10-Q
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________

Commission file number 0-19133

FIRST CASH FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware
75-2237318
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
690 East Lamar Blvd., Suite 400
76011
Arlington, Texas
(Zip Code)
(Address of principal executive offices)
 
(817) 460-3947
(Registrant’s telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     xYes   o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     xYes   o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
x  Large accelerated filer
o  Accelerated filer
o  Non-accelerated filer (Do not check if a smaller reporting company)
o  Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     oYes   x No
As of October 26, 2015, there were 27,806,440 shares of common stock outstanding.


 
 

FIRST CASH FINANCIAL SERVICES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2015

INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



 
 

CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS

Forward-Looking Information
This quarterly report contains forward-looking statements about the business, financial condition and prospects of First Cash Financial Services, 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,” or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy or objectives. Forward-looking statements can also be identified by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.
Forward-looking statements in this quarterly report include, without limitation, the Company’s expectations of earnings per share, earnings growth, expansion strategies, the impact of new or existing regulations, store openings, liquidity (including the availability of capital under existing credit facilities), cash flow, consumer demand for the Company’s products and services, income tax rates, currency exchange rates, future share repurchases and the price of gold and the impacts thereof, earnings and related transaction expenses from acquisitions and mergers, the ability to successfully integrate acquisitions and other performance results. These statements are made to provide the public with management’s current assessment of the Company’s business. Although the Company believes the expectations reflected in forward-looking statements are reasonable, there can be no assurances such expectations will prove to be accurate. Security holders are cautioned such forward-looking statements involve risks and uncertainties. Certain factors may cause results to differ materially from those anticipated by the forward-looking statements made in this quarterly report. Such factors are difficult to predict and many are beyond the control of the Company and may include, without limitation, the following:
changes in regional, national or international economic conditions, including inflation rates, unemployment rates and energy prices;
changes in foreign currency exchange rates and the Mexican peso to U.S. dollar exchange rate in particular;
changes in consumer demand, including purchasing, borrowing and repayment behaviors;
changes in pawn forfeiture rates and credit loss provisions;
changes in the market value of pawn collateral and merchandise inventories, including gold prices and the value of consumer electronics and other products;
changes or increases in competition;
the ability to locate, open and staff new stores and successfully integrate acquisitions;
the availability or access to sources of used merchandise inventory;
changes in credit markets, interest rates and the ability to establish, renew and/or extend the Company’s debt financing;
the ability to maintain banking relationships for treasury services and processing of certain consumer lending transactions;
the ability to hire and retain key management personnel;
new federal, state or local legislative initiatives or governmental regulations (or changes to existing laws and regulations) affecting pawn businesses, consumer loan businesses and credit services organizations (in both the United States and Mexico), including administrative or legal interpretations thereto;
risks and uncertainties related to foreign operations in Mexico;
changes in import/export regulations and tariffs or duties;
changes in banking, anti-money laundering or gun control regulations;
unforeseen litigation or regulatory investigations;
changes in tax rates or policies in the U.S. and Mexico;
inclement weather, natural disasters and public health issues;
security breaches, cyber attacks or fraudulent activity;
a prolonged interruption in the Company’s operations of its facilities, systems, and business functions, including its information technology and other business systems;
the implementation of new, or changes in the interpretation of existing, accounting principles or financial reporting requirements; and
future business decisions.



 
 

These and other risks, uncertainties and regulatory developments are further and more completely described in the Company’s 2014 annual report on Form 10-K filed with the Securities and Exchange Commission on February 12, 2015, including the risks described in Part 1, Item 1A, “Risk Factors” of the Company’s annual report. Many of these risks and uncertainties are beyond the ability of the Company to control, nor can the Company predict, in many cases, all of the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. The forward-looking statements contained in this quarterly report speak only as of the date of this quarterly report, and the Company expressly disclaims any obligation or undertaking to report any updates or revisions to any such statement to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which any such statement is based, except as required by law.



