances than the typical First Cash store, accounted for 22% of the increase with growth from new store openings2020, and the maturation of existing stores accounting for the remainder of the increase.
Pawn Lending Operations
Pawn loan fees in Latin Americaon a same-store basis, increased 11% (13%by 3% (6% on a constant currency basis) totaling $130.3 million. The increase in total and same-store pawn receivables and resulting pawn loan fees was primarily due to the continued recovery in pawn lending demand during fiscal 2017 compared to $116.9 million for fiscal 2016 as a result of the 19% (14%2021 towards pre-pandemic levels.
Latin America pawn loan fees increased 16% (10% on a constant currency basis) increase in pawn loan receivables as of December 31, 2017, totaling $170.4 million during 2021 compared to December 31, 2016. The increase in$147.1 million for 2020. Same-store pawn receivables reflects a same-store pawn receivable increase of 17% (12%fees increased 14% (8% on a constant currency basis) and new store additions.during 2021 compared to 2020. The increase in total and same-store constant currency pawn receivablesloan fees was primarily due to strong demand forthe continued improvement of pawn loansloan origination activity during 2021, partially offset by significantly lower than normal beginning pawn loan levels.
Segment Expenses and the maturation of existing stores.Segment Pre-Tax Operating Income
Wholesale Scrap Jewelry Operations
Latin America wholesale scrap jewelry revenue, consisting primarily of gold sales,Store operating expenses increased 45%8% (3% on a constant currency basis) to $21.6$179.0 million during fiscal 20172021 compared to $15.0$165.5 million during fiscal 2016. The increase in wholesale scrap jewelry revenue was primarily due to a reduced volume of scrapping activities in the Maxi Prenda stores during fiscal 2016 as those stores were being converted to the Company’s proprietary point of sale and loan management system. The scrap gross profit margin in Latin America was2020. Same-store operating expenses increased 6% (5%(1% on a constant currency basis) compared to the prior-year margin of 22%. The 22% scrap gross profit margin in fiscal 2016 was unusually high due to the 18% decline in the average value of the Mexican peso that year, which effectively lowered the cost of the scrap jewelry (scrap is sold in U.S. dollars but sourced in Mexican pesos). Scrap jewelry profits accounted for approximately 1% of Latin America net revenue (gross profit) for fiscal 2017 and fiscal 2016.period.
Segment Expenses and Segment Pre-Tax Operating Income
Store operating expenses increased 14% (15% on a constant currency basis) to $128.7 million during fiscal 2017 compared to $112.8 million during fiscal 2016 and same-store operating expenses increased 6% (increased 7% on a constant currency basis) compared to the prior-year period. The increase in both total and same-store operating expenses was due in large part to increased compensation expense related to incentive pay and wage inflation.
The segment pre-tax operating income for fiscal 20172021 was $116.5$121.8 million, which generated a pre-tax segment operating margin of 24%21% compared to $104.0$106.7 million and 25%19% in the prior year, respectively. The increase in the segment pre-tax operating income and margin was primarily due to an increase in gross profit from retail sales and pawn loan fees and a 6% favorable change in the average value of the Mexican peso, partially offset by a decrease in gross profit from scrap sales and an increase in store operating expenses.
Retail POS Payment Solutions Segment
The Company completed the AFF Acquisition on December 17, 2021 and the results of operations of AFF have been consolidated since the acquisition date. The Company has performed a preliminary valuation analysis of identifiable assets acquired and liabilities assumed and allocated the aggregate purchase consideration based on the fair values of those identifiable assets and liabilities. See Note 3 of Notes to Consolidated Financial Statements for additional information about the AFF Acquisition.
As a result of purchase accounting, AFF’s as reported earning assets, consisting of finance receivables and leased merchandise, contain significant fair value adjustments. The fair value adjustments will be amortized over the life of the lease contracts and finance receivables acquired at the time of acquisition. Future originations of finance receivables and purchases of leased merchandise will be accounted for as described in Note 2 of Notes to Consolidated Financial Statements.
The following table provides a detail of finance receivables as reported and as adjusted to exclude the impacts of purchase accounting as of December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | As Reported
(GAAP) | | Adjustments | | Adjusted
(Non-GAAP) | Finance receivables, before allowance for loan losses (1) | $ | 256,595 | | | $ | (42,657) | | | $ | 213,938 | | | Less allowance for loan losses | 75,574 | | | — | | | 75,574 | | | Finance receivables, net | $ | 181,021 | | | $ | (42,657) | | | $ | 138,364 | |
(1) As reported acquired finance receivables was recorded at fair value in conjunction with purchase accounting. Adjustment represents the difference between the original amortized cost basis and fair value of the remaining acquired finance receivables.
The following table provides a detail of leased merchandise as reported and as adjusted to exclude the impacts of purchase accounting as of December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | As Reported
(GAAP) | | Adjustments | | Adjusted
(Non-GAAP) | Leased merchandise, before allowance for lease losses (1) | $ | 149,386 | | | $ | 53,829 | | | $ | 203,215 | | Less allowance for lease losses (2) | 5,442 | | | 61,526 | | | 66,968 | | | Leased merchandise, net | $ | 143,944 | | | $ | (7,697) | | | $ | 136,247 | |
(1) As reported acquired leased merchandise was recorded at fair value (which includes estimates for charge-offs) in conjunction with purchase accounting. Adjustment represents the difference between the original depreciated cost and fair value of the remaining acquired leased merchandise.
(2) As reported allowance for lease losses represents the provision for lease losses for leases originated between December 17, 2021 and December 31, 2021. Adjustment represents the remaining allowance for lease losses of acquired leased merchandise, which is included in the fair value of the acquired leased merchandise described in (1) above.
AFF’s as reported results of operations also contain significant purchase accounting impacts. The following table presents segment pre-tax operating income as reported and as adjusted to exclude the impacts of purchase accounting for the period from December 17, 2021 through December 31, 2021 (in thousands). Operating expenses include salary and benefit expense of certain operations focused departments, merchant partner incentives, bank and other payment processing charges, credit reporting costs, information technology costs, advertising costs and other operational costs incurred by AFF. Administrative expenses of AFF are not included in the segment pre-tax operating income.
| | | | | | | | | | | | | | | | | | | December 17, 2021 - December 31, 2021 | | As Reported | | | | Adjusted | | (GAAP) | | Adjustments | | (Non-GAAP) | | Retail POS Payment Solutions Segment | | | | | | | Revenue: | | | | | | | Leased merchandise income | $ | 22,720 | | | $ | 404 | | | $ | 23,124 | | | Interest and fees on finance receivables | 9,024 | | | 1,708 | | | 10,732 | | | | | | | | | Total revenue | 31,744 | | | 2,112 | | | 33,856 | | | | | | | | | Cost of revenue: | | | | | | | Depreciation of leased merchandise | 12,826 | | | — | | | 12,826 | | | Provision for lease losses | 5,442 | | | — | | | 5,442 | | Provision for loan losses (1) | 48,952 | | | (44,250) | | | 4,702 | | | | | | | | | Total cost of revenue | 67,220 | | | (44,250) | | | 22,970 | | | | | | | | | Net revenue (loss) | (35,476) | | | 46,362 | | | 10,886 | | | | | | | | | Segment expenses: | | | | | | | Operating expenses | 4,917 | | | — | | | 4,917 | | Depreciation and amortization (2) | 122 | | | — | | | 122 | | | Total segment expenses | 5,039 | | | — | | | 5,039 | | | | | | | | | Segment pre-tax operating income (loss) | $ | (40,515) | | | $ | 46,362 | | | $ | 5,847 | |
(1) As reported provision for loan losses includes the establishment of the initial allowance for expected lifetime credit losses for acquired finance receivables not considered purchased credit deteriorated, which is recorded as an expense in the loan loss provision. See Note 3 of Notes to Consolidated Financial Statements.
(2) Amortization of identified intangible assets in the AFF Acquisition are considered corporate expenses and not included in segment depreciation and amortization.
Consolidated Results of Operations
The following table reconciles pre-tax operating income of the Company’s U.S. operationspawn segment, Latin America pawn segment and Latin America operationsretail POS payment solutions segment discussed above to consolidated net income for the fiscal year ended December 31, 20172021 as compared to the fiscal year ended December 31, 20162020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Increase / | | | | 2021 | | 2020 | | (Decrease) | | Consolidated Results of Operations | | | | | | | | | | Segment pre-tax operating income (loss): | | | | | | | | | | U.S. pawn | | $ | 232,833 | | | $ | 204,735 | | | | 14 | % | | | Latin America pawn | | 121,812 | | | 106,687 | | | | 14 | % | | Retail POS payment solutions (1) | | (40,515) | | | — | | | | — | % | | | Consolidated segment pre-tax operating income | | 314,130 | | | 311,422 | | | | 1 | % | | | | | | | | | | | | Corporate expenses and other income: | | | | | | | | | | Administrative expenses | | 111,259 | | | 110,931 | | | | — | % | | | Depreciation and amortization | | 5,716 | | | 4,546 | | | | 26 | % | | | Interest expense | | 32,386 | | | 29,344 | | | | 10 | % | | | Interest income | | (696) | | | (1,540) | | | | (55) | % | | | Loss on foreign exchange | | 436 | | | 884 | | | | (51) | % | | | Merger and acquisition expenses | | 15,449 | | | 1,316 | | | | 1,074 | % | | | Gain on revaluation of contingent acquisition consideration | | (17,871) | | | — | | | | — | % | | | Impairments and dispositions of certain other assets | | 949 | | | 10,505 | | | | (91) | % | | | Loss on extinguishment of debt | | — | | | 11,737 | | | | (100) | % | | | | | | | | | | | | Total corporate expenses and other income | | 147,628 | | | 167,723 | | | | (12) | % | | | | | | | | | | | | Income before income taxes | | 166,502 | | | 143,699 | | | | 16 | % | | | | | | | | | | | | Provision for income taxes | | 41,593 | | | 37,120 | | | | 12 | % | | | | | | | | | | | | Net income | | $ | 124,909 | | | $ | 106,579 | | | | 17 | % | |
| | | | | | | | | | | | | | | | | | Year Ended December 31, | | Increase / | | | | 2017 | | 2016 | | (Decrease) | | Consolidated Results of Operations | | | | | | | | | | Segment pre-tax operating income: | | | | | | | | | | U.S. operations segment pre-tax operating income | | $ | 244,780 |
| | $ | 148,729 |
| | | 65 | % | | | Latin America operations segment pre-tax operating income | | 116,468 |
| | 104,013 |
| | | 12 | % | | | Consolidated segment pre-tax operating income | | 361,248 |
| | 252,742 |
| | | 43 | % | | | | | | | | | | | | | Corporate expenses and other income: | | | | | | | | | | Administrative expenses | | 122,473 |
| | 96,537 |
| | | 27 | % | | | Depreciation and amortization | | 20,849 |
| | 7,818 |
| | | 167 | % | | | Interest expense | | 24,035 |
| | 20,320 |
| | | 18 | % | | | Interest income | | (1,597 | ) | | (751 | ) | | | 113 | % | | | Merger and other acquisition expenses | | 9,062 |
| | 36,670 |
| | | (75 | )% | | | Loss on extinguishment of debt | | 14,114 |
| | — |
| | | — | % | | | Net gain on sale of common stock of Enova | | — |
| | (1,299 | ) | | | (100 | )% | | | Total corporate expenses and other income | | 188,936 |
| | 159,295 |
| | | 19 | % | | | | | | | | | | | | | Income before income taxes | | 172,312 |
| | 93,447 |
| | | 84 | % | | | | | | | | | | | | | Provision for income taxes | | 28,420 |
| | 33,320 |
| | | (15 | )% | | | | | | | | | | | | | Net income | | $ | 143,892 |
| | $ | 60,127 |
| | | 139 | % | | | | | | | | | | | | | Comprehensive income | | $ | 151,821 |
| | $ | 18,731 |
| | | 711 | % | |
(1) Includes the results of operations for AFF for the period December 17, 2021 to December 31, 2021. These results are significantly impacted by certain purchase accounting adjustments as noted in the retail POS payment solutions segment above.
Corporate Expenses and Taxes
Administrative expenses increased 27%less than 1% to $122.5$111.3 million during fiscal 20172021 compared to $96.5$110.9 million during fiscal 2016, primarily as a result of the Merger and a 36% increase in the weighted-average store count resulting in additional management and supervisory compensation and other support expenses required for such growth. As a percentage of revenue, administrative expenses decreased from 9% during fiscal 2016 to 7% during fiscal 2017,2020, primarily due to synergies realized from the Mergerincreased incentive compensation and the Maxi Prenda acquisition.
Corporate depreciation and amortization increased to $20.8 million during fiscal 2017 compared to $7.8 million during fiscal 2016, primarily due to the assumption of $118.2 million in property and equipment and $23.4 million in intangible assets subject to amortization as a result of the Merger, which were depreciated and amortized during all of fiscal 2017 as compared to the period September 2, 2016 to December 31, 2016 during fiscal 2016.
Interest expense increased to $24.0 million during fiscal 2017 compared to $20.3 million for fiscal 2016. See “—Liquidity and Capital Resources.”
Merger and other acquisition expenses decreased to $9.1 million during fiscal 2017 compared to $36.7 million during fiscal 2016, reflecting the timing of transaction and integration costs related to the Merger. See “—Non-GAAP Financial Information” for additional details of Merger related expenses.
During fiscal 2017, the Company repurchased through a tender offer, or otherwise redeemed, its outstanding $200 million, 6.75% senior notes due 2021 incurring a loss on extinguishment of debt of $14.1 million. See “—Liquidity and Capital Resources.”
The Company’s effective income tax rate for fiscal 2017 was 16.5%, primarily a result of the passage of the Tax Cuts and Jobs Act (“Tax Act”) in fiscal 2017, as the Company recorded a provisional net one-time tax benefit of $27.3 million during the fourth quarter of 2017. Excluding the tax benefit realized as a result of the Tax Act, the effective income tax rate for fiscal 2017 was 32.3% compared to 35.7% for fiscal 2016. The decrease in the adjusted fiscal 2017 effective tax rate as compared to the 2016 effective tax rate was primarily due to an increase in certain foreign permanent tax benefits and certain significant Merger related expenses being non-deductible for income tax purposes during fiscal 2016, which increased the 2016 effective tax rate. The Company expects its effective income tax rate for fiscal 2018 to be between 26.5% and 27.5% as a result of the Tax Act. See Note 11 of Notes to Consolidated Financial Statements.
Net Income, Adjusted Net Income, Net Income Per Share and Adjusted Net Income Per Share
The following table sets forth revenue, net revenue, net income, net income per share, adjusted net income and adjusted net income per share for the fiscal year ended December 31, 2017 as compared to the fiscal year ended December 31, 2016 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2017 | | 2016 | | | | As Reported | | Adjusted | | As Reported | | Adjusted | | | | (GAAP) | | (Non-GAAP) | | (GAAP) | | (Non-GAAP) | | Revenue | | $ | 1,779,822 |
| | $ | 1,779,822 |
| | $ | 1,088,377 |
| | $ | 1,088,377 |
| | Net revenue | | $ | 947,506 |
| | $ | 947,506 |
| | $ | 604,803 |
| | $ | 604,803 |
| | Net income | | $ | 143,892 |
| | $ | 131,225 |
| | $ | 60,127 |
| | $ | 85,332 |
| | Diluted earnings per share | | $ | 3.00 |
| | $ | 2.74 |
| | $ | 1.72 |
| | $ | 2.44 |
| | Weighted average diluted shares | | 47,888 |
| | 47,888 |
| | 35,004 |
| | 35,004 |
|
GAAP and adjusted earnings per share for fiscal 2017 compared to fiscal 2016 were negatively impacted by $0.02 per share due to the year-over-year 1% unfavorable change in the average value of the Mexican peso. Adjusted net income removes certain items from GAAP net income that the Company does not consider to be representative of its actual operating performance, such as the non-recurring 2017 net tax benefit from the Tax Act, debt extinguishment costs and Merger and other acquisition expenses, but does not adjust for the effects of foreign currency rate fluctuations. See “—Non-GAAP Financial Information—Adjusted Net Income and Adjusted Net Income Per Share” below.
Operating Results for the Twelve Months Ended December 31, 2016 Compared to the Twelve Months Ended December 31, 2015
U.S. Operations Segment
The following table details earning assets, which consist of pawn loans, consumer loans, net and inventories as well as other earning asset metrics of the U.S. operations segment as of December 31, 2016 as compared to December 31, 2015 (dollars in thousands, except as otherwise noted):
| | | | | | | | | | | | | | | | Balance at December 31, | | Increase / | | | 2016 | | 2015 | | (Decrease) | | U.S. Operations Segment | | | | | | | | | | | Earning assets: | | | | | | | | | | | Pawn loans | $ | 293,392 |
| | $ | 68,153 |
| | | 330 | % | | Consumer loans, net (1) | | 28,847 |
| | | 688 |
| | | 4,093 | % | | | Inventories | | 282,860 |
| | | 56,040 |
| | | 405 | % | | | | $ | 605,099 |
| | $ | 124,881 |
| | | 385 | % | | | | | | | | | | | | | | Average outstanding pawn loan amount (in ones) | $ | 152 |
| | $ | 169 |
| | | (10 | )% | | | | | | | | | | | | | | Composition of pawn collateral: | | | | | | | | | | | General merchandise | 36 | % | | 45 | % | | | | | | Jewelry | 64 | % | | 55 | % | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | Composition of inventories: | | | | | | | | | | | General merchandise | 47 | % | | 57 | % | | | | | | Jewelry | 53 | % | | 43 | % | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | Percentage of inventory aged greater than one year | 11 | % | | 8 | % | | | | |
| | (1)
| Does not include the off-balance sheet principal portion of active CSO extensions of credit made by independent third-party lenders. These amounts, net of the Company’s estimated fair value of its liability for guaranteeing the extensions of credit, totaled $12.1 million and $7.0 million as of December 31, 2016 and 2015, respectively. |
The following table presents segment pre-tax operating income of the U.S. operations segment for the fiscal year ended December 31, 2016 as compared to the fiscal year ended December 31, 2015 (dollars in thousands). Store operating expenses include salary and benefit expense of store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the stores.
| | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | | | 2016 | | 2015 | | Increase | | U.S. Operations Segment | | | | | | | | | | Revenue: | | | | | | | | | | Retail merchandise sales | | $ | 386,026 |
| | $ | 197,011 |
| | | 96 | % |
| | Pawn loan fees | | 195,883 |
| | 94,761 |
| | | 107 | % |
| | Wholesale scrap jewelry sales | | 47,680 |
| | 19,380 |
| | | 146 | % | | | Consumer loan and credit services fees | | 41,922 |
| | 25,696 |
| | | 63 | % |
| | Total revenue | | 671,511 |
| | 336,848 |
| | | 99 | % |
| | | | | | | | | | | | Cost of revenue: | | | | | | | | | | Cost of retail merchandise sold | | 241,086 |
| | 117,059 |
| | | 106 | % | | | Cost of wholesale scrap jewelry sold | | 41,357 |
| | 17,530 |
| | | 136 | % | | | Consumer loan and credit services loss provision | | 11,494 |
| | 6,770 |
| | | 70 | % | | | Total cost of revenue | | 293,937 |
| | 141,359 |
| | | 108 | % | | | | | | | | | | | | | Net revenue | | 377,574 |
| | 195,489 |
| | | 93 | % | | | | | | | | | | | | | Segment expenses: | | | | | | | | | | Store operating expenses | | 215,227 |
| | 107,852 |
| | | 100 | % | | | Depreciation and amortization | | 13,618 |
| | 6,146 |
| | | 122 | % | | | Total segment expenses | | 228,845 |
| | 113,998 |
| | | 101 | % | | | | | | | | | | | | | Segment pre-tax operating income | | $ | 148,729 |
| | $ | 81,491 |
| | | 83 | % | |
Retail Merchandise Sales Operations
U.S. retail merchandise sales increased 96% to $386.0 million during fiscal 2016 compared to $197.0 million for fiscal 2015. The increase was primarily due to the Cash America 2016 Partial Period, which accounted for 96% of the increase in retail merchandise sales. During fiscal 2016, the gross profit margin on retail merchandise sales in the U.S. was 38% compared to a margin of 41% during fiscal 2015, reflecting an increased mix of general merchandise inventories compared to jewelry inventories in legacy First Cash stores and the impact of lower margins in the Cash America stores.
U.S. inventories increased 405% from $56.0 million at December 31, 2015 to $282.9 million at December 31, 2016. The increase was due to the inclusion of $232.6 million of Cash America inventories partially offset by a 10% decline in legacy First Cash store inventories. Included in the Cash America inventory balance as of December 31, 2016 was $13.5 million of scrap inventories in transit or held in processing locations. The shift in the composition of pawn inventory from general merchandise to jewelry was primarily due to the Cash America stores carrying greater quantities of jewelry merchandise compared to legacy First Cash stores. The increase in inventory aged greater than one year was primarily due to the inclusion of the Cash America stores, which have historically carried higher aged balances than legacy First Cash stores, partially offset by a decrease in aged inventory at legacy First Cash stores.
Pawn Lending Operations
U.S. pawn loan fees increased 107% totaling $195.9 million during fiscal 2016 compared to $94.8 million for fiscal 2015. Pawn loan receivables in the U.S. as of December 31, 2016 increased 330% compared to December 31, 2015. The increase in pawn loan fees and pawn loan receivables was due to the inclusion of the Cash America 2016 Partial Period, which accounted for 101% of the pawn fee increase and 100% of the pawn receivable increase. Legacy First Cash same-store pawn receivables increased 1% as of December 31, 2016 compared to December 31, 2015. Legacy First Cash same-store pawn loan fees declined 4% in fiscal
2016 compared to fiscal 2015, as a result of a 6% decline in the beginning of year same-store pawn loans. The shift in the composition of pawn receivables from general merchandise to jewelry was primarily due to the Cash America stores, which have historically carried a higher percentage of jewelry loans than legacy First Cash stores.
Wholesale Scrap Jewelry Operations
U.S. wholesale scrap jewelry revenue, consisting primarily of gold sales, increased 146% to $47.7 million during fiscal 2016 compared to $19.4 million during fiscal 2015. The increase in wholesale scrap jewelry revenue was primarily due to the inclusion of the Cash America 2016 Partial Period, which accounted for 92% of the increase in wholesale scrap jewelry revenue. The scrap gross profit margin in the U.S. was 13% compared to the prior-year margin of 10%, due primarily to an 8% increase in the average spot price of gold in 2016. Scrap jewelry profits accounted for 2% of U.S. net revenue (gross profit) for fiscal 2016 compared to 1% in fiscal 2015.
Consumer Lending Operations
Service fees from U.S. consumer loans and credit services transactions (collectively, consumer lending operations) increased 63% to $41.9 million during fiscal 2016 compared to $25.7 million for fiscal 2015. The increase in fees was due to the Cash America 2016 Partial Period. Excluding the increase due to the Cash America 2016 Partial Period, consumer loan and credit services fees decreased 29% as the Company continues to de-emphasize consumer lending operations in light of increasing internet-based competition and regulatory constraints. Consumer/payday loan-related products comprised 6% of total U.S. revenue during fiscal 2016 compared to 8% during fiscal 2015.
Segment Expenses and Segment Pre-Tax Operating Income
U.S. store operating expenses increased 100% to $215.2 million during fiscal 2016 compared to $107.9 million during fiscal 2015, primarily as a result of the Merger. Same-store operating expenses in the First Cash legacy stores were consistent with the prior-year period.
The U.S. segment pre-tax operating income for fiscal 2016 was $148.7 million, which generated a pre-tax segment operating margin of 22% compared to $81.5 million and 24% in the prior year, respectively.
Latin America Operations Segment
The following table details earning assets, which consist of pawn loans, consumer loans, net and inventories as well as other earning asset metrics of the Latin America operations segment as of December 31, 2016 as compared to December 31, 2015 (dollars in thousands, except as otherwise noted):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Constant Currency Basis | | | | | | | | | | | | | Balance at | | | | | | | | | | | | | | | | | December 31, | | Increase / | | | Balance at December 31, | | Increase / | | 2016 | | (Decrease) | | | 2016 | | 2015 | | (Decrease) | | (Non-GAAP) | | (Non-GAAP) | | Latin America Operations Segment | | | | | | | | | | | | | | | | | Earning assets: | | | | | | | | | | | | | | | | | Pawn loans | $ | 57,114 |
| | $ | 49,448 |
| | | 16 | % | | | $ | 67,745 |
| | | 37 | % | | | Consumer loans, net | | 357 |
| | | 430 |
| | | (17 | )% | | | 429 |
| | | — | % | | | Inventories | | 47,823 |
| | | 37,418 |
| | | 28 | % | | | 56,908 |
| | | 52 | % | | | | $ | 105,294 |
| | $ | 87,296 |
| | | 21 | % | | | $ | 125,082 |
| | | 43 | % | | | | | | | | | | | | | | | | | | | | Average outstanding pawn loan amount (in ones) | $ | 58 |
| | $ | 63 |
| | | (8 | )% | | | $ | 69 |
| | | 10 | % | | | | | | | | | | | | | | | | | | | | Composition of pawn collateral: | | | | | | | | | | | | | | | | | General merchandise | 80 | % | | 87 | % | | | | | | | | | | | | Jewelry | 20 | % | | 13 | % | | | | | | | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Composition of inventories: | | | | | | | | | | | | | | | | | General merchandise | 76 | % | | 85 | % | | | | | | | | | | | | Jewelry | 24 | % | | 15 | % | | | | | | | | | | | | | 100 | % | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of inventory aged greater than one year | 1 | % | | 2 | % | | | | | | | | | | |
The following table presents segment pre-tax operating income of the Latin America operations segment for the fiscal year ended December 31, 2016 as compared to the fiscal year ended December 31, 2015 (dollars in thousands). Store operating expenses include salary and benefit expense of store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the stores.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Constant Currency Basis | | | | | | | | | | | | Year Ended | | | | | | | | | | | | | | December 31, | | | | | | Year Ended December 31, | | Increase / | | 2016 | | Increase | | | | 2016 | | 2015 | | (Decrease) | | (Non-GAAP) | | (Non-GAAP) | | Latin America Operations Segment | | | | | | | | | | | | | | | | Revenue: | | | | | | | | | | | | | | | | Retail merchandise sales | | $ | 283,105 |
| | $ | 252,285 |
| | | 12 | % | | | $ | 331,325 |
| | | 31 | % | | | Pawn loan fees | | 116,874 |
| | 100,687 |
| | | 16 | % | | | 136,259 |
| | | 35 | % | | | Wholesale scrap jewelry sales | | 14,958 |
| | 12,675 |
| | | 18 | % | | | 14,958 |
| | | 18 | % | | | Consumer loan and credit services fees | | 1,929 |
| | 2,107 |
| | | (8 | )% | | | 2,271 |
| | | 8 | % | | | Total revenue | | 416,866 |
| | 367,754 |
| | | 13 | % | | | 484,813 |
| | | 32 | % | | | | | | | | | | | | | | | | | | | Cost of revenue: | | | | | | | | | | | | | | | | Cost of retail merchandise sold | | 177,470 |
| | 161,572 |
| | | 10 | % | | | 207,615 |
| | | 28 | % | | | Cost of wholesale scrap jewelry sold | | 11,668 |
| | 10,098 |
| | | 16 | % | | | 13,505 |
| | | 34 | % | | | Consumer loan and credit services loss provision | | 499 |
| | 389 |
| | | 28 | % | | | 587 |
| | | 51 | % | | | Total cost of revenue | | 189,637 |
| | 172,059 |
| | | 10 | % | | | 221,707 |
| | | 29 | % | | | | | | | | | |
| | | | | | | | | Net revenue | | 227,229 |
| | 195,695 |
| | | 16 | % | | | 263,106 |
| | | 34 | % | | | | | | | | | |
| | | | | | | | | Segment expenses: | | | | | | |
| | | | | | | | | Store operating expenses | | 112,787 |
| | 99,720 |
| | | 13 | % | | | 130,029 |
| | | 30 | % | | | Depreciation and amortization | | 10,429 |
| | 8,803 |
| | | 18 | % | | | 12,064 |
| | | 37 | % | | | Total segment expenses | | 123,216 |
| | 108,523 |
| | | 14 | % | | | 142,093 |
| | | 31 | % | | | | | | | | | |
|
| | | | | | | | | Segment pre-tax operating income | | $ | 104,013 |
| | $ | 87,172 |
| | | 19 | % | | | $ | 121,013 |
| | | 39 | % | |
Retail Merchandise Sales Operations
Latin America retail merchandise sales increased 12% (31% on a constant currency basis) to $283.1 million during fiscal 2016 compared to $252.3 million for fiscal 2015. The increase was primarily due to the retail revenue contribution from the Maxi Prenda stores acquired in the fourth quarter of 2015 and first quarter of 2016, which accounted for 53% of the constant currency increase, and a 10% increase in same-store constant currency retail sales. During fiscal 2016, the gross profit margin on retail merchandise sales was 37% compared to a margin of 36% on retail merchandise sales during fiscal 2015.
Inventories in Latin America increased 28% (52% on a constant currency basis) from $37.4 million at December 31, 2015 to $47.8 million at December 31, 2016. The increase was consistent with the growth in store counts from acquisitions and store openings in Latin America and the maturation of existing stores. The shift in the composition of pawn inventory from general merchandise to jewelry was primarily due to the Maxi Prenda stores carrying a higher percentage of jewelry inventories and a lower percentage of general merchandise inventories compared to legacy First Cash stores.
Pawn Lending Operations
Pawn loan fees in Latin America increased 16% (35% on a constant currency basis) totaling $116.9 million during fiscal 2016 compared to $100.7 million for fiscal 2015. Latin America pawn loan receivables as of December 31, 2016 increased 16% (37% on a constant currency basis) compared to December 31, 2015. The increase in pawn loan fees and pawn receivables was primarily due to the contribution from the Maxi Prenda stores, which accounted for 71% of the constant currency increase in pawn loan fees and 63% of the constant currency increase in pawn receivables. While Latin America same-store pawn receivables decreased 8% on a U.S. dollar basis compared to the prior year period, constant currency same-store pawn receivables increased 11%, primarily accounting for the remainder of the constant currency increase in Latin America pawn loan fees and pawn receivables. The shift in the composition of pawn receivables from general merchandise to jewelry was primarily due to the Maxi Prenda stores carrying a higher percentage of jewelry loans compared to legacy First Cash stores.
Wholesale Scrap Jewelry Operations
Latin America wholesale scrap jewelry revenue, consisting primarily of gold sales, increased 18% to $15.0 million during fiscal 2016 compared to $12.7 million during fiscal 2015. The increase in wholesale scrap jewelry revenue was primarily due to the contribution from the Maxi Prenda stores. The scrap gross profit margin in Latin America was 22% (10% on a constant currency basis) compared to the prior-year margin of 20%. Scrap jewelry profits accounted for 1% of Latin America net revenue (gross profit) for fiscal 2016, which equaled fiscal 2015.
Segment Expenses and Segment Pre-Tax Operating Income
Store operating expenses increased 13% (30% on a constant currency basis) to $112.8 million during fiscal 2016 compared to $99.7 million during fiscal 2015, primarily as a result of the Maxi Prenda acquisition, partially offset by an 18% year-over-year unfavorable change in the average value of the Mexican peso. Same-store operating expenses decreased 9% (increased 6% on a constant currency basis) compared to the prior-year period.
The segment pre-tax operating income for fiscal 2016 was $104.0 million, which generated a pre-tax segment operating margin of 25% compared to $87.2 million and 24% in the prior year, respectively.
Consolidated Results of Operations
The following table reconciles pre-tax operating income of the Company’s U.S. operations segment and Latin America operations segment discussed above to consolidated net income for the fiscal year ended December 31, 2016 as compared to the fiscal year ended December 31, 2015 (dollars in thousands):
| | | | | | | | | | | | | | | | | | Year Ended December 31, | | Increase / | | | | 2016 | | 2015 | | (Decrease) | | Consolidated Results of Operations | | | | | | | | | | Segment pre-tax operating income: | | | | | | | | | | U.S. operations segment pre-tax operating income | | $ | 148,729 |
| | $ | 81,491 |
| | | 83 | % | | | Latin America operations segment pre-tax operating income | | 104,013 |
| | 87,172 |
| | | 19 | % | | | Consolidated segment pre-tax operating income | | 252,742 |
| | 168,663 |
| | | 50 | % | | | | | | | | | | | | | Corporate expenses and other income: | | | | | | | | | | Administrative expenses | | 96,537 |
| | 51,883 |
| | | 86 | % | | | Depreciation and amortization | | 7,818 |
| | 2,990 |
| | | 161 | % | | | Interest expense | | 20,320 |
| | 16,887 |
| | | 20 | % | | | Interest income | | (751 | ) | | (1,566 | ) | | | (52 | )% | | | Merger and other acquisition expenses | | 36,670 |
| | 2,875 |
| | | 1,175 | % | | | Net gain on sale of common stock of Enova | | (1,299 | ) | | — |
| | | — | % | | | Goodwill impairment - U.S. consumer loan operations | | — |
| | 7,913 |
| | | (100 | )% | | | Total corporate expenses and other income | | 159,295 |
| | 80,982 |
| | | 97 | % | | | | | | | | | | | | | Income before income taxes | | 93,447 |
| | 87,681 |
| | | 7 | % | | | | | | | | | | | | | Provision for income taxes | | 33,320 |
| | 26,971 |
| | | 24 | % | | | | | | | | | | | | | Net income | | $ | 60,127 |
| | $ | 60,710 |
| | | (1 | )% | | | | | | | | | | | | | Comprehensive income | | $ | 18,731 |
| | $ | 22,578 |
| | | (17 | )% | |
Goodwill Impairment - U.S. Consumer Loan Operations
As a result of the Company’s fiscal 2015 goodwill impairment analysis, a $7.9 million goodwill impairment charge was recorded associated with its former U.S. consumer loan operations reporting unit, which is no longer a goodwill reporting unit of the Company.
Corporate Expenses, Other Income and Taxes
Administrative expenses increased to $96.5 million during fiscal 2016 compared to $51.9 million during fiscal 2015, primarily as a result of the Merger and a 49% increase in the weighted-average store count resulting in additional management and supervisory compensation and other support expenses required for such growth, partially offset by an 18% unfavorablefavorable change in the average value of the Mexican peso whichresulting in higher U.S. dollar translated expenses, partially offset by reduced comparative administrative expensestravel costs and other cost saving initiatives in Mexico.response to COVID-19. As a percentage of revenue, administrative expenses increased fromwere 7% during fiscal 2015 to 9% during fiscal 2016 primarily due to the Merger2021 and the Maxi Prenda acquisition.2020.
Corporate depreciation and amortization increased to $7.8 million during fiscal 2016 compared to $3.0 million during fiscal 2015, primarily due to the assumption of $118.2 million in property and equipment and $23.4 million in intangible assets subject to amortization as a result of the Merger.
Interest expense increased 10% to $20.3$32.4 million during fiscal 20162021 compared to $16.9$29.3 million for fiscal 20152020, primarily related to the December 13, 2021 issuance of the $550.0 million senior unsecured notes due in 2030 and increased borrowings on the Company’s revolving unsecured credit facility primarily usedfacilities. See Note 11 of Notes to pay off assumed debt in conjunction with the Merger. See “—LiquidityConsolidated Financial Statements and “Liquidity and Capital Resources.”
Merger and other acquisition expenses increased to $36.7$15.4 million during fiscal 20162021 compared to $2.9$1.3 million during fiscal 2015,2020, reflecting transaction and integration costs primarily related to the Merger.AFF Acquisition in 2021.
The Company recognized a gain of $17.9 million during 2021 as a result of a decrease in the liability for the estimated fair value of certain contingent consideration related to the AFF Acquisition which is tied to the Company’s stock price. The gain was due to the increase in the Company’s stock price from $62.83 on December 16, 2021 to $74.81 on December 31, 2021, which decreased the estimated fair value of the contingent consideration. See “—Non-GAAPNote 3 and Note 6 of Notes to Consolidated Financial Information”Statements for additional detailsinformation about the contingent consideration related to the AFF Acquisition.
During 2021 and 2020, the Company recorded a $1.6 million and $7.1 million write-off of Mergercertain merger related expenses.
Inlease intangibles, respectively. The lease intangibles, which are included in the operating lease right of use asset on the consolidated balance sheets, were recorded in conjunction with the Merger,Cash America merger and were written-off primarily as a result of the Company assumedpurchasing the store real estate from the landlords of certain existing legacy Cash America’s investment inAmerica stores. During 2021, the common stock of Enova International, Inc.,Company also recorded a publicly traded company focused on providing online consumer lending products. Subsequent to the Merger, all of the Enova shares were sold in open market transactions which resulted in a net$0.7 million gain on the sale of $1.3real estate, and during 2020, the Company also recorded a $1.9 million impairment of other assets and a $1.5 million impairment of property and equipment.
During 2020, the Company redeemed its outstanding $300.0 million, 5.375% senior notes due 2024, incurring a loss on extinguishment of debt of $11.7 million, which includes an early redemption premium and other redemption costs of $8.8 million and the write-off of unamortized debt issuance costs of $2.9 million.
For fiscal 2016 and 2015, the Company’sThe consolidated effective federal income tax rates were 35.7%rate for 2021 and 30.8%2020 was 25.0% and 25.8%, respectively. The increasedecrease in the effective tax rate was primarily due to certain significant Mergeran increased foreign permanent tax benefit recorded during 2021 related expenses being non-deductible for income tax purposes and, to a lesser extent, the increasean increased inflation index adjustment allowed in taxable U.S. sourced income due to the Merger, which is subject to a higher tax rate than taxable income sourced in Latin America.
