ITEM 1. FINANCIAL STATEMENTS
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2015
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
20,029
|
|
|
$
|
43,986
|
|
|
$
|
23,153
|
|
Pawn loans
|
237,220
|
|
|
247,381
|
|
|
248,713
|
|
Merchandise held for disposition, net
|
218,262
|
|
|
203,006
|
|
|
241,549
|
|
Pawn loan fees and service charges receivable
|
49,800
|
|
|
50,317
|
|
|
52,798
|
|
Consumer loans, net
|
27,226
|
|
|
30,393
|
|
|
31,291
|
|
Income taxes receivable
|
3,993
|
|
|
4,084
|
|
|
—
|
|
Prepaid expenses and other assets
|
23,082
|
|
|
25,314
|
|
|
22,642
|
|
Investment in equity securities
|
47,069
|
|
|
109,140
|
|
|
42,613
|
|
Total current assets
|
626,681
|
|
|
713,621
|
|
|
662,759
|
|
Property and equipment, net
|
155,779
|
|
|
182,051
|
|
|
171,598
|
|
Goodwill
|
488,522
|
|
|
487,569
|
|
|
488,022
|
|
Intangible assets, net
|
36,523
|
|
|
42,562
|
|
|
39,536
|
|
Other assets
|
6,652
|
|
|
5,913
|
|
|
6,823
|
|
Total assets
|
$
|
1,314,157
|
|
|
$
|
1,431,716
|
|
|
$
|
1,368,738
|
|
Liabilities and Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
62,349
|
|
|
$
|
71,586
|
|
|
$
|
74,586
|
|
Customer deposits
|
21,613
|
|
|
20,350
|
|
|
18,864
|
|
Income taxes currently payable
|
—
|
|
|
—
|
|
|
3,063
|
|
Total current liabilities
|
83,962
|
|
|
91,936
|
|
|
96,513
|
|
Deferred tax liabilities
|
69,323
|
|
|
90,689
|
|
|
64,372
|
|
Other liabilities
|
630
|
|
|
838
|
|
|
723
|
|
Long-term debt
|
183,280
|
|
|
181,319
|
|
|
208,971
|
|
Total liabilities
|
$
|
337,195
|
|
|
$
|
364,782
|
|
|
$
|
370,579
|
|
Equity:
|
|
|
|
|
|
Common stock, $0.10 par value per share, 80,000,000 shares authorized, 30,235,164 shares issued
|
3,024
|
|
|
3,024
|
|
|
3,024
|
|
Additional paid-in capital
|
82,836
|
|
|
80,702
|
|
|
86,557
|
|
Retained earnings
|
1,061,391
|
|
|
1,037,505
|
|
|
1,052,567
|
|
Accumulated other comprehensive income
|
17,817
|
|
|
57,649
|
|
|
14,842
|
|
Treasury shares, at cost (6,241,981 shares, 3,678,936 shares and 5,362,684 shares as of June 30, 2016 and 2015, and as of December 31, 2015, respectively)
|
(188,106
|
)
|
|
(111,946
|
)
|
|
(158,831
|
)
|
Total equity
|
976,962
|
|
|
1,066,934
|
|
|
998,159
|
|
Total liabilities and equity
|
$
|
1,314,157
|
|
|
$
|
1,431,716
|
|
|
$
|
1,368,738
|
|
See notes to consolidated financial statements.