 
 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 
 
 
 
 
 
 
September 30,
 
December 31,
 
 
2015
 
2014
 
2014
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
72,523

 
$
42,760

 
$
67,992

Pawn loan fees and service charges receivable
 
18,116

 
19,481

 
16,926

Pawn loans
 
128,370

 
136,981

 
118,536

Consumer loans, net
 
1,114

 
1,510

 
1,241

Inventories
 
98,188

 
94,890

 
91,088

Prepaid expenses and other current assets
 
5,815

 
6,292

 
4,970

Deferred tax assets
 
6,632

 
6,299

 
7,122

Total current assets
 
330,758

 
308,213

 
307,875

 
 
 
 
 
 
 
Property and equipment, net
 
110,285

 
115,115

 
113,750

Goodwill
 
291,777

 
264,875

 
276,882

Other non-current assets
 
14,297

 
16,464

 
16,168

Deferred tax assets
 
8,085

 

 

Total assets
 
$
755,202

 
$
704,667

 
$
714,675

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
Accounts payable and accrued liabilities
 
$
46,129

 
$
50,178

 
$
42,559

Income taxes payable
 
843

 

 

Total current liabilities
 
46,972

 
50,178

 
42,559

 
 
 
 
 
 
 
Revolving unsecured credit facilities
 
68,500

 
17,500

 
22,400

Senior unsecured notes
 
200,000

 
200,000

 
200,000

Deferred tax liabilities
 

 
7,535

 
1,165

Total liabilities
 
315,472

 
275,213

 
266,124

 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
Preferred stock
 

 

 

Common stock
 
399

 
395

 
397

Additional paid-in capital
 
192,787

 
182,119

 
188,062

Retained earnings
 
624,194

 
555,953

 
582,894

Accumulated other comprehensive loss from
 
 
 
 
 
 
cumulative foreign currency translation adjustments
 
(49,042
)
 
(12,379
)
 
(26,168
)
Common stock held in treasury, at cost
 
(328,608
)
 
(296,634
)
 
(296,634
)
Total stockholders’ equity
 
439,730

 
429,454

 
448,551

Total liabilities and stockholders’ equity
 
$
755,202

 
$
704,667

 
$
714,675

 
 
 
 
 
 
 
The accompanying notes are an integral part
of these condensed consolidated financial statements.

1

 
 

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except per share amounts)
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
 
Retail merchandise sales
 
$
104,937

 
$
101,950

 
$
321,016

 
$
297,846

Pawn loan fees
 
49,882

 
51,778

 
146,119

 
146,971

Consumer loan and credit services fees
 
6,995

 
9,474

 
21,300

 
27,674

Wholesale scrap jewelry revenue
 
7,718

 
11,798

 
24,743

 
37,612

Total revenue
 
169,532

 
175,000

 
513,178

 
510,103

 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
Cost of retail merchandise sold
 
64,875

 
62,780

 
198,757

 
182,363

Consumer loan and credit services loss provision
 
2,368

 
2,913

 
5,074

 
6,892

Cost of wholesale scrap jewelry sold
 
6,847

 
10,444

 
21,088

 
31,608

Total cost of revenue
 
74,090

 
76,137

 
224,919

 
220,863

 
 
 
 
 
 
 
 
 
Net revenue
 
95,442

 
98,863

 
288,259

 
289,240

 
 
 
 
 
 
 
 
 
Expenses and other income:
 
 
 
 
 
 
 
 
Store operating expenses
 
50,995

 
49,293

 
155,062

 
146,719

Administrative expenses
 
11,733

 
13,406

 
40,240

 
40,350

Depreciation and amortization
 
4,637

 
4,404

 
13,651

 
13,001

Goodwill impairment - U.S. consumer loan operations
 
7,913

 

 
7,913

 

Interest expense
 
4,336

 
4,059

 
12,482

 
9,405

Interest income
 
(406
)
 
(179
)
 
(1,143
)
 
(522
)
Total expenses and other income
 
79,208

 
70,983

 
228,205

 
208,953

 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
16,234

 
27,880

 
60,054

 
80,287

 
 
 
 
 
 
 
 
 
Provision for income taxes
 
5,061

 
8,352

 
18,754

 
21,790

 
 
 
 
 
 
 
 
 
Income from continuing operations
 
11,173

 
19,528

 
41,300

 
58,497

 
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax
 

 

 

 
(272
)
 
 
 
 
 
 
 
 
 
Net income
 
$
11,173

 
$
19,528

 
$
41,300

 
$
58,225

 
 
 
 
 
 
 
 
 
Basic income per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.40

 
$
0.69

 
$
1.46

 
$
2.03

Loss from discontinued operations
 

 

 

 
(0.01
)
Net income per basic share
 
$
0.40

 
$
0.69

 
$
1.46

 
$
2.02

 
 
 
 
 
 
 
 
 
Diluted income per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.40

 
$
0.68

 
$
1.45

 
$
2.01

Loss from discontinued operations
 

 

 

 
(0.01
)
Net income per diluted share
 
$
0.40

 
$
0.68

 
$
1.45

 
$
2.00

 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part
of these condensed consolidated financial statements.