Net Income, Adjusted Net Income, Net Income Per Share and Adjusted Net Income Per Share
The following table sets forth revenue, net revenue, net income, net income per share, adjusted net income and adjusted net income per share for the fiscal year ended December 31, 2016Mexico as compared to the fiscal year ended December 31, 2015 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2016 | | 2015 | | | | As Reported | | Adjusted | | As Reported | | Adjusted | | | | (GAAP) | | (Non-GAAP) | | (GAAP) | | (Non-GAAP) | | Revenue | | $ | 1,088,377 |
| | $ | 1,088,377 |
| | $ | 704,602 |
| | $ | 704,602 |
| | Net revenue | | $ | 604,803 |
| | $ | 604,803 |
| | $ | 391,184 |
| | $ | 391,184 |
| | Net income | | $ | 60,127 |
| | $ | 85,332 |
| | $ | 60,710 |
| | $ | 68,483 |
| | Diluted earnings per share | | $ | 1.72 |
| | $ | 2.44 |
| | $ | 2.14 |
| | $ | 2.42 |
| | Weighted average diluted shares | | 35,004 |
| | 35,004 |
| | 28,326 |
| | 28,326 |
|
While as-reported GAAP net income and earnings per share for fiscal 2016 declined 1% and 20%, respectively, compared to the prior year primarily due to Merger and other acquisition expenses, adjusted net income and earnings per share increased 25% and 1%, respectively, compared to the prior year. The smaller increase in adjusted earnings per share for fiscal 2016 compared to fiscal 2015 was a result of an increaseelevated inflation during 2021, partially offset by a tax benefit recognized in 2020 resulting from the Internal Revenue Service finalizing regulations for the GILTI provisions for foreign operations in the weighted average diluted shares outstanding fromU.S. federal tax code, which essentially eliminated the Merger. Adjusted net income removes certain items from GAAP net income thatimpact of the Company does not considerincremental GILTI tax on the Company. See Note 12 of Notes to be representative of its actual operating performance, such as Merger and other acquisition expenses, but does not adjust for the effects of foreign currency rate fluctuations. See “—Non-GAAPConsolidated Financial Information—Adjusted Net Income and Adjusted Net Income Per Share” below.Statements.
Liquidity and Capital Resources
As of December 31, 2017, theMaterial Capital Requirements
The Company’s primary sourcescapital requirements include:
•Expand pawn operations through growth of liquidity were $114.4 millionpawn receivables and inventories in existing stores, new store openings and strategic acquisition of pawn stores; •Expand retail POS payment solutions operations through growth of the business generated from new and existing merchant partners; ◦Expected to result in additional purchases of lease merchandise, funding of additional finance receivables and an increase in servicing and collection activities to support increased leases and finance receivables outstanding; ◦Expected to require operational support and development activities around AFF’s proprietary loan management and decisioning systems along with merchant and customer service functions; 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), general corporate operating activities, income tax payments and debt service among others. The Company believes that net cash provided by operating activities and cash equivalents, $287.9 million of available and unused funds under its revolving unsecured credit facilities will be adequate to meet its liquidity and capital needs for these items in the Company's long-term line of credit with its commercial lenders, $411.0 million in customer loans and fees and service charges receivable and $276.8 million in inventories. As of December 31, 2017, the amount of cash associated with indefinitely reinvested foreign earnings was $79.8 million, which is primarily held in Mexican pesos. The Company had working capital of $721.6 million as of December 31, 2017 and total equity exceeded liabilities by a ratio of 2.5 to 1.
On May 30, 2017, the Company completed an offering of $300.0 million of 5.375% senior notes due on June 1, 2024 (the “Notes”). Interest on the Notes is payable semi-annually in arrears on June 1 and December 1, commencing on December 1, 2017. The Notes were sold to the placement agents as initial purchasers for resale only to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States in accordance with Regulation S under the Securities Act. The Company used the proceeds from the offering to repurchase, or otherwise redeem, its outstanding $200.0 million, 6.75% senior notes due 2021 (the “2021 Notes”), to pay related fees and expenses and for general corporate purposes, including share repurchases and repaying borrowings under the Company’s credit facility. The Company capitalized $5.1 million in issuance costs, which consisted primarily of placement agent fees and legal and other professional expenses. The issuance costs are being amortizedshort-term over the life of the Notes as a component of interest expensenext 12 months and are carried as a direct deduction from the carrying amount of the Notesalso in the accompanying consolidated balance sheets.
The Notes are fully and unconditionally guaranteed on a senior unsecured basis jointly and severally by all of the Company's existing and future domestic subsidiaries that guarantee its primary revolving bank credit facility. The Notes will permit the Company to make share repurchases of up to $100.0 million with the net proceeds of the Notes and other available funds and to make restricted payments, such as purchasing shares of its stock and paying cash dividends, in an unlimited amount if, after giving pro forma effect to the incurrence of any indebtedness to make such payment, the Company's consolidated total debt ratio (“Net Debt Ratio”) is less than 2.25 to 1. The Net Debt Ratio is defined generally in the indenture governing the Notes (the “Indenture”) as the ratio of (1) the total consolidated debt of the Company minus cash and cash equivalents of the Company to (2) the Company’s consolidated trailing twelve months EBITDA, as adjusted to exclude certain non-recurring expenses and giving pro forma effect to operations acquired during the measurement period. As of December 31, 2017, the Net Debt Ratio was 1.1 to 1, see the table below for additional information on the calculation of the Net Debt Ratio.
The Company may redeem the Notes at any time on or after June 1, 2020, at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any. In addition, prior to June 1, 2020, the Company may redeem some or all of the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make-whole” premium set forth in the Indenture. The Company may redeem up to 35% of the Notes prior to June 1, 2020, with the proceeds of certain equity offerings at a redemption price of 105.375% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any. In addition, upon a change of control, noteholders have the right to require the Company to purchase the Notes at a price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any.
During fiscal 2017, the Company recognized a $14.1 million loss on extinguishment of debt related to the repurchase or redemption of the 2021 Notes which includes the tender or redemption premiums paid over the outstanding $200.0 million principal amount of the 2021 Notes and other reacquisition costs of $10.9 million and the write off of unamortized debt issuance costs of $3.2 million.
At December 31, 2017, the Company maintained a line of credit with a group of U.S. based commercial lenders (the “2016 Credit Facility”) in the amount of $400.0 million. In May 2017, the term of the 2016 Credit Facility was extended through September 2, 2022. The calculation of the fixed charge coverage ratio was also amended to remove share repurchases from the calculation to provide greater flexibility for making future share repurchases and paying cash dividends.
At December 31, 2017, the Company had $107.0 million in outstanding borrowings and $5.1 million in outstanding letters of credit under the 2016 Credit Facility, leaving $287.9 million available for future borrowings. The 2016 Credit Facility bears interest, at the Company’s option, at either (i) the prevailing London Interbank Offered Rate (“LIBOR”) (with interest periods of 1 week or 1, 2, 3 or 6 months at the Company’s option) plus a fixed spread of 2.5% or (ii) the prevailing prime or base rate plus a fixed spread of 1.5%. The agreement has a LIBOR floor of 0%. Additionally, the Company is required to pay an annual commitment fee of 0.50% on the average daily unused portion of the 2016 Credit Facility commitment. The weighted-average interest rate on amounts outstanding under the 2016 Credit Facility at December 31, 2017 was 4.00% based on 1 week LIBOR. Under the terms of the 2016 Credit Facility, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The 2016 Credit Facility also contains customary restrictions on the Company’s ability to incur additional debt, grant liens, make investments, consummate acquisitions and similar negative covenants with customary carve-outs and baskets. The Company was
in compliance with the covenants of the 2016 Credit Facility as of December 31, 2017, and believes it has the capacity to borrow a substantial portion of the amount available under the 2016 Credit Facility under the most restrictive covenant. During fiscal 2017, the Company made net payments of $153.0 million pursuant to the 2016 Credit Facility.
In general, revenue growth is dependent upon the Company’s ability to fund the addition of store locations (both de novo openings and acquisitions) and growth in customer loan balances and inventories. In addition to these factors, changes in loan balances, collection of pawn fees, merchandise sales, inventory levels, seasonality, operating expenses, administrative expenses, expenses related to the Merger, tax rates, gold prices, foreign currency exchange rates and the pace of new store expansions and acquisitions, affect the Company’s liquidity. Management believes cash on hand, the borrowings available under its credit facility, anticipated cash generated from operations (including the normal seasonal increases in operating cash flows occurring in the first and fourth quarters) and other current working capital will be sufficient to meet the Company’s anticipated capital requirements for its business for at leastlong-term beyond the next twelve12 months. Where appropriate or desirable, in connection with the Company’s efficient management of its liquidity position, the Company could seek to raise additional funds from a variety of sources, including the sale of assets, reductions in capital spending, the issuance of debt or equity securities and/or changes to its management of current assets. The characteristics of the Company’s current assets, specifically the ability to rapidly liquidate gold jewelry inventory and adjust outflows of cash in its lending practices, gives the Company flexibility to quickly modify its business strategy to increase cash flow from its business, if necessary. Regulatory developments affecting the Company’s operations may also impact profitability and liquidity. See “—Item 1—Business—Governmental Regulation.”
The Company regularly evaluates opportunities to optimize its capital structure, including through consideration of the issuance of debt or equity, to refinance existing debt and to fund ongoing cash needs such as general corporate purposes, growth initiatives and its stock repurchase program.Expand Pawn Operations
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):
| | | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2017 | | 2016 | | 2015 | | Cash flow provided by operating activities | | $ | 220,357 |
| | $ | 96,854 |
| | $ | 92,749 |
| | Cash flow provided by (used in) investing activities | | 1,397 |
| | (25,967 | ) | | (71,676 | ) | | Cash flow provided by (used in) financing activities | | (197,506 | ) | | (58,713 | ) | | 9,127 |
|
| | | | | | | | | | | | | | | | | Balance at December 31, | | | | 2017 | | 2016 | | 2015 | | Net working capital | | $ | 721,626 |
| | $ | 748,507 |
| | $ | 279,259 |
| | Current ratio | 7.0:1 | | 6.2:1 | | 7.0:1 | | | Liabilities to equity | 0.4:1 | | 0.5:1 | | 0.7:1 | | Net Debt Ratio (1) | 1.1:1 | | 2.1:1 | | 1.3:1 | |
| | (1)
| Pursuant to the covenants of the Notes, the Company may 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 Net Debt Ratio is less than 2.25 to 1. Adjusted EBITDA, a component of the Net Debt Ratio, is a non-GAAP measure. See “—Non-GAAP Financial Information” for a calculation of the Net Debt Ratio. |
Net cash provided by operating activities increased $123.5 million, or 128%, from $96.9 million for fiscal 2016 to $220.4 million for fiscal 2017, due primarily to an increase in net income of $83.8 million and net changes in certain adjustments and operating assets and liabilities (as detailed in the statements of cash flows).
Net cash provided by investing activities increased $27.4 million, or 105%, from net cash used in investing activities of $26.0 million during fiscal 2016 to net cash provided by investing activities of $1.4 million during fiscal 2017. Cash flows from investing activities are utilized primarily to fund pawn store acquisitions and purchases of property and equipment. In addition, net cash flows related to fundings/repayments of pawn and consumer loans are included in investing activities. The Company paid $2.2 million in cash related to acquisitions during fiscal 2017 compared to $29.9 million in fiscal 2016. In addition, the portion of the aggregate Merger consideration paid in cash upon closing of the Merger, net of cash acquired, was $8.3 million during fiscal 2016. The Company received funds from a net decrease in pawn and consumer loans of $40.7 million during fiscal 2017 compared to funding a net increase in loans of $16.1 million during fiscal 2016, and received proceeds of $62.1 million from the sale of approximately six million shares of common stock of Enova International, Inc. during fiscal 2016.
Net cash used in financing activities increased $138.8 million from $58.7 million during fiscal 2016 to $197.5 million during fiscal 2017. Net payments on the Company’s credit facility were $153.0 million during fiscal 2017 compared to net borrowings of $202.0 million during fiscal 2016, which was primarily used to pay Merger related expenses and pay off assumed debt in conjunction with the Merger. During fiscal 2017, the Company received $300.0 million in proceeds from the private offering of the Notes and paid $5.3 million in debt issuance costs related to the issuance of the Notes and the extension of the 2016 Credit Facility. Using part of the proceeds from the Notes, the Company repurchased, or otherwise redeemed, the $200.0 million 2021 Notes and paid tender or redemption premiums over the face value of the 2021 Notes and other reacquisition costs of $10.9 million during fiscal 2017. The Company paid $2.4 million of debt issuance costs related to the 2016 Credit Facility during fiscal 2016. In addition, the Company repaid $6.5 million in peso-denominated debt assumed from the Maxi Prenda acquisition and $232.0 million in debt assumed in conjunction with the Merger during fiscal 2016. The Company repurchased $91.7 million worth of shares of its common stock, realized proceeds from the exercise of stock options of $0.3 million and paid dividends of $36.8 million during fiscal 2017, compared to dividends paid of $19.8 million during fiscal 2016.
During fiscal 2017, the Company opened 45 new pawn stores in Latin America, acquired five pawn stores in Latin America, opened two pawn stores in the U.S. and acquired one pawn store in the U.S. The cumulative all-cash purchase price of the 2017 acquisitions was $1.2 million, net of cash acquired and certain post-closing adjustments. During fiscal 2017, the Company also paid $1.0 million of deferred purchase price amounts payable related to prior-year acquisitions. The Company funded $37.1 million in capital expenditures during fiscal 2017, of which $11.2 million related to the purchase of real estate primarily at existing stores with the remainder related primarily to maintenance capital expenditures and new store additions. Acquisition purchase prices, real estate purchase prices, capital expenditures, working capital requirements and start-up losses related to new store openings have been primarily funded through cash balances, operating cash flows and the Company’s credit facility. The Company’s cash flow and liquidity available to fund expansion in 2017 included net cash flow from operating activities of $220.4 million for fiscal 2017.
The Company intends to continue expansion primarily through acquisitions and new store openings.openings, primarily in Latin America. The impacts of COVID-19 limited the number of 2021 new store openings to 61. For fiscal 2018,2022, the Company expects to add approximately 85 stores, primarilyup to 60 de novo full-service pawn locations in Latin America,America. Future store openings remain subject to uncertainties related to the COVID-19 pandemic, including plans for its first stores in Colombia. Additionally,but not limited to, the Company intendsability to continue purchasing the real estate from landlords at its existing stores as opportunities arise at attractive prices. Excluding these real estate purchases, the Company expects total capital expenditures for 2018, including expenditures for newconstruction projects and remodeled storesobtain necessary licenses and other corporate assets, to total approximately $27.5 million to $32.5 million. Management believes cash on hand, the amounts available to be drawn under the credit facilitypermits, utility services, store equipment, supplies and cash generated from operations will be sufficient to accommodate the Company’s current operations and store expansion plans for 2018.staffing.
The Company continually looks for, and is presented with, potential pawn store acquisition opportunities. The Company currently has no other contractual commitments for materially significant future acquisitions, business combinations or capital commitments. The Companyopportunities and will evaluate potential acquisitions based upon growth potential, purchase price, available liquidity, debt covenant restrictions, strategic fit and quality of management personnel, among other factors. If theThe Company encounters an attractive opportunity to acquire newacquired 46 pawn stores in the nearU.S. and acquired a pawn license that will be used to open a new pawn store in the state of Nevada during 2022 for a cumulative purchase price of $79.5 million, net of cash acquired and subject to future post-closing adjustments.
Although viewed by management as a discretionary expenditure not required to operate its pawn stores, the Company may seek additional financing,continue to 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 termsreal estate at 54 store locations, primarily from landlords at existing stores, for a cumulative purchase price of which$79.5 million during 2021.
Expand Retail POS Payment Solutions Operations
AFF will be negotiated oncontinue to promote and build relationships with existing customers and merchants and believes there is an opportunity to increase the share of existing merchants’ overall transaction volumes. While existing merchant partner relationships represent a case-by-case basis.significant source of AFF’s origination volumes, the Company believes there are also many more untapped traditional and e-commerce merchants providing goods and services to customers that could benefit from offering AFF’s retail POS payment solutions. AFF has made, and intends to continue to make, investments in its marketing team to drive awareness of AFF’s products at its merchant partners to increase utilization and encourage repeat business through increased marketing directly to AFF’s customers. In addition, AFF has made and intends to continue to make investments in its unique and proprietary decisioning platform.
Return of Capital to Shareholders
In January 2015,February 2022, the Company’s Board of Directors authorizeddeclared a common stock repurchase program for up to 2,000,000 shares of the Company’s outstanding common stock. During the first quarter of 2017, the Company repurchased 228,000 shares of its common stock at an aggregate cost of $10.0 million and an average cost$0.30 per share of $43.94. In May 2017, the Company’s Board of Directors authorized a new common stock repurchase program for up to $100.0 million of the Company’s outstanding common stock. The new share repurchase program replaced the Company’s prior share repurchase plan, which was terminated in May 2017. Under the May 2017 stock repurchase program, the Company has repurchased 1,388,000 shares of its common stock at an aggregate cost of $83.0 million and an average cost per share of $59.80 and $17.0 million remained available for repurchases as of December 31, 2017. On January 31, 2018, the Company completed the May 2017 stock repurchase program after repurchasing approximately 239,000 shares of common stock at an aggregate cost of $17.0 million. The Company did not repurchase any of its shares in 2016 as it suspended its share repurchase program in 2016 due to the Merger.
In October 2017, the Company’s Board of Directors authorized an additional common stock repurchase program for up to $100.0 million of the Company’s outstanding common stock, which became effective on January 31, 2018 upon completion of the May 2017 stock repurchase program. The Company intends to continue repurchases under its repurchase program in 2018 through open market transactions under trading plans in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act of 1934, as amended, subject to a variety of factors, including, but not limited to, the level of cash balances, credit availability, debt covenant restrictions, general business conditions, regulatory requirements, the market price of the Company’s stock, the dividend policy and the availability of alternative investment opportunities.
Total cash dividends paid in fiscal 2017 and 2016 were $36.8 million and $19.8 million, respectively. In January 2018, the Company’s Board of Directors approved a plan to increase the annual dividend to $0.88 per share, or $0.22 per share quarterly, beginning in the first quarter of 2018. The declared $0.22 first quarter cash dividend on common shares outstanding, or an aggregate of $10.3$14.5 million based on the December 31, 20172021 share counts, willcount, to be paid on February 28, 20182022 to stockholders of record as of February 14, 2018. On an annualized basis, this represents aggregate21, 2022. While the Company currently expects to continue the payment of quarterly cash dividends, of $41.2 million based on December 31, 2017 share counts as compared to aggregate dividends of $36.8 million in fiscal 2017. Thethe 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, and debt covenant restrictions.restrictions and other relevant factors including the impact of COVID-19.
During 2021, the Company repurchased a total of 688,000 shares of common stock at an aggregate cost of $49.6 million and an average cost per share of $72.10, and during 2020, repurchased 1,427,000 shares of common stock at an aggregate cost of $107.0 million and an average cost per share of $74.96. The Company has approximately $72.2 million of remaining availability under its currently authorized stock repurchase program. 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, credit availability, debt covenant restrictions, general business conditions, regulatory requirements, the market price of the Company’s stock, dividend policy, the availability of alternative investment opportunities, including acquisitions, and the impact of COVID-19.
Sources of Liquidity
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 December 31, 2021, the Company’s primary sources of liquidity were $120.0 million in cash and cash equivalents and $267.0 million of available and unused funds under the Company's revolving unsecured credit facilities, subject to certain financial covenants (see Note 11 of Notes to Consolidated Financial Statements). The Company had working capital of $737.2 million as of December 31, 2021.
The Company’s cash and cash equivalents as of December 31, 2021 included $57.5 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. Primarily as a result of reduced store opening and acquisition activity, primarily due to the impacts of COVID-19, the Company elected to repatriate $10.0 million from certain foreign subsidiaries during 2021.
The continued developments and fluidity of the COVID-19 pandemic make it difficult to predict the ongoing impact of COVID-19 on the Company’s liquidity and presents a material uncertainty, which could adversely affect the Company’s results of operations, financial condition and cash flows in the future. Other factors, such as changes in general customer traffic and demand, pawn loan balances, loan-to-value ratios, collection of pawn fees, merchandise sales, inventory levels, LTO and finance receivable originations, collection of lease and finance receivable payments, seasonality, operating expenses, administrative expenses, expenses related to merger and acquisition activities, tax rates, gold prices, foreign currency exchange rates and the pace of new pawn store expansion and acquisitions, affect the Company’s liquidity. 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 “Item 1. Business—Governmental Regulation.”
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, leveraging 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 approximately 49% of total inventory, gives 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):
| | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2021 | | 2020 | | 2019 | | Cash flow provided by operating activities | | $ | 223,304 | | | $ | 222,264 | | | $ | 231,596 | | | Cash flow used in investing activities | | (744,637) | | | (20,352) | | | (137,053) | | | Cash flow provided by (used in) financing activities | | 576,993 | | | (186,502) | | | (120,806) | |
| | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | 2021 | | 2020 | | 2019 | | Working capital | | $ | 737,151 | | | $ | 418,159 | | | $ | 538,087 | | | Current ratio | 2.9:1 | 3.0:1 | 3.7:1 |
Cash Flow Provided by Operating Activities
Net cash provided by operating activities increased $1.0 million from $222.3 million for 2020 to $223.3 million for 2021, due to 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), and an increase in net income of $18.3 million.
Cash Flow Used in Investing Activities
Net cash used in investing activities increased $724.3 million, or 3,559%, from $20.4 million during 2020 to $744.6 million during 2021. Cash flows from investing activities are utilized primarily to fund acquisitions, purchases of furniture, fixtures, equipment and improvements, which includes capital expenditures for improvements to existing pawn 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 finance receivables are included in investing activities. The portion of the AFF Acquisition consideration paid in cash, net of cash acquired, was $462.1 million while the Company also paid $81.8 million in cash related to current and prior-year pawn store acquisitions, $42.0 million for furniture, fixtures, equipment and improvements and $79.5 million for discretionary pawn store real property purchases during 2021 compared to $44.3 million, $37.5 million and $45.5 million in 2020, respectively. The Company funded a net increase in pawn loans of $73.3 million during 2021, whereas the Company received funds from a net decrease in pawn loans of $105.4 million during 2020, and the Company funded a net increase in finance receivables of $5.8 million during 2021.
Cash Flow Provided by Financing Activities
Net cash provided by financing activities increased $763.5 million, or 409%, from net cash used in financing activities of $186.5 million during 2020 to net cash provided by financing activities of $577.0 million during 2021. Net borrowings on the credit facilities were $136.0 million during 2021 compared to net payments of $215.5 million during 2020. During 2021, the Company received $550.0 million in proceeds from the private offering of senior unsecured notes and paid $10.6 million in debt issuance costs which was used primarily to fund the acquisition of AFF. During 2020, the Company received $500.0 million in proceeds from the private offering of senior unsecured notes and paid $8.0 million in debt issuance costs. Using part of the proceeds from these senior unsecured notes, the Company redeemed $300.0 million of senior unsecured notes and paid redemption premiums and other redemption costs of $8.8 million during 2020. The Company funded $49.6 million for share repurchases and paid dividends of $47.5 million during 2021, compared to funding $107.0 million of share repurchases and dividends paid of $44.8 million during 2020. In addition, the Company paid $1.7 million in withholding taxes on net share settlements of restricted stock unit awards and stock options exercised and received $0.4 million in proceeds from the exercise of stock options during 2021, compared to $3.7 million and $1.1 million, during 2020, respectively.
Non-GAAP Financial Information
The Company uses certain financial calculations such as adjusted net income, adjusted net incomediluted 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 defined or explained below) as factors in the measurement and evaluation of the Company’s operating performance and period-over-period growth. The Company derives these financial calculations on the basis of methodologies other than GAAP, primarily by excluding from a comparable GAAP measure certain items the Company does not consider to be representative of its actual operating performance. These financial calculations are “non-GAAP financial measures” as defined inunder 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 because management believes they provide greater transparency into the Company’s results of operations. However, items that are excluded and other adjustments and assumptions that are made in calculating adjusted net income, adjusted net income per share, EBITDA, adjusted EBITDA, free cash flow, adjusted free cash flow and constant currency resultsthese 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, adjusted net income, adjusted net income per share, EBITDA, adjusted EBITDA, free cash flow, adjusted free cash flow and constant currency results,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 to allow more accurate comparisons of the financial results to prior periods, which include the Company’s transaction expenses incurred in connection with its acquisition of AFF. 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 among other expensesthese remeasurement gains or losses 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 benefits, Merger related expenses because it generally would not incur such costs and expenses as partto improve comparability of its continuing operations. The Merger related expenses are predominantly incremental costs directly associatedcurrent periods presented with prior periods.
In conjunction with the Merger and integrationCash America merger in 2016, the Company recorded certain lease intangibles related to above or below market lease liabilities of Cash America including professional fees, legal expenses, severancewhich 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 retention payments, accelerated vestinggain 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 certain equity compensation awards, contract breakage coststhese transactions and costs related to consolidationbecause they are non-cash, non-operating gains or losses. The Company believes this improves comparability of technology systems and corporate facilities.
operating results for current periods presented with prior periods.
Adjusted Net Income and Adjusted Net IncomeDiluted Earnings Per Share
Management believes the presentation of adjusted net income and adjusted net incomediluted earnings per share (“Adjusted Income Measures”) provides investors with greater transparency and provides a more complete understanding of the Company’s financial performance and prospects for the future by excluding items that management believes are non-operating in nature and not representative of the Company’s core operating performance. In addition, management believes the adjustments shown below are useful to investors in order to allow them to compare the Company’s financial results for the current periods presented with the prior periods presented.
The following table provides a reconciliation between the net income and diluted earnings per share calculated in accordance with GAAP to the Adjusted Income Measures,adjusted net income and adjusted diluted earnings per share, which are shown net of tax (unaudited, in thousands, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | | In Thousands | | Per Share | | In Thousands | | Per Share | | In Thousands | | Per Share | | Net income, as reported | $ | 143,892 |
| | $ | 3.00 |
| | $ | 60,127 |
| | $ | 1.72 |
| | $ | 60,710 |
| | $ | 2.14 |
| | Adjustments, net of tax: | | | | | | | | | | | | | Merger and other acquisition expenses: | | | | | | | | | | | | | Transaction | — |
| | — |
| | 14,399 |
| | 0.41 |
| | — |
| | — |
| | Severance and retention | 2,456 |
| | 0.05 |
| | 9,594 |
| | 0.27 |
| | — |
| | — |
| | Other | 3,254 |
| | 0.07 |
| | 2,030 |
| | 0.06 |
| | 1,989 |
| | 0.07 |
| | Total Merger and other acquisition expenses | 5,710 |
| | 0.12 |
| | 26,023 |
| | 0.74 |
| | 1,989 |
| | 0.07 |
| | Net tax benefit from Tax Act | (27,269 | ) | | (0.57 | ) | | — |
| | — |
| | — |
| | — |
| | Loss on extinguishment of debt | 8,892 |
| | 0.19 |
| | — |
| | — |
| | — |
| | — |
| | Net gain on sale of common stock of Enova | — |
| | — |
| | (818 | ) | | (0.02 | ) | | — |
| | — |
| | Restructuring expenses related to U.S. consumer loan operations | — |
| | — |
| | — |
| | — |
| | 5,784 |
| | 0.21 |
| | Adjusted net income | $ | 131,225 |
| | $ | 2.74 |
| | $ | 85,332 |
| | $ | 2.44 |
| | $ | 68,483 |
| | $ | 2.42 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2021 | | 2020 | | 2019 | | In Thousands | | Per Share | | In Thousands | | Per Share | | In Thousands | | Per Share | | Net income and diluted earnings per share, as reported | $ | 124,909 | | | $ | 3.04 | | | $ | 106,579 | | | $ | 2.56 | | | $ | 164,618 | | | $ | 3.81 | | | Adjustments, net of tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Merger and acquisition expenses | 11,872 | | | 0.29 | | | 991 | | | 0.02 | | | 1,276 | | | 0.03 | | | Non-cash foreign currency loss (gain) related to lease liability | 451 | | | 0.01 | | | 874 | | | 0.02 | | | (653) | | | (0.01) | | AFF purchase accounting adjustments, net (1) | 23,517 | | | 0.58 | | | — | | | — | | | — | | | — | | | | | | | | | | | | | | | Impairments and dispositions of certain other assets | 730 | | | 0.02 | | | 6,979 | | | 0.17 | | | 2,659 | | | 0.06 | | | Loss on extinguishment of debt | — | | | — | | | 9,037 | | | 0.22 | | | — | | | — | | | Accrual of pre-merger Cash America income tax liability | — | | | — | | | 693 | | | 0.02 | | | — | | | — | | | | | | | | | | | | | | | Adjusted net income and diluted earnings per share | $ | 161,479 | | | $ | 3.94 | | | $ | 125,153 | | | $ | 3.01 | | | $ | 167,900 | | | $ | 3.89 | |
(1)Includes $34.1 million related to the establishment of the initial allowance for expected lifetime credit losses for purchased AFF finance receivables that are not considered credit deteriorated (non-PCD loans), which is recorded as an expense in the provision for loan losses, $1.6 million related to the amortization of acquired intangible assets and $1.6 million related to other non-cash purchase accounting adjustments, partially offset by the $13.8 million gain on revaluation of AFF contingent acquisition consideration (all shown net of tax).
The following table provides a reconciliation of the gross amounts, the impact of income taxes and the net amounts for each of the adjustments included in the table above (unaudited, in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2021 | | 2020 | | 2019 | | Pre-tax | | Tax | | After-tax | | Pre-tax | | Tax | | After-tax | | Pre-tax | | Tax | | After-tax | | Merger and acquisition expenses | $ | 15,449 | | | $ | 3,577 | | | $ | 11,872 | | | $ | 1,316 | | | $ | 325 | | | $ | 991 | | | $ | 1,766 | | | $ | 490 | | | $ | 1,276 | | | Non-cash foreign currency loss (gain) related to lease liability | 644 | | | 193 | | | 451 | | | 1,249 | | | 375 | | | 874 | | | (933) | | | (280) | | | (653) | | | AFF purchase accounting adjustments, net | 30,542 | | | 7,025 | | | 23,517 | | | — | | | — | | | — | | | — | | | — | | | — | | | | | | | | | | | | | | | | | | | | | Impairment and dispositions of certain other assets | 949 | | | 219 | | | 730 | | | 9,064 | | | 2,085 | | | 6,979 | | | 3,454 | | | 795 | | | 2,659 | | | Loss on extinguishment of debt | — | | | — | | | — | | | 11,737 | | | 2,700 | | | 9,037 | | | — | | | — | | | — | | | Accrual of pre-merger Cash America income tax liability | — | | | — | | | — | | | — | | | (693) | | | 693 | | | — | | | — | | | — | | | | | | | | | | | | | | | | | | | | | Total adjustments | $ | 47,584 | | | $ | 11,014 | | | $ | 36,570 | | | $ | 23,366 | | | $ | 4,792 | | | $ | 18,574 | | | $ | 4,287 | | | $ | 1,005 | | | $ | 3,282 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | | Pre-tax | | Tax | | After-tax | | Pre-tax | | Tax | | After-tax | | Pre-tax | | Tax | | After-tax | Merger and other acquisition expenses (1) | $ | 9,062 |
| | $ | 3,352 |
| | $ | 5,710 |
| | $ | 36,670 |
| | $ | 10,647 |
| | $ | 26,023 |
| | $ | 2,875 |
| | $ | 886 |
| | $ | 1,989 |
| | Net tax benefit from Tax Act | — |
| | 27,269 |
| | (27,269 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Loss on extinguishment of debt | 14,114 |
| | 5,222 |
| | 8,892 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Net gain on sale of common stock of Enova | — |
| | — |
| | — |
| | (1,299 | ) | | (481 | ) | | (818 | ) | | — |
| | — |
| | — |
| | Restructuring expenses related to U.S. consumer loan operations | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,878 |
| | 3,094 |
| | 5,784 |
| | Total adjustments | $ | 23,176 |
| | $ | 35,843 |
| | $ | (12,667 | ) | | $ | 35,371 |
| | $ | 10,166 |
| | $ | 25,205 |
| | $ | 11,753 |
| | $ | 3,980 |
| | $ | 7,773 |
|
| | (1)
| Resulting tax benefit for fiscal 2016 is less than the statutory rate as a portion of the transaction costs were not deductible for tax purposes. See Note 4 of Notes to Consolidated Financial Statements for further information. |
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 Net Debt Ratioconsolidated total debt ratio as defined in the Company’s senior notes covenants.unsecured notes. The following table provides a reconciliation of net income to EBITDA and adjusted EBITDA (unaudited, dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2021 | | 2020 | | 2019 | | Net income | $ | 124,909 | | | $ | 106,579 | | | $ | 164,618 | | | Income taxes | | 41,593 | | | | 37,120 | | | | 59,993 | | | Depreciation and amortization | | 45,906 | | | | 42,105 | | | | 41,904 | | | Interest expense | | 32,386 | | | | 29,344 | | | | 34,035 | | | Interest income | | (696) | | | | (1,540) | | | | (1,055) | | | EBITDA | | 244,098 | | | | 213,608 | | | | 299,495 | | | Adjustments: | | | | | | | | | | Merger and acquisition expenses | | 15,449 | | | | 1,316 | | | | 1,766 | | | Non-cash foreign currency loss (gain) related to lease liability | | 644 | | | | 1,249 | | | | (933) | | AFF purchase accounting adjustments, net (1) | | 28,491 | | | | — | | | | — | | | Impairments and dispositions of certain other assets | | 949 | | | | 9,064 | | | | 3,454 | | | Loss on extinguishment of debt | | — | | | | 11,737 | | | | — | | | | | | | | | | | | | | | | | | | | | Adjusted EBITDA | $ | 289,631 | | | $ | 236,974 | | | $ | 303,782 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | Net income | $ | 143,892 |
| | $ | 60,127 |
| | $ | 60,710 |
| | Income taxes | | 28,420 |
| | | 33,320 |
| | | 26,971 |
| Depreciation and amortization (1) | | 55,233 |
| | | 31,865 |
| | | 17,446 |
| | Interest expense | | 24,035 |
| | | 20,320 |
| | | 16,887 |
| | Interest income | | (1,597 | ) | | | (751 | ) | | | (1,566 | ) | | EBITDA | | 249,983 |
| | | 144,881 |
| | | 120,448 |
| | Adjustments: | | | | | | | | | | Merger and other acquisition expenses | | 9,062 |
| | | 36,670 |
| | | 2,875 |
| | Loss on extinguishment of debt | | 14,114 |
| | | — |
| | | — |
| | Net gain on sale of common stock of Enova | | — |
| | | (1,299 | ) | | | — |
| | Restructuring expenses related to U.S. consumer loan operations | | — |
| | | — |
| | | 8,878 |
| | Adjusted EBITDA | $ | 273,159 |
| | $ | 180,252 |
| | $ | 132,201 |
| | | | | | | | | | | | Net Debt Ratio calculated as follows: | | | | | | | | | | Total debt (outstanding principal) | $ | 407,000 |
| | $ | 460,000 |
| | $ | 258,000 |
| | Less: cash and cash equivalents | | (114,423 | ) | | | (89,955 | ) | | | (86,954 | ) | | Net debt | $ | 292,577 |
| | $ | 370,045 |
| | $ | 171,046 |
| | Adjusted EBITDA | $ | 273,159 |
| | $ | 180,252 |
| | $ | 132,201 |
| | Net Debt Ratio | 1.1 | :1 | | 2.1 | :1 | | 1.3 | :1 |
(1)Excludes $2.1 million of amortization expense related to identifiable intangible assets for the twelve months ended December 31, 2021, which is already included in the add back of depreciation and amortization to calculate EBITDA.
| | (1)
| For fiscal 2015, excludes $0.5 million of depreciation and amortization, which is included in the restructuring expenses related to U.S. consumer loan operations. |
Free Cash Flow and Adjusted Free Cash Flow
For purposes of its internal liquidity assessments, the Company considers free cash flow and adjusted free cash flow. The Company defines free cash flow as cash flow from operating activities less purchases of propertyfurniture, fixtures, equipment and equipmentimprovements and net fundings/repayments of pawn loan and consumer loans,finance receivables, which are considered to be operating in nature by the Company but are included in cash flow from investing activities, and adjustedactivities. Adjusted free cash flow is defined as free cash flow adjusted for Merger relatedmerger 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 an additional measure of cash generated by business operations that may be used to repay scheduled debt maturities and debt service or, following payment of such debt obligations and other non-discretionary items, may be available to invest in future growth through new business development activities or acquisitions, repurchase stock, pay cash dividends or repay debt obligations prior to their maturities. These metrics can also be used to evaluate the Company’s ability to generate cash flow from business operations and the impact that this cash flow has on the Company’s liquidity. However, free cash flow and adjusted free cash flow have limitations as analytical tools and should not be considered in isolation or as a substitute for cash flow from operating activities or other income statement data prepared in accordance with GAAP. The following table reconciles net cash flow from operating activities to free cash flow and adjusted free cash flow (unaudited, in thousands):
| | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | Cash flow from operating activities | $ | 220,357 |
| | $ | 96,854 |
| | $ | 92,749 |
| | Cash flow from investing activities: | | | | | | | Loan receivables, net of cash repayments | 40,735 |
| | (16,072 | ) | | (3,716 | ) | Purchases of property and equipment (1) | (37,135 | ) | | (33,863 | ) | | (21,073 | ) | | Free cash flow | 223,957 |
| | 46,919 |
| | 67,960 |
| | Merger related expenses paid, net of tax benefit | 6,659 |
| | 20,939 |
| | — |
| | Adjusted free cash flow | $ | 230,616 |
| | $ | 67,858 |
| | $ | 67,960 |
|
| | (1)
| Includes $11.2 million, $13.4 million and $3.6 million of real estate expenditures primarily at existing stores for the twelve months ended December 31, 2017, 2016 and 2015, respectively. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2021 | | 2020 | | 2019 | | Cash flow from operating activities | $ | 223,304 | | | $ | 222,264 | | | $ | 231,596 | | | Cash flow from investing activities: | | | | | | | | | Pawn loans, net (1) | | (73,340) | | | | 105,418 | | | | 21,650 | | | Finance receivables, net | | (5,844) | | | | 1,590 | | | | 12,756 | | | Purchases of furniture, fixtures, equipment and improvements | | (42,022) | | | | (37,543) | | | | (44,311) | | | Free cash flow | | 102,098 | | | | 291,729 | | | | 221,691 | | | Merger and acquisition expenses paid, net of tax benefit | | 11,872 | | | | 991 | | | | 1,276 | | | Adjusted free cash flow | $ | 113,970 | | | $ | 292,720 | | | $ | 222,967 | |
(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.
Retail POS Payment Solutions Segment Purchase Accounting Adjustments
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.
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 measurement of financial performance.measure. The Company’s management uses constant currency results to evaluate operating results of business operations in Latin America, which are primarily transacted in local currencies.