1
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenue
|
|
|
|
|
|
|
|
Pawn loan fees and service charges
|
$
|
76,110
|
|
|
$
|
76,899
|
|
|
$
|
155,795
|
|
|
$
|
154,212
|
|
Proceeds from disposition of merchandise
|
148,138
|
|
|
138,703
|
|
|
326,435
|
|
|
310,916
|
|
Consumer loan fees
|
16,066
|
|
|
19,311
|
|
|
34,173
|
|
|
39,630
|
|
Other
|
837
|
|
|
1,551
|
|
|
1,953
|
|
|
3,468
|
|
Total Revenue
|
241,151
|
|
|
236,464
|
|
|
518,356
|
|
|
508,226
|
|
Cost of Revenue
|
|
|
|
|
|
|
|
Disposed merchandise
|
109,384
|
|
|
98,060
|
|
|
238,602
|
|
|
217,944
|
|
Consumer loan loss provision
|
3,552
|
|
|
4,413
|
|
|
7,495
|
|
|
9,200
|
|
Total Cost of Revenue
|
112,936
|
|
|
102,473
|
|
|
246,097
|
|
|
227,144
|
|
Net Revenue
|
128,215
|
|
|
133,991
|
|
|
272,259
|
|
|
281,082
|
|
Expenses
|
|
|
|
|
|
|
|
Operations and administration
|
108,614
|
|
|
113,306
|
|
|
219,405
|
|
|
229,644
|
|
Depreciation and amortization
|
13,028
|
|
|
14,559
|
|
|
26,533
|
|
|
29,078
|
|
Gain on divestitures
|
—
|
|
|
(201
|
)
|
|
—
|
|
|
(201
|
)
|
Total Expenses
|
121,642
|
|
|
127,664
|
|
|
245,938
|
|
|
258,521
|
|
Income from Operations
|
6,573
|
|
|
6,327
|
|
|
26,321
|
|
|
22,561
|
|
Interest expense
|
(3,436
|
)
|
|
(3,557
|
)
|
|
(7,355
|
)
|
|
(7,201
|
)
|
Interest income
|
—
|
|
|
5
|
|
|
20
|
|
|
7
|
|
Foreign currency transaction (loss) gain
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
32
|
|
Loss on early extinguishment of debt
|
—
|
|
|
(607
|
)
|
|
(11
|
)
|
|
(607
|
)
|
Gain on disposition of equity securities
|
6
|
|
|
1,099
|
|
|
123
|
|
|
1,225
|
|
Income before Income Taxes
|
3,143
|
|
|
3,260
|
|
|
19,098
|
|
|
16,017
|
|
Provision for income taxes
|
1,045
|
|
|
1,189
|
|
|
6,367
|
|
|
6,101
|
|
Net Income
|
$
|
2,098
|
|
|
$
|
2,071
|
|
|
$
|
12,731
|
|
|
$
|
9,916
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
Net Income:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.09
|
|
|
$
|
0.08
|
|
|
$
|
0.52
|
|
|
$
|
0.35
|
|
Diluted
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.51
|
|
|
$
|
0.35
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
24,326
|
|
|
27,326
|
|
|
24,569
|
|
|
28,005
|
|
Diluted
|
24,714
|
|
|
27,508
|
|
|
24,908
|
|
|
28,124
|
|
Dividends declared per common share
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
$
|
0.16
|
|
|
$
|
0.10
|
|
See notes to consolidated financial statements.
2
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net Income
|
$
|
2,098
|
|
|
$
|
2,071
|
|
|
$
|
12,731
|
|
|
$
|
9,916
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
Change in fair value of marketable equity securities before reclassification
(a)
|
4,329
|
|
|
(3,741
|
)
|
|
3,054
|
|
|
(13,520
|
)
|
Gain on disposition of equity securities reclassified from accumulated other comprehensive income
(b)
|
(4
|
)
|
|
(709
|
)
|
|
(79
|
)
|
|
(790
|
)
|
Total other comprehensive income (loss), net of tax
|
$
|
4,325
|
|
|
$
|
(4,450
|
)
|
|
$
|
2,975
|
|
|
$
|
(14,310
|
)
|
Comprehensive income (loss)
|
$
|
6,423
|
|
|
$
|
(2,379
|
)
|
|
$
|
15,706
|
|
|
$
|
(4,394
|
)
|
|
|
(a)
|
Net of tax (provision) benefit of
$(2,385)
and
$2,066
for the
three months ended June 30,
2016
and
2015
, respectively, and
$(1,683)
and
$7,416
for the
six months ended June 30,
2016
and
2015
, respectively.
|
|
|
(b)
|
Includes a
$6
and
$1,099
gain on available-for-sale securities that was reclassified to “Gain on disposition of equity securities” in the consolidated statements of income for the
three months ended June 30,
2016
and
2015
, respectively, and
$123
and
$1,225
for the
six months ended June 30,
2016
and
2015
, respectively. The tax impact of these reclassification were
$2
and
$390
for the
three months ended June 30,
2016
and
2015
, respectively, and
$44
and
$435
for the
six months ended June 30,
2016
and
2015
, respectively.
|
See notes to consolidated financial statements.