2

 
 

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
11,173

 
$
19,528

 
$
41,300

 
$
58,225

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Currency translation adjustment, gross
 
(21,536
)
 
(7,600
)
 
(35,191
)
 
(7,120
)
Tax benefit
 
7,538

 
2,660

 
12,317

 
2,492

Comprehensive income (loss)
 
$
(2,825
)
 
$
14,588

 
$
18,426

 
$
53,597

 
 
 
 
 
 
 
 
 
 The accompanying notes are an integral part
of these condensed consolidated financial statements.

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited, in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accum-
ulated
Other
Compre-
hensive
Loss
 
Common Stock
Held in Treasury
 
Total
Stock-
holders’
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
Shares
 
Amount
 
 
Balance at 12/31/2014
 

 
$

 
39,708

 
$
397

 
$
188,062

 
$
582,894

 
$
(26,168
)
 
11,200

 
$
(296,634
)
 
$
448,551

Shares issued under share-based com-pensation plan
 

 

 
5

 

 

 

 

 

 

 

Exercise of stock options
 

 

 
145

 
2

 
2,899

 

 

 

 

 
2,901

Income tax benefit from exercise of stock options
 

 

 

 

 
1,617

 

 

 

 

 
1,617

Share-based compensation expense
 

 

 

 

 
209

 

 

 

 

 
209

Net income
 

 

 

 

 

 
41,300

 

 

 

 
41,300

Currency translation adjustment, net of tax
 

 

 

 

 

 

 
(22,874
)
 

 

 
(22,874
)
Repurchases of treasury stock
 

 

 

 

 

 

 

 
661

 
(31,974
)
 
(31,974
)
Balance at 9/30/2015
 

 
$

 
39,858

 
$
399

 
$
192,787

 
$
624,194

 
$
(49,042
)
 
11,861

 
$
(328,608
)
 
$
439,730

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part
of these condensed consolidated financial statements.




3

 
 

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
CONTINUED
(unaudited, in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accum-
ulated
Other
Compre-
hensive
Loss
 
Common Stock
Held in Treasury
 
Total
Stock-
holders’
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
 
Shares
 
Amount
 
 
Balance at 12/31/2013
 

 
$

 
39,377

 
$
394

 
$
176,675

 
$
497,728

 
$
(7,751
)
 
10,429

 
$
(252,687
)
 
$
414,359

Shares issued under share-based com-pensation plan
 

 

 
5

 

 

 

 

 

 

 

Exercise of stock options
 

 

 
125

 
1

 
2,261

 

 

 

 

 
2,262

Income tax benefit from exercise of stock options
 

 

 

 

 
1,813

 

 

 

 

 
1,813

Share-based compensation expense
 

 

 

 

 
1,370

 

 

 

 

 
1,370

Net income
 

 

 

 

 

 
58,225

 

 

 

 
58,225

Currency translation adjustment, net of tax
 

 

 

 

 

 

 
(4,628
)
 

 

 
(4,628
)
Repurchases of treasury stock
 

 

 

 

 

 

 

 
771

 
(43,947
)
 
(43,947
)
Balance at 9/30/2014
 

 
$

 
39,507

 
$
395

 
$
182,119

 
$
555,953

 
$
(12,379
)
 
11,200

 
$
(296,634
)
 
$
429,454

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part
of these condensed consolidated financial statements.