The Company believes constant currency results provide investors with valuable supplemental information regarding the underlying performance of its business operations in Latin America, consistent with how the Company’s management evaluates such performance and operating results. Constant currency results reported herein are calculated by translating certain balance sheet and income statement items denominated in local currencies using the exchange rate from the prior-year comparable period, as opposed to the current comparable period, in order to exclude the effects of foreign currency rate fluctuations for purposes of evaluating period-over-period comparisons. Business operations in Mexico, Guatemala and GuatemalaColombia are transacted in Mexican pesos, and Guatemalan quetzales respectively.and Colombian pesos. The Company also has operations in El Salvador where the reporting and functional currency is the U.S. dollar. See the Latin America operationspawn segment tables in “—Results“Results of Operations” above for an additional reconciliation of certain constant currency amounts to as reported GAAP amounts.
Contractual Commitments
A tabular disclosureEffects of contractual obligations at December 31, 2017 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | Payments Due by Period | | | Total | | Less Than 1 Year | | 1 - 3 Years | | 3 - 5 Years | | More Than 5 Years | | Operating leases | $ | 367,596 |
| | $ | 102,299 |
| | $ | 151,995 |
| | $ | 73,648 |
| | $ | 39,654 |
| Revolving unsecured credit facility (1) | 107,000 |
| | — |
| | — |
| | 107,000 |
| | — |
| | Senior unsecured notes | 300,000 |
| | — |
| | — |
| | — |
| | 300,000 |
| | Interest on senior unsecured notes | 104,813 |
| | 16,125 |
| | 32,250 |
| | 32,250 |
| | 24,188 |
| | Employment contracts | 14,153 |
| | 3,425 |
| | 6,713 |
| | 4,015 |
| | — |
| | Total | $ | 893,562 |
| | $ | 121,849 |
| | $ | 190,958 |
| | $ | 216,913 |
| | $ | 363,842 |
|
| | (1)
| Excludes interest obligations under the Company's revolving unsecured credit facility. See Note 10 of Notes to Consolidated Financial Statements.
|
Off-Balance Sheet Arrangements
The Company offers a fee-based credit services organization program to assist consumers in obtaining extensions of credit. The Company’s stand-alone consumer loan stores and select pawn stores in the states of Texas and Ohio offer the CSO Programs. The Company’s CSO Programs comply with the respective jurisdiction’s credit services organization act, credit access business law or a similar statute. Under the CSO Programs, the Company assists customers in applying for a short-term extension of credit from the Independent Lenders and issues the Independent Lenders a guarantee for the repayment of the extension of credit.
For extension of credit products originated by the Independent Lenders, the Independent Lenders are responsible for evaluating each of its customers’ applications, determining whether to approve an extension of credit based on an application and determining the amount of the extension of credit. The Company is not involved in the Independent Lenders’ extension of credit approval processes or in determining the Independent Lenders’ approval procedures or criteria. At December 31, 2017, the outstanding amount of active extensions of credit originated and held by the Independent Lenders was $9.7 million.
Since the Company may not be successful in collection of delinquent accounts under the CSO Programs, the Company’s consumer loan loss provision includes amounts estimated to be adequate to absorb credit losses from extensions of credit in the aggregate consumer loan portfolio, including those expected to be assigned to the Company or acquired by the Company as a result of its guaranty obligations. Estimated losses of $0.4 million on portfolios owned by the Independent Lenders are included in accounts payable and accrued liabilities in the consolidated balance sheet as of December 31, 2017. The Company believes this amount is adequate to absorb credit losses from extensions of credit expected to be assigned to the Company or acquired by the Company as a result of its guaranty obligations.
Inflation
TheDuring 2021, the Company does not believe inflation has had a material effect on the volume of customerpawn loans originated by the Company or AFF’s transaction volume, merchandise sales of the Company, or the Company’s results of operations.operations during 2021. Widely reported inflation has occurred, however, and may be ongoing into the foreseeable future. Depending on the severity and persistence of these inflationary pressures, the Company could see a negative impact on its customers’ ability to pay (including an impact on the collectability of its accounts receivable) for its goods and services as well as increases in wages and other operating costs. However, inflationary economic environments could also benefit the Company by increasing customer demand for value priced products and lending services in its pawn stores.
Seasonality
The Company’s business is subject to seasonal variations, and operating results for each quarter and year-to-date periods are not necessarily indicative of the results of operations for the full year. Typically, the Company experiences seasonal growth of pawn service fees in the third and fourth quarter of each year due to pawn loan balance growth. ServicePawn service fees generally decline in the first and second quarter of each year after the heavytypical repayment period of pawn and consumer loans associated with statutory bonuses received by customers in the fourth quarter in Mexico and with tax refund proceeds received by customers in the first quarter in the U.S. In addition, AFF customers generally exercise the early buyout option on their existing lease or finance receivable more frequently during the first quarter associated with tax refund proceeds. Retail sales are seasonally higher in the fourth quarter associated with holiday shopping and, to a lesser extent, in the first quarter associated with tax refunds.refunds in the U.S.
Recent Accounting Pronouncements
See discussion in Note 2 of Notes to Consolidated Financial Statements.
Item 7A. 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. The impact of current-year fluctuations in foreign currency exchange rates, in particular, are further discussed in Part II, Item 7 herein. The Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes.
Gold Price Risk
The Company has significant holdings of gold in the form of jewelry inventories and pawn collateral, and a significant portion of retail merchandise sales are gold jewelry, as are most of the wholesale scrap jewelry sales. At December 31, 2017,2021, the Company held approximately $141.2$129.0 million in jewelry inventories, which was primarily gold, representing 51%49% of total inventory. In addition, approximately $193.1$198.3 million, or 56%57%, of total pawn loans were collateralized by jewelry, which was also primarily gold. Of the Company’s total retail merchandise revenue during fiscal 2017,2021, approximately $325.8$408.3 million, or 31%36%, was from jewelry sales. During fiscal 2017,2021, the average market price of gold increased by 1%2%, from $1,251$1,769 to $1,257$1,799 per ounce. The price of gold at December 31, 2021 was $1,806 per ounce compared to $1,888 at December 31, 2020. A significant and sustained decline in the price of gold would negatively impact the value of jewelry inventories held by the Company and the value of gold jewelry pledged as collateral by pawn customers. As a result, the Company’s profit margins from the sale of existing jewelry inventories wouldcould be negatively impacted, as wouldcould the potential profit margins on gold jewelry currently pledged as collateral by pawn customers in the event it was forfeited by the customer. In addition, a decline in gold prices could result in a lower balance of pawn loans outstanding for the Company, as customers generally would receive lower loan amounts for individual pieces of pledged gold jewelry. Thejewelry, although the Company believes that many customers would be willing to add additional items of value to their pledge in order to obtain the desired loan amount, thus mitigating a portion of this risk.
Foreign Currency Risk
The financial statements of the Company’s subsidiaries in Mexico, Guatemala and GuatemalaColombia are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates for revenues and expenses. Adjustments resulting from translating net assets are reported as a separate component of accumulated other comprehensive income (loss) within stockholders’ equity under the caption currency“currency translation adjustment.” Exchange rate gains or losses related to foreign currency transactions are recognized as transaction gains or losses in the Company’s income statement as incurred. The Company also has operations in El Salvador where the reporting and functional currency is the U.S. dollar.
On a dollar translated basis, both Latin America revenues and cost of revenues account for 27% and 28%, respectively,35% of consolidated amounts for the year ended December 31, 2017.2021. The majority of Latin America revenues and a smaller portion of expenses are denominated in currencies other than the U.S. dollar and the Company, therefore, has foreign currency risk related to these currencies, which are primarily the Mexican peso, and to a much lesser extent, the Guatemalan quetzal.quetzal and Colombian peso.
Accordingly, changes in exchange rates, and in particular a weakening of foreign currencies relative to the U.S. dollar, may negatively affect the Company’s revenue and earnings of its Latin America pawn operations as expressed in U.S. dollars. For the year ended December 31, 2017,2021, the Company’s Latin America revenues and pre-tax operating income would have been approximately $6.1$29.9 million and $1.5$5.7 million higher,lower, respectively, had foreign currency exchange rates remained consistent with those for the year ended December 31, 2016.2020. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” for further discussion of Latin America constant currency results.
The Company does not typically use long-term foreign exchange contracts or derivatives to hedge any foreign currency exposures. The volatility of exchange rates depends on many factors that it cannot forecast with reliable accuracy. The Company’s continued Latin America expansion increases exposure to exchange rate fluctuations and, as a result, such fluctuations could have a significant impact on future results of operations. The average value of the Mexican peso to the U.S. dollar exchange rate for fiscal 20172021 was 18.920.3 to 1 compared to 18.721.5 to 1 in fiscal 20162020 and 15.819.3 to 1 in fiscal 2015. It is anticipated that for 2018 a2019. A one point change in the average Mexican peso to the U.S. dollar exchange rate will impactwould have impacted 2021 annual earnings by approximately $3.7 million to $4.6$3.0 million.
The average valueimpact of the Guatemalan quetzalforeign exchange rates in Guatemala and Colombia are not material to the U.S. dollar exchange rate for fiscal 2017 was 7.4 to 1, compared to 7.6 to 1 in fiscal 2016 and 7.7 to 1 in fiscal 2015.Company’s financial position or results of operations.
Interest Rate Risk
The Company is potentially exposed to market risk in the form of interest rate risk in regards to its long-term lineunsecured lines of credit. At December 31, 2017,2021, the Company had $107.0$259.0 million outstanding under its revolving linelines of credit. The revolving linelines of credit isare generally priced with a variable rate based on a 1 weekfixed spread over LIBOR or 1, 2, 3the Mexican Central Bank’s interbank equilibrium rate (“TIIE”) and reprice with any changes in LIBOR or 6 month LIBOR plus a fixed spread.TIIE. Based on the average outstanding indebtedness during fiscal 2017,2021, a 1% (100 basis points) increase in interest rates would have increased the Company’s interest expense by approximately $1.6$1.8 million for fiscal 2017.2021.
Interest rate fluctuations will generally not affect the Company’s future earnings or cash flows on its fixed rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of the Company’s fixed rate instruments. At December 31, 2017,2021, the fair value of the Company’s fixed rate debt was approximately $314.0$1,058.0 million and the outstanding principal of the Company’s fixed rate debt was $300.0$1,050.0 million. The fair value estimate of the Company’s fixed rate debt was estimated based on a discounted cash flow analysis using a discount rate representing the Company’s estimate of the ratequoted prices in markets that would be used by market participants.are not active. Changes in assumptions or estimation methodologies may have a material effect on this estimated fair value. As the Company expectshas the ability to hold its fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, the Company does not expect that fluctuations in interest rates, and the resulting change in fair value of its fixed rate instruments, would have a significant impact on the Company’s operations.
The Company’s cash and cash equivalents are sometimes invested in money market accounts. Accordingly, the Company is subject to changes in market interest rates. However, the Company does not believe a change in these rates would have a material adverse effect on the Company’s operating results, financial condition, or cash flows.
Item 8. Financial Statements and Supplementary Data
The financial statements prepared in accordance with Regulation S-X are included in a separate section of this report. See the index to Financial Statements at Item 15(a)(1) and (2) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of December 31, 20172021 (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.
Limitations on Effectiveness of Controls and Procedures
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect 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.
Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of the Company’s internal control over financial reporting. Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, (3) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the board of directors, and (4) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations, therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2021. To make this assessment, management used the criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludesconcluded that, as of December 31, 2017,2021, the Company’s internal control over financial reporting is effective based on those criteria.
Management has excluded AFF from its assessment of internal control over financial reporting as of December 31, 2021, because it was acquired by the Company in a business combination on December 17, 2021. The Company is currently in the process of integrating AFF into its assessment of its internal control over financial reporting. AFF’s total assets and revenue represent approximately 31% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021.
The Company’s internal control over financial reporting as of December 31, 2017,2021, has been audited by RSM US LLP, the independent registered public accounting firm that audited the Company’s financial statements included in this report, and RSM’sRSM US LLP’s attestation report is included below.
Changes in Internal Control Over Financial Reporting
ThereExcept for the AFF Acquisition, there have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 20172021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors and Stockholders of FirstCash Holdings, Inc.
Opinion on the Internal Control Over Financial Reporting We have audited FirstCash Holdings, Inc. and its subsidiaries (the Company) internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172021 and 2016,2020, the related consolidated statements of income, comprehensive income, stockholders'stockholders’ equity and cash flows for each of the twothree years in the period ended December 31, 20172021 and the related notes to the consolidated financial statements of the Company and our report dated February 20, 201828, 2022 expressed an unqualified opinion.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded AFF from its assessment of internal control over financial reporting as of December 31, 2021, because it was acquired by the Company in a business combination on December 17, 2021. We have also excluded AFF from our audit of internal control over financial reporting. AFF’s total assets and revenue represent approximately 31% and 2%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2021.
Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Dallas, Texas February 20, 201828, 2022
Item 9B. Other Information
Not applicable.On February 25, 2022, the Company entered into new employment agreements with Rick L. Wessel, the Company’s Chief Executive Officer, T. Brent Stuart, the Company’s President and Chief Operating Officer, R. Douglas Orr, the Company’s Executive Vice President and Chief Financial Officer and Howard F. Hambleton, the Company’s President of AFF, which were approved by the Compensation Committee (the “Committee”) of the Board of Directors of the Company on February 4, 2022.
The employment agreements with Messrs. Wessel, Stuart, Orr and Hambleton became effective upon signing and the terms of the employment agreements initially run through December 31, 2024, with automatic one-year extensions thereafter unless either party provides the other party with written notice on non-renewal at least 90 days prior to any such extension.
The employment agreements provide for annual base salaries, to be effective as of January 1, 2022, in the following amounts: $1,258,660 for Mr. Wessel, $776,620 for Mr. Stuart, $723,060 for Mr. Orr and $600,000 for Mr. Hambleton, in each case subject to annual review and increases in the discretion of the Committee. The executives will also be eligible to earn an annual bonus based on satisfaction of performance criteria established by the Committee for each fiscal year during the term of the agreement, with a target bonus opportunity equal to not less than a specified percentage of the executive’s then current base salary (150% in the case of Mr. Wessel; 125% in the case of Messrs. Stuart, Orr and Hambleton). In addition, the executives will be eligible for grants of stock-based awards under the Company’s long-term equity compensation plan, and will be eligible to participate in any of the Company’s incentive, savings, retirement and welfare benefit plans available to other senior officers of the Company.
The employment agreements provide that if an executive’s employment with the Company is terminated during the term by the Company without “cause” or by the executive for “good reason” (as such terms are defined in the employment agreements), the executive would be entitled to a lump sum cash severance payment equal to 50% (or 200%, if such termination occurs within twelve months following a change in control of the Company) of the sum of (i) the executive’s base salary in effect as of the termination, and (ii) the average of the annual bonuses earned by the executive for each of the three fiscal years immediately preceding the year in which the termination occurs. The executive would also be entitled to continue to participate in the Company’s health and welfare benefit plans at active employee rates for a period of eighteen months (the “COBRA subsidy”). In addition, if such termination occurs within twelve months following a change in control of the Company, the executive would be entitled to a pro rata annual bonus for the year in which the termination occurs, and accelerated vesting and full payout under of all of his outstanding time-vesting and performance-based equity incentive awards (based on an assumed achievement of all relevant performance goals at “target” level, or based on a higher actual or deemed level of achievement of performance goals, in the sole discretion of the Committee). Furthermore, if such termination occurs within twelve months following a change in control of the Company, the Company will pay to the executive, in lieu of the COBRA subsidy described above, a lump sum in cash in an amount equal to the full monthly cost of the executive’s health and welfare benefit coverage multiplied by 24.
The employment agreements prohibit the executives from competing with the Company during the employment term and for a period of 36 months following termination of employment. The executives would also be prohibited from soliciting Company customers and recruiting Company employees during this period.
The employment agreements of Messrs. Wessel, Stuart, Orr and Hambleton are filed as Exhibits 10.17, 10.18, 10.19 and 10.20, respectively, to this Annual Report on Form 10-K and each is incorporated herein by reference and the foregoing descriptions of these employment agreement are qualified in their entirety by these exhibits.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 to this Annual Report on Form 10-K with respect to the directors, executive officers and compliance with Section 16(a) of the Exchange Act is incorporated herein by reference from the information provided under the headings “Election of Directors,” “Executive Officers,” “Corporate Governance, Board Matters and Director Compensation” and “SectionDelinquent Section 16(a) Beneficial Ownership Reporting Compliance,Reports,” contained in the Company’s Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for the Company’s 20182022 Annual Meeting of Stockholders to be held on or about May 29, 2018June 9, 2022 (the “2018“2022 Proxy Statement”).
The Company has adopted a Code of Ethics that applies to all of its directors, officers, and employees. This Code of Ethics is publicly available on the Company’s website at www.firstcash.com. The Company intends to disclose future amendments to, or waivers from, certain provisions of its Code of Ethics on its website in accordance with applicable NYSENasdaq and SEC requirements. Copies of the Company’s Code of Ethics are also available, free of charge, by submitting a written request to FirstCash Holdings, Inc., Investor Relations, 1600 West 7th Street, Fort Worth, Texas 76102.
Item 11. Executive Compensation
The information required by Item 11 to this Annual Report on Form 10-K is incorporated herein by reference from the information provided under the headings “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” of the 20182022 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 to this Annual Report on Form 10-K is incorporated herein by reference from the information provided under the heading “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of the 20182022 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 to this Annual Report on Form 10-K is incorporated herein by reference from the information provided under the headings “Certain Relationships and Related Person Transactions” and “Corporate Governance, Board Matters and Director Compensation” of the 20182022 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 to this Annual Report on Form 10-K is incorporated herein by reference from the information provided under the heading “Ratification of Independent Registered Public Accounting Firm” of the 20182022 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules | | | | | | | | | | | | | | | | | | | (a) | The following documents are filed as part of this report: | | | (1) | Consolidated Financial Statements: | Page | | | | | Report of Independent Registered Public Accounting Firm (PCAOB ID: 49) | | | | | | Consolidated Balance Sheets | | | | | | Consolidated Statements of Income | | | | | | Consolidated Statements of Comprehensive Income | | | | | | Consolidated Statements of Changes in Stockholders’ Equity | | | | | | Consolidated Statements of Cash Flows | | | | | | Notes to Consolidated Financial Statements | | | | | | | | | (a) | The following documents are filed as part of this report:(2) | | | (1) | Consolidated Financial Statements: | Page | | | | | Report of Independent Registered Public Accounting Firm | | | | | | Consolidated Balance Sheets | | | | | | Consolidated Statements of Income | | | | | | Consolidated Statements of Comprehensive Income | | | | | | Consolidated Statements of Changes in Stockholders’ Equity | | | | | | Consolidated Statements of Cash Flows | | | | | | Notes to Consolidated Financial Statements | | | | | | | | | | (2) | All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. | | | | | | | | (3) | Exhibits: |
| | | | | | | | | | | | | | | | | | | Incorporated by Reference | | | | Exhibit No. | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith | | 2.1 | | | | 8-K | | 0-19133 | | 2.1 | | 04/29/2016 | | | | 3.1 | | | | DEF 14A | | 0-19133 | | B | | 04/29/2004 | | | | 3.2 | | | | 8-K | | 001-10960 | | 3.1 | | 09/02/2016 | | | | 3.3 | | | | 8-K | | 001-10960 | | 3.2 | | 09/02/2016 | | | | 4.1 | | Common Stock Specimen | | S-1 | | 33-48436 | | 4.2a | | 06/05/1992 | | | | 4.2 | | | | 8-K | | 0-19133 | | 4.1 | | 03/25/2014 | | | | 4.3 | | | | 8-K | | 001-10960 | | 4.1 | | 05/31/2017 | | | | 4.4 | | | | 8-K | | 001-10960 | | 4.2 | | 05/31/2017 | | | | 10.1 | | | | DEF 14A | | 0-19133 | | C | | 04/29/2004 | | | | 10.2 | | | | DEF 14A | | 0-19133 | | A | | 04/28/2011 | | | | 10.3 | | | | S-8 | | 333- 214452 | | 99.2 | | 11/04/2016 | | | | 10.4 | | | | S-8 | | 333- 106881 | | 4(g) | | 05/31/2012 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incorporated by Reference | | | | Exhibit No. | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith | | 2.1 | | Business Combination Agreement, dated as of October 27, 2021, by and among FirstCash, Inc., FirstCash Holdings, Inc., Atlantis Merger Sub, Inc., American First Finance, Inc., Doug Rippel and the other seller parties thereto. * | | 8-K | | 001-10960 | | 2.1 | | 11/01/2021 | | | | 2.2 | | First Amendment, dated as of December 6, 2021, to that certain Business Combination Agreement, dated as of October 27, 2021, by and among FirstCash, Inc., FirstCash Holdings, Inc., Atlantis Merger Sub, Inc., American First Finance, Inc., Doug Rippel and the other seller parties thereto. * | | 8-K | | 001-10960 | | 2.1 | | 12/07/2021 | | | | 2.3 | | | | 8-K12B | | 001-10960 | | 2.1 | | 12/16/2021 | | | | 3.1 | | | | DEF 14A | | 0-19133 | | B | | 04/29/2004 | | | | 3.2 | | | | 8-K | | 001-10960 | | 3.1 | | 09/02/2016 | | | | 3.3 | | | | 8-K12B | | 001-10960 | | 3.1 | | 12/16/2021 | | | | 3.4 | | | | 8-K12B | | 001-10960 | | 3.2 | | 12/16/2021 | | | | 4.1 | | Common Stock Specimen | | S-1 | | 33-48436 | | 4.2a | | 06/05/1992 | | | | 4.2 | | | | 8-K | | 001-10960 | | 4.1 | | 05/31/2017 | | | | 4.3 | | | | 8-K | | 001-10960 | | 4.1 | | 08/26/2020 | | |
| | | | | | | | | | | | | | | | | | | Incorporated by Reference | | | | Exhibit No. | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith | | 10.5 | | | | 8-K | | 0-19133 | | 10.1 | | 07/26/2016 | | | | 10.6 | | | | 8-K | | 0-19133 | | 10.1 | | 08/26/2016 | | | | 10.7 | | | | 8-K | | 0-19133 | | 10.2 | | 08/26/2016 | | | | 10.8 | | | | 8-K | | 0-19133 | | 10.3 | | 08/26/2016 | | | | 10.9 | | | | 10-Q | | 001-10960 | | 10.1 | | 05/05/2017 | | | | 10.10 | | | | 8-K | | 001-10960 | | 10.1 | | 05/31/2017 | | | | 16.1 | | | | 8-K | | 0-19133 | | 16.1 | | 08/30/2016 | | | | 21.1 | | | | | | | | | | | | X | | 23.1 | | | | | | | | | | | | X | | 23.2 | | | | | | | | | | | | X | | 31.1 | | | | | | | | | | | | X | | 31.2 | | | | | | | | | | | | X | | 32.1 | | | | | | | | | | | | X | | 32.2 | | | | | | | | | | | | X | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incorporated by Reference | | | | Exhibit No. | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith | | 4.4 | | | | 8-K | | 001-10960 | | 4.1 | | 12/07/2021 | | | | 4.5 | | | | 8-K | | 001-10960 | | 4.1 | | 12/13/2021 | | | | 4.6 | | | | | | | | | | | | X | | 10.1 | | | | DEF 14A | | 0-19133 | | C | | 04/29/2004 | | | | 10.2 | | | | DEF 14A | | 0-19133 | | A | | 04/28/2011 | | | | 10.3 | | | | S-8 | | 333-214452 | | 99.2 | | 11/04/2016 | | | | 10.4 | | | | S-8 | | 333-106881 | | 4(g) | | 05/31/2012 | | | | 10.5 | | | | 8-K | | 0-19133 | | 10.1 | | 07/26/2016 | | | | 10.6 | | | | 10-Q | | 001-10960 | | 10.1 | | 05/05/2017 | | | | 10.7 | | | | 8-K | | 001-10960 | | 10.1 | | 05/31/2017 | | | | 10.8 | | | | 10-Q | | 001-10960 | | 10.1 | | 08/01/2018 | | | | 10.9 | | | | 8-K | | 001-10960 | | 10.1 | | 10/04/2018 | | | | 10.10 | | | | DEF 14A | | 001-10960 | | B | | 04/26/2019 | | | | 10.11 | | | | 8-K | | 001-10960 | | 10.1 | | 12/19/2019 | | | | 10.12 | | | | 10-K | | 001-10960 | | 10.16 | | 02/03/2020 | | | | 10.13 | | | | 8-K | | 001-10960 | | 10.1 | | 11/10/2020 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incorporated by Reference | | | | Exhibit No. | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith | | 10.14 | | | | 8-K | | 001-10960 | | 10.1 | | 12/13/2021 | | | | 10.15 | | | | 8-K12B | | 001-10960 | | 10.1 | | 12/16/2021 | | | | 10.16 | | | | 8-K | | 001-10960 | | 10.1 | | 12/17/2021 | | | | 10.17 | | | | | | | | | | | | X | | 10.18 | | | | | | | | | | | | X | | 10.19 | | | | | | | | | | | | X | | 10.20 | | | | | | | | | | | | X | | 21.1 | | | | | | | | | | | | X | | 23.1 | | | | | | | | | | | | X | | 31.1 | | | | | | | | | | | | X | | 31.2 | | | | | | | | | | | | X | | 32.1 | | | | | | | | | | | | X | | 32.2 | | | | | | | | | | | | X | | 101.INS | | 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 | | | | | | | | | | X | | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | | X | | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | X | | 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Incorporated by Reference | | | | Exhibit No. | | Exhibit Description | | Form | | File No. | | Exhibit | | Filing Date | | Filed Herewith | 101 (1)
101.PRE | | The following financial information fromInline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | X | | 104 | | Cover Page Interactive Data File (embedded within the Company's Annual Report on Form 10-K for fiscal 2017, filed with the SEC on February 20, 2018, is formattedInline XBRL document contained in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at December 31, 2017 and December 31, 2016, (ii) Consolidated Statements of Income for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2017, December 31, 2016 and December 31, 2015, and (vi) Notes to Consolidated Financial Statements.Exhibit 101) | | | | | | | | | | X |
| | * | The schedules to the Agreement and Plan of Merger have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. Registrant will furnish copies of such schedules to the U.S. Securities and Exchange Commission upon request by the Commission. |
| | ** | Indicates management contract or compensatory plan, contract or arrangement. |
| | (1)
| The XBRL related information in Exhibit 101 to this Annual Report on Form 10-K shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document. |
* Indicates management contract or compensatory plan, contract or arrangement. Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | Dated: February 28, 2022 | FIRSTCASH HOLDINGS, INC. | Dated: February 20, 2018 | FIRSTCASH, INC.(Registrant) | | (Registrant) | | | | /s/ RICK L. WESSEL | | Rick L. Wessel | | Chief Executive Officer | | (On behalf of the Registrant) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | Signature | Capacity | Date | | | | /s/ RICK L. WESSEL Rick L. Wessel | Vice-Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
| February 20, 201828, 2022 | | | | /s/ R. DOUGLAS ORR R. Douglas Orr | Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
| February 20, 201828, 2022 | | | | /s/ DANIEL R. FEEHAN
Daniel R. Feehan | Chairman of the Board | February 20, 201828, 2022 | | | | /s/ DANIEL E. BERCE Daniel E. Berce | Director | February 20, 201828, 2022 | | | | /s/ MIKEL D. FAULKNER Mikel D. Faulkner | Director | February 20, 201828, 2022 | | | | /s/ PAULA K. GARRETT Paula K. Garrett | Director | February 28, 2022 | | | | /s/ JAMES H. GRAVES James H. Graves | Director | February 20, 201828, 2022 | | | | /s/ JORGE MONTAÑO
Jorge Montaño
| Director | February 20, 2018 | | | | /s/ RANDEL G. OWEN Randel G. Owen | Director | February 20, 2018 |
| 28, 2022 | | | | /s/ DOUGLAS R. RIPPEL Douglas R. Rippel | Director | February 28, 2022 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of FirstCash Holdings, Inc.
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of FirstCash Holdings, Inc., and its subsidiaries (the Company) as of December 31, 20172021 and 2016,2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the twothree years in the period ended December 31, 2017,2021, and the related notes to the consolidated financial statements (collectively, the financial statements)“financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the twothree years in the period ended December 31, 2017,2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sCompany’s internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 20, 201828, 2022 expressed an unqualified opinion on the effectiveness of the Company'sCompany’s internal control over financial reporting.
Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue recognition—accrual for earned but uncollected pawn loan fees As described in Note 2 of the consolidated financial statements, the Company’s revenue recognition policy for pawn loan fees is to accrue pawn loan fee revenue on a constant-yield basis over the life of the pawn loan for all pawn loans of which the Company deems collection to be probable based on historical pawn redemption statistics. The Company's accrual for earned but uncollected pawn loan fees as of December 31, 2021 was $42.9 million, which is included in accounts receivable, net in the accompanying consolidated balance sheets.
The determination of the accrual for earned but uncollected pawn loan fees was subjective and required management to make significant judgements related to the probability of redemption and the expected effective yield of the pawn loan portfolio at the measurement date. We identified the accrual for earned but uncollected pawn loan fees as a critical audit matter as auditing the probability of redemption and the expected yield of the pawn loan portfolio was complex and required a high degree of auditor judgement and subjectivity due to the significant judgements applied by management noted above.
Our audit procedures related to the Company’s accrual for earned but uncollected pawn loan fees, specifically the assumptions for the probability of redemption and expected effective yield of the pawn loan portfolio, included the following, among others:
•We obtained an understanding of the relevant controls related to the accrual for earned but uncollected pawn loan fees and tested such controls for design and operating effectiveness, including (a) the review and approval of key assumptions and (b) the completeness and accuracy of data inputs. •We obtained management’s calculation of the accrual for earned but uncollected pawn loan fees and tested the calculation for completeness and accuracy of data used as inputs. •We evaluated the methodology and assumptions used by management to develop the effective pawn loan yield, including consideration of historical patterns and the probability of redemption. •We assessed the validity of data used in the calculation of the accrual for earned but uncollected pawn loan fees by agreeing, on a sample basis, key data inputs to source documents.
Allowance for credit losses—finance receivables As described in Notes 2 and 7 to the consolidated financial statements, the Company established an allowance for credit losses on its finance receivable portfolios of $75.6 million as of December 31, 2021, which was estimated using the Company’s current expected credit loss (CECL) model. Credit losses on finance receivables were estimated and recognized upon purchase of the receivable, based on expected credit losses for the life of the receivable. The Company’s CECL model segmented the finance receivable population into monthly pools of receivables and estimated the allowance for credit losses by applying modeled loss rates primarily derived from internal, historical cumulative loss experience from comparable economic cycles, then adjusted by qualitative factors to address recent and forecasted business trends. Qualitative factors to address recent and forecasted business trends included, but were not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices.
The determination of the allowance for credit losses on finance receivables was subjective and required management to make significant judgements related to the selection and application of modeled loss rates and adjustments to address recent and forecasted business trends. Specifically, incorporating observable and forecasted economic conditions could have a material impact on the measurement of the allowance for credit losses to the extent that forecasted economic conditions change significantly. We identified the allowance for credit losses on finance receivable portfolios as a critical audit matter as auditing the judgements surrounding the selection of modeled loss rates and adjustments to address recent and forecasted business trends was complex and required a high degree of auditor judgement and subjectivity.
Our audit procedures related to the Company’s allowance for credit losses on finance receivables, specifically the selection and application of modeled loss rates and adjustments to address recent and forecasted business trends, included the following, among others:
•We tested the completeness and accuracy of data inputs into the CECL model, including historical origination balances, loss rates, first payment default rates, and delinquency rates, by tracing to internal source documents. •We evaluated key assumptions and judgements surrounding the selection of modeled loss rates and adjustments for current conditions and future expectations for reasonableness by comparing to internal and external source data.
Allowance for lease losses—leased merchandise As described in Notes 2 and 8 to the consolidated financial statements, the Company established an allowance for lease losses on its portfolio of merchandise subject to operating leases of $5.4 million as of December 31, 2021, representing estimated losses from uncollectible rental agreements. The Company estimated this reserve based on a combination of historical losses and expected future losses that gave consideration to recent and forecasted business trends including, but not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices.
The determination of the allowance for lease losses on merchandise subject to operating leases was subjective and required management to make significant judgements related to the selection and application of historical losses and adjustments for expected future losses. We identified the allowance for lease losses on merchandise subject to operating leases as a critical audit matter as auditing the judgements surrounding the selection and application of historical losses and adjustments for expected future losses was complex and required a high degree of auditor judgement and subjectivity.
Our audit procedures related to the Company’s allowance for lease losses on merchandise subject to operating leases, specifically the selection and application of historical losses and adjustments for expected future losses, included the following, among others:
•We tested the completeness and accuracy of data inputs into the allowance for lease losses model, including historical origination balances, loss rates, first payment default rates, and delinquency rates, by tracing to internal source documents. •We evaluated key assumptions and judgements surrounding the selection of historical losses and adjustments for expected future losses for reasonableness by comparing to internal and external source data.
Acquisition of American First Finance—valuation of acquired finance receivables, leased merchandise, developed technology and merchant relationships intangible assets, and contingent consideration As described in Note 3 and 6 to the consolidated financial statements, the Company completed its acquisition of American First Finance on December 17, 2021 with total purchase consideration of $1.1 billion. In conjunction with the acquisition, acquired finance receivables were recorded at a fair value of $225.3 million; acquired leased merchandise was recorded at a fair value of $139.6 million; an intangible asset for developed technology was recorded at a fair value of $99.4 million; an intangible asset for merchant relationships was recorded at a fair value of $194.0 million; and contingent consideration in the form of earnout liabilities was recorded at fair value of $127.4 million on the opening balance sheet, along with other acquired assets and liabilities.
To determine the fair value of acquired finance receivables, management first segmented the finance receivable population into pools of receivables with similar risk characteristics and then bifurcated each segment by receivables that have experienced a more-than-insignificant deterioration in credit quality since origination based on delinquency status (i.e., purchase credit deteriorated finance receivables) and non-purchase credit deteriorated finance receivables. Management then used discounted cash flow analyses that considered factors such as discount rate and estimated losses to determine the fair value. Management determined estimated losses by applying modeled loss rates primarily derived from internal, historical cumulative loss experience from comparable economic cycles, adjusted by qualitative factors to address recent and forecasted business trends. Qualitative factors to address recent and forecasted business trends included, but were not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices. To determine the fair value of leased merchandise, management used a model that considered factors including assumptions about replacement cost sourced from third parties that was then adjusted for depreciation over estimated useful lives, as well as economic obsolescence of the leased merchandise. Management estimated economic obsolescence by applying modeled loss rates primarily derived from historical losses and expected future losses that gave consideration to recent and forecasted business trends including, but not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices.
To determine the fair value of the developed technology intangible asset, management utilized a cost method that contained assumptions on the estimated costs to rebuild the developed technology, including developer’s profit margins and economic obsolescence.
To determine the fair value of the merchant relationships intangible asset, management utilized a discounted cash flow model that contained assumptions on projected cash flows from merchants, a discount rate, and an attrition rate.
The earnout liabilities primarily consisted of two separate components that were recorded at fair value on the acquisition date of December 17, 2021 and remeasured at fair value on December 31, 2021. The first component provides for a defined payment to the seller should certain income-based thresholds be achieved over a defined earnout measurement period. To determine the fair value of the income-based earnout liability, management utilized a model which simulated scenarios that contained assumptions on projected cash flows and a discount rate. The second component provides for a defined payment to the seller should certain share price-based thresholds be achieved over a defined measurement period. To determine the fair value of the share price-based earnout liability, management utilized a model which simulated scenarios that contained assumptions on projected stock price, volatility and a discount rate.
We identified the determination of the fair value of acquired finance receivables, leased merchandise, developed technology and merchant relationships intangible assets and the valuation of earnout liabilities as critical audit matters as auditing those estimates required a high degree of auditor judgment, subjectivity, and effort in performing procedures and included the use of professionals with specialized skill and knowledge.
Our audit procedures related to the determination of the fair value of acquired finance receivables, leased merchandise, developed technology and merchant relationships intangible assets and the valuation of earnout liabilities included the following, among others:
•We obtained an understanding of the relevant controls related to the valuation model applied and tested such controls for design and operating effectiveness, including those controls over (a) validation of data within the model, and (b) the
management review and approval of the computed fair value, including the selection and application of the inputs into the model. •We utilized internal valuation specialists to assist the audit team in testing the methodologies and techniques for appropriateness, as well as evaluating significant, challenging assumptions in the models and methods to determine fair value of the acquired assets and liabilities as outlined above. Specifically, audit procedures included the following, among others:
•For acquired finance receivables: ◦We tested the completeness and accuracy of data inputs into the discounted cash flow and CECL models, including discount rate, historical origination balances, loss rates, first payment default rates, and delinquency rates by segment, by tracing to internal source documents. ◦We evaluated key assumptions and judgements surrounding the selection of modeled loss rates and adjustments for current conditions and future expectations for reasonableness by comparing to internal and external source data.
•For acquired leased merchandise: ◦Valuation specialists assisted us in testing the reasonableness of inputs by comparing assumptions related to replacement cost to external sources and recalculating depreciation over estimated useful lives, including reviewing the estimated useful lives applied to the leased merchandise for reasonableness in their application. ◦We evaluated economic obsolescence by testing the completeness and accuracy of data inputs into the lease losses model, including historical origination balances, loss rates, first payment default rates and delinquency rates, by tracing to internal source documents. ◦We evaluated the economic obsolescence inputs by assessing key assumptions and judgements surrounding the selection of historical losses and adjustments for expected future losses for reasonableness and comparing to internal and external source data.
•For the acquired developed technology intangible asset: ◦Together with valuation specialists, we compared assumptions related to costs to rebuild and economic obsolescence to internal sources. ◦Valuation specialists assisted us in assessing the reasonableness of inputs by comparing assumptions related to developer’s profit margin to external sources.
•For the acquired merchant relationships intangible asset: ◦Together with valuation specialists, we tested the completeness and accuracy of data inputs into the discounted cash flow model, including assessing the reasonableness of the discount rate by tracing to internal and external source documents and performing calculations to form independent expectations. ◦Valuation specialists assisted us in evaluating the reasonableness of inputs by comparing assumptions related to the attrition rate to external sources and performing calculations to form independent expectations.