3
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(dollars in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
paid-in
capital
|
|
Retained
earnings
|
|
Accumulated
other
comprehensive
income (loss)
|
|
Treasury shares, at cost
|
|
Total
Equity
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
|
Balance as of January 1, 2015
|
30,235,164
|
|
|
$
|
3,024
|
|
|
$
|
86,388
|
|
|
$
|
1,030,387
|
|
|
$
|
71,959
|
|
|
(1,428,495
|
)
|
|
$
|
(58,556
|
)
|
|
$
|
1,133,202
|
|
Shares issued under stock-based plans
|
|
|
|
|
(5,896
|
)
|
|
|
|
|
|
112,757
|
|
|
4,292
|
|
|
(1,604
|
)
|
Stock-based compensation expense
|
|
|
|
|
3,247
|
|
|
|
|
|
|
|
|
|
|
3,247
|
|
Income tax benefit from stock-based compensation
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
256
|
|
Net income
|
|
|
|
|
|
|
9,916
|
|
|
|
|
|
|
|
|
9,916
|
|
Dividends paid
|
|
|
|
|
|
|
(2,798
|
)
|
|
|
|
|
|
|
|
(2,798
|
)
|
Marketable equity securities loss, net of tax
|
|
|
|
|
|
|
|
|
(14,310
|
)
|
|
|
|
|
|
(14,310
|
)
|
Purchases of treasury shares
|
|
|
|
|
(3,293
|
)
|
|
|
|
|
|
(2,363,198
|
)
|
|
(57,682
|
)
|
|
(60,975
|
)
|
Balance as of June 30, 2015
|
30,235,164
|
|
|
$
|
3,024
|
|
|
$
|
80,702
|
|
|
$
|
1,037,505
|
|
|
$
|
57,649
|
|
|
(3,678,936
|
)
|
|
$
|
(111,946
|
)
|
|
$
|
1,066,934
|
|
Balance as of January 1, 2016
|
30,235,164
|
|
|
$
|
3,024
|
|
|
$
|
86,557
|
|
|
$
|
1,052,567
|
|
|
$
|
14,842
|
|
|
(5,362,684
|
)
|
|
$
|
(158,831
|
)
|
|
$
|
998,159
|
|
Shares issued under stock-based plans
|
|
|
|
|
(6,580
|
)
|
|
|
|
|
|
211,861
|
|
|
6,294
|
|
|
(286
|
)
|
Stock-based compensation expense
|
|
|
|
|
2,859
|
|
|
|
|
|
|
|
|
|
|
2,859
|
|
Net income
|
|
|
|
|
|
|
12,731
|
|
|
|
|
|
|
|
|
12,731
|
|
Dividends paid
|
|
|
|
|
|
|
(3,907
|
)
|
|
|
|
|
|
|
|
(3,907
|
)
|
Marketable equity securities gain, net of tax
|
|
|
|
|
|
|
|
|
2,975
|
|
|
|
|
|
|
2,975
|
|
Purchases of treasury shares
|
|
|
|
|
|
|
|
|
|
|
(1,091,158
|
)
|
|
(35,569
|
)
|
|
(35,569
|
)
|
Balance as of June 30, 2016
|
30,235,164
|
|
|
$
|
3,024
|
|
|
$
|
82,836
|
|
|
$
|
1,061,391
|
|
|
$
|
17,817
|
|
|
(6,241,981
|
)
|
|
$
|
(188,106
|
)
|
|
$
|
976,962
|
|
See notes to consolidated financial statements.