4

 
 

FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Nine Months Ended
 
 
September 30,
 
 
2015
 
2014
Cash flow from operating activities:
 
 
 
 
Net income
 
$
41,300

 
$
58,225

Adjustments to reconcile net income to net cash flow provided by operating activities:
 
 
 
 
Non-cash portion of credit loss provision
 
466

 
797

Share-based compensation expense
 
209

 
1,370

Depreciation and amortization expense
 
13,651

 
13,001

Amortization of debt issuance costs
 
715

 
633

Impairment of goodwill - U.S. consumer loan operations
 
7,913

 

Deferred income taxes
 
2,293

 
1,488

Changes in operating assets and liabilities, net of business combinations:
 
 
 
 
Pawn fees and service charges receivable
 
(2,203
)
 
(3,084
)
Merchandise inventories
 
(3,310
)
 
(3,548
)
Prepaid expenses and other assets
 
(1,731
)
 
(906
)
Accounts payable and accrued expenses
 
4,428

 
10,502

Income taxes payable, current
 
1,391

 
(9,150
)
Net cash flow provided by operating activities
 
65,122

 
69,328

Cash flow from investing activities:
 
 
 
 
Loan receivables, net of cash repayments
 
(22,299
)
 
(24,324
)
Purchases of property and equipment
 
(15,528
)
 
(17,801
)
Acquisitions of pawn stores, net of cash acquired
 
(33,015
)
 
(34,873
)
Net cash flow used in investing activities
 
(70,842
)
 
(76,998
)
Cash flow from financing activities:
 
 
 
 
Borrowings from revolving credit facilities
 
82,055

 
25,500

Repayments of revolving credit facilities
 
(35,955
)
 
(190,000
)
Repayments of notes payable
 

 
(8,352
)
Issuance of senior unsecured notes
 

 
200,000

Debt issuance costs paid
 

 
(6,601
)
Purchases of treasury stock
 
(31,974
)
 
(43,947
)
Proceeds from exercise of share-based compensation awards
 
2,901

 
2,262

Income tax benefit from exercise of stock options
 
1,617

 
1,813

Net cash flow provided by (used in) financing activities
 
18,644

 
(19,325
)
Effect of exchange rates on cash
 
(8,393
)
 
(888
)
Change in cash and cash equivalents
 
4,531

 
(27,883
)
Cash and cash equivalents at beginning of the period
 
67,992

 
70,643

Cash and cash equivalents at end of the period
 
$
72,523

 
$
42,760

 
 
 
 
 
The accompanying notes are an integral part
of these condensed consolidated financial statements.

5

 
 

FIRST CASH FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1 - Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated balance sheet at December 31, 2014, which is derived from audited financial statements, and the unaudited condensed consolidated financial statements, including the notes thereto, include the accounts of First Cash Financial Services, Inc. and its wholly-owned subsidiaries (together, the “Company”). All significant intercompany accounts and transactions have been eliminated.

These unaudited consolidated financial statements are condensed and do not include all disclosures and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. These interim period financial statements should be read in conjunction with the Company’s consolidated financial statements, which are included in the Company’s annual report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (the “SEC”) on February 12, 2015. The condensed consolidated financial statements as of September 30, 2015 and 2014, and for the three month and nine month periods ended September 30, 2015 and 2014, are unaudited, but in management’s opinion include all adjustments (consisting of only normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flow for such interim periods. Operating results for the periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the full fiscal year.

The Company manages its pawn and consumer loan operations under three operating segments: U.S. pawn operations, U.S. consumer loan operations and Mexico operations. The three operating segments have been aggregated into one reportable segment because they have similar economic characteristics and similar long-term financial performance metrics. Additionally, all three segments offer similar and overlapping products and services to a similar customer demographic and are supported by a single, centralized administrative support platform.

The Company has significant operations in Mexico where the functional currency for the Company’s operating subsidiaries is the Mexican 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. Revenue and expenses are translated at the average exchange rates occurring during the three month and nine month periods ended September 30, 2015.

Certain amounts in prior year comparative presentations have been reclassified in order to conform to the 2015 presentation.

Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)” (“ASU 2014-08”). ASU 2014-08 requires a disposal representing a strategic shift that has (or will have) a major effect on an entity’s financial results or a business activity classified as held for sale should be reported as discontinued operations. ASU 2014-08 also expands the disclosure requirements for discontinued operations and adds new disclosures for individually significant dispositions that do not qualify as discontinued operations. ASU 2014-08 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2014. The adoption of ASU 2014-08 did not have a material effect on the Company’s current financial position, results of operations or financial statement disclosures, however, it may impact the reporting of future discontinued operations if and when they occur.

In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 is a comprehensive new 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 disclosures 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 2015-14, which delayed the effective date of ASU 2014-09 by one year resulting in it becoming 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. The Company is currently assessing the potential impact of ASU 2014-09 on its consolidated financial statements.