•For earnout liabilities: ◦Together with valuation specialists, we tested both components of the earnout liability by comparing key terms, including the measurement period and defined income and stock price thresholds, utilized in the valuation models to internal source documents. ◦Valuation specialists assisted us in evaluating the reasonableness of inputs in the income-based earnout liability fair value calculation by comparing assumptions in the projected cash flows model, including earnings volatility and discount rate assumptions, tracing to internal and external source documents, and performing calculations to form independent expectations. ◦Valuation specialists assisted us in evaluating the reasonableness of inputs in the stock price-based earnout liability fair value calculation by assessing the reasonableness of projected stock price, including stock price volatility and discount rate assumptions, through tracing to internal and external source documents and performing calculations to form independent expectations.
s/ RSM US LLP
We have served as the Company’s auditor since 2016.
Dallas, Texas February 20, 201828, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | | | | | | | | | | | | | | | | FIRSTCASH HOLDINGS, INC. | | CONSOLIDATED BALANCE SHEETS | | (in thousands, except per share amounts) | | | | | | | December 31, | | | | 2021 | | 2020 | | ASSETS | | | | | | Cash and cash equivalents | | $ | 120,046 | | | $ | 65,850 | | | Accounts receivable, net | | 55,356 | | | 41,110 | | | Pawn loans | | 347,973 | | | 308,231 | | | Finance receivables, net | | 181,021 | | | — | | | Inventories | | 263,311 | | | 190,352 | | | Leased merchandise, net | | 143,944 | | | — | | | Income taxes receivable | | 5,419 | | | 9,634 | | | Prepaid expenses and other current assets | | 12,288 | | | 9,388 | | | Total current assets | | 1,129,358 | | | 624,565 | | | | | | | | Property and equipment, net | | 462,526 | | | 373,667 | | | Operating lease right of use asset | | 306,061 | | | 298,957 | | | Goodwill | | 1,536,178 | | | 977,381 | | | Intangible assets, net | | 388,184 | | | 83,651 | | | Other assets | | 8,531 | | | 9,818 | | | Deferred tax assets, net | | 5,614 | | | 4,158 | | | Total assets | | $ | 3,836,452 | | | $ | 2,372,197 | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | Accounts payable and accrued liabilities | | $ | 240,940 | | | $ | 81,917 | | | Customer deposits and prepayments | | 57,310 | | | 34,719 | | | Income taxes payable | | 3,387 | | | 1,148 | | | Lease liability, current | | 90,570 | | | 88,622 | | | Total current liabilities | | 392,207 | | | 206,406 | | | | | | | | Revolving unsecured credit facilities | | 259,000 | | | 123,000 | | | | | | | | Senior unsecured notes | | 1,033,904 | | | 492,916 | | | Deferred tax liabilities, net | | 126,098 | | | 71,173 | | | Lease liability, non-current | | 203,166 | | | 194,887 | | | Other liabilities | | 13,950 | | | — | | | Total liabilities | | 2,028,325 | | | 1,088,382 | | | | | | | | Commitments and contingencies (Note 13) | | 0 | | 0 | | | | | | | Stockholders’ equity: | | | | | | Common stock; $0.01 par value; 90,000 shares authorized; | | | | | 57,322 and 49,276 shares issued, respectively; | | | | | 48,479 and 41,038 shares outstanding, respectively | | 573 | | | 493 | | | Additional paid-in capital | | 1,724,956 | | | 1,221,788 | | | Retained earnings | | 866,679 | | | 789,303 | | | Accumulated other comprehensive loss | | (131,299) | | | (118,432) | | Common stock held in treasury, 8,843 and 8,238 shares at cost, respectively | | (652,782) | | | (609,337) | | | Total stockholders’ equity | | 1,808,127 | | | 1,283,815 | | | Total liabilities and stockholders’ equity | | $ | 3,836,452 | | | $ | 2,372,197 | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
To the Board of Directors and Stockholders
FirstCash, Inc.
We have audited the accompanying consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows of First Cash Financial Services, Inc. and subsidiaries (collectively the “Company”) for the year ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of First Cash Financial Services, Inc. and subsidiaries for the year ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
/s/ Hein & Associates LLP
Dallas, Texas
February 17, 2016
| | | | | | | | | | | | | | | | | | | | | | FIRSTCASH HOLDINGS, INC. | | CONSOLIDATED STATEMENTS OF INCOME | | (in thousands, except per share amounts) | | | | | | | | | Year Ended December 31, | | | | 2021 | | 2020 | | 2019 | | Revenue: | | | | | | | | Retail merchandise sales | | $ | 1,134,249 | | | $ | 1,075,518 | | | $ | 1,175,561 | | | Pawn loan fees | | 475,782 | | | 457,517 | | | 564,824 | | | Leased merchandise income | | 22,720 | | | — | | | — | | | Interest and fees on finance receivables | | 9,024 | | | 2,016 | | | 20,178 | | | Wholesale scrap jewelry sales | | 57,190 | | | 96,233 | | | 103,876 | | | Total revenue | | 1,698,965 | | | 1,631,284 | | | 1,864,439 | | | | | | | | | | Cost of revenue: | | | | | | | | Cost of retail merchandise sold | | 663,464 | | | 641,087 | | | 745,861 | | | Depreciation of leased merchandise | | 12,826 | | | — | | | — | | | Provision for lease losses | | 5,442 | | | — | | | — | | | Provision for loan losses | | 48,952 | | | (488) | | | 4,159 | | | Cost of wholesale scrap jewelry sold | | 49,129 | | | 79,546 | | | 96,072 | | | Total cost of revenue | | 779,813 | | | 720,145 | | | 846,092 | | | | | | | | | | Net revenue | | 919,152 | | | 911,139 | | | 1,018,347 | | | | | | | | | | Expenses and other income: | | | | | | | | Operating expenses | | 564,832 | | | 562,158 | | | 595,539 | | | Administrative expenses | | 111,259 | | | 110,931 | | | 122,334 | | | Depreciation and amortization | | 45,906 | | | 42,105 | | | 41,904 | | | Interest expense | | 32,386 | | | 29,344 | | | 34,035 | | | Interest income | | (696) | | | (1,540) | | | (1,055) | | | Loss (gain) on foreign exchange | | 436 | | | 884 | | | (787) | | | Merger and acquisition expenses | | 15,449 | | | 1,316 | | | 1,766 | | | Gain on revaluation of contingent acquisition consideration | | (17,871) | | | — | | | — | | | Impairments and dispositions of certain other assets | | 949 | | | 10,505 | | | — | | | Loss on extinguishment of debt | | — | | | 11,737 | | | — | | | | | | | | | | Total expenses and other income | | 752,650 | | | 767,440 | | | 793,736 | | | | | | | | | | Income before income taxes | | 166,502 | | | 143,699 | | | 224,611 | | | | | | | | | | Provision for income taxes | | 41,593 | | | 37,120 | | | 59,993 | | | | | | | | | | Net income | | $ | 124,909 | | | $ | 106,579 | | | $ | 164,618 | | | | | | | | | | Earnings per share: | | | | | | | | Basic | | $ | 3.05 | | | $ | 2.57 | | | $ | 3.83 | | | Diluted | | 3.04 | | | 2.56 | | | 3.81 | | | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | FIRSTCASH, INC. | | CONSOLIDATED BALANCE SHEETS | | (in thousands, except per share amounts) | | | | | | | | | December 31, | | | | | 2017 | | 2016 | | | ASSETS | | | | | | | Cash and cash equivalents | | $ | 114,423 |
| | $ | 89,955 |
| | | Fees and service charges receivable | | 42,736 |
| | 41,013 |
| | | Pawn loans | | 344,748 |
| | 350,506 |
| | | Consumer loans, net | | 23,522 |
| | 29,204 |
| | | Inventories | | 276,771 |
| | 330,683 |
| | | Income taxes receivable | | 19,761 |
| | 25,510 |
| | | Prepaid expenses and other current assets | | 20,236 |
| | 25,264 |
| | | Total current assets | | 842,197 |
| | 892,135 |
| | | | | | | | | | Property and equipment, net | | 230,341 |
| | 236,057 |
| | | Goodwill | | 831,145 |
| | 831,151 |
| | | Intangible assets, net | | 93,819 |
| | 104,474 |
| | | Other assets | | 54,045 |
| | 71,679 |
| | | Deferred tax assets | | 11,237 |
| | 9,707 |
| | | Total assets | | $ | 2,062,784 |
| | $ | 2,145,203 |
| | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | Accounts payable and accrued liabilities | | $ | 84,331 |
| | $ | 109,354 |
| | | Customer deposits | | 32,019 |
| | 33,536 |
| | | Income taxes payable | | 4,221 |
| | 738 |
| | | Total current liabilities | | 120,571 |
| | 143,628 |
| | | | | | | | | | Revolving unsecured credit facility | | 107,000 |
| | 260,000 |
| | | Senior unsecured notes | | 295,243 |
| | 196,545 |
| | | Deferred tax liabilities | | 47,037 |
| | 61,275 |
| | | Other liabilities | | 17,600 |
| | 33,769 |
| | | Total liabilities | | 587,451 |
| | 695,217 |
| | | | | | | | | | Commitments and contingencies (Note 12) | |
| |
| | | | | | | | | | Stockholders’ equity: | | | | | | | Preferred stock; $0.01 par value; 10,000 shares authorized; no shares issued or | | | | | | | outstanding | | — |
| | — |
| | | Common stock; $0.01 par value; 90,000 shares authorized; | | | | | | 49,276 and 49,276 shares issued, respectively; | | | | | | 46,914 and 48,507 shares outstanding, respectively | | 493 |
| | 493 |
| | | Additional paid-in capital | | 1,220,356 |
| | 1,217,969 |
| | | Retained earnings | | 494,457 |
| | 387,401 |
| | | Accumulated other comprehensive loss | | (111,877 | ) | | (119,806 | ) | | Common stock held in treasury, 2,362 and 769 shares at cost, respectively | | (128,096 | ) | | (36,071 | ) | | | Total stockholders’ equity | | 1,475,333 |
| | 1,449,986 |
| | | Total liabilities and stockholders’ equity | | $ | 2,062,784 |
| | $ | 2,145,203 |
| | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
F-6
| | | | | | | | | | | | | | | | | | | | | | FIRSTCASH HOLDINGS, INC. | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | (in thousands) | | | | | | | | | Year Ended December 31, | | | | 2021 | | 2020 | | 2019 | | Net income | | $ | 124,909 | | | $ | 106,579 | | | $ | 164,618 | | | Other comprehensive income: | | | | | | | | Currency translation adjustment | | (12,867) | | | (21,463) | | | 16,148 | | | Comprehensive income | | $ | 112,042 | | | $ | 85,116 | | | $ | 180,766 | | | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | FIRSTCASH, INC. | | CONSOLIDATED STATEMENTS OF INCOME | | (in thousands, except per share amounts) | | | | | | | | | | Year Ended December 31, | | | | 2017 | | 2016 | | 2015 | | Revenue: | | | | | | | | Retail merchandise sales | | $ | 1,051,099 |
| | $ | 669,131 |
| | $ | 449,296 |
| | Pawn loan fees | | 510,905 |
| | 312,757 |
| | 195,448 |
| | Wholesale scrap jewelry sales | | 140,842 |
| | 62,638 |
| | 32,055 |
| | Consumer loan and credit services fees | | 76,976 |
| | 43,851 |
| | 27,803 |
| | Total revenue | | 1,779,822 |
| | 1,088,377 |
| | 704,602 |
| | | | | | | | | | Cost of revenue: | | | | | | | | Cost of retail merchandise sold | | 679,703 |
| | 418,556 |
| | 278,631 |
| | Cost of wholesale scrap jewelry sold | | 132,794 |
| | 53,025 |
| | 27,628 |
| | Consumer loan and credit services loss provision | | 19,819 |
| | 11,993 |
| | 7,159 |
| | Total cost of revenue | | 832,316 |
| | 483,574 |
| | 313,418 |
| | | | | | | | | | Net revenue | | 947,506 |
| | 604,803 |
| | 391,184 |
| | | | | | | | | | Expenses and other income: | | | | | | | | Store operating expenses | | 551,874 |
| | 328,014 |
| | 207,572 |
| | Administrative expenses | | 122,473 |
| | 96,537 |
| | 51,883 |
| | Depreciation and amortization | | 55,233 |
| | 31,865 |
| | 17,939 |
| | Interest expense | | 24,035 |
| | 20,320 |
| | 16,887 |
| | Interest income | | (1,597 | ) | | (751 | ) | | (1,566 | ) | | Merger and other acquisition expenses | | 9,062 |
| | 36,670 |
| | 2,875 |
| | Loss on extinguishment of debt | | 14,114 |
| | — |
| | — |
| | Net gain on sale of common stock of Enova | | — |
| | (1,299 | ) | | — |
| | Goodwill impairment - U.S. consumer loan operations | | — |
| | — |
| | 7,913 |
| | Total expenses and other income | | 775,194 |
| | 511,356 |
| | 303,503 |
| | | | | | | | | | Income before income taxes | | 172,312 |
| | 93,447 |
| | 87,681 |
| | | | | | | | | | Provision for income taxes | | 28,420 |
| | 33,320 |
| | 26,971 |
| | | | | | | | | | Net income | | $ | 143,892 |
| | $ | 60,127 |
| | $ | 60,710 |
| | | | | | | | | | Net income per share: | | | | | | | | Basic | | $ | 3.01 |
| | $ | 1.72 |
| | $ | 2.16 |
| | Diluted | | 3.00 |
| | 1.72 |
| | 2.14 |
| | | | | | | | | | Dividends declared per common share | | $ | 0.77 |
| | $ | 0.565 |
| | $ | — |
| | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
F-7
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FIRSTCASH HOLDINGS, INC. | | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | | (in thousands, except per share amounts) | | | | | | | | | | | | | | | | | | | | | | | | Common
Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Accum-
ulated
Other
Compre-
hensive
Loss | | Common Stock
Held in Treasury | | Total
Stock-
holders’
Equity | | | | | | | Shares | | Amount | | | | | | | | Shares | | Amount | | | | As of 12/31/2020 | | | | | 49,276 | | | $ | 493 | | | $ | 1,221,788 | | | $ | 789,303 | | | $ | (118,432) | | | 8,238 | | | $ | (609,337) | | | $ | 1,283,815 | | | Shares issued under share-based compensation plan, net of 28 shares net-settled | | | | | — | | | — | | | (7,090) | | | — | | | — | | | (73) | | | 5,427 | | | (1,663) | | | Exercise of stock options | | | | | — | | | — | | | (358) | | | — | | | — | | | (10) | | | 738 | | | 380 | | | | | | | | | | | | | | | | | | | | | | | Shares issued upon acquisition of American First Finance | | | | | 8,046 | | | 80 | | | 505,466 | | | — | | | — | | | — | | | — | | | 505,546 | | | Share-based compensation expense | | | | | — | | | — | | | 5,150 | | | — | | | — | | | — | | | — | | | 5,150 | | | Net income | | | | | — | | | — | | | — | | | 124,909 | | | — | | | — | | | — | | | 124,909 | | | Cash dividends ($1.17 per share) | | | | | — | | | — | | | — | | | (47,533) | | | — | | | — | | | — | | | (47,533) | | | Currency translation adjustment | | | | | — | | | — | | | — | | | — | | | (12,867) | | | — | | | — | | | (12,867) | | | Purchases of treasury stock | | | | | — | | | — | | | — | | | — | | | — | | | 688 | | | (49,610) | | | (49,610) | | | | | | | | | | | | | | | | | | | | | | | As of 12/31/2021 | | | | | 57,322 | | | $ | 573 | | | $ | 1,724,956 | | | $ | 866,679 | | | $ | (131,299) | | | 8,843 | | | $ | (652,782) | | | $ | 1,808,127 | | | | | | | | | | | | | | | | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | FIRSTCASH, INC. | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | (in thousands) | | | | | | | | | | Year Ended December 31, | | | | 2017 | | 2016 | | 2015 | | Net income | | $ | 143,892 |
| | $ | 60,127 |
| | $ | 60,710 |
| | Other comprehensive income (loss): | | | | | | | | Currency translation adjustment | | 7,929 |
| | (41,396 | ) | | (38,132 | ) | | Comprehensive income | | $ | 151,821 |
| | $ | 18,731 |
| | $ | 22,578 |
| | | | | | | | | The accompanying notes are an integral part
of these consolidated financial statements. |
F-8
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FIRSTCASH, INC. | | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accum- ulated Other Compre- hensive Loss | | Common Stock Held in Treasury | | Total Stock- holders’ Equity | | | Shares | | Amount | | Shares | | Amount | | | | | | | | Shares | | Amount | | | | Balance at 12/31/2016 | — |
| | $ | — |
| | 49,276 |
| | $ | 493 |
| | $ | 1,217,969 |
| | $ | 387,401 |
| | $ | (119,806 | ) | | 769 |
| | $ | (36,071 | ) | | $ | 1,449,986 |
| | Shares issued under share-based compensa-tion plan | — |
| | — |
| | — |
| | — |
| | (440 | ) | | — |
| | — |
| | (10 | ) | | 440 |
| | — |
| | Exercise of stock options | — |
| | — |
| | — |
| | — |
| | (242 | ) | | — |
| | — |
| | (13 | ) | | 549 |
| | 307 |
| | Share-based compensa-tion expense | — |
| | — |
| | — |
| | — |
| | 3,069 |
| | — |
| | — |
| | — |
| | — |
| | 3,069 |
| | Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 143,892 |
| | — |
| | — |
| | — |
| | 143,892 |
| | Dividends paid | — |
| | — |
| | — |
| | — |
| | — |
| | (36,836 | ) | | — |
| | — |
| | — |
| | (36,836 | ) | | Currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,929 |
| | — |
| | — |
| | 7,929 |
| | Repurchases of treasury stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,616 |
| | (93,014 | ) | | (93,014 | ) | | Balance at 12/31/2017 | — |
| | $ | — |
| | 49,276 |
| | $ | 493 |
| | $ | 1,220,356 |
| | $ | 494,457 |
| | $ | (111,877 | ) | | 2,362 |
| | $ | (128,096 | ) | | $ | 1,475,333 |
| | | | | | | | | | | | | | | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FIRSTCASH HOLDINGS, INC. | | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | | CONTINUED | | (in thousands, except per share amounts) | | | | | | | | | | | | | | | | | | | | | | | | Common
Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Accum-
ulated
Other
Compre-
hensive
Loss | | Common Stock
Held in Treasury | | Total
Stock-
holders’
Equity | | | | | | | Shares | | Amount | | | | | | | | Shares | | Amount | | | | As of 12/31/2019 | | | | | 49,276 | | | $ | 493 | | | $ | 1,231,528 | | | $ | 727,476 | | | $ | (96,969) | | | 6,947 | | | $ | (512,493) | | | $ | 1,350,035 | | | Shares issued under share-based compensation plan, net of 46 shares net-settled | | | | | — | | | — | | | (10,663) | | | — | | | — | | | (98) | | | 7,337 | | | (3,326) | | | Exercise of stock options, net of 22 shares net-settled | | | | | — | | | — | | | (1,991) | | | — | | | — | | | (38) | | | 2,789 | | | 798 | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation expense | | | | | — | | | — | | | 2,914 | | | — | | | — | | | — | | | — | | | 2,914 | | | Net income | | | | | — | | | — | | | — | | | 106,579 | | | — | | | — | | | — | | | 106,579 | | | Cash dividends ($1.08 per share) | | | | | — | | | — | | | — | | | (44,752) | | | — | | | — | | | — | | | (44,752) | | | Currency translation adjustment | | | | | — | | | — | | | — | | | — | | | (21,463) | | | — | | | — | | | (21,463) | | | Purchases of treasury stock | | | | | — | | | — | | | — | | | — | | | — | | | 1,427 | | | (106,970) | | | (106,970) | | | | | | | | | | | | | | | | | | | | | | | As of 12/31/2020 | | | | | 49,276 | | | $ | 493 | | | $ | 1,221,788 | | | $ | 789,303 | | | $ | (118,432) | | | 8,238 | | | $ | (609,337) | | | $ | 1,283,815 | | | | | | | | | | | | | | | | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FIRSTCASH HOLDINGS, INC. | | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | | CONTINUED | | (in thousands, except per share amounts) | | | | | | | | | | | | | | | | | | | | | | | | Common
Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Accum-
ulated
Other
Compre-
hensive
Loss | | Common Stock
Held in Treasury | | Total
Stock-
holders’
Equity | | | | | | | Shares | | Amount | | | | | | | | Shares | | Amount | | | | As of 12/31/2018 | | | | | 49,276 | | | $ | 493 | | | $ | 1,224,608 | | | $ | 606,810 | | | $ | (113,117) | | | 5,673 | | | $ | (400,690) | | | $ | 1,318,104 | | | Shares issued under share-based compensation plan | | | | | — | | | — | | | (1,441) | | | — | | | — | | | (21) | | | 1,441 | | | — | | | Exercise of stock options | | | | | — | | | — | | | (319) | | | — | | | — | | | (10) | | | 719 | | | 400 | | | | | | | | | | | | | | | | | | | | | | | Share-based compensation expense | | | | | — | | | — | | | 8,680 | | | — | | | — | | | — | | | — | | | 8,680 | | | Net income | | | | | — | | | — | | | — | | | 164,618 | | | — | | | — | | | — | | | 164,618 | | | Cash dividends ($1.02 per share) | | | | | — | | | — | | | — | | | (43,952) | | | — | | | — | | | — | | | (43,952) | | | Currency translation adjustment | | | | | — | | | — | | | — | | | — | | | 16,148 | | | — | | | — | | | 16,148 | | | Purchases of treasury stock | | | | | — | | | — | | | — | | | — | | | — | | | 1,305 | | | (113,963) | | | (113,963) | | | | | | | | | | | | | | | | | | | | | | | As of 12/31/2019 | | | | | 49,276 | | | $ | 493 | | | $ | 1,231,528 | | | $ | 727,476 | | | $ | (96,969) | | | 6,947 | | | $ | (512,493) | | | $ | 1,350,035 | | | | | | | | | | | | | | | | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FIRSTCASH, INC. | | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | | CONTINUED | | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accum- ulated Other Compre- hensive Loss | | Common Stock Held in Treasury | | Total Stock- holders’ Equity | | | Shares | | Amount | | Shares | | Amount | | | | | | | | Shares | | Amount | | | | Balance at 12/31/2015 | — |
| | $ | — |
| | 40,288 |
| | $ | 403 |
| | $ | 202,393 |
| | $ | 643,604 |
| | $ | (78,410 | ) | | 12,052 |
| | $ | (336,608 | ) | | $ | 431,382 |
| | Shares issued under share-based compensa-tion plan | — |
| | — |
| | 7 |
| | — |
| | (3,903 | ) | | — |
| | — |
| | (83 | ) | | 3,903 |
| | — |
| | Shares issued upon merger with Cash America | — |
| | — |
| | 20,181 |
| | 202 |
| | 1,015,305 |
| | — |
| | — |
| | — |
| | — |
| | 1,015,507 |
| | Share-based compensa-tion expense | — |
| | — |
| | — |
| | — |
| | 4,174 |
| | — |
| | — |
| | — |
| | — |
| | 4,174 |
| | Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 60,127 |
| | — |
| | — |
| | — |
| | 60,127 |
| | Dividends paid | — |
| | — |
| | — |
| | — |
| | — |
| | (19,808 | ) | | — |
| | — |
| | — |
| | (19,808 | ) | | Currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (41,396 | ) | | — |
| | — |
| | (41,396 | ) | | Retirement of treasury stock | — |
| | — |
| | (11,200 | ) | | (112 | ) | | — |
| | (296,522 | ) | | — |
| | (11,200 | ) | | 296,634 |
| | — |
| | Balance at 12/31/2016 | — |
| | $ | — |
| | 49,276 |
| | $ | 493 |
| | $ | 1,217,969 |
| | $ | 387,401 |
| | $ | (119,806 | ) | | 769 |
| | $ | (36,071 | ) | | $ | 1,449,986 |
| | | | | | | | | | | | | | | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | FIRSTCASH HOLDINGS, INC. | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | (in thousands) | | Year Ended December 31, | | | 2021 | | 2020 | | 2019 | | Cash flow from operating activities: | | | | | | | Net income | $ | 124,909 | | | $ | 106,579 | | | $ | 164,618 | | | Adjustments to reconcile net income to net cash flow provided by operating activities: | | | | | | | Depreciation of leased merchandise | 12,826 | | | — | | | — | | | Provision for lease losses | 5,442 | | | — | | | — | | | Provision for loan losses | 48,952 | | | (839) | | | 2,395 | | | Share-based compensation expense | 5,150 | | | 2,914 | | | 8,680 | | | Depreciation and amortization expense | 45,906 | | | 42,105 | | | 41,904 | | | Amortization of debt issuance costs | 1,671 | | | 1,649 | | | 1,430 | | | Net amortization of premiums, discounts and unearned origination fees on finance receivables | 1,132 | | | — | | | — | | | Gain on revaluation of contingent acquisition consideration | (17,871) | | | — | | | — | | | Impairments and dispositions of certain other assets | 949 | | | 10,505 | | | — | | | | | | | | | Loss on extinguishment of debt | — | | | 11,737 | | | — | | | Deferred income taxes, net | 10,722 | | | 14,476 | | | 7,008 | | | Changes in operating assets and liabilities, net of business combinations: | | | | | | | Accounts receivable, net | (2,492) | | | 5,474 | | | 110 | | | Inventories purchased directly from customers, wholesalers or manufacturers | (27,006) | | | 29,174 | | | 5,842 | | | Leased merchandise, net | (22,563) | | | — | | | — | | | Prepaid expenses and other assets | 3,094 | | | 1,400 | | | (1,049) | | | Accounts payable, accrued liabilities and other liabilities | 26,180 | | | 8,621 | | | (3,383) | | | Income taxes | 6,303 | | | (11,531) | | | 4,041 | | | Net cash flow provided by operating activities | 223,304 | | | 222,264 | | | 231,596 | | | Cash flow from investing activities: | | | | | | Pawn loans, net (1) | (73,340) | | | 105,418 | | | 21,650 | | | Finance receivables, net | (5,844) | | | 1,590 | | | 12,756 | | | Purchases of furniture, fixtures, equipment and improvements | (42,022) | | | (37,543) | | | (44,311) | | | Purchases of store real property | (79,507) | | | (45,502) | | | (74,661) | | | Portion of AFF Acquisition paid in cash, net of cash acquired | (462,102) | | | — | | | — | | | Acquisitions of pawn stores, net of cash acquired | (81,822) | | | (44,315) | | | (52,487) | | | Net cash flow used in investing activities | (744,637) | | | (20,352) | | | (137,053) | | | Cash flow from financing activities: | | | | | | | Borrowings from unsecured credit facilities | 560,000 | | | 354,425 | | | 257,000 | | | Repayments of unsecured credit facilities | (424,000) | | | (569,933) | | | (217,000) | | | | | | | | | | | | | | | Issuance of senior unsecured notes | 550,000 | | | 500,000 | | | — | | | Redemption of senior unsecured notes | — | | | (300,000) | | | — | | | Redemption premium and other redemption costs on senior unsecured notes | — | | | (8,781) | | | — | | | Debt issuance costs paid | (10,581) | | | (7,963) | | | (1,149) | | | Purchases of treasury stock | (49,610) | | | (106,970) | | | (116,105) | | | Proceeds from exercise of stock options | 380 | | | 1,140 | | | 400 | | | Payment of withholding taxes on net share settlements of restricted stock unit awards and stock options exercised | (1,663) | | | (3,668) | | | — | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FIRSTCASH, INC. | | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY | | CONTINUED | | (in thousands) | | | | | | | | | | | | | | | | | | | | | | | | Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accum- ulated Other Compre- hensive Loss | | Common Stock Held in Treasury | | Total Stock- holders’ Equity | | | Shares | | Amount | | Shares | | Amount | | | | | | | | Shares | | Amount | | | | Balance at 12/31/2014 | — |
| | $ | — |
| | 39,708 |
| | $ | 397 |
| | $ | 188,062 |
| | $ | 582,894 |
| | $ | (40,278 | ) | | 11,200 |
| | $ | (296,634 | ) | | $ | 434,441 |
| | Shares issued under share-based compensa-tion plan | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Exercise of stock options, net of 80 shares net-settled | — |
| | — |
| | 575 |
| | 6 |
| | 8,776 |
| | — |
| | — |
| | — |
| | — |
| | 8,782 |
| | Income tax benefit from exercise of stock options | — |
| | — |
| | — |
| | — |
| | 5,126 |
| | — |
| | — |
| | — |
| | — |
| | 5,126 |
| | Share-based compensa-tion expense | — |
| | — |
| | — |
| | — |
| | 429 |
| | — |
| | — |
| | — |
| | — |
| | 429 |
| | Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 60,710 |
| | — |
| | — |
| | — |
| | 60,710 |
| | Currency translation adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (38,132 | ) | | — |
| | — |
| | (38,132 | ) | | Repurchases of treasury stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 852 |
| | (39,974 | ) | | (39,974 | ) | | Balance at 12/31/2015 | — |
| | $ | — |
| | 40,288 |
| | $ | 403 |
| | $ | 202,393 |
| | $ | 643,604 |
| | $ | (78,410 | ) | | 12,052 |
| | $ | (336,608 | ) | | $ | 431,382 |
| | | | | | | | | | | | | | | | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
F-11
| | | | | | | | | | | | | | | | | | | FIRSTCASH HOLDINGS, INC. | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | CONTINUED | | (in thousands) | | Year Ended December 31, | | 2021 | | 2020 | | 2019 | | Dividends paid | (47,533) | | | (44,752) | | | (43,952) | | | Net cash flow provided by (used in) financing activities | 576,993 | | | (186,502) | | | (120,806) | | | Effect of exchange rates on cash | (1,464) | | | 3,913 | | | 997 | | | Change in cash and cash equivalents | 54,196 | | | 19,323 | | | (25,266) | | | Cash and cash equivalents at beginning of the year | 65,850 | | | 46,527 | | | 71,793 | | | Cash and cash equivalents at end of the year | $ | 120,046 | | | $ | 65,850 | | | $ | 46,527 | | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | Cash paid during the period for: | | | | | | | Interest | $ | 29,461 | | | $ | 21,033 | | | $ | 32,680 | | | Income taxes | 24,563 | | | 34,186 | | | 48,867 | | | | | | | | | Supplemental disclosure of non-cash investing and financing activity: | | | | | | | Non-cash transactions in connection with pawn loans settled through forfeitures of collateral transferred to inventories | $ | 430,306 | | | $ | 340,891 | | | $ | 500,744 | | | | | | | | | Issuance of common stock associated with the AFF Acquisition | 505,546 | | | — | | | — | | | | | | | | | | | | | |
| | | | | | | | | | | | | | FIRSTCASH, INC. | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | (in thousands) | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | Cash flow from operating activities: | | | | | | | Net income | $ | 143,892 |
| | $ | 60,127 |
| | $ | 60,710 |
| | Adjustments to reconcile net income to net cash flow provided by operating activities: | | | | | | | Non-cash portion of credit loss provision | 12,727 |
| | 5,970 |
| | 761 |
| | Share-based compensation expense | 3,069 |
| | 4,174 |
| | 429 |
| | Net gain on sale of common stock of Enova | — |
| | (1,299 | ) | | — |
| | Depreciation and amortization expense | 55,233 |
| | 31,865 |
| | 17,939 |
| | Amortization of debt issuance costs | 1,838 |
| | 1,427 |
| | 943 |
| | Amortization of favorable/(unfavorable) lease intangibles, net | (976 | ) | | (232 | ) | | — |
| | Loss on extinguishment of debt | 14,114 |
| | — |
| | — |
| | Impairment of goodwill - U.S. consumer loan operations | — |
| | — |
| | 7,913 |
| | Deferred income taxes, net | (14,497 | ) | | 11,912 |
| | (430 | ) | | Changes in operating assets and liabilities, net of business combinations: | | | | | | | Fees and service charges receivable | (1,411 | ) | | 1,776 |
| | (100 | ) | | Inventories | 16,193 |
| | (4,619 | ) | | (1,404 | ) | | Prepaid expenses and other assets | 13,702 |
| | 4,878 |
| | 490 |
| | Accounts payable, accrued expenses and other liabilities | (35,135 | ) | | (16,335 | ) | | 4,350 |
| | Income taxes | 11,608 |
| | (2,790 | ) | | 1,148 |
| | Net cash flow provided by operating activities | 220,357 |
| | 96,854 |
| | 92,749 |
| | Cash flow from investing activities: | | | | | | | Loan receivables, net of cash repayments | 40,735 |
| | (16,072 | ) | | (3,716 | ) | | Purchases of property and equipment | (37,135 | ) | | (33,863 | ) | | (21,073 | ) | | Portion of aggregate merger consideration paid in cash, net of cash acquired | — |
| | (8,250 | ) | | — |
| | Acquisitions of pawn stores, net of cash acquired | (2,203 | ) | | (29,866 | ) | | (46,887 | ) | | Proceeds from sale of common stock of Enova | — |
| | 62,084 |
| | — |
| | Net cash flow provided by (used in) investing activities | 1,397 |
| | (25,967 | ) | | (71,676 | ) | | Cash flow from financing activities: | | | | | | | Borrowings from revolving credit facility | 206,000 |
| | 400,000 |
| | 120,000 |
| | Repayments of revolving credit facility | (359,000 | ) | | (198,000 | ) | | (84,400 | ) | | Repayments of debt assumed with merger and other acquisitions | — |
| | (238,532 | ) | | — |
| | Issuance of senior unsecured notes | 300,000 |
| | — |
| | — |
| | Repurchase/redemption of senior unsecured notes | (200,000 | ) | | — |
| | — |
| | Repurchase/redemption premiums paid on senior unsecured notes | (10,895 | ) | | — |
| | — |
| | Debt issuance costs paid | (5,342 | ) | | (2,373 | ) | | (407 | ) | | Purchases of treasury stock | (91,740 | ) | | — |
| | (39,974 | ) | | Proceeds from exercise of share-based compensation awards | 307 |
| | — |
| | 9,895 |
| | Income tax benefit from exercise of stock options | — |
| | — |
| | 5,126 |
| | Dividends paid | (36,836 | ) | | (19,808 | ) | | — |
| | Payment of minimum withholding taxes on net share settlement of stock options exercised | — |
| | — |
| | (1,113 | ) | | Net cash flow provided by (used in) financing activities | (197,506 | ) | | (58,713 | ) | | 9,127 |
| | Effect of exchange rates on cash | 220 |
| | (9,173 | ) | | (11,238 | ) |
(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.
| | | | | | | | | | | | | | FIRSTCASH, INC. | | CONSOLIDATED STATEMENTS OF CASH FLOWS | | CONTINUED | | (in thousands) | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | Change in cash and cash equivalents | 24,468 |
| | 3,001 |
| | 18,962 |
| | Cash and cash equivalents at beginning of the year | 89,955 |
| | 86,954 |
| | 67,992 |
| | Cash and cash equivalents at end of the year | $ | 114,423 |
| | $ | 89,955 |
| | $ | 86,954 |
| | | | | | | | | Supplemental disclosure of cash flow information: | | | | | | | Cash paid during the period for: | | | | | | | Interest | $ | 24,301 |
| | $ | 18,663 |
| | $ | 15,464 |
| | Income taxes | 29,813 |
| | 21,535 |
| | 21,579 |
| | | | | | | | | Supplemental disclosure of non-cash investing and financing activity: | | | | | | | Non-cash transactions in connection with pawn loans settled through forfeitures of collateral transferred to inventories | $ | 436,705 |
| | $ | 265,060 |
| | $ | 186,389 |
| | Amounts payable assumed in connection with pawn acquisitions (see Note 3) | — |
| | 2,554 |
| | 575 |
| | Issuance of common stock associated with the merger (see Note 3) | — |
| | 1,015,507 |
| | — |
| | Revolving unsecured credit facility assumed as a result of the merger (see Note 3) | — |
| | (232,000 | ) | | — |
| | Notes payable assumed in other acquisitions (see Note 3) | — |
| | (6,630 | ) | | — |
| | | | | | | | The accompanying notes are an integral part of these consolidated financial statements. |
FIRSTCASH HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANYGENERAL
Organization and Nature of the Company
On December 16, 2021, FirstCash, Inc., implemented a holding company reorganization, which resulted in FirstCash Holdings, Inc. owning all of the outstanding capital stock of FirstCash, Inc. Following the reorganization, FirstCash Holdings, Inc. became the successor issuer to FirstCash, Inc. FirstCash Holdings, Inc. (together with its wholly-owned subsidiaries, the “Company”) is incorporated in the state of Delaware. The Company is engaged primarily in the operation of pawn stores, which lend money on the collateral of pledged personal property and retail previously owned merchandise acquired through pawn forfeitures and purchases directly from the general public. The Company also retails limited quantities of new or refurbished merchandise obtained directly from wholesalers and manufacturers. In addition to making short-term secured pawn loans, certain of the Company’s pawn stores offer short-term consumer loans and credit services. The Company also operates consumer loan stores that provide consumer loans, credit services and check cashing services, although beginning in fiscal 2018, the Company will no longer offer fee-based check cashing services in its non-franchised stores. As of December 31, 2017, the Company owned and operated 2,039 pawn stores and 72 consumer loan stores in 26 U.S. states (including the District of Columbia), 32 states in Mexico and the countries of Guatemala and El Salvador.
On September 1, 2016,December 17, 2021, the Company completed its merger with Cash America International, Inc.the acquisition (the “AFF Acquisition”) of American First Finance (“Cash America”AFF”), whereby Cash America merged with and intowhich is a wholly owned subsidiary of the Company (the “Merger”leading technology-driven retail point-of-sale (“POS”). The accompanying audited consolidated results of operations for the year ended December 31, 2017 includes the results of operations for Cash America, while the comparable prior-year period includes the results of operations for Cash America for the period September 2, 2016 to December 31, 2016, affecting comparability of fiscal 2017 and 2016 amounts. payment solutions platform primarily focused on providing lease-to-own (“LTO”) products. See Note 3 for additional information about the Merger.AFF Acquisition.
The Company operates 2 business lines: pawn operations and retail POS payment solutions which are organized into 3 reportable segments. The U.S. pawn segment consists of all pawn operations in 26 U.S. states and the District of Columbia, while 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.
The Company’s primary business line continues to be the operation of retail pawn stores, also known as “pawnshops,” which focus on serving cash and credit-constrained consumers. 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’s retail POS payment solutions segment focuses on providing LTO and retail financing payment options across a large network of traditional and e-commerce retail merchant partners in all 50 states in the U.S., the District of Columbia and Puerto Rico. AFF’s retail merchant partnerships provide consumer goods and services to their shoppers and use AFF’s LTO and retail finance solutions to facilitate payments on such transactions.