4
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
Cash Flows from Operating Activities
|
|
|
|
Net Income
|
$
|
12,731
|
|
|
$
|
9,916
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization expenses
|
26,533
|
|
|
29,078
|
|
Amortization of debt discount and issuance costs
|
987
|
|
|
1,035
|
|
Consumer loan loss provision
|
7,495
|
|
|
9,200
|
|
Stock-based compensation
|
2,859
|
|
|
3,247
|
|
Deferred income taxes, net
|
3,312
|
|
|
(1,676
|
)
|
Non-cash loss on early extinguishment of debt
|
41
|
|
|
216
|
|
Non-cash gain on disposition of equity securities
|
(123
|
)
|
|
(1,225
|
)
|
Other
|
5,056
|
|
|
4,128
|
|
Changes in operating assets and liabilities, net of assets acquired:
|
|
|
|
Merchandise other than forfeited
|
16,229
|
|
|
3,656
|
|
Pawn loan fees and service charges receivable
|
3,009
|
|
|
3,223
|
|
Finance and service charges on consumer loans
|
(51
|
)
|
|
535
|
|
Prepaid expenses and other assets
|
303
|
|
|
(5,821
|
)
|
Accounts payable and accrued expenses
|
(11,569
|
)
|
|
(1,420
|
)
|
Current and noncurrent income taxes
|
(7,056
|
)
|
|
5,053
|
|
Other operating assets and liabilities
|
2,739
|
|
|
3,082
|
|
Net cash provided by operating activities
|
62,495
|
|
|
62,227
|
|
Cash Flows from Investing Activities
|
|
|
|
Pawn loans made
|
(378,586
|
)
|
|
(375,817
|
)
|
Pawn loans repaid
|
223,497
|
|
|
225,833
|
|
Principal recovered through dispositions of forfeited pawn loans
|
168,874
|
|
|
155,952
|
|
Consumer loans made or purchased
|
(193,577
|
)
|
|
(249,770
|
)
|
Consumer loans repaid
|
188,546
|
|
|
254,061
|
|
Acquisitions, net of cash acquired
|
(867
|
)
|
|
—
|
|
Purchases of property and equipment
|
(7,622
|
)
|
|
(6,883
|
)
|
Proceeds from disposition of marketable equity securities
|
93
|
|
|
351
|
|
Other investing activities
|
(232
|
)
|
|
1,215
|
|
Net cash provided by investing activities
|
126
|
|
|
4,942
|
|
Cash Flows from Financing Activities
|
|
|
|
Net payments under bank lines of credit
|
(23,269
|
)
|
|
—
|
|
Repurchases of notes payable
|
(3,000
|
)
|
|
(12,411
|
)
|
Treasury shares purchased
|
(35,569
|
)
|
|
(57,682
|
)
|
Accelerated share repurchases forward contact
|
—
|
|
|
(3,293
|
)
|
Dividends paid
|
(3,907
|
)
|
|
(2,798
|
)
|
Net cash used in financing activities
|
(65,745
|
)
|
|
(76,184
|
)
|
Effect of exchange rates on cash
|
—
|
|
|
(41
|
)
|
Net decrease in cash and cash equivalents
|
(3,124
|
)
|
|
(9,056
|
)
|
Cash and cash equivalents at beginning of year
|
23,153
|
|
|
53,042
|
|
Cash and cash equivalents at end of period
|
$
|
20,029
|
|
|
$
|
43,986
|
|
Supplemental Disclosures
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
Pawn loans forfeited and transferred to merchandise held for disposition
|
$
|
165,590
|
|
|
$
|
153,267
|
|
Pawn loans renewed
|
$
|
95,375
|
|
|
$
|
103,789
|
|
See notes to consolidated financial statements.
5
|
|
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
1. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include all of the accounts of Cash America International, Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.
The financial statements presented as of
June 30, 2016
and
2015
and for the
six-month periods
ended
June 30, 2016
and
2015
are unaudited but, in management’s opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim periods. The consolidated balance sheet data as of December 31,
2015
included herein was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles in the United States of America (“GAAP”). Operating results for the
three- and six-month periods
ended
June 30, 2016
are not necessarily indicative of the results that may be expected for the full fiscal year.