6

 
 

In April 2015, the Financial Accounting Standards Board issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. In August 2015, the Financial Accounting Standards Board issued ASU No. 2015-15, which clarified the guidance in ASU 2015-03 regarding presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The SEC Staff announced they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 requires retrospective application and represents a change in accounting principle. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect ASU 2015-03 to have a material effect on the Company’s results of operations, however, it will impact future balance sheet presentation and financial statement disclosures related to the Company’s debt issuance costs, upon adoption.

In July 2015, the Financial Accounting Standards Board issued 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 does not expect ASU 2015-11 to have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.

In September 2015, the Financial Accounting Standards Board issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. ASU 2015-16 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning on or after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The adoption of ASU 2015-16 did not have a material effect on the Company’s current financial position, results of operations or financial statement disclosures.


7

 
 

Note 2 - Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (unaudited, in thousands, except per share data):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
 
Income from continuing operations for calculating basic and diluted earnings per share
 
$
11,173

 
$
19,528

 
$
41,300

 
$
58,497

Loss from discontinued operations
 

 

 

 
(272
)
Net income for calculating basic and diluted earnings per share
 
$
11,173

 
$
19,528

 
$
41,300

 
$
58,225

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares for calculating basic earnings per share
 
28,019

 
28,397

 
28,206

 
28,762

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options and nonvested awards
 
205

 
408

 
212

 
398

Weighted-average common shares for calculating diluted earnings per share
 
28,224

 
28,805

 
28,418

 
29,160

 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.40

 
$
0.69

 
$
1.46

 
$
2.03

Loss from discontinued operations
 

 

 

 
(0.01
)
Net income per basic share
 
$
0.40

 
$
0.69

 
$
1.46

 
$
2.02

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.40

 
$
0.68

 
$
1.45

 
$
2.01

Loss from discontinued operations
 

 

 

 
(0.01
)
Net income per diluted share
 
$
0.40

 
$
0.68

 
$
1.45

 
$
2.00


Note 3 - Acquisitions

The Company completed acquisitions during the nine months ended September 30, 2015 as described below consistent with its strategy to continue its expansion of pawn stores in selected markets. The purchase price of each acquisition was allocated to assets and liabilities acquired based upon their estimated fair market values at the date of acquisition. The excess purchase price over the estimated fair market value of the net assets acquired has been recorded as goodwill. The goodwill arising from these acquisitions consists largely of the synergies and economies of scale expected from combining the operations of the Company and the pawn stores acquired.

During the nine months ended September 30, 2015, 30 pawn stores located in five U.S. states were acquired by the Company in five separate asset purchase transactions (“U.S. Acquisitions”) for an aggregate purchase price of $33,240,000, net of cash acquired, and was composed of $32,090,000 in cash and payables to the sellers of $1,150,000. During the nine months ended September 30, 2015, the Company also paid $925,000 of purchase price amounts payable related to prior-year acquisitions.


8

 
 

The preliminary allocations of the purchase prices for the U.S. Acquisitions are as follows (in thousands):
 
U.S. Acquisitions
Pawn loans
$
3,438

Pawn loan fees and service charges receivable
204

Inventory
2,608

Other current assets
9

Property and equipment
310

Goodwill (1)
26,506

Intangible assets (2)
513

Other non-current assets
5

Current liabilities
(353
)
Purchase price
$
33,240


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

(2)
Intangible assets primarily consist of customer relationships, which are included in other non-current assets in the accompanying condensed consolidated balance sheets. Customer relationships are generally amortized over five years.

During the nine months ended September 30, 2015, revenue from the U.S. Acquisitions since the acquisition dates was $5,498,000. During the nine months ended September 30, 2015, the net loss from the U.S. Acquisitions since the acquisition dates (including acquisition and integration costs) was $349,000. Combined transaction and integration costs related to acquisitions during the nine months ended September 30, 2015 were approximately $1,175,000, which are primarily included in administrative expenses in the accompanying condensed consolidated statements of income.

Note 4 - Long-Term Debt

Senior Unsecured Notes

On March 24, 2014, the Company issued $200,000,000 of 6.75% senior notes due on April 1, 2021 (the “Notes”). Interest on the Notes is payable semi-annually in arrears on April 1 and October 1. The Notes permit the Company to make certain restricted payments, such as repurchasing shares of its stock and paying cash dividends, within certain parameters, the most restrictive of which generally limits such restricted payments to 50% of adjusted net income.