Continuing Impact of COVID-19
The COVID-19 pandemic continues to impact numerous aspects of the Company’s business and the continuing long-term impact to its business remains unknown. The extent to which COVID-19 continues to impact the Company’s operations, results of operations, liquidity and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the unknown duration and severity of the COVID-19 pandemic, which may be impacted by variants of concern and the efficacy and adoption rate of the COVID-19 vaccines in the jurisdictions in which the Company operates. In addition, changes in economic conditions and consumer spending, rising inflation, and the actions taken to limit the economic impact of COVID-19, such as government stimulus and other transfer programs, have and may continue to have a material adverse impact on demand for pawn loans in future periods. Moreover, safety protocols, staffing constraints and supply chain delays continue to impact operations and traffic counts for many retailers, which include the Company’s pawn stores and many of AFF’s retail merchant partners.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed in the preparation of these financial statements:
Principles of consolidation - The accompanying consolidated financial statements include the accounts of FirstCash Holdings, Inc. and its wholly-owned subsidiaries. The Company regularly makes acquisitions and the results of operations for the acquired storesoperations have been consolidated since the acquisition dates. All significant intercompany accounts and transactions have been eliminated. See Note 3.
Cash and cash equivalents - The Company considers any highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. As of December 31, 2017,2021, the amount of cash associated with indefinitely reinvested foreign earnings was $79.8$57.5 million, which is primarily held in Mexican pesos.
Pawn loans and revenue recognition - Pawn loans typically have a term of 30 days and are secured by the customer’s pledge of tangible personal property, which the Company holds during the term of the loan. If a pawn loan defaults, the Company relies on the sale of the pawned property to recover the principal amount of an unpaid pawn loan, plus a yield on the investment, becauseas the Company’s pawn loans are non-recourse against the customer. The customer’s creditworthiness does not affect the Company’s financial position or results of operations. The Company accrues pawn loan fee revenue on a constant-yield basis over the life of the pawn loan for all pawns for which the Company deems collection to be probable based on historical pawn redemption statistics.statistics, which is included in accounts receivable, net in the accompanying consolidated balance sheets. If the pawn loan is not repaid prior to the expiration of the pawn loan term, including any extension or grace period, if applicable, the principal amount loaned becomes the inventory carrying value of the forfeited collateral, which is typically recovered through sales to other customersof the forfeited items at prices well above the carrying value.
The Company’s pawn merchandise sales are primarily retail sales to the general public in its pawn stores. The Company acquireshas determined no allowance related to credit losses on pawn loans is required as the fair value of the pledged collateral is significantly in excess of the pawn loan amount.
Pawn inventories and revenue recognition - Pawn inventories represent merchandise inventory throughacquired from forfeited pawn loans and through purchases of used goodsmerchandise purchased directly from the general public. The Company also retails limited quantities of new or refurbished merchandise obtained directly from wholesalers and manufacturers. Pawn inventories from forfeited pawn loans are recorded at the amount of the pawn principal on the unredeemed goods, exclusive of accrued interest. Pawn inventories purchased directly from customers, wholesalers and manufacturers are recorded at cost. The cost of pawn inventories is determined on the specific identification method. Pawn inventories are stated at the lower of cost or net realizable value and, accordingly, valuation allowances are established if pawn inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. Management has evaluated pawn inventories and determined that a valuation allowance is not necessary.
The Company’s merchandise sales are primarily retail sales to the general public in its pawn stores. The Company records sales revenue at the time of the sale. The Company presents merchandise sales net of any sales or value-added taxes collected. The Company does not provide direct financing to customers for the purchase of its merchandise, but does permit its customers to purchase merchandise on an interest-free layaway plan. Should the customer fail to make a required payment pursuant to a layaway plan, the previous payments are typically forfeited to the Company. Interim payments from customers on layaway sales are recorded as deferred revenue and subsequently recorded as retail merchandise sales revenue when the final payment is received or when previous payments are forfeited to the Company. Some jewelry inventory is melted and processed at third-party facilities and the precious metal and diamond content is sold at either prevailing market commodity prices or a previously agreed upon price with a commodity buyer. The Company records revenue from these wholesale scrap jewelry transactions when a price has been agreed upon and the Company ships the jewelrycommodity to the buyer.
Layaway plan and deferred revenue - The Company does not currently provide direct financing to customers for the purchase of merchandise in its pawn stores, but does permit its customers to purchase pawn merchandise on an interest-free “layaway” plan. Should the customer fail to make a required payment pursuant to a layaway plan, the item is returned to pawn inventory and all or a portion of previous payments are typically forfeited to the Company. Deposits and interim payments from customers on layaway sales are recorded as deferred revenue and subsequently recorded as retail merchandise sales revenue when the merchandise is delivered to the customer upon receipt of final payment or when previous payments are forfeited to the Company. Layaway payments from customers are included in customer deposits and prepayments in the accompanying consolidated balance sheets.
Leased merchandise and revenue recognition - The Company provides merchandise, consisting primarily of furniture and mattresses, appliances, jewelry, electronics and automotive products, to customers of its merchant partners for lease under certain terms agreed to by the customer. The customer has the right to acquire the title either through an early buyout option or through payment of all required lease payments. The Company maintains ownership of the leased merchandise until all payment obligations are satisfied under the lease agreement. The customer has the right to cancel the lease at any time by returning the merchandise and making all scheduled payments due through the minimum lease holding period, which is typically 60 days. Leased merchandise contracts can typically be renewed for between six to 24 months. Leased merchandise is stated at depreciated cost. The Company depreciates leased merchandise over the life of the lease, and assumes no salvage value. Depreciation is accelerated upon an early buyout. All of the Company’s leased merchandise represents on-lease merchandise and all leases are operating leases.
Lease income is recognized over the lease term and is recorded net of any sales taxes collected. Charges for late fees and insufficient fund fees are recognized as income when collected. Initial direct costs related to the Companyʼs lease agreements are added to the basis of the leased property and recognized over the lease term in proportion to the recognition of lease income. The Company typically charges the customer a non-refundable processing fee at lease inception and may also receive a discount from or pay a premium to certain merchant partners for leases originated at their locations, which are deferred and amortized using the straight-line method as adjustments to lease income over the contractual life of the related leased merchandise. Unamortized fees, discounts and premiums are recognized in full upon early buyout or charge-off.
Consumer loans are unsecured cash advances and installment loans with terms that typically range from 7 to 365 days. The Company accrues consumer loan fees on a constant-yield basis over the term of the consumer loan. The Company offers fee-based credit services organization programs (“CSO Programs”) to assist consumersfor lease income earned but not yet collected as accrued rent receivable, which is included in obtaining extensions of credit from independent, non-bank, consumer lending companies (the “Independent Lenders”). The Company’s stand-alone consumer loan stores and select pawn storesaccounts receivable, net in the states of Texas and Ohio offer the CSO Programs. The Company’s CSO Programs comply with the respective jurisdiction’s credit services organization act, credit access business law or a similar statute. The Company recognizes credit services fees ratably over the life of the extension of credit made by the Independent Lenders. The extensions of credit made by the Independent Lenders to credit services customers typically have terms of 7 to 365 days.
Credit loss provisions - The Company has determined no allowance related to credit losses on pawn loans is required as the fair value of the pledged collateral is significantlyaccompanying consolidated balance sheets. Alternatively, lease payments received in excess of the pawn loan amount.amount earned are recognized as deferred revenue, which is included in customer deposits and prepayments in the accompanying consolidated balance sheets. Customer payments are first applied to applicable sales tax and scheduled lease payments, then applied to any uncollected fees, such as late fees and insufficient fund fees. The Company maintainscollects sales taxes on behalf of the customer and remits all applicable sales taxes collected to the respective jurisdiction.
Provision for lease losses - The Company records a provision for lease losses on an allowance for creditmethod, which estimates the leased merchandise losses on consumer loans on an aggregate basis at a level it considers sufficient to cover estimated losses inincurred but not yet identified by management as of the collectionend of its consumer loans.the accounting period. The allowance for creditlease losses is based primarily upon historical credit loss experience with consideration given to recent creditand forecasted business trends including, but not limited to, loss trends, and changes in loan characteristics (e.g., average amount financed and term), delinquency levels, collateral values, economic conditions, underwriting and collection practices.
The Company charges off leased merchandise when a lease is 90 days or more contractually past due. If an account is deemed to be uncollectible prior to this date, the Company will charge off the leased merchandise at the point in time it is deemed uncollectible.
Finance receivables and revenue recognition - The Company purchases and services retail finance receivables, the term of which typically ranges from six to 24 months, directly from its merchant partners or from its bank partner. The Company has a partnership with a Utah state-chartered bank that requires the Company to purchase the rights to the cash flows associated with finance receivables marketed to retail consumers on the bank’s behalf. The bank establishes the underwriting criteria for the finance receivables originated by the bank.
Interest income is recognized using the interest method over the life of the finance receivable for all loans for which the Company deems collection to be probable based on historical loan redemption statistics and stops accruing interest upon charge-off. Accrued interest, net of an allowance for uncollectible interest income is included in accounts receivable, net in the accompanying consolidated balance sheets and as of December 31, 2021 and 2020 was $12.4 million and $0.0 million, respectively. Charges for late fees and insufficient fund fees are recognized as income when collected. The Company receives an origination fee on newly purchased bank loans and may receive a discount from or pay a premium to certain merchant partners for finance receivables purchased from them, which are deferred and amortized using the interest method as adjustments to yield over the contractual life of the related finance receivable. Unamortized origination fees, discounts and premiums are recognized in full upon early payoff or charge-off.
The Company offers customers an early payoff discount on most of its finance receivables whereby the customer has between 90 and 105 days to pay the full principal balance without incurring any interest charge. If the borrower does not pay the full principal balance prior to the expiration of the early payoff discount period, interest charges are applied retroactively to the inception date of the loan. The Company accrues interest income during the early payoff discount period but records a reserve for loans expected to pay the full principal balance prior to the expiration of the early payoff discount period based on historical payment patterns.
Provision for loan losses - Expected lifetime losses on finance receivables are recognized upon loan purchase, which requires the Company to make its best estimate of probable lifetime losses at the time of purchase. The Company segments its finance receivable portfolio into pools of receivables with similar risk characteristics which include loan product and monthly origination vintage and evaluates each pool for impairment.
The Company calculates the allowance for loan losses based on historical loss information and incorporates observable and forecasted economic conditions over a reasonable and supportable forecast period covering the full contractual life of finance receivables. Incorporating observable and forecasted economic conditions could have a material impact on the measurement of the allowance to the extent that forecasted economic conditions change significantly. The Company may also consider other qualitative factors to address recent and forecasted business trends in estimating the allowance, as necessary, including, but not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices. The allowance for creditloan losses is periodically reviewed by management with any changes reflected in current operations.maintained at a level considered appropriate to cover expected lifetime losses on the finance receivable portfolio, and the appropriateness of the allowance is evaluated at each period end.
The Company fully reserves or charges off consumer loans once the loan has been classified as delinquent for 60 days. Short-term loans are considered delinquent when payment of an amount due is not made as of the due date. Installment loans are considered delinquentfinance receivables when a customer misses two payments.receivable is 90 days or more contractually past due. If a loanan account is estimateddeemed to be uncollectible before it is fully reserved, it is charged off at that point. Recoveries on loans previously chargedprior to the allowance, including the sale of delinquent loans to unaffiliated third parties, are credited to the allowance when collected or when sold to a third party. The Company generally does not accrue interest on delinquent consumer loans. In addition, delinquent consumer loans generally may not be renewed, and if, during its attempt to collect on a delinquent consumer loan, the Company allows additional time for payment through a payment plan or a promise to pay, it is still considered delinquent. Generally, all payments received are first applied against accrued but unpaid interest and fees and then against the principal balance of the loan.
Under the CSO Programs, the Company assists customers in applying for a short-term extension of credit from Independent Lenders and issues the Independent Lenders a guarantee for the repayment of the extension of credit. The Company is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. According to the guarantee, if the borrower defaults on the extension of credit,this date, the Company will paycharge off the Independent Lendersfinance receivable at the principal, accrued interest, insufficient funds and late fee, if applicable, all of which the Company records as a component of its credit loss provision. The Company is entitled to seek recovery, directly from its customers, of the amounts it pays the Independent Lenderspoint in performing under the guarantees. The Company records the estimated fair value of the liability in accrued liabilities. The estimated fair value of the liability is periodically reviewed by management with any changes reflected in current operations.
Althoughtime it is at least reasonably possible that events or circumstances could occur in the future that are not presently foreseen which could cause actual credit losses to be materially different from the recorded allowance for credit losses, the Company believes it has given appropriate consideration to all relevant factors and has made reasonable assumptions in determining the allowance for credit losses.deemed uncollectible.
Foreign currency transactions - The Company has significantpawn operations in Latin America where in Mexico, Guatemala and GuatemalaColombia the functional currency is the Mexican peso, and Guatemalan quetzal respectively.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 fiscal period. Prior to translation, U.S. dollar-denominated transactions of the foreign subsidiaries are remeasured into their functional currency using current rates of exchange for monetary assets and liabilities and historical rates of exchange for non-monetary assets and liabilities. Gains and losses from remeasurement of dollar-denominated monetary assets and liabilities in Mexico, Guatemala and GuatemalaColombia are included in store operating expenses.(gain) loss on foreign exchange in the consolidated statements of income. Deferred taxes are not currently providedrecorded on cumulative foreign currency translation adjustments, as the Company indefinitely reinvests earnings of its foreign subsidiaries. The Company also has pawn operations in El Salvador where the reporting and functional currency is the U.S. dollar.
The average value of the Mexican peso to the U.S. dollar exchange rate for fiscal 20172021 was 18.920.3 to 1 compared to 18.721.5 to 1 in fiscal 20162020 and 15.819.3 to 1 in fiscal 2015.2019. The average value of the Guatemalan quetzal to the U.S. dollar exchange rate for fiscal 20172021, 2020 and 2019 was 7.47.7 to 1. The average value of the Colombian peso to the U.S. dollar exchange rate for 2021 was 3,742 to 1 compared to 7.63,693 to 1 in fiscal 20162020 and 7.73,280 to 1 in fiscal 2015.2019.
Store operatingOperating expenses - Costs incurred in operating the Company’s pawn stores and consumer loan stores have been classified as store operating expenses. Operating expenses, which include salary and benefit expense of pawn store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores. Additionally, costs incurred in operating AFF have been classified as operating expenses, which include salary and benefit expense of certain operations focused departments, merchant partner incentives, bank and other payment processing charges, credit reporting costs, information technology costs, advertising costs and other operational costs incurred.
Layaway and deferred revenue - Interim payments from customers on layaway sales are credited to deferred revenue and subsequently recorded as retail merchandise sales revenue when the final payment is received or when the previous payments are forfeited to the Company. Layaway payments from customers are included in customer deposits in the accompanying consolidated balance sheets.
Inventories - Inventories represent merchandise acquired from forfeited pawns and merchandise purchased directly from the general public. The Company also retails limited quantities of new or refurbished merchandise obtained directly from wholesalers and manufacturers. Inventories from forfeited pawns are recorded at the amount of the pawn principal on the unredeemed goods, exclusive of accrued interest. Inventories purchased directly from customers, wholesalers and manufacturers are recorded at cost. The cost of inventories is determined on the specific identification method. Inventories are stated at the lower of cost or net realizable value and, accordingly, inventory valuation allowances are established when inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. Management has evaluated inventories and determined that a valuation allowance is not necessary.
Property and equipment - Property and equipment are recorded at cost. Depreciation is recorded on the straight-line method generally based on estimated useful lives of 30 to 40 years for buildings and three to five years for furniture, fixtures and equipment. The costs of improvements on leased pawn stores are capitalized as leasehold improvements and are depreciated using the straight-line method over the applicable lease period, or useful life, if shorter. Maintenance and repairs are charged to expense as incurred;incurred and renewals and betterments are charged to the appropriate property and equipment accounts. Upon sale or retirement of depreciable assets, the cost and related accumulated depreciation is removed from the accounts, and the resulting gain or loss is included in the results of operations in the period the assets are sold or retired.
Business combinations - Business combination accounting requires the Company to determine the fair value of all assets acquired, including identifiable intangible assets, liabilities assumed and contingent consideration issued in a business combination. The total consideration of the acquisition is allocated to the assets and liabilities in amounts equal to the estimated fair value of each asset and liability as of the acquisition date, and any remaining acquisition consideration is classified as goodwill. This allocation process requires extensive use of estimates and assumptions. When appropriate, the Company utilizes independent valuation experts to advise and assist in determining the fair value of the assets acquired and liabilities assumed in connection with a business acquisition, in determining appropriate amortization methods and periods for identified intangible assets and in determining the fair value of contingent consideration, which is reviewed at each subsequent reporting period with changes in the fair value of the contingent consideration recognized in the consolidated statements of income. See Note 3.
Goodwill and other indefinite-lived intangible assets - Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination. The Company performs its goodwill impairment assessment annually as of December 31, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s reporting units, which are tested for impairment, are U.S. operations andpawn, Latin America operations.pawn and retail POS payment solutions. The Company assesses goodwill for impairment at a reporting unit level by first assessing a range of qualitative factors, including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company’s products and services, regulatory and political developments, entity specific factors, such as strategy and changes in key personnel, and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company proceeds to the two-step impairment testing methodology. See Note 13.14.
The Company’s other material indefinite-lived intangible assets consist of certain trade names and pawn licenses and franchise agreements related to a check-cashing operation.licenses. The Company performs its indefinite-lived intangible asset impairment assessment annually as of December 31, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unitan indefinite-lived intangible asset below its carrying amount. See Note 13.14.
Merger and acquisition expenses - The Company incurs incremental costs directly associated with merger and acquisition activity, including, but not limited to, professional fees, legal expenses, severance, retention and other employee-related costs, contract breakage costs and costs related to consolidation of technology systems and corporate facilities. The Company presents merger and acquisition expenses separately in the consolidated statements of income to identify these incremental activities apart from the expenses incurred to operate the business.
Long-lived assets - Property and equipment, intangible assets subject to amortization and non-current assets are reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset is less than the net book value of the asset. Generally, the amount of the impairment loss is measured as the difference between the net book value of the asset and the estimated fair value of the related asset.
During 2020, the Company recorded a $1.9 million impairment of other assets and a $1.5 million impairment of property and equipment. The Company hasdid not recordedrecord any material impairment loss for the fiscal yearsyear ended December 31, 2017, 2016 and 2015.2021.
Fair value of financial instruments - The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. All fair value measurements related to acquisitions are level 3, non-recurring measurements, based on non-observableunobservable inputs. Unless otherwise disclosed, the fair values of financial instruments approximate their recorded values, due primarily to their short-term nature. See Note 6.
Income taxes - The Company uses the asset and liability method of computing deferred income taxes on all material temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. The Tax Cuts and Jobs Act (“Tax Act”), which was enacted in December 2017, had a substantial impact on the Company’s income taxes for the year ended December 31, 2017. See Note 11.12.
Advertising - The Company expenses the costs of advertising the first time the advertising takes place.when incurred. Advertising expense for the fiscal years ended December 31, 2017, 20162021, 2020 and 2015,2019, was $1.8$1.0 million, $1.9$1.1 million, and $0.7$1.2 million, respectively.
Share-based compensation - All share-based payments to employees and directors are recognized in the financial statements based on the grant date or if applicable, the subsequent modification date fair value. The Company recognizes compensation cost net of estimated forfeitures and recognizes the compensation cost for only those awards expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term. The Company records share-based compensation cost as an administrative expense. See Note 14.15.
Forward sales commitments - The Company periodically uses forward sale agreements with a major gold bullion bank to sell a portion of the expected amount of scrap gold, which is typically jewelry that is broken or of low retail value, produced in the normal course of business from its liquidation of such merchandise. These commitments qualify for an exemption from derivative accounting as normal sales, based on historical terms, conditions and quantities, and are therefore not recorded on the Company's balance sheet.
Earnings per share - Basic incomeearnings per share is computed by dividing net income by the weighted-average number of shares outstanding during the year. Diluted incomeearnings per share is calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the year.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2021 | | 2020 | | 2019 | | Numerator: | | | | | | | Net income | $ | 124,909 | | | $ | 106,579 | | | $ | 164,618 | | | | | | | | | Denominator: | | | | | | | Weighted-average common shares for calculating basic earnings per share | 40,975 | | | 41,502 | | | 43,020 | | | Effect of dilutive securities: | | | | | | | Stock options and restricted stock unit awards | 49 | | | 98 | | | 188 | | | Weighted-average common shares for calculating diluted earnings per share | 41,024 | | | 41,600 | | | 43,208 | | | | | | | | | Earnings per share: | | | | | | | Basic | $ | 3.05 | | | $ | 2.57 | | | $ | 3.83 | | | Diluted | 3.04 | | | 2.56 | | | 3.81 | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | Numerator: | | | | | | | Net income | $ | 143,892 |
| | $ | 60,127 |
| | $ | 60,710 |
| | | | | | | | | Denominator: | | | | | | | Weighted-average common shares for calculating basic earnings per share | 47,854 |
| | 34,997 |
| | 28,138 |
| | Effect of dilutive securities: | | | | | | | Stock options and nonvested stock awards | 34 |
| | 7 |
| | 188 |
| | Weighted-average common shares for calculating diluted earnings per share | 47,888 |
| | 35,004 |
| | 28,326 |
| | | | | | | | | Net income per share: | | | | | | | Basic | $ | 3.01 |
| | $ | 1.72 |
| | $ | 2.16 |
| | Diluted | $ | 3.00 |
| | $ | 1.72 |
| | $ | 2.14 |
|
PervasivenessUse of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Significant estimates include the accrual for earned but uncollected pawn fees, allowances for doubtful accounts receivablelease and loan losses and related creditlease and loan loss provisions, impairmentvaluation of acquired assets, assumed liabilities and contingent consideration of the AFF Acquisition, evaluation of goodwill and other intangible assets for impairment and current and deferred tax assets and liabilities.
Reclassification - Certain amounts in the consolidated statements of income and consolidated statements of cash flows for the years ended December 31, 2020 and 2019 have been reclassified in order to conform to the 2021 presentation.
Recent accounting pronouncements - In May 2014,December 2019, the Financial Accounting Standards Board issued ASU No. 2014-09, “Revenue from Contracts with CustomersNo 2019-12, “Income Taxes (Topic 606)”740): Simplifying the Accounting for Income Taxes” (“ASU 2014-09”2019-12”). ASU 2014-09 is a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the Financial Accounting Standards Board issued ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606),” which delayed the effective date of ASU 2014-09 by one year. In addition, between March 2016 and December 2016, the Financial Accounting Standards Board issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting revenue gross versus net)” (“ASU 2016-08”), ASU No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients” (“ASU 2016-12”), and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”). ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 clarify2019-12 removes certain aspects of ASU 2014-09 and provide additional implementation guidance. ASU 2014-09, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 (collectively, “ASC 606”) become effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. Early adoption is permitted but not before annual reporting periods beginning after December 15, 2016. Entities are permitted to adopt ASC 606 using one of two methods: (a) full retrospective adoption, meaning the standard is applied to all periods presented, or (b) modified retrospective adoption, meaning the cumulative effect of applying the new standard is recognized as an adjustmentexceptions to the opening retained earnings balance.
The Company will adopt ASC 606 on January 1, 2018 using the modified retrospective method. The Company evaluated the impact of ASC 606 and has concluded ASC 606 will not impact the Company’s revenue recognition for pawn loan fees or consumer loan fees, as it believes neither is within the scope of ASC 606. Further, the Company has not identified any impacts to its consolidated financial statements that it believes will be material as a result of the adoption of ASC 606 for other revenue streams (retail merchandise sales, credit services fees and wholesale scrap jewelry sales).
In July 2015, the Financialgeneral principles in Topic 740 in Generally Accepted Accounting Standards Board issuedPrinciples. ASU No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 requires inventory be measured at the lower of cost or net realizable value. ASU 2015-11 defines net realizable value as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Inventory measured using last-in, first-out (“LIFO”) or the retail inventory method are excluded from the scope of this update. ASU 2015-11 requires prospective application and is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, with early adoption permitted. The Company adopted ASU 2015-11 as of January 1, 2017, and the guidance was applied prospectively. There were no changes to the Company’s financial position, results of operations, financial statement disclosures or valuation of inventory.
In February 2016, the Financial Accounting Standards Board issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires a lessee to recognize, in the statement of financial position, a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. Lessor accounting remains largely unchanged. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently assessing the potential impact of ASU 2016-02 on its consolidated financial statements.
In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. ASU 2016-132019-12 is effective for public entities for fiscal years beginning after December 15, 2019,2020, with early adoption permitted. The Company is currently assessing the potential impactadoption of ASU 2016-132019-12 did not have a material effect on its consolidatedthe Company’s current financial statements.position, results of operations or financial statement disclosures.
In August 2016,March 2020, the Financial Accounting Standards Board issued ASU No. 2016-15, “StatementNo 2020-04, “Reference Rate Reform (Topic 848): Facilitation of Cash Flows (Topic 230): Classificationthe Effects of Certain Cash Receipts and Cash Payments”Reference Rate Reform on Financial Reporting” (“ASU 2016-15”2020-04”). ASU 2016-15 clarifies how companies present2020-04 provides temporary optional expedients and classify certain cash receiptsexceptions to the GAAP guidance on contract modifications and cash payments inhedge accounting to ease the statement of cash flows.financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing existing diversity in practice. ASU 2016-152020-04 is effective for public entities for fiscal years beginning afteron March 12, 2020, and the Company may elect to apply the amendments prospectively through December 15, 2017, with early adoption permitted.31, 2022. The Company does not expect ASU 2016-15 to have a material effect on its consolidated financial statements or current financial statement disclosures.
In January 2017, the Financial Accounting Standards Board issued ASU No. 2017-01, “Business Combinations (Topic 805) - Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 provides amendments to clarify the definition of a business and affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. Early adoption is permitted under certain circumstances. The Company does not expect ASU 2017-012020-04 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.
In January 2017,August 2021, the Financial Accounting Standards Board issued ASU No 2021-06, “Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 2017-04, “Intangibles - Goodwill33-10786, Amendments to Financial Disclosures About Acquired and Other (Topic 350) - Simplifying the TestDisposed Businesses, and No.33-10835, Update of Statistical Disclosures for Goodwill Impairment”Bank and Savings and Loan Registrants” (“ASU 2017-04”2021-06”). These amendments eliminate step 2 fromASU 2021-06 amends certain SEC disclosure guidance that is included in the goodwill impairment test. The amendments also eliminateaccounting standards codification to reflect the requirements for any reporting unit with a zero or negative carrying amountSEC’s recent issuance of rules intended to perform a qualitative assessmentmodernize and if it fails that qualitative test, to perform step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017 and should be adopted on a prospective basis.streamline disclosure requirements. The Company doesadopted ASU 2021-06 upon issuance, which did not expect ASU 2017-04 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.
NOTE 3 - MERGER AND OTHER ACQUISITIONS
2017 AcquisitionsAmerican First Finance Acquisition
During fiscal 2017,On December 17, 2021, the Company completed the acquisitions of five stores in Mexico and one store in the U.S., which were not material to the Company’s consolidated financial statements.
2016 Cash America Merger
On September 1, 2016, the Company completed its Merger of equals business combination with Cash America as contemplated by the Agreement and Plan of Merger, dated as of April 28, 2016 (the “Merger Agreement”), by and among the Company, Cash America and Frontier Merger Sub LLC, a wholly owned subsidiary of the Company (“Merger Sub”). Pursuant to the Merger Agreement, Cash America merged with and into Merger Sub, with Merger Sub continuing as the surviving entity in the Merger and a wholly owned subsidiary of the Company.
AFF Acquisition. Under the terms and conditions set forth in the business combination agreement dated October 27, 2021, as amended, the Company acquired all of the Merger Agreement, each former shareequity interests of Cash America common stock issued and outstanding immediately prior to September 1, 2016 was converted to 0.84AFF in exchange for 8,046,252 shares of the Company’s common stock with fractional shares paid in cash. As a result,and cash consideration. Immediately following the AFF Acquisition, the Company’s shareholders owned approximately 83% of the common stock of the Company issuedand the seller parties owned approximately 20,181,000 shares17%.
In addition to the closing purchase price, the seller parties have the right to receive up to an additional $375.0 million of itscontingent consideration (the “Contingent Consideration”). In particular, the seller parties have the right to receive up to $250.0 million of additional consideration if AFF achieves certain adjusted EBITDA targets for the period consisting of the fourth quarter of 2021 through the end of 2022 and up to $50.0 million if AFF achieves certain adjusted EBITDA targets for the first half of 2023. In addition, the seller parties have the right to receive up to an additional $75.0 million of consideration in the event that the highest average stock price of the Company for any 10-day period from December 6, 2021 through February 28, 2023 is less than $86.25. The Contingent Consideration is payable in cash or Company common stock, to former holders of Cash America common stock. Additionally, Cash America employee and director based restricted stock awards outstanding immediately prior toat the Merger were fully-vested and paid out in cash in conjunction with the closing of the Merger. The Company was determined to be the accounting acquirer in the Merger.Company’s discretion.
The following table summarizes the consideration transferred in connection with the MergerAFF Acquisition, net of cash acquired (in thousands except ratioshare and per share amount)amounts): | | | | | | | Cash America Merger | | Cash America shares outstanding at September 1, 2016 | 24,025 |
| | Exchange ratio | 0.84 |
| | Shares of First Cash common stock issued | 20,181 |
| | Company common stock per share price at September 1, 2016 | $ | 50.32 |
| | Fair value of Company common stock issued to Cash America shareholders | $ | 1,015,507 |
| | Cash in lieu of fractional shares paid by the Company | 10 |
| | Cash America outstanding stock awards settled in cash | 50,760 |
| | Aggregate Merger consideration | $ | 1,066,277 |
|
| | | | | | | AFF Acquisition | Shares of ContentsFirstCash Holdings, Inc. common stock issued | 8,046,252 | | | Closing common stock price per share at December 16, 2021 | $ | 62.83 | | | Stock consideration | $ | 505,546 | | | Cash consideration paid to AFF shareholders at closing | 253,087 | | | Cash consideration paid to extinguish AFF pre-existing debt | 257,278 | | | Present value of deferred consideration payable to AFF shareholders on December 31, 2022 | 23,873 | | | Estimated fair value of Contingent Consideration (see Note 6) | 127,420 | | | Less cash acquired | (48,263) | | | Aggregate purchase consideration | $ | 1,118,941 | |
The following amounts represent the final determination (as of the Merger date) of the fair valueCompany has performed a valuation analysis of identifiable assets acquired and liabilities assumed and allocated the aggregate purchase consideration based on the fair values of those identifiable assets and liabilities. The estimate of the fair values of identifiable assets acquired and liabilities assumed are determined by applying various valuation techniques, including discounted cash flow analyses, Monte Carlo simulations and the replacement cost method, which include various inputs and assumptions such as discount rates, projected cash flows and profit margins, attrition rates, economic obsolescence, expected charge-off rates and depreciation, some of which may not be observable in the Merger, including adjustments made duringmarket. The purchase price allocation is subject to change as the twelve monthCompany finalizes the analysis of the fair value at the date of the AFF Acquisition. The final determination of the fair value of assets acquired and liabilities assumed will be completed within the twelve-month measurement period from the date of the Merger (in thousands):AFF Acquisition, as required by applicable accounting guidance. Due to the significance of the AFF Acquisition, the Company may use all of this measurement period to adequately analyze and assess the fair values of assets acquired and liabilities assumed.
| | | | | | | Cash America Merger | | Cash and cash equivalents | $ | 42,520 |
| | Pawn loans | 234,761 |
| | Fees and service charges receivable | 26,893 |
| | Consumer loans | 27,549 |
| | Inventories | 224,548 |
| | Income taxes receivable | 25,276 |
| | Other current assets | 28,547 |
| Investment in common stock of Enova (1) | 60,785 |
| | Property and equipment | 118,199 |
| Goodwill (2) | 519,418 |
| Intangible assets (3) | 103,250 |
| | Other assets | 62,994 |
| | Current liabilities | (95,630 | ) | | Customer deposits | (21,536 | ) | Revolving unsecured credit facility (4) | (232,000 | ) | | Deferred tax liabilities | (27,120 | ) | | Other liabilities | (32,177 | ) | | Aggregate Merger consideration | $ | 1,066,277 |
|
| | | | | | | | | | Represents Cash America’s investment in the common stock | |
The allocation of the aggregate purchase consideration, net of cash acquired and subject to future measurement period adjustments, is as follows (in thousands):
| | | | | | | AFF Acquisition | | Accounts receivable | $ | 11,660 | | Finance receivables (1) | 225,261 | | | Leased merchandise | 139,649 | | | Prepaid expenses and other current assets | 4,474 | | | Property and equipment | 11,670 | | Operating lease right of Enova International, Inc. (“Enova”), a publicly traded company focused on providing online consumer lending products. Prior to December 31, 2016, alluse asset | 491 | | Goodwill (2) | 503,106 | | Intangible assets (3) | 305,100 | | | Accounts payable and accrued liabilities | (28,357) | | | Customer deposits and prepayments | (11,014) | | | Lease liability, current | (10) | | | Deferred tax liabilities | (42,608) | | | Lease liability, non-current | (481) | | | Purchase price | $ | 1,118,941 | |
(1)Finance receivables acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”). The Company evaluated the acquired finance receivables for deterioration in credit quality primarily based on delinquency status. At the acquisition date, an estimate of expected lifetime credit losses for PCD finance receivables is added to the acquisition date fair value to establish the initial amortized cost basis of the PCD finance receivables. As the initial allowance for credit losses is added to the fair value, there is no provision for loan losses recognized upon acquisition of a PCD loan. See Note 7.
A reconciliation of the difference between the fair value of the PCD finance receivables and the unpaid principal balance as of the date of the acquisition is as follows (in thousands):
| | | | | | | PCD Finance Receivables | Unpaid principal balance of the Enova shares acquired were sold in open market transactions at an average pricePCD finance receivables | $ | 41,900 | | | Non-credit discount | (4,120) | | Amortized cost of $10.40 per share, which resulted in a net gain on salePCD finance receivables | 37,780 | | | Less allowance for loan losses recognized for PCD finance receivables | 32,036 | | Fair value of $1.3 million and generated net proceedsPCD finance receivables | $ | 5,744 | |
For acquired finance receivables not deemed PCD at acquisition (“non-PCD”), the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected lifetime credit losses is estimated and recorded as provision for loan losses. See Note 7.
A reconciliation of the difference between the fair value of the non-PCD finance receivables and the unpaid principal balance as of the date of the acquisition is as follows (in thousands):
| | | | | | | Non-PCD Finance Receivables | Unpaid principal balance of $62.1 million.non-PCD finance receivables | $ | 177,456 | | | Fair value premium | 42,061 | | | Fair value of non-PCD finance receivables | 219,517 | | | Less allowance for loan losses recognized for non-PCD finance receivables | 44,250 | | | Carrying value of non-PCD finance receivables | $ | 175,267 | |
| | | | | | | | | | The goodwill is attributable to the excess of the aggregate Merger consideration over the fair value of the net tangible and intangible assets acquired and liabilities assumed and is considered to represent the synergies and economies of scale expected from combining the operations of the Company and Cash America. This goodwill has been assigned to the U.S. operations reporting unit. Approximately $223.0 million of the goodwill arising from the Merger is expected to be deductible for U.S. income tax purposes. |
| | (3)
| Intangible assets acquired and the respective useful lives assigned consist of the following (dollars in thousands): |
| | | | | | | | | | | Amount | | Useful life (in years) | | Trade names | | $ | 46,300 |
| | Indefinite | | Pawn licenses | | 32,300 |
| | Indefinite | | Customer relationships | | 14,700 |
| | Five | | Executive non-compete agreements | | 8,700 |
| | Two | | Franchise agreements related to check cashing operation | | 1,250 |
| | Indefinite | | | | $ | 103,250 |
| | |
(3)Intangible assets acquired and the respective useful lives assigned consist of the following (in thousands, except useful life):
| | | | | | | | | | | | | | | Useful Life | | AFF Acquisition | | (In Years) | | Merchant relationships | $ | 194,000 | | | 7 | | Developed technology | 99,400 | | | 5 | | Trade name | 10,200 | | | 2 | | Relationships with existing lessees | 1,500 | | | 1 | | | | | | Total intangible assets | $ | 305,100 | | | |
The customermerchant relationships are being amortized using an accelerated amortization method that reflects the future cash flows expected from the returning pawn customers of Cash America. The non-compete agreements are being amortized over a straight-line basis over the lifeexisting merchant relationships. Annual estimated amortization expense of the non-compete agreements. Asmerchant relationships over each of the trade names, pawn licensesnext five years is approximately $30.6 million, $31.5 million, $29.8 million, $28.2 million and franchise agreements have indefinite lives, they are not amortized.$26.2 million.
| | (4)
| Represents outstanding borrowings under Cash America’s revolving unsecured credit facility that became due upon completion of the Merger. The Cash America revolving unsecured credit facility was repaid by the Company using proceeds from the 2016 Credit Facility (as described in Note 10) and was terminated upon completion of the Merger. |
In accordance with applicable accounting guidance, measurement period adjustments pertaining to the Merger were recorded during fiscal 2017 and were not retroactively reclassified to prior periods. Such measurement period adjustments were not material.
Transaction costs associated with the Merger were expensed as incurred and are included in Merger and other acquisition expenses in the consolidated statements of income. These expenses included investment banking, legal, accounting, and other related third party costs associated with the Merger, including preparation for regulatory filings and shareholder approvals. See Note 4 for further information about Merger and other acquisition expenses.
2016 Other2021 Pawn Acquisitions
TheDuring 2021, the Company completed other acquisitions during fiscal 2016, as described below, consistent with its strategy to continue its expansion ofacquired 46 pawn stores in selected markets. the U.S. in 3 separate transactions and acquired a pawn license that will be used to open a new pawn store in the state of Nevada. The aggregate purchase price for these acquisitions totaled $79.5 million, net of cash acquired and subject to future post-closing adjustments. The aggregate purchase price was composed of $76.0 million in cash paid at closing and remaining short-term amounts payable to the sellers of approximately $3.5 million. During 2021, the Company also paid $5.8 million of purchase price amounts payable related to prior-year acquisitions.