The Company’s primary line of business is pawn lending. Pawn loans are short-term loans made on the pledge of tangible personal property. Pawn loan fees and service charges are generated from the Company’s pawn loan portfolio. In relation to its pawn lending operations, the Company also disposes of collateral from unredeemed pawn loans and liquidates a smaller volume of merchandise purchased directly from customers or from third parties.
Another component of the Company’s business is originating, arranging, guaranteeing or purchasing consumer loans in some of its locations. Consumer loans provide customers with cash, typically in exchange for an obligation to repay the amount advanced plus fees and any applicable interest. Consumer loans offered by the Company are either written by the Company or by a third-party lender through the Company’s credit services organization or credit access business programs (“CSO programs”) and include short-term loans (commonly referred to as payday loans) and installment loans. Revenue from consumer loan fees includes interest income, finance charges and fees for services provided through the CSO programs (“CSO fees”). For more information on the Company’s CSO programs, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—the Company’s Business—Consumer Loan Activities
.”
A small component of the Company’s business includes the offering of check cashing services through franchised check cashing centers, for which the Company receives franchise fees. In addition, in some of its Company-operated lending locations, the Company offers check cashing services, as well as prepaid debit cards that are issued and serviced through a third party.
The Company has
one
reportable operating segment, and therefore, all required financial segment information can be found directly in the consolidated financial statements. The Company evaluates the performance of its reportable segment based on income from operations.
These financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
Goodwill and Other Indefinite Lived Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination and is not amortized. In accordance with Accounting Standards Codification (“ASC”) 350-20-35,
Goodwill-Subsequent Measurement
(“ASC 350”), the Company tests goodwill and intangible assets with an indefinite life for potential impairment annually as of June 30 and between
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
annual tests 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, which would result in impairment. The Company has one reportable operating segment, which serves as the only reporting unit for goodwill assessment.
The Company completed its annual assessment of goodwill as of June 30, 2016. The Company elected to perform a qualitative assessment in accordance with ASU 2012-02,
Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
(“ASU 2012-02”), and, based on the results of this assessment, determined that no conditions existed that would make it more likely than not that goodwill was impaired.
As part of the goodwill assessment, the Company also considers certain observable quantitative factors in its assessment, such as the market value of its equity, which is the observable market value of the Company based on the quoted market prices of the Company’s common stock at the measurement date. The Company compares the market value of its equity to the carrying value of its equity. As of June 30, 2016, the market value of the Company’s equity was higher than the carrying value of equity. In addition, as part of the
Agreement and Plan of Merger (the “Merger Agreement”)
entered into by the Company,
First Cash Financial Services, Inc., a Delaware corporation (“FCFS”),
and Frontier Merger Sub, LLC, a Texas limited liability company, the estimated merger consideration based on the stock price of FCFS as of June 30, 2016 was in excess of the Company’s carrying value of equity. See
Note 8
for a description of the Merger Agreement with FCFS. Therefore, the Company’s goodwill is not considered to be at risk of being impaired at this time. However, a decline in general economic, market or business conditions, significant unfavorable changes in the Company’s forecasted revenue, expenses, cash flows, weighted-average cost of capital, and/or market transaction multiples, or a termination of the Merger Agreement could represent a potential triggering event that may indicate an impairment review should be performed. The Company will continue to monitor for events and circumstances that could negatively impact the key assumptions in determining its fair value.
The Company performed its annual indefinite-lived intangible asset impairment test as of June 30, 2016. The Company’s indefinite-lived intangible assets consist of trademarks, trade names, and licenses and had a carrying amount of
$15.0 million
as of June 30, 2016. The Company elected to perform a qualitative assessment in accordance with
ASU
2012-02 and determined that no conditions existed that would make it more likely than not that the indefinite-lived intangible assets were impaired. Therefore, no further quantitative assessment was required.
Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”), which simplifies several aspects related to the accounting for share-based payment transactions. Per ASU 2016-09: (1) all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement, rather than in additional paid-in capital under current guidance; (2) excess tax benefits should be classified along with other income tax cash flows as an operating activity on the statement of cash flows, rather than as a separate cash inflow from financing activities and cash outflow from operating activities under current guidance; (3) cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity; and (4) an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, which is consistent with current guidance, or account for forfeitures when they occur. ASU 2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted.
Effective January 1, 2016, the Company elected to early adopt ASU 2016-09. The Company prospectively applied the guidance dictating that excess tax benefits be recognized on the income statement. For the three and
six months ended June 30, 2016
, the Company recognized an excess income tax benefit of
$0.2 million
and
$0.7 million
, respectively, that reduced the income tax provision and increased net income on the consolidated statements of income. The Company retrospectively applied the guidance dictating the presentation of excess tax benefits as an operating cash flow and included the
$0.7 million
excess income tax benefit as part of “Current and noncurrent
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
income taxes” presented as an operating activity on the consolidated statement of cash flows for the
six months ended June 30, 2016
. For the
six months ended June 30, 2015
, the
$0.3 million
excess tax benefit presented as offsetting operating and financing activities in the consolidated cash flow statements within the quarterly report filed on Form 10-Q for the
six months ended June 30, 2015
was eliminated from the presentation due to the adoption of this guidance. In addition, the Company retrospectively applied the guidance dictating that cash paid by an employer when directly withholding shares for tax-withholding purposes be classified as a financing activity, and, consistent with prior period presentation, these amounts were included as part of “Treasury shares purchased” presented as a financing activity on the consolidated statement of cash flows for the
six months ended June 30, 2016
and
2015
. Finally, the Company elected to account for forfeitures when they occur.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”), which requires that all deferred tax assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts on the balance sheet. ASU 2015-17 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2016 and can be prospectively or retrospectively applied. Early adoption is permitted. The Company early adopted ASU 2015-17 on January 1, 2016 and retrospectively applied ASU 2015-17 for all periods presented. The impact of this change in accounting principle on amounts previously reported on the consolidated balance sheet as of
June 30, 2015
was a reclassification of
$20.4 million
previously reported as “Current deferred tax liabilities” in the current liabilities section of the consolidated balance sheet to “Deferred tax liabilities” in the noncurrent liabilities section of the consolidated balance sheet. As of December 31, 2015, the impact of this change in accounting principle resulted in a reclassification of
$7.7 million
previously reported as “Current deferred tax assets” in the current assets section of the consolidated balance sheet to “Deferred tax liabilities” in the noncurrent liabilities section of the consolidated balance sheet.
In April 2015, the FASB issued ASU 2015-03,
Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”), which requires that 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, consistent with debt discounts. In addition, since ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs specifically related to line-of-credit arrangements, the FASB also issued ASU 2015-15,
Interest-Imputed Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
(“ASU 2015-15”), in August 2015. ASU 2015-15 states that, for line-of-credit arrangements, entities can continue to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt costs ratably over the term of the arrangement. ASU 2015-03 and ASU 2015-15 apply to all business entities and are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2015.
On January 1, 2016, the Company retrospectively adopted ASU 2015-03 and ASU 2015-15. As a result, unamortized debt issuance costs related to the Company’s $300.0 million in aggregate principal amount of 5.75% senior notes due 2018 (the “2018 Senior Notes”) of
$2.0 million
,
$3.1 million
and
$2.6 million
as of
June 30,
2016
and
2015
and
December 31,
2015
, respectively, were reclassified from “Other assets” to a deduction of “Long-term debt” on the Company’s consolidated balance sheets. Unamortized debt issuance costs related to the Company’s
$280.0 million
line of credit due 2018 (the “Line of Credit”) of
$1.1 million
,
$1.4 million
and
$1.4 million
as of
June 30,
2016
and
2015
and
December 31,
2015
, respectively, remain in “Other assets” on the Company’s consolidated balance sheets. Adoption of ASU 2015-03 and ASU 2015-15 did not impact the results of operations, retained earnings or cash flows in the current or previous reporting periods.