Revolving Credit Facilities

At September 30, 2015, the Company maintained a line of credit with a group of U.S. based commercial lenders (the “2014 Credit Facility”) in the amount of $160,000,000, which matures in February 2019. At September 30, 2015, the Company had $68,500,000 outstanding under the 2014 Credit Facility and $91,500,000 was available for borrowings. The 2014 Credit Facility bears interest, at the Company’s option, at either (i) the prevailing London Interbank Offered Rate (“LIBOR”) (with interest periods of 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 interest rate on amounts outstanding under the 2014 Credit Facility at September 30, 2015 was 2.75% based on the prevailing 30-day LIBOR rate. The 2014 Credit Facility requires the Company to maintain certain financial ratios and comply with certain financial covenants and allows the Company to make certain restricted payments, such as repurchasing shares of its stock and paying cash dividends, within certain parameters, provided the Company maintains compliance with those financial ratios and covenants after giving effect to such restricted payments. The Company was in compliance with the requirements and covenants of the 2014 Credit Facility as of September 30, 2015. During the nine months ended September 30, 2015, the Company had net proceeds of $46,100,000 from borrowings pursuant to the 2014 Credit Facility.

On March 9, 2015, the Company entered into an agreement with a bank in Mexico to establish a revolving credit facility (the “Mexico Credit Facility”) in the amount of $10,000,000. The Mexico Credit Facility bears interest at the prevailing 30-day LIBOR rate plus a fixed spread of 2.0% and matures in December 2017. 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 requirements and covenants of the Mexico Credit Facility as of September 30, 2015. The Company is required to pay a one-time commitment fee of $25,000 due when the first amount is drawn/borrowed. At September 30, 2015, the Company had no amount outstanding under the Mexico Credit Facility and $10,000,000 was available for borrowings.

9

 
 

Note 5 - Fair Value of Financial Instruments

The fair value of financial instruments is determined by reference to various market data and other valuation techniques, as appropriate. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The three fair value levels are (from highest to lowest):

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.

As cash and cash equivalents have maturities of less than three months, the carrying values of cash and cash equivalents approximate fair value (Level 1 of the fair value hierarchy). Due to their short-term maturities, pawn loans, consumer loans (net), pawn loan fees and service charges receivable approximate fair value (Level 3 of the fair value hierarchy).

The carrying value of the 2014 Credit Facility and the Mexico Credit Facility approximated fair value for all periods presented. The fair value of the Notes was approximately $201,000,000, $209,000,000 and $207,000,000 as of September 30, 2015, 2014 and December 31, 2014, respectively, compared to a carrying value of $200,000,000. These fair values have been estimated based on a discounted cash flow analysis using a discount rate representing the Company’s estimate of the rate that would be used by market participants (Level 2 of the fair value hierarchy). Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.

Note 6 - Goodwill

Changes in the carrying value of goodwill for the nine months ended September 30, 2015 were as follows:

Balance at December 31, 2014
$
276,882

Acquisitions (Note 3)
26,506

Goodwill impairment - U.S. consumer loan operations
(7,913
)
Effect of foreign currency translation
(4,621
)
Other adjustments
923

Balance at September 30, 2015
$
291,777


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 value. The Company’s reporting units, which are tested for impairment, are U.S. pawn operations, U.S. consumer loan operations and Mexico pawn and consumer loan operations. The Company assesses goodwill for impairment at a reporting unit level by initially 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.

The first step is a comparison of the reporting unit's fair value to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than its carrying value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than its carrying value, the difference is recorded as an impairment charge.

During the third quarter of 2015, the Company determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the U.S. consumer loan operations reporting unit. These indicators included, among others, the impacts of recently enacted and additional proposed local, state and federal regulatory restrictions affecting short-term and long-term profitability expectations for payday and title lending products, the Company’s long-term ongoing strategy to reduce

10

 
 

non-core consumer lending operations along with significant deterioration in payday lending market conditions. Due to the aforementioned indicators, the Company concluded that it was more likely than not that the fair value of the U.S. consumer loan operations reporting unit was less than the carrying value.