The purchase price of each acquisitionof the 2021 pawn acquisitions was allocated to assets acquired and liabilities assumed based upon theirthe estimated fair market values at the date of acquisition. The excess purchase price over the estimated fair market value of the net assets acquired has been recorded as goodwill. The goodwill arising from these pawn store acquisitions consists largely of the synergies and economies of scale expected from combining the operations of the Company and the pawn stores acquired. These pawn 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 acquiredis gathering information to finalize the stockvaluation of Maxi Prenda, S.A. de C.V., the operating entity owning the pawn loans, inventories, layaways and other operatingthese assets and liabilitiesliabilities. The preliminary allocation of 166 pawn stores located in Mexico on January 6, 2016 and the assets of 13 pawn stores located in El Salvador on February 2, 2016 in related transactions (collectively the “Latin America Acquisition”). The combinedaggregate purchase price for these individually immaterial pawn store acquisitions during 2021 (the “2021 Pawn Acquisitions”) is as follows (in thousands):
| | | | | | | 2021 Pawn Acquisitions | | Pawn loans | $ | 7,920 | | | Accounts receivable, net | 470 | | | | | Inventories | 8,822 | | | Other current assets | 294 | | | Property and equipment | 1,174 | | Goodwill (1) | 59,645 | | | Intangible assets | 2,835 | | | Other non-current assets | 36 | | | Current liabilities | (1,659) | | | | | | | Aggregate purchase price | $ | 79,537 | |
(1)Substantially all of the all-cash transaction was $30.1 million, net of cash acquired before certain post-closing adjustments. Subsequentgoodwill is expected to the acquisition, $0.2 million of post closing adjustments were identified, resulting in a combined purchase price of $29.9 million, net of cash acquired and is subject to further post-closing adjustments. be deductible for U.S. income tax purposes.
Unaudited Pro Forma Financial Information
The purchase was composed of $27.4 million in cash paid during fiscal 2016 and remaining payables to the sellers of approximately $2.5 million. In addition, the Company assumed approximately $6.6 million in peso-denominated debt from these acquisitions which was repaid in full by the Company in January 2016. The assets, liabilities and results of operations for the AFF Acquisition and the 2021 Pawn Acquisitions have been consolidated since the respective acquisition dates. During 2021, revenue from AFF and the 2021 Pawn Acquisitions was $56.0 million and the net loss from AFF and the 2021 Pawn Acquisitions since the acquisition dates (including $11.9 million of transaction costs, net of tax) was approximately $41.0 million. Transaction costs associated with the locationsAFF Acquisition and the 2021 Pawn Acquisitions were expensed as incurred and are includedpresented in the Company’s consolidated resultsstatements of income as of themerger and acquisition dates. The goodwill resulting from the Latin America Acquisition has been assigned to the Latin America operations reporting unit.expenses. These expenses include investment banking, legal, accounting and other related third-party costs, including preparation for regulatory filings.
During fiscal 2016, three pawn stores located in the U.S. were acquired by the Company (“U.S. Acquisitions”) for an all-cash aggregate purchase price of $2.0 million, net of cash acquired. During fiscal 2016, the Company also paid $0.6 million of deferred purchase price amounts payable related to prior-year acquisitions. The goodwill resulting from the U.S. Acquisitions has been assigned to the U.S. operations reporting unit.
Supplemental Pro Forma Information
The following unaudited supplemental pro forma financial information for the years ended December 31, 2016 and 2015 reflects the consolidated results of operations of the Company as if the Merger, the Latin AmericaAFF Acquisition and the U.S.2021 Pawn Acquisitions had occurred on January 1, 20152020, after giving effect to certain adjustments (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | Year Ended | | Year Ended | | December 31, 2021 | | December 31, 2020 | | As Reported | | Pro Forma | | As Reported | | Pro Forma | | Total revenue | $ | 1,698,965 | | | $ | 2,305,860 | | | $ | 1,631,284 | | | $ | 2,024,055 | | | Net income | 124,909 | | | 156,257 | | | 106,579 | | | 60,059 | | | | | | | | | | | Net income per share: | | | | | | | | | Basic | $ | 3.05 | | | $ | 3.21 | | | $ | 2.57 | | | $ | 1.21 | | | Diluted | 3.04 | | | 3.20 | | | 2.56 | | | 1.21 | |
| | | | | | | | | | | | | | | | | | | Year Ended | | Year Ended | | | December 31, 2016 | | December 31, 2015 | | | As Reported | | Pro Forma | | As Reported | | Pro Forma | | Total revenue | $ | 1,088,377 |
| | $ | 1,771,835 |
| | $ | 704,602 |
| | $ | 1,792,523 |
| | Net income | 60,127 |
| | 118,333 |
| | 60,710 |
| | 61,479 |
| | | | | | | | | | | Net income per share: | | | | | | | | | Basic | $ | 1.72 |
| | $ | 2.44 |
| | $ | 2.16 |
| | $ | 1.27 |
| | Diluted | 1.72 |
| | 2.44 |
| | 2.14 |
| | 1.27 |
|
Pro forma adjustments are included only to the extent they are directly attributable to the Merger and 2016 acquisitions. The unaudited pro forma results have been adjusted with respect to certain aspects of the MergerAFF Acquisition and 2016 acquisitions2021 Pawn Acquisitions primarily to reflect:
•depreciation and amortization expense that would have been recognized assuming fair value adjustments to the existing tangible and intangible assets acquired and liabilities assumed;
interest expense based on a lower combined weighted-average interest rate on borrowings (see Note 10) partially offset by •an increase in total indebtedness primarily incurred to finance certain cash payments and transaction costs related to the Merger;
AFF Acquisition and 2021 Pawn Acquisitions, partially offset by the elimination of losses on extinguishment ofAFF’s pre-existing debt recognized in Cash America’s historical financial statements, as the related debtthat was terminated upon completion of the Merger; andrepaid at closing; •the inclusion in the pro forma fiscal 2015 amountyear ended December 31, 2020 of $68.8$15.4 million in Merger and other acquisition expenses incurred by both the acquirees and acquirerCompany (excluded from the pro forma fiscal 2016 amounts).year ended December 31, 2021); and
•the exclusion of $44.3 million of loan loss provision expense in the year ended December 31, 2021 resulting from the establishment of the initial allowance for expected lifetime credit losses for non-PCD finance receivables acquired in the AFF Acquisition (see Note 7).
The pro forma financial information has been prepared for informational purposes only and does not include any anticipated synergies or other potential benefits of the Merger or 2016 acquisitions.AFF Acquisition and 2021 Pawn Acquisitions. It also does not give effect to certain future charges that the Company expects to incur in connection with the MergerAFF Acquisition and 2016 acquisitions,2021 Pawn Acquisitions, including, but not limited to, additional professional fees, legal expenses, severance, retention and other employee-related costs, contract breakage costs and costs related to consolidation of technology systemssystems. The pro forma information is based on the Company’s preliminary valuation analysis of identifiable assets acquired and corporate facilities.liabilities assumed and therefore subject to change. Pro forma results do not purport to be indicative of what would have resulted had the acquisitions occurred on the date indicated or what may result in the future.
During 2020, the Company acquired 40 pawn stores in Mexico in 2 separate transactions and 22 pawn stores in the U.S. in 2 separate transactions. The aggregate purchase price for these acquisitions totaled $43.6 million, net of cash acquired. The aggregate purchase price was composed of $41.4 million in cash paid during 2020 and remaining short-term amounts payable to the sellers of approximately $2.2 million.
NOTE 4 - MERGER AND OTHER ACQUISITION EXPENSESOPERATING LEASES
Lessor
Refer to Note 2 to the consolidated financial statements for further information about the Company’s revenue generating activities as a lessor. All of the Company’s lease agreements are considered operating leases.
Lessee
The Company incurred significant expensesleases 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, which the Company accounts for separately. Lease components include rent, taxes and insurance costs while non-lease components include common area or other maintenance costs. Operating leases are included in 2017operating lease right of use assets, lease liability, current and 2016lease liability, non-current in connectionthe consolidated balance sheets. The Company does not have any finance leases.
Leased facilities are generally leased for a term of three to five years with one or more options to renew for an additional three to five years, typically at the Merger and integration with Cash America. The Merger related expenses are predominantly incremental costs directly associated with the Merger and integration of Cash America, including professional fees, legal expenses, severance, retention and other employee-related costs, accelerated vesting of certain equity compensation awards, contract breakage costs and costs related to consolidation of technology systems and corporate facilities.Company’s sole discretion. In addition, the Company incurred transaction and integration costsmajority of these leases can be terminated early upon an adverse change in connection withlaw which negatively affects the Company’s other acquisitions in 2016 and 2015.store’s profitability. The Company presents Mergerregularly evaluates renewal and other acquisitiontermination options to determine if the Company is reasonably certain to exercise the option, and excludes these options from the lease term included in the recognition of the operating lease right of use asset and lease liability until such certainty exists. The weighted-average remaining lease term for operating leases as of December 31, 2021, 2020 and 2019 was 4.1 years, 4.0 years and 3.9 years, respectively.
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 December 31, 2021, 2020 and 2019 was 6.2%, 7.0% and 7.8%, 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 $0.6 million, loss of $1.2 million and gain of $0.9 million during the year ended December 31, 2021, 2020 and 2019, respectively, related to the remeasurement of these U.S. dollar denominated operating leases, which is included in loss (gain) on foreign exchange in the accompanying consolidated statements of income.
Lease expense is recognized on a straight-line basis over the lease term, with variable lease expense recognized in the period such payments are incurred. The following table details the components of lease expense included in operating expenses separately in the consolidated statements of income to identify these activities apart fromduring the expenses incurred to operate the business. The table below summarizes the major components of Mergeryear ended December 31, 2021, 2020 and other acquisition expenses2019 (in thousands):
| | | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2021 | | 2020 | | 2019 | | Operating lease expense | $ | 125,439 | | | $ | 121,649 | | | $ | 124,082 | | Variable lease expense (1) | 16,021 | | | 14,444 | | | 7,775 | | | Total operating lease expense | $ | 141,460 | | | $ | 136,093 | | | $ | 131,857 | |
(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.
| | | | | | | | | | | | | | | | | Year Ended December 31, | | | | 2017 | | 2016 | | 2015 | | Merger related expenses: | | | | | | | Transaction (1) | | $ | — |
| | $ | 18,252 |
| | $ | — |
| Severance and retention (2) | | 3,897 |
| | 15,229 |
| | — |
| Other (3) | | 5,165 |
| | 2,739 |
| | — |
| | Total Merger related expenses | | 9,062 |
| | 36,220 |
| | — |
| | | | | | | | | | Other acquisition expenses: | | | | | | | | Transaction and integration | | — |
| | 450 |
| | 2,875 |
| | Total other acquisition expenses | | — |
| | 450 |
| | 2,875 |
| | Total Merger and other acquisition expenses | | $ | 9,062 |
| | $ | 36,670 |
| | $ | 2,875 |
|
| | (1)
| For the year ended December 31, 2016, the Company recognized an income tax benefit of $3.9 million, respectively, related to the Merger transaction expenses; a significant portion of these expenses were not deductible for income tax purposes. |
| | (2)
| For the year ended December 31, 2017 and 2016, the Company made severance and retention payments of $7.4 million and $10.4 million, respectively, and as of December 31, 2017 and 2016, had $1.3 million and $4.8 million, respectively, accrued for future payments. Accrued severance and retention is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. |
| | (3)
| Represents accelerated share-based compensation expense related to restricted stock awards for certain First Cash employees which vested as a result of the Merger and other integration expenses. |
The following table details the maturity of lease liabilities for all operating leases as of December 31, 2021 (in thousands):
| | | | | | | 2022 | $ | 106,197 | | | 2023 | 85,967 | | | 2024 | 62,418 | | | 2025 | 36,743 | | | 2026 | 18,060 | | | Thereafter | 23,514 | | | Total | $ | 332,899 | | | Less amount of lease payments representing interest | (39,163) | | | Total present value of lease payments | $ | 293,736 | |
The following table details supplemental cash flow information related to operating leases for the year ended December 31, 2021, 2020 and 2019 (in thousands):
| | | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2021 | | 2020 | | 2019 | | Cash paid for amounts included in the measurement of operating lease liabilities | $ | 114,463 | | | $ | 110,965 | | | $ | 116,448 | | | Leased assets obtained in exchange for new operating lease liabilities | 110,531 | | | 104,576 | | | 71,117 | |
NOTE 5 - CAPITAL STOCKSTOCKHOLDERS' EQUITY
In January 2015, the Company’s Board of Directors authorizedOn December 16, 2021, FirstCash, Inc. implemented a common stock repurchase program for up to 2,000,000 sharesholding company reorganization, which resulted in FirstCash Holdings, Inc. owning all of the Company’s outstanding common stock. Duringcapital stock of FirstCash, Inc. Following the first quarter of 2017,reorganization, FirstCash Holdings, Inc. became the successor issuer to FirstCash, Inc.
On December 17, 2021, the Company repurchased 228,000issued 8,046,252 shares of its common stock at an aggregate costto former owners of $10.0 million and an average cost per share of $43.94. In May 2017,AFF as consideration for the Company’s Board of Directors authorized a new common stock repurchase programAFF Acquisition. See Note 3 for up to $100.0 million ofadditional information about the Company’s outstanding common stock. The new share repurchase program replaced the Company’s prior share repurchase plan, which was terminated in May 2017. Under the May 2017 stock repurchase program,AFF Acquisition.
During 2021, the Company has repurchased 1,388,000 sharesa total of its common stock at an aggregate cost of $83.0 million and an average cost per share of $59.80 and $17.0 million remained available for repurchases as of December 31, 2017. On January 31, 2018, the Company completed the May 2017 stock repurchase program after repurchasing approximately 239,000688,000 shares of common stock at an aggregate cost of $17.0 million. The Company did not repurchase any$49.6 million and an average cost per share of its$72.10, and during 2020, repurchased 1,427,000 shares in 2016 as it suspended its share repurchase program in 2016 due to the Merger.
In October 2017, the Company’s Board of Directors authorized an additional common stock repurchase program for up to $100.0at an aggregate cost of $107.0 million and an average cost per share of the Company’s outstanding common stock, which became effective on January 31, 2018 upon completion of the May 2017 stock repurchase program.$74.96. The Company intends to continue repurchases under its active share repurchase program in 2018 through open market transactions under trading plans in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act of 1934, as amended, subject to a variety of factors, including, but not limited to, the level of cash balances, credit availability, debt covenant restrictions, general business conditions, regulatory requirements, the market price of the Company’s stock, the dividend policy, and the availability of alternative investment opportunities.opportunities, including acquisitions, and the impact of COVID-19.
The following table provides purchases made by the Company of shares of its common stock under each share repurchase program in effect during 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Plan Authorization Date | | Plan Completion Date | | Dollar Amount Authorized | | Shares Purchased in 2021 | | Dollar Amount Purchased in 2021 | | Remaining Dollar Amount Authorized For Future Purchases | | January 28, 2020 | | May 4, 2021 | | $ | 100,000 | | | 318,000 | | | $ | 21,827 | | | $ | — | | | January 27, 2021 | | Currently active | | 100,000 | | | 370,000 | | | 27,783 | | | 72,217 | | | Total | | | | | | 688,000 | | | $ | 49,610 | | | $ | 72,217 | |
Total cash dividends paid in fiscal 20172021 and 20162020 were $36.8$47.5 million and $19.8$44.8 million, respectively. 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 and debt covenant restrictions.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The three fair value levels are (from highest to lowest):
Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data.
Recurring Fair Value Measurements
AsThe Company’s financial assets and liabilities as of December 31, 2017, the Company did not have any financial assets or liabilities2021 that are measured at fair value on a recurring basis. basis are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Estimated Fair Value | | | December 31, | | Fair Value Measurements Using | | | 2021 | | Level 1 | | Level 2 | | Level 3 | | Financial liabilities: | | | | | | | | | Contingent Consideration (1) | | $ | 109,549 | | | $ | — | | | $ | — | | | $ | 109,549 | |
(1)The Company’scurrent portion of $95.6 million is included in accounts payable and accrued liabilities and the non-current portion of $14.0 million is included in other liabilities in the accompanying consolidated balance sheets.
As further discussed in Note 3, the Company estimated the preliminary fair value of the Contingent Consideration to be $127.4 million, as of the AFF Acquisition date. The Company revalues the Contingent Consideration to fair value at the end of each reporting period. The estimate of the fair value of Contingent Consideration is determined by applying a Monte Carlo simulation, which includes inputs not observable in the market, such as the risk-free rate, risk-adjusted discount rate, the volatility of the underlying financial metrics and projected financial forecast of AFF over the earn-out period, and therefore represents a Level 3 measurement. Significant increases or decreases in these inputs could result in a significantly lower or higher fair value measurement of the Contingent Consideration.
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 year ended December 31, 2021 is as follows (in thousands):
| | | | | | | Contingent Consideration | | Contingent Consideration issued December 17, 2021 (see Note 3) | $ | 127,420 | | Change in fair value (1) | (17,871) | | | Balance at December 31, 2021 | $ | 109,549 | |
(1) The Company recognized a $17.9 million gain during 2021 as a result of the change in fair value of the stock price component of Contingent Consideration (see Note 3), which is included in gain on revaluation of contingent acquisition consideration in the accompanying consolidated statements of income. The change in fair value was a result of the increase in the Company’s stock price from $62.83 on December 16, 2021 to $74.81 on December 31, 2021.
There were no transfers in or out of Level 1, 2 or 3 during the year ended December 31, 2021 and 2020, and the Company did not have any financial assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2016 were as follows (in thousands):2020. | | | | | | | | | | | | | | | | | | | | | December 31, | | Fair Value Measurements Using | | | | 2016 | | Level 1 | | Level 2 | | Level 3 | | Financial assets: | | | | | | | | | | Cash America nonqualified savings plan (see Note 15) | | $ | 12,663 |
| | $ | 12,663 |
| | $ | — |
| | $ | — |
| | | | $ | 12,663 |
| | $ | 12,663 |
| | $ | — |
| | $ | — |
|
Prior to the Merger, Cash America had a nonqualified savings plan that was available to certain members of management. Upon completion of the Merger, the nonqualified savings plan was terminated and during the three months ended March 31, 2017, the Company dissolved the plan and distributed the remaining assets to the participants. As of December 31, 2016, the assets of the nonqualified savings plan included marketable equity securities, which were classified as Level 1 and the fair values are based on quoted market prices. The nonqualified savings plan assets were included in prepaid expenses and other current assets in the accompanying consolidated balance sheet with an offsetting liability of equal amount, which was included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.
Fair Value Measurements on a NonrecurringNon-Recurring Basis
The Company measures non-financial assets and liabilities, such as property and equipment and intangible assets, at fair value on a nonrecurringnon-recurring basis, or when events or circumstances indicate that the carrying amount of the assets may be impaired. During 2020, the Company recorded a $1.9 million impairment of other assets and a $1.5 million impairment of property and equipment.
Financial Assets and Liabilities Not Measured at Fair Value, But for Which Fair Value is Disclosed
The Company’s financial assets and liabilities as of December 31, 20172021 and 20162020 that are not measured at fair value in the consolidated balance sheets are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Carrying Value | | Estimated Fair Value | | | December 31, | | December 31, | | Fair Value Measurements Using | | | 2021 | | 2021 | | Level 1 | | Level 2 | | Level 3 | | Financial assets: | | | | | | | | | | | | Cash and cash equivalents | | $ | 120,046 | | | $ | 120,046 | | | $ | 120,046 | | | $ | — | | | $ | — | | | Accounts receivable, net | | 55,356 | | | 55,356 | | | — | | | — | | | 55,356 | | | Pawn loans | | 347,973 | | | 347,973 | | | — | | | — | | | 347,973 | | | Finance receivables, net | | 181,021 | | | 233,000 | | | — | | | — | | | 233,000 | | | | | | | | | | | | | | | $ | 704,396 | | | $ | 756,375 | | | $ | 120,046 | | | $ | — | | | $ | 636,329 | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | Revolving unsecured credit facilities | | $ | 259,000 | | | $ | 259,000 | | | $ | — | | | $ | 259,000 | | | $ | — | | | Senior unsecured notes (outstanding principal) | | 1,050,000 | | | 1,058,000 | | | — | | | 1,058,000 | | | — | | | | $ | 1,309,000 | | | $ | 1,317,000 | | | $ | — | | | $ | 1,317,000 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | Carrying Value | | Estimated Fair Value | | | | December 31, | | December 31, | | Fair Value Measurements Using | | | | 2017 | | 2017 | | Level 1 | | Level 2 | | Level 3 | | Financial assets: | | | | | | | | | | | | Cash and cash equivalents | | $ | 114,423 |
| | $ | 114,423 |
| | $ | 114,423 |
| | $ | — |
| | $ | — |
| | Pawn loans | | 344,748 |
| | 344,748 |
| | — |
| | — |
| | 344,748 |
| | Consumer loans, net | | 23,522 |
| | 23,522 |
| | — |
| | — |
| | 23,522 |
| | Fees and service charges receivable | | 42,736 |
| | 42,736 |
| | — |
| | — |
| | 42,736 |
| | | | $ | 525,429 |
| | $ | 525,429 |
| | $ | 114,423 |
| | $ | — |
| | $ | 411,006 |
| | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | Revolving unsecured credit facility | | $ | 107,000 |
| | $ | 107,000 |
| | $ | — |
| | $ | 107,000 |
| | $ | — |
| | Senior unsecured notes, outstanding principal | | 300,000 |
| | 314,000 |
| | — |
| | 314,000 |
| | — |
| | | | $ | 407,000 |
| | $ | 421,000 |
| | $ | — |
| | $ | 421,000 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Carrying Value | | Estimated Fair Value | | | December 31, | | December 31, | | Fair Value Measurements Using | | | 2020 | | 2020 | | Level 1 | | Level 2 | | Level 3 | | Financial assets: | | | | | | | | | | | | Cash and cash equivalents | | $ | 65,850 | | | $ | 65,850 | | | $ | 65,850 | | | $ | — | | | $ | — | | | Accounts receivable, net | | 41,110 | | | 41,110 | | | — | | | — | | | 41,110 | | | Pawn loans | | 308,231 | | | 308,231 | | | — | | | — | | | 308,231 | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 415,191 | | | $ | 415,191 | | | $ | 65,850 | | | $ | — | | | $ | 349,341 | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | Revolving unsecured credit facility | | $ | 123,000 | | | $ | 123,000 | | | $ | — | | | $ | 123,000 | | | $ | — | | | Senior unsecured notes (outstanding principal) | | 500,000 | | | 516,000 | | | — | | | 516,000 | | | — | | | | $ | 623,000 | | | $ | 639,000 | | | $ | — | | | $ | 639,000 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | Carrying Value | | Estimated Fair Value | | | | December 31, | | December 31, | | Fair Value Measurements Using | | | | 2016 | | 2016 | | Level 1 | | Level 2 | | Level 3 | | Financial assets: | | | | | | | | | | | | Cash and cash equivalents | | $ | 89,955 |
| | $ | 89,955 |
| | $ | 89,955 |
| | $ | — |
| | $ | — |
| | Pawn loans | | 350,506 |
| | 350,506 |
| | — |
| | — |
| | 350,506 |
| | Consumer loans, net | | 29,204 |
| | 29,204 |
| | — |
| | — |
| | 29,204 |
| | Fees and service charges receivable | | 41,013 |
| | 41,013 |
| | — |
| | — |
| | 41,013 |
| | | | $ | 510,678 |
| | $ | 510,678 |
| | $ | 89,955 |
| | $ | — |
| | $ | 420,723 |
| | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | Revolving unsecured credit facility | | $ | 260,000 |
| | $ | 260,000 |
| | $ | — |
| | $ | 260,000 |
| | $ | — |
| | Senior unsecured notes, outstanding principal | | 200,000 |
| | 208,000 |
| | — |
| | 208,000 |
| | — |
| | | | $ | 460,000 |
| | $ | 468,000 |
| | $ | — |
| | $ | 468,000 |
| | $ | — |
|
As cash and cash equivalents have maturities of less than three months, the carrying value of cash and cash equivalents approximates fair value. Due to their short-term maturities, the carrying value of pawn loans and fees and service chargesaccounts receivable, net approximate fair value. Short-term loans and installment loans, collectively, represent consumer loans,
Finance receivables are measured at amortized cost, net of an allowance for loan losses on the accompanying consolidated balance sheetssheets. 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 carried net of the allowanceadjusted for estimated loan losses, which is calculated by applying historical loss rates combined with recent default trends to the gross consumer loan balance. The unobservable inputs used to calculate the fair value of these loans include historical loss rates, recent default trends and estimated remaining loan terms. Therefore, the carrying value approximated the fair value.credit risk, among other factors).
The carrying value of the Company’s revolving unsecured credit facility approximatesfacilities approximate fair value as of December 31, 20172021 and 2016.2020. 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 a fixed spread over LIBOR or the Mexican Central Bank’s interbank equilibrium rate (“TIIE”) and reprice with any changes in LIBOR or TIIE. The fair value of the senior unsecured notes have beenis estimated based on a discounted cash flow analysis using a discount rate representing the Company’s estimate of the ratequoted prices in markets that would be used by market participants. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.are not active.
NOTE 7 - CUSTOMER LOANS AND VALUATION ACCOUNTSFINANCE RECEIVABLES, NET
Customer loans, including pawnFinance receivables, and net of unearned finance fees, consist of the following (in thousands):
| | | | | | | | | | | | | As of December 31, | | 2021 | | 2020 | | Finance receivables, gross | $ | 220,329 | | | $ | — | | Fair value premium on non-PCD finance receivables (1) | 40,251 | | | — | | Non-credit discount on PCD finance receivables (2) | (3,521) | | | — | | | Merchant partner discounts and premiums, net | (104) | | | — | | | Unearned origination fees | (360) | | | — | | | Finance receivables, amortized cost | 256,595 | | | — | | | Less allowance for loan losses | 75,574 | | | — | | | Finance receivables, net | $ | 181,021 | | | $ | — | |
| | | | | | | | | | | | | | | Pawn | | Consumer Loan | | Total | | December 31, 2017 | | | | | | | Total customer loans | $ | 344,748 |
| | $ | 25,337 |
| | $ | 370,085 |
| | Less allowance for doubtful accounts | — |
| | (1,815 | ) | | (1,815 | ) | | | $ | 344,748 |
| | $ | 23,522 |
| | $ | 368,270 |
| | | | | | | | | December 31, 2016 | | | | | | | Total customer loans | $ | 350,506 |
| | $ | 31,455 |
| | $ | 381,961 |
| | Less allowance for doubtful accounts | — |
| | (2,251 | ) | | (2,251 | ) | | | $ | 350,506 |
| | $ | 29,204 |
| | $ | 379,710 |
|
(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 as interest income on an effective yield basis over the lives of the related non-PCD finance receivables. See Note 3.
(2)Represents the difference between the unpaid principal balance and the amortized cost basis as of the date of the AFF Acquisition, which is recognized through interest income on an effective yield basis over the life of the related PCD finance receivables. See Note 3.
Changes in the allowance for consumer loan credit losses are as follows (in thousands):
| | | | | | | | | | | | | | | As of December 31, | | | 2021 | | | | 2020 | | Balance at beginning of year | $ | — | | | | | $ | 34 | | Provision for loan losses (1) | 48,952 | | | | | (488) | | Initial allowance recognized for PCD loans (2) | 32,036 | | | | | — | | | Charge-offs | (5,545) | | | | | (114) | | | Recoveries | 131 | | | | | 568 | | | Balance at end of year | $ | 75,574 | | | | | $ | — | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | Balance at beginning of year | $ | 2,251 |
| | $ | 66 |
| | $ | 81 |
| | Provision for credit losses | 12,762 |
| | 6,049 |
| | 808 |
| | Charge-offs, net of recoveries from customers | (13,198 | ) | | (3,864 | ) | | (823 | ) | | Balance at end of year | $ | 1,815 |
| | $ | 2,251 |
| | $ | 66 |
|
Under(1)For the CSO Programs, the Company assists customers in applying foryear ended December 31, 2021, includes $44.3 million as a short-term extension of credit from Independent Lenders and issues the Independent Lenders a guarantee for the repaymentresult of the extensionestablishment of credit. the initial allowance for expected lifetime credit losses for non-PCD finance receivables acquired in the AFF Acquisition, which is recorded as provision for loan losses in the consolidated statements of income. See Note 3.
(2)Represents the establishment of the initial allowance for expected lifetime credit losses for PCD finance receivables acquired in the AFF Acquisition, which is added to the acquisition date fair value to establish the initial amortized cost basis of the PCD loans. As this initial allowance for loan losses is added to the acquisition date fair value, there is no provision for loan losses recognized in the consolidated statements of income. See Note 3.
The following is an assessment of the credit quality indicators of the amortized cost of finance receivables as of December 31, 2021, by origination year:
| | | | | | | | | | | | | | | | | | | | | | 2021 | | | | 2020 | | Total | FICO score category (1): | | | | | | | | | No FICO score identified or obtained | $ | 57,536 | | | | | $ | 2,537 | | | $ | 60,073 | | | 599 or less | 69,703 | | | | | 11,701 | | | 81,404 | | | Between 600 and 699 | 59,121 | | | | | 9,389 | | | 68,510 | | | 700 or greater | 8,637 | | | | | 1,241 | | | 9,878 | | | Finance receivables before fair value adjustments | $ | 194,997 | | | | | $ | 24,868 | | | 219,865 | | | Fair value premium on non-PCD finance receivables | | | | | | | 40,251 | | | Non-credit discount on PCD finance receivables | | | | | | | (3,521) | | | Finance receivables, amortized cost | | | | | | | $ | 256,595 | |
(1)FICO score as determined at the time of loan origination.
The following is an aging of the amortized cost of finance receivables as of December 31, 2021, by origination year:
| | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | Total | | Delinquency: | | | | | | | 1 to 30 days past due | $ | 16,077 | | | $ | 2,260 | | | $ | 18,337 | | | 31 to 60 days past due | 10,024 | | | 1,648 | | | 11,672 | | 61 to 90 days past due (1) | 7,898 | | | 1,478 | | | 9,376 | | | Total past due finance receivables before fair value adjustments | 33,999 | | | 5,386 | | | 39,385 | | | Current finance receivables before fair value adjustments | 160,998 | | | 19,482 | | | 180,480 | | | Finance receivables before fair value adjustments | $ | 194,997 | | | $ | 24,868 | | | 219,865 | | | Fair value premium on non-PCD finance receivables | | | | | 40,251 | | | Non-credit discount on PCD finance receivables | | | | | (3,521) | | | Finance receivables, amortized cost | | | | | $ | 256,595 | |
(1)The Company charges off finance receivables when a receivable is required to recognize, at the inception90 days or more contractually past due.
NOTE 8 - LEASED MERCHANDISE, NET
Leased merchandise, net consists of the guarantee, a liability forfollowing (in thousands):
| | | | | | | | | | | | | As of December 31, | | 2021 | | 2020 | Leased merchandise (1) | $ | 156,280 | | | $ | — | | | Processing fees | (440) | | | — | | | Merchant partner discounts and premiums, net | 310 | | | — | | | Accumulated depreciation | (6,764) | | | — | | | Leased merchandise, before allowance for lease losses | 149,386 | | | — | | | Allowance for lease losses | 5,442 | | | — | | | Leased merchandise, net | $ | 143,944 | | | $ | — | |
(1)Acquired leased merchandise in the AFF Acquisition was recorded at fair value of the obligation undertaken by issuing the guarantee. The Company records the estimated fair value of the liability in accrued liabilities. value. See Note 3.
Changes in the liabilityallowance for credit serviceslease losses are as follows (in thousands):
| | | | | | | | | | | | | | | As of December 31, | | | 2021 | | | | 2020 | | Balance at beginning of year | $ | — | | | | | $ | — | | Provision for lease losses (1) | 5,442 | | | | | — | | Charge-offs (2) | — | | | | | — | | | Recoveries | — | | | | | — | | | Balance at end of year | $ | 5,442 | | | | | $ | — | |
(1)Represents the provision for lease losses on leases originated from December 17, 2021 through December 31, 2021.
(2)Acquired leased merchandise in the AFF Acquisition was recorded at fair value. As a result, leased merchandise charged-off between December 17, 2021 and December 31, 2021 was allocated no fair value. See Note 3.
| | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | Balance at beginning of year | $ | 582 |
| | $ | 498 |
| | $ | 493 |
| | Provision for credit losses | 7,057 |
| | 5,944 |
| | 6,351 |
| | Amounts paid to Independent Lenders under guarantees, net of recoveries from customers | (7,199 | ) | | (5,860 | ) | | (6,346 | ) | | Balance at end of year | $ | 440 |
| | $ | 582 |
| | $ | 498 |
|
NOTE 89 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands): | | | | Year Ended December 31, | | As of December 31, | | | 2017 | | 2016 | | 2021 | | 2020 | | Land | $ | 33,700 |
| | $ | 30,364 |
| Land | $ | 114,150 | | | $ | 83,458 | | | Buildings | 63,016 |
| | 55,137 |
| Buildings | 199,100 | | | 150,132 | | | Furniture, fixtures, equipment and leasehold improvements | 313,545 |
| | 284,391 |
| | | Furniture, fixtures, equipment and improvements | | Furniture, fixtures, equipment and improvements | 468,118 | | | 425,360 | | | | 410,261 |
| | 369,892 |
| | 781,368 | | | 658,950 | | | Less: accumulated depreciation | (179,920 | ) | | (133,835 | ) | Less: accumulated depreciation | (318,842) | | | (285,283) | | | | $ | 230,341 |
| | $ | 236,057 |
| | | Property and equipment, net | | Property and equipment, net | $ | 462,526 | | | $ | 373,667 | |
Depreciation expense for the fiscal years ended December 31, 2017, 20162021, 2020 and 2015,2019 was $44.5$42.5 million, $26.6$39.8 million and $16.1$39.1 million, respectively.
NOTE 910 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in thousands):
| | | | | | | | | | | | | As of December 31, | | 2021 | | 2020 | Acquisition purchase price amounts payable to sellers (1) | $ | 123,475 | | | $ | 5,965 | | | Accrued compensation | 33,546 | | | 21,874 | | | Sales, property, and payroll taxes payable | 32,463 | | | 24,984 | | | Trade accounts payable | 23,077 | | | 7,187 | | | Accrued interest payable | 9,375 | | | 8,121 | | | Benefits liabilities and withholding payable | 3,084 | | | 2,852 | | | | | | | Other accrued liabilities | 15,920 | | | 10,934 | | | $ | 240,940 | | | $ | 81,917 | |
| | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | Accrued compensation | $ | 25,203 |
| | $ | 25,285 |
| | Sales, property, and payroll withholding taxes payable | 14,812 |
| | 13,546 |
| | Current unfavorable lease intangible liability | 7,767 |
| | 9,258 |
| | Deferred CSO fees | 7,560 |
| | 7,776 |
| | Trade accounts payable | 4,791 |
| | 11,664 |
| | Benefits liabilities and withholding payable | 3,465 |
| | 4,501 |
| | Accrued interest payable | 1,402 |
| | 3,506 |
| | Merger related severance and retention payable | 1,336 |
| | 4,848 |
| | Liability for expected losses on outstanding CSO guarantees | 440 |
| | 582 |
| | Cash America nonqualified savings plan (see Note 15) | — |
| | 12,663 |
| | Other accrued liabilities | 17,555 |
| | 15,725 |
| | | $ | 84,331 |
| | $ | 109,354 |
|
NOTE 10 - LONG-TERM DEBT
As(1)Includes the present value of the deferred consideration payable to AFF shareholders on December 31, 2017, annual maturities2022 of $23.9 million and the short-term portion of the outstanding long-term debt for eachestimated fair value of the five years after December 31, 2017 are as follows (in thousands):Contingent Consideration of $95.6 million. See Note 3 and Note 6.
| | | | | | Fiscal | | | 2018 | $ | — |
| | 2019 | — |
| | 2020 | — |
| | 2021 | — |
| | 2022 | 107,000 |
| | Thereafter | 300,000 |
| | | $ | 407,000 |
|
NOTE 11 - LONG-TERM DEBT
The following table details the Company’s long-term debt at the respective principal amounts, net of unamortized debt issuance costs on the senior unsecured notes (in thousands):
| | | | | | | | | | | | | As of December 31, | | 2021 | | 2020 | Revolving unsecured credit facility, maturing 2024 (1) | $ | 259,000 | | | $ | 123,000 | | | | | | | Senior unsecured notes: | | | | | | | | 4.625% senior unsecured notes due 2028 (2) | 492,499 | | | 492,916 | | 5.625% senior unsecured notes due 2030 (3) | 541,405 | | | — | | | | | | | Total senior unsecured notes | 1,033,904 | | | 492,916 | | | | | | | Total long-term debt | $ | 1,292,904 | | | $ | 615,916 | |
(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 December 31, 2021 and 2020, deferred debt issuance costs of $7.5 million and $7.1 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 December 31, 2021, deferred debt issuance costs of $8.6 million are included as a direct deduction from the carrying amount of the senior unsecured notes due 2030 in the accompanying consolidated balance sheets.
As of December 31, 2021, annual maturities of the outstanding long-term debt for each of the five years after December 31, 2021 are as follows (in thousands):
| | | | | | | 2022 | $ | — | | | 2023 | — | | | 2024 | 259,000 | | | 2025 | — | | | 2026 | — | | | Thereafter | 1,050,000 | | | $ | 1,309,000 | |
Revolving Unsecured Credit Facility
As of December 31, 2021, the Company maintained an unsecured line of credit with a group of U.S. based commercial lenders (the “Credit Facility”) in the amount of $500.0 million. The Credit Facility matures on December 19, 2024.