In April 2015, the FASB issued ASU 2015-05,
Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
(“ASU 2015-05”), which defines specific criteria that entities must apply to determine if a cloud computing arrangement includes an in-substance software license. The result of the assessment will direct the entity to apply either software licensing or service contract guidance to record the related fees. ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015 and can be prospectively or retrospectively
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
applied. The Company prospectively adopted ASU 2015-02 on January 1, 2016, and the adoption did not have a material effect on its financial position or results of operations.
In February 2015, the FASB issued ASU 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
(“ASU 2015-02”), which provides guidance for reporting entities that are required to evaluate whether they should consolidate certain legal entities. In accordance with ASU 2015-02, all legal entities are subject to reevaluation under the revised consolidation model. ASU 2015-02 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Entities are permitted to apply ASU 2015-02 either retrospectively or through a modified retrospective approach. The Company retrospectively adopted ASU 2015-02 on January 1, 2016, and the adoption did not have a material effect on its financial position or results of operations.
Accounting Standards to be Adopted in Future Periods
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
which requires entities to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. ASU 2016-13 is effective for public entities that are Securities and Exchange Commission
(“SEC”) filers for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company does not expect that the adoption of ASU 2016-13 will have a material effect on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07,
Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transaction to the Equity Method of Accounting
(“ASU 2016-07”), which eliminates the requirement that when an investment qualifies for the use of the equity method as a result of an increase in the level of ownership interest or degree of influence, the investor must adjust the investment, results of operations and retained earnings retrospectively as if the equity method had been in effect during all previous periods in which the investment had been held. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. In addition, ASU 2016-07 requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. ASU 2016-07 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, and should be applied prospectively. Early adoption is permitted. Since the Company does not account for its investment in Enova common stock under the equity method of accounting, the Company does not expect that the adoption of ASU 2016-07 will have a material effect on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 824)
(“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to recognize the following for all leases with terms longer than 12 months: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Leases with a term of 12 months or less will be accounted for similarly to existing guidance for operating leases today. In addition, ASU 2016-02 aligns lessor accounting with the lessee accounting model and ASU 2014-09,
Revenue from Contracts with Customers (Topic 606) Section A—Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40)
(“ASU 2014-09”). ASU 2016-02 is effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. Entities must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
statements. The Company is still assessing the potential impact of ASU 2016-02 on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”), which requires that equity investments, except for those accounted for under the equity method or those that result in consolidation of the investee, be measured at fair value, with subsequent changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. ASU 2016-01 also impacts the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted only for certain provisions. The Company does not expect that the adoption of ASU 2016-01 will have a material effect on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, which supersedes the revenue recognition requirements in ASC 605,
Revenue Recognition
. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 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 FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606)
, which defers the effective date of ASU 2014-09 by one year. In addition, between March 2016 and May 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(“ASU 2016-08”), ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
(“ASU 2016-10”) and ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients
(“ASU 2016-12”). ASU 2016-08, ASU 2016-10 and ASU 2016-12 clarify certain aspects of ASU 2014-09 and provide additional implementation guidance. For public business entities, ASU 2014-09, ASU 2016-08, ASU 2016-10 and ASU 2016-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted at, but not before, the original effective date, which is for fiscal years, and interim periods within those years, beginning after December 15, 2016. Entities are permitted to apply ASU 2014-09, ASU 2016-08, ASU 2016-10, and ASU 2016-12 either retrospectively or through an alternative transition model. The Company does not expect that the adoption of ASU 2014-09, ASU 2016-08, ASU 2016-10 and ASU 2016-12 will have a material effect on its consolidated financial statements.