The Company estimated fair value of the U.S. consumer loan operations reporting unit by applying a multiple to the reporting units’ forecast earnings before interest, taxes, depreciation and amortization, as this is a common valuation technique within the consumer loan industry (the inputs used in the fair value calculation are significant unobservable inputs, or Level 3 inputs, in the fair value hierarchy). The resulting estimated fair value of the reporting unit was less than its carrying value and after performing the second step in the goodwill impairment testing methodology, the Company determined there was no material implied goodwill.

As a result, a $7,913,000 goodwill impairment charge was recorded in the third quarter of fiscal 2015, which is included as goodwill impairment - U.S. consumer loan operations in the accompanying condensed consolidated statements of operations. As of September 30, 2015, the Company has no remaining goodwill or other intangible assets associated with its U.S. consumer loan operations reporting unit.

Note 7 - Condensed Consolidating Guarantor Financial Statements

In connection with the issuance of the Notes, certain of the Company’s domestic subsidiaries (collectively, “Guarantor Subsidiaries”), fully, unconditionally, jointly and severally guaranteed the payment obligations under the Notes. Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly, by the Company. The following supplemental financial information sets forth, on a consolidating basis, the balance sheets, statements of comprehensive income (loss) and statements of cash flows of First Cash Financial Services, Inc. (the “Parent Company”), the Guarantor Subsidiaries and the Parent Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”).

The supplemental condensed consolidating financial information has been prepared pursuant to SEC rules and regulations for interim condensed financial information and does not include the more complete disclosures included in annual financial statements. Investments in consolidated subsidiaries have been presented under the equity method of accounting. The principal eliminating entries eliminate investments in subsidiaries, intercompany balances and intercompany revenues and expenses. The condensed financial information may not necessarily be indicative of the results of operations or financial position had the Guarantor Subsidiaries or Non-Guarantor Subsidiaries operated as independent entities.

11

 
 

Condensed Consolidating Balance Sheet
September 30, 2015
(unaudited, in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
9,581

 
$
2,628

 
$
60,314

 
$

 
$
72,523

Pawn loan fees and service charges receivable
 

 
6,435

 
11,681

 

 
18,116

Pawn loans
 

 
55,029

 
73,341

 

 
128,370

Consumer loans, net
 

 
580

 
534

 

 
1,114

Inventories
 

 
37,495

 
60,693

 

 
98,188

Prepaid expenses and other current assets
 
4,420

 

 
1,785

 
(390
)
 
5,815

Deferred tax assets
 
1,069

 

 
5,563

 

 
6,632

Total current assets
 
15,070

 
102,167

 
213,911

 
(390
)
 
330,758

 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
3,490

 
51,318

 
55,477

 

 
110,285

Goodwill
 

 
151,671

 
140,106

 

 
291,777

Other non-current assets
 
5,261

 
4,038

 
4,998

 

 
14,297

Deferred tax assets
 

 

 
29,187

 
(21,102
)
 
8,085

Intercompany receivable
 

 

 
176,223

 
(176,223
)
 

Investments in subsidiaries
 
879,924

 

 

 
(879,924
)
 

Total assets
 
$
903,745

 
$
309,194

 
$
619,902

 
$
(1,077,639
)
 
$
755,202

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
 
$
19,616

 
$
7,272

 
$
19,241

 
$

 
$
46,129

Income taxes payable
 

 

 
1,233

 
(390
)
 
843

Total current liabilities
 
19,616

 
7,272

 
20,474

 
(390
)
 
46,972

 
 
 
 
 
 
 
 
 
 
 
Revolving unsecured credit facilities
 
68,500

 

 

 

 
68,500

Senior unsecured notes
 
200,000

 

 

 

 
200,000

Deferred tax liabilities
 
244

 
14,647

 
6,211

 
(21,102
)
 

Intercompany payable
 
176,223

 

 

 
(176,223
)
 

Total liabilities
 
464,583

 
21,919

 
26,685

 
(197,715
)
 
315,472

 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
Preferred stock
 

 

 

 

 

Common stock
 
399

 

 

 

 
399

Additional paid-in capital
 
192,787

 

 

 

 
192,787

Retained earnings
 
574,584

 
287,275

 
642,259

 
(879,924
)
 
624,194

Accumulated other comprehensive loss
 

 

 
(49,042
)
 

 
(49,042
)
Common stock held in treasury, at cost
 
(328,608
)
 

 

 

 
(328,608
)
Total stockholders’ equity
 
439,162

 
287,275

 
593,217

 
(879,924
)
 