On December 8, 2021, the Credit Facility was amended (the “2021 Amendment”) in order to, among other things, permit the AFF Acquisition and amend the domestic and total leverage ratio covenants temporarily as a result of the AFF Acquisition. The domestic leverage ratio increased from 4.5 times to 5.0 times domestic EBITDA, adjusted for certain customary items as more fully set forth in the Credit Facility (“Adjusted Domestic EBITDA”), through December 31, 2021 and then decreases to 4.5 times Adjusted Domestic EBITDA through December 31, 2022. The consolidated leverage ratio was increased from 3.3 to 4.0 times consolidated EBITDA, adjusted for certain customary items as more fully set forth in the Credit Facility (“Adjusted EBITDA”), through December 31, 2021 and then decreases to 3.5 times Adjusted EBITDA through December 31, 2022. The temporary changes to the leverage ratios as provided in the 2021 Amendment will revert to the previously scheduled ratios of 4.0 times Adjusted Domestic EBITDA and 3.0 times Adjusted EBITDA effective January 1, 2023.
| | | | | | | | | | | As of December 31, | | | 2017 | | 2016 | | Senior unsecured notes: | | | | 5.375% senior notes due 2024 (1) | $ | 295,243 |
| | $ | — |
| 6.75% senior notes due 2021 (2) | — |
| | 196,545 |
| | | $ | 295,243 |
| | $ | 196,545 |
| | | | | | | Revolving unsecured credit facility, maturing 2022 | $ | 107,000 |
| | $ | 260,000 |
|
| | | | | | | | | | As of December 31, 2017, deferred debt issuance costs of $4.8 million are included as a direct deduction from the carrying amount of the senior unsecured notes due 2024 in the accompanying consolidated balance sheets. |
| | (2)
| As of December 31, 2016, deferred debt issuance costs of $3.5 million are included as a direct deduction from the carrying amount of the senior unsecured notes due 2021 in the accompanying consolidated balance sheets. |
As of December 31, 2021, the Company had $259.0 million in outstanding borrowings and $3.2 million in outstanding letters of credit under the Credit Facility, leaving $237.8 million available for future borrowings, subject to certain financial covenants. The Credit Facility is unsecured and bears interest, at the Company’s option, of either (1) the prevailing LIBOR (with interest periods of 1 week or 1, 2, 3 or 6 months at the Company’s option) plus a fixed spread of 2.5% or (2) the prevailing prime or base rate plus a fixed spread of 1.5%. The agreement has a LIBOR floor of 0%. Additionally, the Company is required to pay an annual commitment fee of 0.325% on the average daily unused portion of the Credit Facility commitment. The weighted-average interest rate on amounts outstanding under the Credit Facility at December 31, 2021 was 2.63% based on 1 week LIBOR. Under the terms of the Credit Facility, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The Credit Facility also contains customary restrictions on the Company’s ability to incur additional debt, grant liens, make investments, consummate acquisitions and similar negative covenants with customary carve-outs and baskets. The Company was in compliance with the covenants of the Credit Facility as of December 31, 2021. During 2021, the Company received net proceeds of $136.0 million from borrowings pursuant to the Credit Facility.
Revolving Unsecured Uncommitted Credit Facility
As of December 31, 2021, the Company’s primary subsidiary in Mexico, First Cash S.A. de C.V., maintained an unsecured and uncommitted line of credit guaranteed by FirstCash, Inc. with a bank in Mexico (the “Mexico Credit Facility”) in the amount of $600.0 million Mexican pesos. The Mexico Credit Facility bears interest at the TIIE plus a fixed spread of 2.5% and matures on March 9, 2023. 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 December 31, 2021. At December 31, 2021, the Company had no amount outstanding under the Mexico Credit Facility and $600.0 million Mexican pesos available for borrowings.
Senior Unsecured Notes Due 2028
On May 30, 2017,August 26, 2020, the Company completed an offering of $300.0issued $500.0 million of 5.375%4.625% senior unsecured notes due on JuneSeptember 1, 20242028 (the “Notes”“2028 Notes”)., all of which are currently outstanding. Interest on the 2028 Notes is payable semi-annually in arrears on JuneMarch 1 and DecemberSeptember 1, commencing on DecemberMarch 1, 2017.2021. The 2028 Notes were sold to thein a private placement agents as initial purchasers for resale only to qualified institutional buyers in accordance withreliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States in accordance with Regulation S under the Securities Act.. The Company used the proceeds from the offering to repurchase, or otherwise redeem its outstanding $200.0$300.0 million, 6.75%5.375% senior notes due 20212024 (the “2021“2024 Notes”), to repay a portion of the Credit Facility and to pay for related fees and expenses associated with the offering and for general corporate purposes, including share repurchases and paying borrowings under the Company’s credit facility. The Company capitalized $5.1 million in issuance costs, which consisted primarily of placement agent fees and legal and other professional expenses. The issuance costs are being amortized over the liferedemption of the Notes as a component of interest expense and are carried as a direct deduction from the carrying amount of the Notes in the accompanying consolidated balance sheets.2024 Notes.
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 primary revolving bank credit facility.Credit Facility. The 2028 Notes will permit the Company to make share repurchases of up to $100.0 million with the net proceeds of the Notes and other available funds and to make restricted payments, such as purchasing shares of its stock and paying cash dividends, in an unlimited amount if, after giving pro forma effect to the incurrence of any indebtedness to make such payment, the Company's consolidated total debt ratio (“Net Debt Ratio”) is less than 2.252.75 to 1. The Net Debt Ratioconsolidated total debt ratio is defined generally in the indenture governing the 2028 Notes (the “Indenture”“2028 Notes Indenture”) as the ratio of (1) the total consolidated debt of the Company minus cash and cash equivalents of the Company to (2) the Company’s consolidated trailing twelve months EBITDA, as adjusted to exclude certain non-recurring expenses and giving pro forma effect to operations acquired during the measurement period. As of December 31, 2021, the Company’s consolidated total debt ratio was 3.1 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 2.75 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 2.75 to 1.
The Company may redeem some or all of the 2028 Notes at any time on or after JuneSeptember 1, 2020,2023, at the redemption prices set forth in the 2028 Notes Indenture, plus accrued and unpaid interest, if any. In addition, prior to JuneSeptember 1, 2020,2023, the Company may redeem some or all of the 2028 Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus a “make-whole” premium set forth in the 2028 Notes Indenture. The Company may redeem up to 35%40% of the 2028 Notes on or prior to JuneSeptember 1, 2020,2023 with the proceeds of certain equity offerings at the redemption prices set forth in the 2028 Notes Indenture. If the Company sells certain assets or consummates certain change in control transactions, the Company will be required to make an offer to repurchase the 2028 Notes.
Redemption of 2024 Notes
During 2020, the Company redeemed all outstanding 2024 Notes. As a result, the Company recognized a loss on extinguishment of debt of $11.7 million, which includes the redemption price of 105.375% ofpremium paid over the outstanding $300.0 million principal amount of the 2024 Notes redeemed,and other redemption costs of $8.8 million and the write-off of unamortized debt issuance costs of $2.9 million.
Senior Unsecured Notes Due 2030
On December 13, 2021, the Company issued $550.0 million of 5.625% 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, commencing on July 1, 2022. The 2030 Notes were sold in a private placement in reliance on Rule 144A and Regulation S under the Securities Act. The Company used the proceeds from the offering to finance the cash consideration of the AFF Acquisition, repay in full the outstanding debt under AFF’s credit facility, to pay fees, costs and expenses incurred in connection with the AFF Acquisition and the offering of the 2030 Notes and the remainder to repay a portion of the borrowings under the Company’s Credit Facility. The Company capitalized approximately $8.6 million in debt issuance costs, which consisted primarily of the initial purchaser’s discount and fees and legal and other professional expenses. The debt issuance costs are being amortized over the life of the 2030 Notes as a component of interest expense and are carried as a direct deduction from the carrying amount of the 2030 Notes in the accompanying consolidated balance sheets.
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 3.0 to 1. The consolidated total debt ratio is defined generally in the indenture governing the 2030 Notes (the “2030 Notes Indenture”) as the ratio of (1) the total consolidated debt of the Company minus cash and cash equivalents of the Company to (2) the Company’s consolidated trailing twelve months EBITDA, as adjusted to exclude certain non-recurring expenses and giving pro forma effect to operations acquired during the measurement period. As of December 31, 2021, the Company’s consolidated total debt ratio was 3.1 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 3.0 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 3.0 to 1.
The Company may redeem some or all of the 2030 Notes at any time on or after January 1, 2025, at the redemption prices set forth in the 2030 Notes Indenture, plus accrued and unpaid interest, if any. In addition, upon a change of control, noteholders have the rightprior to requireJanuary 1, 2025, the Company to purchasemay redeem some or all of the 2030 Notes at a price equal to 101%100% of the principal amount of the Notes,thereof, plus accrued and unpaid interest, if any.
During fiscal 2017,any, plus a “make-whole” premium set forth in the 2030 Notes Indenture. The Company may redeem up to 40% of the 2030 Notes on or prior to January 1, 2025 with the proceeds of certain equity offerings at the redemption prices set forth in the 2030 Notes Indenture. If the Company recognized a $14.1 million loss on extinguishment of debt relatedsells certain assets or consummates certain change in control transactions, the Company will be required to make an offer to repurchase the repurchase or redemption of the 2021 Notes which includes the tender or redemption premiums paid over the outstanding $200.0 million principal amount of the 2021 Notes and other reacquisition costs of $10.9 million and the write off of unamortized debt issuance costs of $3.2 million.2030 Notes.
Revolving Credit Facility
At December 31, 2017, the Company maintained a line of credit with a group of U.S. based commercial lenders (the “2016 Credit Facility”) in the amount of $400.0 million. In May 2017, the term of the 2016 Credit Facility was extended through September 2, 2022. The calculation of the fixed charge coverage ratio was also amended to remove share repurchases from the calculation to provide greater flexibility for making future share repurchases and paying cash dividends.
At December 31, 2017, the Company had $107.0 million in outstanding borrowings and $5.1 million in outstanding letters of credit under the 2016 Credit Facility, leaving $287.9 million available for future borrowings. The 2016 Credit Facility bears interest, at the Company’s option, at either (i) the prevailing London Interbank Offered Rate (“LIBOR”) (with interest periods of 1 week or 1, 2, 3 or 6 months at the Company’s option) plus a fixed spread of 2.5% or (ii) the prevailing prime or base rate plus a fixed spread of 1.5%. The agreement has a LIBOR floor of 0%. Additionally, the Company is required to pay an annual commitment fee of 0.50% on the average daily unused portion of the 2016 Credit Facility commitment. The weighted-average interest rate on amounts outstanding under the 2016 Credit Facility at December 31, 2017 was 4.00% based on 1 week LIBOR. Under the terms of the 2016 Credit Facility, the Company is required to maintain certain financial ratios and comply with certain financial covenants. The 2016 Credit Facility also contains customary restrictions on the Company’s ability to incur additional debt, grant liens, make investments, consummate acquisitions and similar negative covenants with customary carve-outs and baskets. The Company was in compliance with the covenants of the 2016 Credit Facility as of December 31, 2017. During fiscal 2017, the Company made net payments of $153.0 million pursuant to the 2016 Credit Facility.
NOTE 1112 - INCOME TAXES
On December 22, 2017, the Tax Act was enacted into law. The Tax Act significantly changes U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate from 35% to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. corporations. As a result, the Company recorded a provisional net income tax benefit of $27.3 million during the fourth quarter of 2017. This amount, which is included in the provision for income taxes in the consolidated statements of income, consists of two components: (i) a $29.2 million income tax benefit resulting from the remeasurement of the Company’s domestic net deferred tax liabilities based on the new lower U.S. corporate income tax rate, and (ii) a $1.9 million U.S. tax expense relating to the one-time mandatory tax on previously deferred earnings of the Company’s foreign subsidiaries, which will be paid over an eight-year period.
While the Company has substantially completed its provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate of such effects, the $27.3 million net income tax benefit may differ due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions the Company made, implementation guidance from the Internal Revenue Service and clarifications of state law. Once the Company finalizes certain estimates and tax positions when it files its 2017 U.S. and state tax returns, it will be able to conclude whether any further adjustments are required to its domestic net deferred tax liability balance as of December 31, 2017, as well as to the liability associated with the one-time mandatory tax on previously deferred foreign earnings. Any adjustments to these provisional amounts will be included in provision for income taxes in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.
Components of the provision for income taxes and the income to which it relates for the years ended December 31, 2017, 20162021, 2020 and 20152019 consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2021 | | 2020 | | 2019 | Income before income taxes (1): | | | | | | | Domestic | $ | 110,535 | | | $ | 98,111 | | | $ | 145,570 | | | Foreign | 55,967 | | | 45,588 | | | 79,041 | | | Income before income taxes | $ | 166,502 | | | $ | 143,699 | | | $ | 224,611 | | | | | | | | | Current income taxes: | | | | | | | U.S. Federal | $ | 14,031 | | | $ | 14,951 | | | $ | 26,624 | | | Foreign | 15,242 | | | 9,909 | | | 21,904 | | | U.S. state and local | 2,045 | | | 2,158 | | | 2,553 | | | Current provision for income taxes | 31,318 | | | 27,018 | | | 51,081 | | | | | | | | | Deferred provision (benefit) for income taxes: | | | | | | | U.S. Federal | 11,008 | | | 4,485 | | | 7,498 | | | Foreign | (1,542) | | | 5,287 | | | 863 | | | U.S. state and local | 809 | | | 330 | | | 551 | | | Total deferred provision for income taxes | 10,275 | | | 10,102 | | | 8,912 | | | | | | | | | Provision for income taxes | $ | 41,593 | | | $ | 37,120 | | | $ | 59,993 | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | Income before income taxes (1): | | | | | | | Domestic | $ | 93,365 |
| | $ | 30,804 |
| | $ | 27,599 |
| | Foreign | 78,947 |
| | 62,643 |
| | 60,082 |
| | Income before income taxes | $ | 172,312 |
| | $ | 93,447 |
| | $ | 87,681 |
| | | | | | | | | Current income taxes: | | | | | | Federal (2) | $ | 15,995 |
| | $ | 1,419 |
| | $ | 7,933 |
| | Foreign | 23,340 |
| | 18,787 |
| | 18,763 |
| | State and local | 968 |
| | 1,139 |
| | 705 |
| | Current provision for income taxes | 40,303 |
| | 21,345 |
| | 27,401 |
| | | | | | | | | Deferred provision (benefit) for income taxes: | | | | | | Federal (3) | (11,509 | ) | | 11,826 |
| | 931 |
| | Foreign | (1,079 | ) | | (528 | ) | | (1,414 | ) | | State and local | 705 |
| | 677 |
| | 53 |
| | Total deferred provision (benefit) for income taxes | (11,883 | ) | | 11,975 |
| | (430 | ) | | | | | | | | | Provision for income taxes | $ | 28,420 |
| | $ | 33,320 |
| | $ | 26,971 |
|
(1)Includes the allocation of certain administrative expenses and intercompany payments, such as royalties and interest, between domestic and foreign subsidiaries.
| | (1)
| Includes the allocation of certain administrative expenses and the payment of royalties between domestic and foreign subsidiaries. |
| | (2)
| The year ended December 31, 2017 includes an estimated $1.9 million income tax expense relating to the one-time mandatory tax on previously deferredAt December 31, 2021, the cumulative amount of undistributed earnings of the Company’s foreign subsidiaries as a result of the Tax Act. |
| | (3)
| The year ended December 31, 2017 includes an estimated $29.2 million income tax benefit resulting from the remeasurement of the Company’s domestic net deferred tax liabilities based on the new lower corporate income tax rate as a result of the Tax Act. |
The Company does not include foreign subsidiaries in its consolidatedwas $248.8 million. The Tax Cuts and Jobs Act imposed a mandatory transition tax on accumulated foreign earnings and generally eliminated U.S. federal income tax returntaxes on dividends from foreign subsidiaries with the exception of foreign withholding taxes and itother foreign local tax. During 2021, the Company repatriated $10.0 million from certain foreign subsidiaries, which was not subject to withholding or federal income tax. It is the Company’s intent to indefinitely reinvest the remaining undistributed earnings and future earnings of these subsidiaries outside the U.S. At December 31, 2017, theand, therefore, deferred taxes are not currently recorded on cumulative amount of indefinitely reinvested earnings of foreign subsidiaries is $155.1 million, a portion of which has been included in the Company’s computation of the one-time mandatory tax on previously deferred earnings as a result of the Tax Act discussed above.currency translation adjustments.
The principal deferred tax assets and liabilities consist of the following at December 31, 2017 and 2016(in thousands):
| | | | | | | | | | | | | As of December 31, | | 2021 | | 2020 | | Deferred tax assets: | | | | | Property and equipment in foreign jurisdictions | $ | 11,452 | | | $ | 9,905 | | | Finance receivables | 7,421 | | | — | | | Accrued fees on forfeited pawn loans | 6,645 | | | 5,246 | | | Deferred cost of goods sold deduction | 1,989 | | | 3,622 | | | Accrued compensation, payroll taxes and employee benefits | 4,294 | | | 4,235 | | | U.S. state and certain foreign net operating losses | 6,429 | | | 5,942 | | | Other | 3,811 | | | 3,364 | | | Total deferred tax assets | 42,041 | | | 32,314 | | | | | | | Deferred tax liabilities: | | | | | Intangible assets | 126,283 | | | 81,749 | | | Leased merchandise and property and equipment in domestic jurisdictions | 24,035 | | | 3,759 | | | Net operating lease asset | 3,726 | | | 4,188 | | | Other | 2,052 | | | 3,691 | | | Total deferred tax liabilities | 156,096 | | | 93,387 | | | | | | | Net deferred tax liabilities before valuation allowance | (114,055) | | | (61,073) | | | Valuation allowance | (6,429) | | | (5,942) | | | Net deferred tax liabilities | $ | (120,484) | | | $ | (67,015) | | | | | | | Reported as: | | | | | Deferred tax assets | $ | 5,614 | | | $ | 4,158 | | | Deferred tax liabilities | (126,098) | | | (71,173) | | | Net deferred tax liabilities | $ | (120,484) | | | $ | (67,015) | |
| | | | | | | | | | | December 31, | | | 2017 | | 2016 | | Deferred tax assets: | | | | | Property and equipment in foreign jurisdictions | $ | 6,752 |
| | $ | 5,604 |
| | Accrued fees on forfeited pawn loans | 7,002 |
| | 8,221 |
| | Deferred cost of goods sold deduction | 2,058 |
| | 1,674 |
| | Cash America nonqualified savings plan (see Note 15) | — |
| | 4,685 |
| | Accrued compensation and employee benefits | 1,749 |
| | 3,626 |
| | Accrued Merger severance and retention | — |
| | 2,718 |
| State net operating losses (1) | 6,219 |
| | — |
| | Other | 5,459 |
| | 8,024 |
| | Total deferred tax assets | 29,239 |
| | 34,552 |
| | | | | | | Deferred tax liabilities: | | | | | Intangible assets | 55,121 |
| | 75,998 |
| | Property and equipment in domestic jurisdictions | 1,054 |
| | 7,716 |
| | Other | 2,645 |
| | 2,406 |
| | Total deferred tax liabilities | 58,820 |
| | 86,120 |
| | | | | | | Net deferred tax liabilities before valuation allowance | (29,581 | ) | | (51,568 | ) | Valuation allowance (1) | (6,219 | ) | | — |
| | Net deferred tax liabilities | $ | (35,800 | ) | | $ | (51,568 | ) | | | | | | | Reported as: | | | | | Deferred tax assets | $ | 11,237 |
| | $ | 9,707 |
| | Deferred tax liabilities | (47,037 | ) | | (61,275 | ) | | Net deferred tax liabilities | $ | (35,800 | ) | | $ | (51,568 | ) |
| | (1)
| The state net operating losses and related valuation allowance relate primarily to entities assumed in conjunction with the Merger and were identified during fiscal 2017 as a result of the Company’s finalization of the fair value of assets acquired and liabilities assumed during the twelve month measurement period from the date of the Merger, as required by applicable accounting guidance. |
The Company has a valuation allowance of $6.2$6.4 million and $5.9 million as of December 31, 20172021 and 2020, respectively, related to the deferred tax assets associated with its U.S. state and certain foreign net operating losses. The Company has evaluated the nature and timing of its other deferred tax assets and concluded that no additional valuation allowance is necessary.
The effective rate on net income differs from the U.S. federal statutory rate of 35%. The following is a reconciliation of such differencesincome taxes calculated at the U.S. federal statutory rate to the provision for income taxes (dollars in thousands):
| | | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2021 | | 2020 | | 2019 | | U.S. federal statutory rate | 21 | % | | 21 | % | | 21 | % | | | | | | | | Tax at the U.S. federal statutory rate | $ | 35,149 | | | $ | 30,177 | | | $ | 47,168 | | U.S. state income tax, net of federal tax benefit of $599, $522 and $652, respectively | 2,255 | | | 1,965 | | | 2,452 | | Net incremental income tax expense from foreign earnings (1) | 2,007 | | | 5,732 | | | 6,314 | | | Non-deductible compensation expense | 1,943 | | | 1,050 | | | 2,074 | | | Global intangible low-taxed income tax | — | | | (1,863) | | | 1,100 | | | | | | | | | Other taxes and adjustments, net | 239 | | | 59 | | | 885 | | | Provision for income taxes | $ | 41,593 | | | $ | 37,120 | | | $ | 59,993 | | | | | | | | | Effective tax rate | 25.0 | % | | 25.8 | % | | 26.7 | % |
| | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | Tax at the U.S. federal statutory rate | $ | 60,309 |
| | $ | 32,706 |
| | $ | 30,688 |
| State income taxes, net of federal tax benefit of $586, $636 and $265, respectively | 1,087 |
| | 1,181 |
| | 493 |
| Rate benefit from foreign earnings (1) | (5,442 | ) | | (3,642 | ) | | (3,531 | ) | | Net tax benefit resulting from the enactment of the Tax Act | (27,269 | ) | | — |
| | — |
| | Nondeductible transaction related costs | — |
| | 2,659 |
| | — |
| | Other taxes and adjustments, net | (265 | ) | | 416 |
| | (679 | ) | | Provision for income taxes | $ | 28,420 |
| | $ | 33,320 |
| | $ | 26,971 |
| | Effective tax rate | 16.5 | % | | 35.7 | % | | 30.8 | % |
(1)Includes a $6.3 million, $2.0 million and $2.3 million foreign permanent tax benefit related to an inflation index adjustment allowed under Mexico tax law for the years ended December 31, 2021, 2020 and 2019, respectively.
| | (1)
| Includes a $4.0 million, $1.5 million and $1.4 million foreign permanent tax benefit related to an inflation index adjustment allowed under Mexico tax law for the years ended December 31, 2017, 2016 and 2015, respectively. |
The Company’s foreign operating subsidiaries are owned by a wholly-owned subsidiary located in the Netherlands. The foreign operating subsidiaries are subject to their respective foreign statutory rates, which differ from the U.S. federal statutory rate. The statutory tax rates in Mexico, Guatemala, Colombia and El Salvador are 30%, 25%, 31% and 30%, respectively. The statutory tax rate in the Netherlands is 0% on eligible dividends received from its foreign subsidiaries.
The Company reviews the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty50 percent likelihood of being realized upon ultimate settlement. Interest and penalties related to income tax liabilities that could arise would be classified as interest expense in the Company’s consolidated statements of income.
As of December 31, 20172021 and 2016,2020, the Company had no unrecognized tax benefits and, therefore, the Company did not have a liability for accrued interest and penalties and no such interest or penalties were incurred for the fiscal years ended December 31, 2017, 20162021, 2020 and 2015. The Company does not believe its unrecognized tax benefits will significantly change over the next twelve months.2019.
The Company files federal income tax returns in the U.S., Mexico, Guatemala, Colombia, El Salvador and the Netherlands, as well as multiple state and local income tax returns in the U.S. The Company’s U.S. federal returns are not subject to examination for tax years prior to 2014.2017. The majority of the Company’s U.S. state income tax returns are not subject to examination for the tax years prior to 2014 with the exception of six states, which are not subject to examination for tax years prior to 2013.2018. With respect to federal tax returns in Mexico, Guatemala, Colombia, El Salvador and the Netherlands, the tax years prior to 20122016 are closed to examination. There are no state income taxes in Mexico, Guatemala, Colombia, El Salvador or the Netherlands.
NOTE 1213 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain of its facilities and equipment under operating leases with terms generally ranging from three to five years. Most facility leases contain renewal options. Remaining future minimum rentals due under non-cancelable operating leases are as follows (in thousands):
| | | | | | Fiscal | | | 2018 | $ | 102,299 |
| | 2019 | 85,949 |
| | 2020 | 66,046 |
| | 2021 | 47,174 |
| | 2022 | 26,474 |
| | Thereafter | 39,654 |
| | | $ | 367,596 |
|
Rent expense under such leases was $117.7 million, $74.3 million and $50.0 million for the years ended December 31, 2017, 2016 and 2015, respectively.
As a result of the Merger, the Company recognized a favorable lease intangible asset and an unfavorable lease intangible liability related to assumed Cash America leases to the extent such leases contained favorable or unfavorable terms relative to market (together the “Lease Intangibles”). The current portion of favorable lease intangibles is included in prepaid expenses and other current assets and the non-current portion is included in other assets in the accompanying consolidated balance sheets. The current portion of unfavorable lease intangibles is included in accounts payable and accrued liabilities and the non-current portion is included in other liabilities in the accompanying consolidated balance sheets. The Lease Intangibles are amortized to rent expense, which is a component of store operating expenses, on a straight-line basis over the lives of the respective leases.
The following table details amounts for the Lease Intangibles for the years ending December 31, 2017 and 2016 (in thousands):
| | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | Favorable lease intangible asset | $ | 53,429 |
| | $ | 61,875 |
| | Unfavorable lease intangible liability | $ | (25,367 | ) | | $ | (34,989 | ) |
The net amortization of the Lease Intangibles reduced store operating expense by $1.0 million and $0.2 million for the years ended December 31, 2017 and 2016, respectively. Additionally, the Company closed 12 stores with Lease Intangibles during the year ended December 31, 2017 and wrote-off $0.2 million in net unfavorable lease intangibles. The remaining weighted-average amortization period for favorable and unfavorable lease intangibles is 5.1 and 2.3 years, respectively. Estimated future net amortization of the Lease Intangibles is as follows (in thousands):
| | | | | | Fiscal | | | 2018 | $ | (73 | ) | | 2019 | 929 |
| | 2020 | 1,920 |
| | 2021 | 2,395 |
| | 2022 | 2,906 |
| | Thereafter | 19,985 |
| | | $ | 28,062 |
|
Litigation
The Company, in the ordinary course of business, is a defendant (actual or threatened) in certain lawsuits, arbitration claimsproceedings and other general claims. In management’s opinion, any potential adverse result should not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Guarantees
The Company offers fee-based CSO Programs to assist consumersOn January 14, 2022, plaintiff Genesee County Employees’ Retirement System filed a putative shareholder securities class action lawsuit (the “Litigation”) in obtaining extensionsthe United States District Court for the Northern District of credit from Independent Lenders. The Company’s CSO Programs comply with the respective jurisdiction’s credit services organization act, credit access business law or a similar statute. Under the CSO Programs,Texas against the Company assists customersand certain of its current officers styled Genesee County Employees’ Retirement System v. FirstCash Holdings, Inc., et al., Civil Action No. 4:22-CV-00033-P (N.D. Tex.). The complaint alleges that the defendants made materially false and/or misleading statements that caused losses to investors. The complaint further alleges that the defendants failed to disclose in applying for a short-term extension of credit frompublic statements that the Independent LendersCompany engaged in widespread and issues the Independent Lenders a guarantee for the repaymentsystemic violations of the extension of credit.Military Lending Act (“MLA”). The extensions of credit made by the Independent Lenders to credit services customers typically range in amount from $50 to $1,500 and have terms of 7 to 365 days. The Independent Lenders are considered variable interest entities of the Company. The net loans outstanding represent less than 50% of the Independent Lenders’ total assets. In addition, the CompanyLitigation does not havequantify any ownership interestalleged damages, but, in the Independent Lenders, does not exercise control over themaddition to attorneys’ fees and is not the primary beneficiary and, therefore, does not consolidate the Independent Lenders’ results with its results.
The Company is requiredcosts, it seeks to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantees. According to the guarantee, if the borrower defaults on the extension of credit, the Company will pay the Independent Lenders the principal, accrued interest, insufficient funds fee and late fees, if applicable, all of which the Company records as a component of its credit loss provision. The Company is entitled to seek recovery, directly from its customers, of the amounts it pays the Independent Lenders in performing under the guarantees. The Company records the estimated fair value of the liability in accrued liabilities. The loss provision associated with the CSO Programs is based primarily upon historical loss experience, with consideration given to recent loss trends, delinquency rates, economic conditions and management’s expectations of future credit losses. The Company’s maximum loss exposure under all of the outstanding guarantees issuedrecover damages on behalf of the plaintiff and other persons who purchased or otherwise acquired Company stock during the putative class period from February 1, 2018 through November 12, 2021 at allegedly inflated prices and purportedly suffered financial harm as a result. The Company disputes these allegations and intends to defend the Litigation vigorously. At this stage, the Company is unable to determine whether a future loss will be incurred due to this Litigation, or estimate a range of loss, if any, and accordingly, no amounts have been accrued in the Company’s financial statements.
On November 12, 2021, the Consumer Financial Protection Bureau (“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 MLA. The CFPB also alleges that the Company violated a 2013 CFPB order against its predecessor company that, among other things, required the company to cease and desist from further MLA violations. The CFPB is seeking an injunction, redress for affected borrowers and a civil monetary penalty. While the Company intends to vigorously defend itself against the allegations in the case, the Company cannot predict or determine the timing or final outcome of this matter, or the effect that any adverse determinations the lawsuit may have on it.
On November 7, 2018, plaintiffs Maria Andrade and Shaun Caulkins filed a class action complaint (the “Andrade Compliant”) in the United States District Court for the Northern District of California against AFF. In the Andrade Complaint, the plaintiffs allege that AFF partnered with California merchants to deceive California customers into taking out usurious loans made from AFF, an unlicensed lender. Based on these allegations, the plaintiffs assert claims on behalf of themselves and a class of all California residents who purchased consumer goods or services from AFF’s partner retail businesses. Plaintiffs seek, among other things, a declaration that AFF’s security agreements are void and uncollectible, restitution of all amounts collected from class members, actual damages, statutory damages, and attorneys’ fees. Plaintiff Caulkins’ claims were dismissed in October 2020 and co-defendants were dismissed from the complaint in August 2021. The class certification motion hearing is set for June 13, 2022. At this time, the Company cannot predict or determine the timing or final outcome of the Andrade Complaint or the effect that any adverse determinations the lawsuit may have on it.
On October 20, 2021, plaintiff Larry Facio filed a class action complaint in the United States District Court for the Northern District of California against AFF. In his compliant, the plaintiff alleges that AFF partnered with California merchants to deceive California customers into taking out usurious loans made from AFF, an unlicensed lender. The complaint mirrors that of the Independent Lenderspreviously filed Andrade Complaint, in which Facio would be an eligible class member if a class becomes certified. The case has been stayed pending resolution of the Andrade Complaint. Accordingly, the Company cannot predict or determine the timing or final outcome of this matter or the effect that any adverse determinations the lawsuit may have on it.
Gold Forward Sales Contracts
As of December 31, 2021, the Company had contractual commitments to deliver a total of 7,500 gold ounces during the month of January 2022 at a weighted-average price of $1,807 per ounce. The ounces required to be delivered were on hand as of December 31, 2017 was $10.1 million compared to $13.2 million at December 31, 2016.2021.
NOTE 1314 - GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill
Changes in the carrying value of goodwill by segment were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2021 | U.S.
Pawn
Segment | | Latin America
Pawn Segment | | Retail POS Payment Solutions Segment | | Total | | Balance, beginning of year | $ | 802,148 | | | $ | 175,233 | | | $ | — | | | $ | 977,381 | | | Acquisitions (see Note 3) | 59,645 | | | — | | | 503,106 | | | 562,751 | | | | | | | | | | | Effect of foreign currency translation | — | | | (3,954) | | | — | | | (3,954) | | | | | | | | | | | Balance, end of year | $ | 861,793 | | | $ | 171,279 | | | $ | 503,106 | | | $ | 1,536,178 | | | | | | | | | | | December 31, 2020 | | | | | | | | | Balance, beginning of year | $ | 771,311 | | | $ | 177,332 | | | $ | — | | | $ | 948,643 | | | Acquisitions (see Note 3) | 28,978 | | | 4,456 | | | — | | | 33,434 | | | | | | | | | | | Effect of foreign currency translation | — | | | (6,505) | | | — | | | (6,505) | | | Other adjustments | 1,859 | | | (50) | | | — | | | 1,809 | | | Balance, end of year | $ | 802,148 | | | $ | 175,233 | | | $ | — | | | $ | 977,381 | |
| | | | | | | | | | | | | | December 31, 2017 | U.S. operations segment | | Latin America operations segment | | Total | | Balance, beginning of year | $ | 746,204 |
| | $ | 84,947 |
| | $ | 831,151 |
| | Merger and other acquisitions (see Note 3) | 414 |
| | 140 |
| | 554 |
| | Effect of foreign currency translation | — |
| | 2,061 |
| | 2,061 |
| | Other adjustments | (2,621 | ) | | — |
| | (2,621 | ) | | Balance, end of year | $ | 743,997 |
| | $ | 87,148 |
| | $ | 831,145 |
| | | | | | | | | December 31, 2016 | | | | | | | Balance, beginning of year | $ | 222,901 |
| | $ | 72,708 |
| | $ | 295,609 |
| | Merger and other acquisitions (see Note 3) | 523,303 |
| | 20,413 |
| | 543,716 |
| | Effect of foreign currency translation | — |
| | (8,276 | ) | | (8,276 | ) | | Other adjustments | — |
| | 102 |
| | 102 |
| | Balance, end of year | $ | 746,204 |
| | $ | 84,947 |
| | $ | 831,151 |
|
The Company performed its annual assessment of goodwill and determined there was no impairment as of December 31, 20172021 and 2016. As a result of the Company’s fiscal 2015 goodwill impairment analysis, a $7.9 million goodwill impairment charge was recorded associated with its U.S. consumer loan operations reporting unit, which is no longer a goodwill reporting unit of the Company. Therefore, accumulated goodwill impairment included in the goodwill balance at January 1, 2016 was $7.9 million.2020.
Definite-Lived Intangible Assets
The following table summarizes the components of gross and net definite-lived intangiblesintangible assets subject to amortization as of December 31, 2017 and 2016 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | 2021 | | 2020 | | | Gross
Carrying
Amount | | Accumulated Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated Amortization | | Net
Carrying
Amount | | Merchant relationships | | $ | 194,000 | | | $ | (962) | | | $ | 193,038 | | | $ | — | | | $ | — | | | $ | — | | | Developed technology | | 99,400 | | | (828) | | | 98,572 | | | — | | | — | | | — | | | Customer relationships | | 26,111 | | | (25,174) | | | 937 | | | 25,782 | | | (23,918) | | | 1,864 | | | AFF trade name | | 10,200 | | | (213) | | | 9,987 | | | — | | | — | | | — | | | Lessee relationships | | 1,500 | | | (48) | | | 1,452 | | | — | | | — | | | — | | | | $ | 331,211 | | | $ | (27,225) | | | $ | 303,986 | | | $ | 25,782 | | | $ | (23,918) | | | $ | 1,864 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, | | | | 2017 | | 2016 | | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Customer relationships | | $ | 24,533 |
| | $ | (15,256 | ) | | $ | 9,277 |
| | $ | 24,452 |
| | $ | (8,861 | ) | | $ | 15,591 |
| | Executive non-compete agreements | | 8,700 |
| | (5,800 | ) | | 2,900 |
| | 8,700 |
| | (1,450 | ) | | 7,250 |
| | | | $ | 33,233 |
| | $ | (21,056 | ) | | $ | 12,177 |
| | $ | 33,152 |
|
| $ | (10,311 | ) | | $ | 22,841 |
|
TheMerchant relationships and customer relationships are generally amortized using an accelerated amortization method that reflects the future cash flows expected from the existing AFF merchants and returning pawn customers.
The executive non-compete agreements are being amortized over a straight-line basis overfollowing table details the life ofremaining weighted-average amortization periods for the executive non-compete agreements.definite-lived intangible assets included in the table above:
| | | | | | | Weighted-Average
Remaining
Amortization
Period (Years) | | As of December 31, 2021 | | | Merchant relationships | 3.3 | | Developed technology | 2.5 | | Customer relationships | 1.6 | | Trade name | 1.0 | | Lessee relationships | 0.7 | | Total definite-lived intangible assets | 3.0 |
Amortization expense for definite-lived intangible assets was $10.7$3.4 million, $5.2$2.3 million and $1.8$2.9 million for the years ended December 31, 2017, 20162021, 2020 and 2015, respectively. The remaining weighted-average amortization period for customer relationships, executive non-compete agreements and total definite-lived intangible assets is 1.5, 0.4 and 1.3 years,2019, respectively. Estimated future amortization expense is as follows (in thousands):
| | | | | | | 2022 | $ | 57,074 | | | 2023 | 56,914 | | | 2024 | 49,842 | | | 2025 | 48,188 | | | 2026 | 45,250 | | | Thereafter | 46,718 | | | $ | 303,986 | |
| | | | | | Fiscal | | | 2018 | $ | 6,533 |
| | 2019 | 2,590 |
| | 2020 | 2,053 |
| | 2021 | 1,001 |
| | 2022 | — |
| | | $ | 12,177 |
|
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets as of December 31, 2021 and 2020 consist of the following (in thousands):
| | | | | | | | | | | | | | | | | As of December 31, | | | 2021 | | 2020 | | Trade names | | $ | 46,300 | | | $ | 46,300 | | Pawn licenses (1) | | 36,648 | | | 34,237 | | | Other indefinite-lived intangibles | | 1,250 | | | 1,250 | | | | $ | 84,198 | | | $ | 81,787 | |
(1)Costs to renew licenses with indefinite lives are expensed as incurred and recorded in operating expenses in the consolidated statements of income.
The Company performed its annual assessment of indefinite-lived intangible assets and determined there was no impairment as of December 31, 20172021 and 2016. Indefinite-lived intangible assets as of December 31, 2017 and 2016, consist of the following (in thousands):2020.
| | | | | | | | | | | | | As of December 31, | | | | 2017 | | 2016 | | Trade names | | $ | 46,300 |
| | $ | 46,300 |
| Pawn licenses (1) | | 34,092 |
| | 34,083 |
| | Franchise agreements related to check-cashing operation | | 1,250 |
| | 1,250 |
| | | | $ | 81,642 |
| | $ | 81,633 |
|
| | (1)
| Costs to renew licenses with indefinite lives are expensed as incurred and recorded in store operating expenses in the consolidated statements of income. |
NOTE 1415 - EQUITY COMPENSATION PLANS AND SHARE-BASED COMPENSATION
The Company has previously adopted equity and share-based compensation plans to attract and retain executives,executive officers, directors and key employees. Under these plans, the Company has grantedmay grant qualified and non-qualified common stock options, stock appreciation rights, restricted stock and nonvested commonrestricted stock unit awards to executive officers, directors and other key employees. At December 31, 2017, 872,0002021, 3,205,000 shares were reserved for future grants to all employees and directors under the plans. Additionally, there were 2,021,000 shares reserved for future grants to current employees and directors who were not employees or directors of the Company at the date of the Merger.