439,730

Total liabilities and stockholders’ equity
 
$
903,745

 
$
309,194

 
$
619,902

 
$
(1,077,639
)
 
$
755,202



12

 
 

Condensed Consolidating Balance Sheet
September 30, 2014
(unaudited, in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
17,380

 
$
2,809

 
$
22,571

 
$

 
$
42,760

Pawn loan fees and service charges receivable
 

 
7,480

 
12,001

 

 
19,481

Pawn loans
 

 
57,116

 
79,865

 

 
136,981

Consumer loans, net
 

 
842

 
668

 

 
1,510

Inventories
 

 
34,915

 
59,975

 

 
94,890

Prepaid expenses and other current assets
 
3,708

 

 
2,584

 

 
6,292

Deferred tax assets
 
906

 

 
5,393

 

 
6,299

Total current assets
 
21,994

 
103,162

 
183,057

 

 
308,213

 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
4,050

 
50,094

 
60,971

 

 
115,115

Goodwill
 

 
158,308

 
106,567

 

 
264,875

Other non-current assets
 
6,354

 
4,981

 
5,129

 

 
16,464

Deferred tax assets
 

 

 
10,106

 
(10,106
)
 

Intercompany receivable
 

 

 
169,711

 
(169,711
)
 

Investments in subsidiaries
 
804,310

 

 

 
(804,310
)
 

Total assets
 
$
836,708

 
$
316,545

 
$
535,541

 
$
(984,127
)
 
$
704,667

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
 
$
19,979

 
$
6,684

 
$
23,515

 
$

 
$
50,178

Total current liabilities
 
19,979

 
6,684

 
23,515

 

 
50,178

 
 
 
 
 
 
 
 
 
 
 
Revolving unsecured credit facility
 
17,500

 

 

 

 
17,500

Senior unsecured notes
 
200,000

 

 

 

 
200,000

Deferred tax liabilities
 
64

 
14,761

 
2,816

 
(10,106
)
 
7,535

Intercompany payable
 
169,711

 

 

 
(169,711
)
 

Total liabilities
 
407,254

 
21,445

 
26,331

 
(179,817
)
 
275,213

 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
Preferred stock
 

 

 

 

 

Common stock
 
395

 

 

 

 
395

Additional paid-in capital
 
182,119

 

 

 

 
182,119

Retained earnings
 
543,877

 
295,100

 
521,286

 
(804,310
)
 
555,953

Accumulated other comprehensive loss
 
(303
)
 

 
(12,076
)
 

 
(12,379
)
Common stock held in treasury, at cost
 
(296,634
)
 

 

 

 
(296,634
)
Total stockholders’ equity
 
429,454

 
295,100

 
509,210

 
(804,310
)
 
429,454

Total liabilities and stockholders’ equity
 
$
836,708

 
$
316,545

 
$
535,541

 
$
(984,127
)
 
$
704,667


13

 
 

Condensed Consolidating Balance Sheet
December 31, 2014
(unaudited, in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,799

 
$
2,906

 
$
57,287

 
$

 
$
67,992

Pawn loan fees and service charges receivable
 

 
7,120

 
9,806

 

 
16,926

Pawn loans
 

 
55,709

 
62,827

 

 
118,536

Consumer loans, net
 

 
655

 
586

 

 
1,241

Inventories
 

 
35,206

 
55,882

 

 
91,088

Prepaid expenses and other current assets
 
1,881

 

 
3,089

 

 
4,970

Deferred tax assets
 
1,069

 

 
6,053

 

 
7,122

Total current assets
 
10,749

 
101,596

 
195,530

 

 
307,875

 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
3,997

 
50,184

 
59,569

 

 
113,750

Goodwill
 

 
158,308

 
118,574

 

 
276,882

Other non-current assets
 
5,967

 
4,744

 
5,457

 

 
16,168

Deferred tax assets
 

 

 
17,127

 
(17,127
)
 

Intercompany receivable
 

 

 
170,132

 
(170,132
)
 

Investments in subsidiaries
 
837,486

 

 

 
(837,486
)
 

Total assets
 
$
858,199

 
$
314,832

 
$
566,389

 
$
(1,024,745
)
 
$
714,675

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
 
$
16,940

 
$
6,459

 
$
19,160

 
$

 
$
42,559

Total current liabilities
 
16,940

 
6,459

 
19,160