Nonvested Common Stock Awards (RestrictedRestricted Stock Unit Awards)Awards
The Company has granted nonvested common stock awards (in the form oftime-based and performance-based restricted stock units)units under the Company’s equity and share-based incentive compensation plans. The restricted stock units are settled in shares of common stock upon vesting. The awards granted in 2017 include upvesting and the Company typically issues treasury shares to 117,000 shares with performance-based criteria over a three-year cumulative performance period beginning in the year of grant. The vesting performance criteria for the 2017 performance-based grants relate to growth in the Company’s net income, adjusted for certain non-core and/or non-recurring items, and total store additions over the three-year cumulative period. The awards granted in 2016 and 2015 each included 40,000 shares with performance-based criteria with four annual measurement periods beginning in each year of issuance. The vesting performance criteria for the 2016 and 2015 performance-based grants relate to growth in the Company’s EBITDA, adjusted for certain non-core and/or non-recurring items, compared to the base period, which is the fiscal year prior to the year of issuance. All other awards granted in 2017, 2016 and 2015 vest ratably over a five or six year period from the grant date.satisfy vested restricted stock unit awards. The grant date fair value of the restricted stock units is based on the Company’s closing stock price on the day of the grant or(or subsequent award modification date, if applicable,applicable), and the grant date fair value of performance-based awards is based on the maximum amount of the award expected to be achieved. The amount attributable to award grants is amortized to expense over the vesting periods.
The 2021 performance-based awards vest three years from the date of the grant. The performance period for these awards is a three-year cumulative period beginning in January of the respective grant year. The performance goals for the 2021 grant include net income, adjusted for certain non-core and/or non-recurring items, store additions and the Company’s total shareholder return relative to a peer group over the three-year cumulative period. The Company’s level of achievement of the performance goals at the end of each performance period will result in awards being earned between 0% and 150% of the target share award.
The 2020 performance-based awards were originally granted in January 2020, prior to the impacts of COVID-19 as described in Note 1, which caused the cumulative three-year performance targets to be deemed unattainable. The Compensation Committee of the Board of Directors canceled the original 2020 grant and replaced it with a new grant of performance-based awards in December 2020 with a reduced target award. Two-thirds of the replacement grant vests on December 31, 2022 based on a two-year cumulative performance period beginning on January 1, 2021 with performance measures tied to adjusted net income and store addition targets. The remaining one-third of the replacement grant vests on December 31, 2023 based on the Company’s total shareholder return relative to a peer group over the three-year performance period from January 1, 2021 to December 31, 2023. The Company’s achievement level of the performance goals at the end of each respective performance period will result in awards being earned between 0% and 150% of the target share award.
The 2019 performance-based awards vest three years from the date of the grant. The performance period for these awards is a three-year cumulative period beginning in January of the respective grant year. The performance goals for the 2019 grant include net income, adjusted for certain non-core and/or non-recurring items, growth in constant currency pawn revenue (retail merchandise sales, pawn loan fees and wholesale scrap jewelry sales) and new (“de novo”) store openings over the three-year cumulative period. The Company’s level of achievement of the performance goals at the end of each performance period will result in awards being earned between 0% and 150% of the target share award.
The time-based awards granted in 2021, 2020 and 2019 generally vest, subject to continued employment with the Company, over a three or five-year period from the grant date.
The following table summarizes the restricted stock unit award activity during 2017, 2016for the years ended December 31, 2021, 2020 and 20152019 (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2019 | | | | Weighted- | | | | Weighted- | | | | Weighted- | | | | Average | | | | Average | | | | Average | | Underlying | | Fair Value | | Underlying | | Fair Value | | Underlying | | Fair Value | | Shares | | of Grant | | Shares | | of Grant | | Shares | | of Grant | | Outstanding at beginning of year | 373 | | | $ | 77.40 | | | 357 | | | $ | 69.13 | | | 254 | | | $ | 59.53 | | Performance-based grants (1) | 105 | | | 58.68 | | | 238 | | | 78.40 | | | 109 | | | 86.86 | | | Time-based grants | 48 | | | 58.68 | | | 21 | | | 84.93 | | | 19 | | | 86.86 | | | Performance-based vested | (91) | | | 72.70 | | | (117) | | | 48.25 | | | (10) | | | 45.93 | | | Time-based vested | (19) | | | 67.86 | | | (12) | | | 76.84 | | | (15) | | | 73.78 | | Performance-based canceled (2) | (18) | | | 72.56 | | | (114) | | | 84.93 | | | — | | | — | | | Time-based canceled | (15) | | | 72.49 | | | — | | | — | | | — | | | — | | | Outstanding at end of year | 383 | | | $ | 71.93 | | | 373 | | | $ | 77.40 | | | 357 | | | $ | 69.13 | |
| | | | | | | | | | | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | | | | Weighted- | | | | Weighted- | | | | Weighted- | | | | | Average | | | | Average | | | | Average | | | Underlying | | Fair Value | | Underlying | | Fair Value | | Underlying | | Fair Value | | | Shares | | of Grant | | Shares | | of Grant | | Shares | | of Grant | | Outstanding at beginning of year | 30 |
| | $ | 45.93 |
| | 79 |
| | $ | 48.10 |
| | 87 |
| | $ | 48.99 |
| | Granted | 137 |
| | 47.57 |
| | 51 |
| | 42.60 |
| | 45 |
| | 47.08 |
| | Vested | (10 | ) | | 45.93 |
| | (100 | ) | | 45.96 |
| | (5 | ) | | 43.26 |
| | Canceled or forfeited | — |
| | — |
| | — |
| | — |
| | (48 | ) | | 49.26 |
| | Outstanding at end of year | 157 |
| | 47.36 |
| | 30 |
| | 45.93 |
| | 79 |
| | 48.10 |
|
(1)Represents the maximum possible award. The Company’s level of achievement of the respective performance goals will result in actual vesting of between zero shares and the maximum share award. Performance-based grants for 2020 include 114 shares which were subsequently cancelled in 2020 as described in footnote (2) below.
(2)Performance-based canceled for 2020 represents cancellation of performance-based awards granted in January of 2020 that were subsequently replaced with a new performance-based award granted in December 2020. The grant date fair value of the December 2020 replacement performance-based awards was $72.37 per share.
Restricted stock unit awards vesting in 2017, 20162021, 2020 and 20152019 had an aggregate intrinsic value of $0.7$6.6 million, $4.9$9.4 million and $0.2$2.1 million, respectively, based on the closing price of the Company’s stock on the date of vesting. The outstanding award units had an aggregate intrinsic value of $10.6$28.7 million at December 31, 2017. During 2016, with the exception of 40,000 performance based awards granted in 2016 to senior executives which included double-trigger change in control provisions, the change of control provisions triggered by the Merger resulted in immediate vesting of 83,000 restricted stock unit awards outstanding as of September 1, 2016, the date of the Merger.2021.
Stock Options
The Company has not issued any common stock options in the last six fiscal years.since 2011. Previous option awards have been granted to purchase the Company’s common stock at an exercise price equal to or greater than the fair market value at the date of grant and generally had a maximum duration of ten years. The Company typically issues treasury shares to satisfy stock option exercises.
Stock options outstanding as of December 31, 2017 are as follows (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | Weighted-Average | | Currently | | Exercise Price | | Option Shares | | Remaining Life | | Exercisable Shares | | | $ | 38.00 |
| | | | 40 |
| | | 3.9 | | | — |
| | | | $ | 40.00 |
| | | | 50 |
| | | 3.0 | | | 20 |
| | | | | | | | 90 |
| | | 3.4 | | | 20 |
| |
A summary ofThe following table summarizes stock option activity for the years ended December 31, 2017, 20162021, 2020 and 2015, is as follows2019 (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2020 | | 2019 | | | | Weighted- | | | | Weighted- | | | | Weighted- | | | | Average | | | | Average | | | | Average | | Underlying | | Exercise | | Underlying | | Exercise | | Underlying | | Exercise | | Shares | | Price | | Shares | | Price | | Shares | | Price | | Outstanding at beginning of year | 10 | | | $ | 38.00 | | | 70 | | | $ | 38.86 | | | 80 | | | $ | 39.00 | | | | | | | | | | | | | | | Exercised | (10) | | | 38.00 | | | (60) | | | 39.00 | | | (10) | | | 40.00 | | | | | | | | | | | | | | | Outstanding at end of year | — | | | — | | | 10 | | | 38.00 | | | 70 | | | 38.86 | | | | | | | | | | | | | | | Exercisable at end of year | — | | | — | | | — | | | — | | | 40 | | | 39.00 | |
| | | | | | | | | | | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 | | | | | Weighted- | | | | Weighted- | | | | Weighted- | | | | | Average | | | | Average | | | | Average | | | Underlying | | Exercise | | Underlying | | Exercise | | Underlying | | Exercise | | | Shares | | Price | | Shares | | Price | | Shares | | Price | | Outstanding at beginning of year | 103 |
| | $ | 37.34 |
| | 103 |
| | $ | 37.34 |
| | 758 |
| | $ | 20.67 |
| | Exercised | (13 | ) | | 24.57 |
| | — |
| | — |
| | (655 | ) | | 18.06 |
| | Outstanding at end of year | 90 |
| | $ | 39.11 |
| | 103 |
| | $ | 37.34 |
| | 103 |
| | $ | 37.34 |
| | | | | | | | | | | | | | | Exercisable at end of year | 20 |
| | $ | 40.00 |
| | 23 |
| | $ | 31.43 |
| | 13 |
| | $ | 24.57 |
|
At December 31, 2017, the aggregate intrinsic value for the stock options outstanding was $2.6 million, of which $0.5 million was exercisable at the end of the year, with weighted-average remaining contractual terms of 3.4 years. The aggregate intrinsic value reflects the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2017.
The total intrinsic value of options exercised for fiscal 2017, 20162021, 2020 and 2015,2019 was $0.3$0.4 million, $0.0$1.8 million and $14.6$0.6 million, respectively. The intrinsic values are based on the closing price of the Company’s stock on the date of exercise.
Share-Based Compensation Expense
The Company’s net income includes the following compensation costs related to share-based compensation arrangements (in thousands): | | | | Year Ended December 31, | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | 2021 | | 2020 | | 2019 | | Gross compensation costs: | | | | | | Gross compensation costs: | | | | | | | Nonvested “restricted” stock | 2,959 |
| | 4,038 |
| | 280 |
| | | Restricted stock unit awards | | Restricted stock unit awards | $ | 5,150 | | | $ | 2,899 | | | $ | 8,637 | | | Stock options | 110 |
| | 136 |
| | 149 |
| Stock options | — | | | 15 | | | 43 | | | Total gross compensation costs | 3,069 |
| | 4,174 |
| | 429 |
| Total gross compensation costs | 5,150 | | | 2,914 | | | 8,680 | | | | | | | | | | | Income tax benefits: | | | | | | Income tax benefits: | | Nonvested “restricted” stock (1) | (1,036 | ) | | (782 | ) | | (98 | ) | | | Stock options | (39 | ) | | (48 | ) | | (52 | ) | | | Restricted stock unit awards | | Restricted stock unit awards | (205) | | | (901) | | | (302) | | | Exercise of stock options | | Exercise of stock options | — | | | (94) | | | (114) | | | Total income tax benefits | (1,075 | ) | | (830 | ) | | (150 | ) | Total income tax benefits | (205) | | | (995) | | | (416) | | | | | | | | | | | Net compensation expense | $ | 1,994 |
| | $ | 3,344 |
| | $ | 279 |
| Net compensation expense | $ | 4,945 | | | $ | 1,919 | | | $ | 8,264 | | | | | | | | | | | Tax benefit realized from stock options exercised during the year | $ | — |
| | $ | — |
| | $ | 5,126 |
| |
| | (1)
| Income tax benefit on nonvested stock compensation expense for 2016 is less than the statutory rate as a portion of the expense is not tax deductible. |
As of December 31, 2017,2021, the total compensation cost related to nonvestednon-vested restricted stock unit awards not yet recognized was $4.9$10.4 million (based on maximum possible award vesting) and is expected to be recognized over the weighted-average period of 1.51.4 years. As of December 31, 2017, the total compensation cost related to nonvested stock options not yet recognized was $0.1 million and is expected to be recognized over the weighted-average period of 1.5 years.
NOTE 1516 - BENEFIT PLANS
The Company’s 401(k) savings plan (the “Plan”) is available to all full-time, U.S.-based employees who have been employed with the Company for six months or longer. Effective January 1, 2017, underUnder the Plan, a participant may contribute up to 100% of earnings, with the Company matching the first 5% of contributions at a rate of 50%. Prior to January 1, 2017, the Company matched the first 6% of contributions at a rate of 40%. The employee and Company contributions are paid to a corporate trustee and invested in various funds.funds based on participant direction. Company contributions made to participants’ accounts become fully vested upon completion of five years of service. The total Company matching contributions to the Plan were $4.2$3.5 million, $2.0$3.3 million and $0.8$3.1 million for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.
Cash America hadAFF has a 401(k) savings plan that was(the “AFF Plan”) which is available to substantially all of itsAFF employees whereby participants couldwho have been employed with AFF for two months or longer. Under the AFF Plan, a participant may contribute up to 75%90% of their eligible earnings, subject to regulatory and other plan restrictions. Cash America madewith the Company matching cashthe first 6% of contributions at a rate of 50%. The employee and Company contributions are paid to a corporate trustee and invested in various funds based on participant direction. Company contributions made to participants’ accounts become fully vested upon completion of each participant’sfive years of service. The total Company matching contributions to the 401(k) plan, based on participant contributions of up to 5% of eligible compensation. EffectiveAFF Plan from December 17, 2021 through December 31, 2016, the Cash America 401(k) savings plan was merged into the Plan.2021 were less than $0.1 million.
Prior to the Merger, Cash America had a nonqualified savings plan that was available to certain members of management. Upon completion of the Merger, the nonqualified savings plan was terminated and during the three months ended March 31, 2017, the Company dissolved the plan and distributed the remaining assets to the participants. At December 31, 2016, the nonqualified savings plan assets were included in prepaid expenses and other current assets in the accompanying consolidated balance sheet with an offsetting liability of equal amount, which was included in accounts payable and accrued expenses in the accompanying consolidated balance sheet.
NOTE 1617 - SEGMENT AND GEOGRAPHIC INFORMATION
Segment Information
The Company organizes its operations into two3 reportable segments as follows:
•U.S. operations - Includes all pawn •Latin America pawn •Retail POS payment solutions (AFF)
Corporate expenses and consumer loan operations inincome, which include administrative expenses, corporate depreciation and amortization, interest expense, interest income, merger and acquisition expenses and loss (gain) on foreign exchange, write-offs of certain lease intangibles and impairments of certain other assets, are presented on a consolidated basis and are not allocated between the U.S. pawn segment, Latin America operations - Includes all pawn segment and consumer loan operations in Latin America, which currently includes operations in Mexico, Guatemala and El Salvadorretail POS payment solutions segment.
The following tables present reportable segment information for the three years ended December 31, 2017, 20162021, 2020 and 20152019 as well as separately identified segment assets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2021 | | | | U.S.
Pawn | | Latin America
Pawn | | Retail POS
Payment
Solutions | | Corporate | | Consolidated | | Revenue: | | | | | | | | | | | | Retail merchandise sales | | $ | 742,374 | | | $ | 391,875 | | | $ | — | | | $ | — | | | $ | 1,134,249 | | | Pawn loan fees | | 305,350 | | | 170,432 | | | — | | | — | | | 475,782 | | | Leased merchandise income | | — | | | — | | | 22,720 | | | — | | | 22,720 | | | Interest and fees on finance receivables | | — | | | — | | | 9,024 | | | — | | | 9,024 | | | Wholesale scrap jewelry sales | | 27,163 | | | 30,027 | | | — | | | — | | | 57,190 | | | Total revenue | | 1,074,887 | | | 592,334 | | | 31,744 | | | — | | | 1,698,965 | | | | | | | | | | | | | | Cost of revenue: | | | | | | | | | | | | Cost of retail merchandise sold | | 416,039 | | | 247,425 | | | — | | | — | | | 663,464 | | | Depreciation of leased merchandise | | — | | | — | | | 12,826 | | | — | | | 12,826 | | | Provision for lease losses | | — | | | — | | | 5,442 | | | — | | | 5,442 | | | Provision for loan losses | | — | | | — | | | 48,952 | | | — | | | 48,952 | | | Cost of wholesale scrap jewelry sold | | 22,886 | | | 26,243 | | | — | | | — | | | 49,129 | | | Total cost of revenue | | 438,925 | | | 273,668 | | | 67,220 | | | — | | | 779,813 | | | | | | | | | | | | | | Net revenue (loss) | | 635,962 | | | 318,666 | | | (35,476) | | | — | | | 919,152 | | | | | | | | | | | | | | Expenses and other income: | | | | | | | | | | | | Store operating expenses | | 380,895 | | | 179,020 | | | 4,917 | | | — | | | 564,832 | | | Administrative expenses | | — | | | — | | | — | | | 111,259 | | | 111,259 | | | Depreciation and amortization | | 22,234 | | | 17,834 | | | 122 | | | 5,716 | | | 45,906 | | | Interest expense | | — | | | — | | | — | | | 32,386 | | | 32,386 | | | Interest income | | — | | | — | | | — | | | (696) | | | (696) | | | Loss on foreign exchange | | — | | | — | | | — | | | 436 | | | 436 | | | Merger and acquisition expenses | | — | | | — | | | — | | | 15,449 | | | 15,449 | | | Gain on revaluation of contingent acquisition consideration | | — | | | — | | | — | | | (17,871) | | | (17,871) | | | Impairments and dispositions of certain other assets | | — | | | — | | | — | | | 949 | | | 949 | | | | | | | | | | | | | | | | | | | | | | | | | Total expenses and other income | | 403,129 | | | 196,854 | | | 5,039 | | | 147,628 | | | 752,650 | | | | | | | | | | | | | | Income (loss) before income taxes | | $ | 232,833 | | | $ | 121,812 | | | $ | (40,515) | | | $ | (147,628) | | | $ | 166,502 | |
| | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | | | U.S. Operations | | Latin America Operations | | Corporate | | Consolidated | | Revenue: | | | | | | | | | | Retail merchandise sales | | $ | 717,490 |
| | $ | 333,609 |
| | $ | — |
| | $ | 1,051,099 |
| | Pawn loan fees | | 380,596 |
| | 130,309 |
| | — |
| | 510,905 |
| | Wholesale scrap jewelry sales | | 119,197 |
| | 21,645 |
| | — |
| | 140,842 |
| | Consumer loan and credit services fees | | 75,209 |
| | 1,767 |
| | — |
| | 76,976 |
| | Total revenue | | 1,292,492 |
| | 487,330 |
| | — |
| | 1,779,822 |
| | | | | | | | | | | | Cost of revenue: | | | | | | | | | | Cost of retail merchandise sold | | 468,527 |
| | 211,176 |
| | — |
| | 679,703 |
| | Cost of wholesale scrap jewelry sold | | 112,467 |
| | 20,327 |
| | — |
| | 132,794 |
| | Consumer loan and credit services loss provision | | 19,431 |
| | 388 |
| | — |
| | 19,819 |
| | Total cost of revenue | | 600,425 |
| | 231,891 |
| | — |
| | 832,316 |
| | | | | | | | | | | | Net revenue | | 692,067 |
| | 255,439 |
| | — |
| | 947,506 |
| | | | | | | | | | | | Expenses and other income: | | | | | | | | | | Store operating expenses | | 423,214 |
| | 128,660 |
| | — |
| | 551,874 |
| | Administrative expenses | | — |
| | — |
| | 122,473 |
| | 122,473 |
| | Depreciation and amortization | | 24,073 |
| | 10,311 |
| | 20,849 |
| | 55,233 |
| | Interest expense | | — |
| | — |
| | 24,035 |
| | 24,035 |
| | Interest income | | — |
| | — |
| | (1,597 | ) | | (1,597 | ) | | Merger and other acquisition expenses | | — |
| | — |
| | 9,062 |
| | 9,062 |
| | Loss on extinguishment of debt | | — |
| | — |
| | 14,114 |
| | 14,114 |
| | Total expenses and other income | | 447,287 |
| | 138,971 |
| | 188,936 |
| | 775,194 |
| | | | | | | | | | | | Income (loss) before income taxes | | $ | 244,780 |
| | $ | 116,468 |
| | $ | (188,936 | ) | | $ | 172,312 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | | U.S.
Pawn | | Latin America
Pawn | | Retail POS
Payment
Solutions | | Corporate | | Consolidated | | Pawn loans | | $ | 256,311 | | | $ | 91,662 | | | $ | — | | | $ | — | | | $ | 347,973 | | | Finance receivables, net | | — | | | — | | | 181,021 | | | — | | | 181,021 | | | Inventories | | 197,486 | | | 65,825 | | | — | | | — | | | 263,311 | | | Leased merchandise, net | | — | | | — | | | 143,944 | | | — | | | 143,944 | | | Goodwill | | 861,793 | | | 171,279 | | | 503,106 | | | — | | | 1,536,178 | | | Total assets | | 1,944,487 | | | 562,661 | | | 1,178,729 | | | 150,575 | | | 3,836,452 | |
| | | | | | | | | | | | | | | | | | | | | December 31, 2017 | | | | U.S.
Operations | | Latin America
Operations | | Corporate | | Consolidated | | Pawn loans | | $ | 276,570 |
| | $ | 68,178 |
| | $ | — |
| | $ | 344,748 |
| | Consumer loans, net | | $ | 23,179 |
| | $ | 343 |
| | $ | — |
| | $ | 23,522 |
| | Inventories | | $ | 216,739 |
| | $ | 60,032 |
| | $ | — |
| | $ | 276,771 |
| | Total assets | | $ | 1,527,012 |
| | $ | 282,605 |
| | $ | 253,167 |
| | $ | 2,062,784 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2020 | | | | U.S.
Pawn | | Latin America
Pawn | | | | Corporate | | Consolidated | | Revenue: | | | | | | | | | | | | Retail merchandise sales | | $ | 720,281 | | | $ | 355,237 | | | | | $ | — | | | $ | 1,075,518 | | | Pawn loan fees | | 310,437 | | | 147,080 | | | | | — | | | 457,517 | | | | | | | | | | | | | Interest and fees on finance receivables (1) | | 2,016 | | | — | | | | | — | | | 2,016 | | | Wholesale scrap jewelry sales | | 45,405 | | | 50,828 | | | | | — | | | 96,233 | | | Total revenue | | 1,078,139 | | | 553,145 | | | | | — | | | 1,631,284 | | | | | | | | | | | | | | Cost of revenue: | | | | | | | | | | | | Cost of retail merchandise sold | | 415,938 | | | 225,149 | | | | | — | | | 641,087 | | | | | | | | | | | | | | | | | | | | | | | | Provision for loan losses (1) | | (488) | | | — | | | | | — | | | (488) | | | Cost of wholesale scrap jewelry sold | | 39,584 | | | 39,962 | | | | | — | | | 79,546 | | | Total cost of revenue | | 455,034 | | | 265,111 | | | | | — | | | 720,145 | | | | | | | | | | | | | | Net revenue | | 623,105 | | | 288,034 | | | | | — | | | 911,139 | | | | | | | | | | | | | | Expenses and other income: | | | | | | | | | | | | Store operating expenses | | 396,627 | | | 165,531 | | | | | — | | | 562,158 | | | Administrative expenses | | — | | | — | | | | | 110,931 | | | 110,931 | | | Depreciation and amortization | | 21,743 | | | 15,816 | | | | | 4,546 | | | 42,105 | | | Interest expense | | — | | | — | | | | | 29,344 | | | 29,344 | | | Interest income | | — | | | — | | | | | (1,540) | | | (1,540) | | | Loss on foreign exchange | | — | | | — | | | | | 884 | | | 884 | | | Merger and acquisition expenses | | — | | | — | | | | | 1,316 | | | 1,316 | | | | | | | | | | | | | | Impairments and dispositions of certain other assets | | — | | | — | | | | | 10,505 | | | 10,505 | | | Loss on extinguishment of debt | | — | | | — | | | | | 11,737 | | | 11,737 | | | | | | | | | | | | | | Total expenses and other income | | 418,370 | | | 181,347 | | | | | 167,723 | | | 767,440 | | | | | | | | | | | | | | Income (loss) before income taxes | | $ | 204,735 | | | $ | 106,687 | | | | | $ | (167,723) | | | $ | 143,699 | |
| | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2016 | | | | U.S. Operations | | Latin America Operations | | Corporate | | Consolidated | | Revenue: | | | | | | | | | | Retail merchandise sales | | $ | 386,026 |
| | $ | 283,105 |
| | $ | — |
| | $ | 669,131 |
| | Pawn loan fees | | 195,883 |
| | 116,874 |
| | — |
| | 312,757 |
| | Wholesale scrap jewelry sales | | 47,680 |
| | 14,958 |
| | — |
| | 62,638 |
| | Consumer loan and credit services fees | | 41,922 |
| | 1,929 |
| | — |
| | 43,851 |
| | Total revenue | | 671,511 |
| | 416,866 |
| | — |
| | 1,088,377 |
| | | | | | | | | | | | Cost of revenue: | | | | | | | | | | Cost of retail merchandise sold | | 241,086 |
| | 177,470 |
| | — |
| | 418,556 |
| | Cost of wholesale scrap jewelry sold | | 41,357 |
| | 11,668 |
| | — |
| | 53,025 |
| | Consumer loan and credit services loss provision | | 11,494 |
| | 499 |
| | — |
| | 11,993 |
| | Total cost of revenue | | 293,937 |
| | 189,637 |
| | — |
| | 483,574 |
| | | | | | | | | | | | Net revenue | | 377,574 |
| | 227,229 |
| | — |
| | 604,803 |
| | | | | | | | | | | | Expenses and other income: | | | | | | | | | | Store operating expenses | | 215,227 |
| | 112,787 |
| | — |
| | 328,014 |
| | Administrative expenses | | — |
| | — |
| | 96,537 |
| | 96,537 |
| | Depreciation and amortization | | 13,618 |
| | 10,429 |
| | 7,818 |
| | 31,865 |
| | Interest expense | | — |
| | — |
| | 20,320 |
| | 20,320 |
| | Interest income | | — |
| | — |
| | (751 | ) | | (751 | ) | | Merger and other acquisition expenses | | — |
| | — |
| | 36,670 |
| | 36,670 |
| | Net gain on sale of common stock of Enova | | — |
| | — |
| | (1,299 | ) | | (1,299 | ) | | Total expenses and other income | | 228,845 |
| | 123,216 |
| | 159,295 |
| | 511,356 |
| | | | | | | | | | | | Income (loss) before income taxes | | $ | 148,729 |
| | $ | 104,013 |
| | $ | (159,295 | ) | | $ | 93,447 |
|
(1)Effective June 30, 2020, the Company’s U.S. pawn segment ceased offering an unsecured consumer loan product in the U.S.
| | | | | December 31, 2016 | | As of December 31, 2020 | | | | U.S.
Operations | | Latin America
Operations | | Corporate | | Consolidated | | U.S.
Pawn | | Latin America
Pawn | | | Corporate | | Consolidated | | Pawn loans | | $ | 293,392 |
| | $ | 57,114 |
| | $ | — |
| | $ | 350,506 |
| Pawn loans | | $ | 220,391 | | | $ | 87,840 | | | | $ | — | | | $ | 308,231 | | | Consumer loans, net | | $ | 28,847 |
| | $ | 357 |
| | $ | — |
| | $ | 29,204 |
| | | | Inventories | | $ | 282,860 |
| | $ | 47,823 |
| | $ | — |
| | $ | 330,683 |
| Inventories | | 136,109 | | | 54,243 | | | | — | | | 190,352 | | | | Goodwill | | Goodwill | | 802,148 | | | 175,233 | | | | — | | | 977,381 | | | Total assets | | $ | 1,637,995 |
| | $ | 247,915 |
| | $ | 259,293 |
| | $ | 2,145,203 |
| Total assets | | 1,718,975 | | | 540,473 | | | | 112,749 | | | 2,372,197 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2019 | | | | U.S.
Pawn | | Latin America
Pawn | | | | Corporate | | Consolidated | | Revenue: | | | | | | | | | | | | Retail merchandise sales | | $ | 722,127 | | | $ | 453,434 | | | | | $ | — | | | $ | 1,175,561 | | | Pawn loan fees | | 379,395 | | | 185,429 | | | | | — | | | 564,824 | | | | | | | | | | | | | | Interest and fees on finance receivables | | 20,178 | | | — | | | | | — | | | 20,178 | | | Wholesale scrap jewelry sales | | 71,813 | | | 32,063 | | | | | — | | | 103,876 | | | Total revenue | | 1,193,513 | | | 670,926 | | | | | — | | | 1,864,439 | | | | | | | | | | | | | | Cost of revenue: | | | | | | | | | | | | Cost of retail merchandise sold | | 447,911 | | | 297,950 | | | | | — | | | 745,861 | | | | | | | | | | | | | | | | | | | | | | | | | Provision for loan losses | | 4,159 | | | — | | | | | — | | | 4,159 | | | Cost of wholesale scrap jewelry sold | | 65,941 | | | 30,131 | | | | | — | | | 96,072 | | | Total cost of revenue | | 518,011 | | | 328,081 | | | | | — | | | 846,092 | | | | | | | | | | | | | | Net revenue | | 675,502 | | | 342,845 | | | | | — | | | 1,018,347 | | | | | | | | | | | | | | Expenses and other income: | | | | | | | | | | | | Store operating expenses | | 412,508 | | | 183,031 | | | | | — | | | 595,539 | | | Administrative expenses | | — | | | — | | | | | 122,334 | | | 122,334 | | | Depreciation and amortization | | 20,860 | | | 14,626 | | | | | 6,418 | | | 41,904 | | | Interest expense | | — | | | — | | | | | 34,035 | | | 34,035 | | | Interest income | | — | | | — | | | | | (1,055) | | | (1,055) | | | Gain on foreign exchange | | — | | | — | | | | | (787) | | | (787) | | | Merger and acquisition expenses | | — | | | — | | | | | 1,766 | | | 1,766 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total expenses and other income | | 433,368 | | | 197,657 | | | | | 162,711 | | | 793,736 | | | | | | | | | | | | | | Income (loss) before income taxes | | $ | 242,134 | | | $ | 145,188 | | | | | $ | (162,711) | | | $ | 224,611 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2019 | | | U.S.
Pawn | | Latin America
Pawn | | | | Corporate | | Consolidated | | Pawn loans | | $ | 268,793 | | | $ | 100,734 | | | | | $ | — | | | $ | 369,527 | | | Consumer loans, net | | 751 | | | — | | | | | — | | | 751 | | | | | | | | | | | | | | Inventories | | 181,320 | | | 83,936 | | | | | — | | | 265,256 | | | | | | | | | | | | | | Goodwill | | 771,311 | | | 177,332 | | | | | — | | | 948,643 | | | Total assets | | 1,767,504 | | | 574,059 | | | | | 97,877 | | | 2,439,440 | |
| | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2015 | | | | U.S. Operations | | Latin America Operations | | Corporate | | Consolidated | | Revenue: | | | | | | | | | | Retail merchandise sales | | $ | 197,011 |
| | $ | 252,285 |
| | $ | — |
| | $ | 449,296 |
| | Pawn loan fees | | 94,761 |
| | 100,687 |
| | — |
| | 195,448 |
| | Wholesale scrap jewelry sales | | 19,380 |
| | 12,675 |
| | — |
| | 32,055 |
| | Consumer loan and credit services fees | | 25,696 |
| | 2,107 |
| | — |
| | 27,803 |
| | Total revenue | | 336,848 |
| | 367,754 |
| | — |
| | 704,602 |
| | | | | | | | | | | | Cost of revenue: | | | | | | | | | | Cost of retail merchandise sold | | 117,059 |
| | 161,572 |
| | — |
| | 278,631 |
| | Cost of wholesale scrap jewelry sold | | 17,530 |
| | 10,098 |
| | — |
| | 27,628 |
| | Consumer loan and credit services loss provision | | 6,770 |
| | 389 |
| | — |
| | 7,159 |
| | Total cost of revenue | | 141,359 |
| | 172,059 |
| | — |
| | 313,418 |
| | | | | | | | | | | | Net revenue | | 195,489 |
| | 195,695 |
| | — |
| | 391,184 |
| | | | | | | | | | | | Expenses and other income: | | | | | | | | | | Store operating expenses | | 107,852 |
| | 99,720 |
| | — |
| | 207,572 |
| | Administrative expenses | | — |
| | — |
| | 51,883 |
| | 51,883 |
| | Depreciation and amortization | | 6,146 |
| | 8,803 |
| | 2,990 |
| | 17,939 |
| | Interest expense | | — |
| | — |
| | 16,887 |
| | 16,887 |
| | Interest income | | — |
| | — |
| | (1,566 | ) | | (1,566 | ) | | Merger and other acquisition expenses | | — |
| | — |
| | 2,875 |
| | 2,875 |
| | Goodwill impairment - U.S. consumer loan operations | | — |
| | — |
| | 7,913 |
| | 7,913 |
| | Total expenses and other income | | 113,998 |
| | 108,523 |
| | 80,982 |
| | 303,503 |
| | | | | | | | | | | | Income (loss) before income taxes | | $ | 81,491 |
| | $ | 87,172 |
| | $ | (80,982 | ) | | $ | 87,681 |
|
| | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | | | U.S.
Operations | | Latin America
Operations | | Corporate | | Consolidated | | Pawn loans | | $ | 68,153 |
| | $ | 49,448 |
| | $ | — |
| | $ | 117,601 |
| | Consumer loans, net | | $ | 688 |
| | $ | 430 |
| | $ | — |
| | $ | 1,118 |
| | Inventories | | $ | 56,040 |
| | $ | 37,418 |
| | $ | — |
| | $ | 93,458 |
| | Total assets | | $ | 423,178 |
| | $ | 218,530 |
| | $ | 111,187 |
| | $ | 752,895 |
|
Geographic Information
The following table shows revenue and long-lived assets (all non-current assets except operating lease right of use asset, goodwill, intangibles, net and deferred tax assets) by geographic area (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | 2021 | | 2020 | | 2019 | | Revenue: | | | | | | | | U.S. | | $ | 1,106,631 | | | $ | 1,078,139 | | | $ | 1,193,513 | | | Mexico | | 562,493 | | | 530,462 | | | 641,505 | | | Other Latin America | | 29,841 | | | 22,683 | | | 29,421 | | | | $ | 1,698,965 | | | $ | 1,631,284 | | | $ | 1,864,439 | | | | | | | | | | Long-lived assets: | | | | | | | | U.S. | | $ | 373,218 | | | $ | 286,079 | | | $ | 254,395 | | | Mexico | | 84,648 | | | 82,438 | | | 80,385 | | | Other Latin America | | 13,191 | | | 14,968 | | | 12,893 | | | | $ | 471,057 | | | $ | 383,485 | | | $ | 347,673 | |
| | | | | | | | | | | | | | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | Revenue: | | | | | | | U.S. | $ | 1,292,492 |
| | $ | 671,511 |
| | $ | 336,848 |
| | Mexico | 464,161 |
| | 397,549 |
| | 367,754 |
| | Other Latin America | 23,169 |
| | 19,317 |
| | — |
| | | $ | 1,779,822 |
| | $ | 1,088,377 |
| | $ | 704,602 |
| | | | | | | | | Long-lived assets: | | | | | | | U.S. | $ | 227,659 |
| | $ | 257,939 |
| | $ | 65,742 |
| | Mexico | 53,175 |
| | 47,243 |
| | 49,259 |
| | Other Latin America | 3,552 |
| | 2,554 |
| | 1,349 |
| | | $ | 284,386 |
| | $ | 307,736 |
| | $ | 116,350 |
|
F-45
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the fiscal years ended December 31, 2017 and 2016, are set forth in the table below (in thousands, except per share amounts). The Company’s operations are subject to seasonal fluctuations. The Company issued 20,181,000 shares of common stock on September 1, 2016 as a result of the Merger, which significantly increased the diluted weighted average shares used in computing diluted income (loss) per share. The Company computed the quarterly diluted income per share amounts as if each quarter was a discrete period based on that quarter’s weighted average shares outstanding. As a result, the sum of the diluted earnings per share by quarter will not necessarily total the annual diluted earnings per share.
| | | | | | | | | | | | | | | | | | | Quarter Ended | | | March 31 | | June 30 | | September 30 | | December 31 | | 2017 | | | | | | | | | Total revenue | $ | 447,576 |
| | $ | 416,629 |
| | $ | 435,412 |
| | $ | 480,205 |
| | Total cost of revenue | 204,676 |
| | 192,205 |
| | 204,366 |
| | 231,069 |
| | Net revenue | 242,900 |
| | 224,424 |
| | 231,046 |
| | 249,136 |
| | Total expenses and other income | 190,658 |
| | 202,956 |
| | 189,479 |
| | 192,101 |
| | Net income | 32,645 |
| | 15,239 |
| | 28,274 |
| | 67,734 |
| | Diluted net income per share | 0.67 |
| | 0.32 |
| | 0.59 |
| | 1.43 |
| | Diluted weighted average shares | 48,402 |
| | 48,289 |
| | 47,668 |
| | 47,212 |
| | | | | | | | | | | 2016 | | | | | | | | | Total revenue | $ | 183,203 |
| | $ | 181,979 |
| | $ | 261,153 |
| | $ | 462,042 |
| | Total cost of revenue | 81,340 |
| | 80,518 |
| | 113,789 |
| | 207,927 |
| | Net revenue | 101,863 |
| | 101,461 |
| | 147,364 |
| | 254,115 |
| | Total expenses and other income | 82,202 |
| | 84,215 |
| | 146,941 |
| | 197,998 |
| | Net income (loss) | 13,174 |
| | 11,673 |
| | (1,412 | ) | | 36,692 |
| | Diluted net income (loss) per share | 0.47 |
| | 0.41 |
| | (0.04 | ) | | 0.76 |
| | Diluted weighted average shares | 28,241 |
| | 28,243 |
| | 34,631 |
| | 48,532 |
|
|