2. Credit Quality Information on Pawn Loans
In its pawn loan portfolio, the Company monitors the type and adequacy of collateral compared to historical forfeiture rates, average loan amounts and gross profit margins, among other factors. If a pawn loan defaults, the Company relies on the disposition of forfeited merchandise to recover the principal amount of an unpaid pawn loan, plus a yield on the investment, because the Company’s pawn loans are non-recourse against the customer. In addition, a pawn loan customer’s creditworthiness does not affect the Company’s financial position or results of operations. Generally, forfeited merchandise has historically sold for an amount in excess of the carrying value of the merchandise. Goods pledged to secure pawn loans are tangible personal property items such as jewelry, tools, televisions and other electronics, musical instruments and other miscellaneous items.
A pawn loan is considered delinquent if the customer does not repay or, where allowed by law, renew or extend the loan on or prior to its contractual maturity date plus any applicable grace period. Therefore, the balance of “Pawn loans” in the consolidated balance sheets includes delinquent loans that are in the process of being moved to merchandise held for disposition but have not yet been transferred. Pawn loan fees and service charges do not accrue on delinquent pawn loans. When a pawn loan is considered delinquent, any accrued pawn loan fees and service charges are reversed, and no additional pawn loan fees and service charges are accrued. As of
June 30, 2016
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
and
2015
and
December 31, 2015
, the Company had current pawn loans outstanding of
$229.2 million
,
$239.2 million
and
$241.6 million
, respectively, and delinquent pawn loans outstanding of
$8.0 million
,
$8.2 million
and
$7.1 million
, respectively.
3. Consumer Loans, Credit Quality Information on Consumer Loans, Allowance and Liability for Estimated Losses on Consumer Loans and Guarantees of Consumer Loans
Current and Delinquent Consumer Loans
The Company classifies its consumer loans as either current or delinquent. Short-term loans are considered delinquent when payment of an amount due is not made as of the due date. Installment loans are considered delinquent when a customer misses two payments. The Company allows for normal payment processing time before considering a loan delinquent but does not provide for any additional grace period.
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.
Allowance and Liability for Estimated Losses on Consumer Loans
The Company monitors the performance of its consumer loan portfolio and maintains either an allowance or liability for estimated losses on consumer loans (including earned fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the portfolio. The allowance for estimated losses on the consumer loans owned by the Company reduces the outstanding loan balance in the consolidated balance sheets. The liability for estimated losses related to loans guaranteed under the Company’s CSO programs is included in “Accounts payable and accrued expenses” in the consolidated balance sheets. Increases or decreases in the allowance and the liability for estimated losses are increased by charge-offs and decreased by recoveries, and the net change is recorded as “Consumer loan loss provision” in the consolidated statements of income.
In determining the allowance or liability for estimated losses on consumer loans, the Company applies a documented systematic methodology. In calculating the allowance or liability for loan losses, outstanding loans are divided into discrete groups of short-term loans and installment loans and are analyzed as current or delinquent.
The allowance or liability for short-term loans classified as current is based on historical loss rates adjusted for recent default trends for current loans. For delinquent short-term loans, the allowance or liability is based on a six-month rolling average of loss rates by stage of collection. For installment loans, the Company uses a migration analysis to estimate losses inherent in the portfolio once an adequate period of time has elapsed in order for the Company to generate a meaningful indication of performance history. The allowance or liability calculation under the migration analysis is based on historical charge-off experience and the loss emergence period, which represents the average amount of time between the first occurrence of a loss event to the charge-off of a loan. The factors the Company considers in determining the adequacy of the allowance or liability include past due performance, historical behavior of monthly vintages, underwriting changes and recent trends in delinquency in the migration analysis. Prior to the establishment of an indicative migration analysis, the Company estimates future losses for its installment loans based on the historical charge-off experience of the total portfolio on a static pool basis.
The Company fully reserves or charges off consumer loans once the loan has been classified as delinquent for
60
days. If a loan is estimated to be uncollectible before it is fully reserved, it is charged off at that point. Consumer loans classified as delinquent generally have an age of
one
to
59
days from the date the loan became delinquent, as defined above. Recoveries on loans previously charged 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.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The components of Company-owned consumer loan portfolio receivables as of
June 30, 2016
and
2015
and
December 31, 2015
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
As of
|
|
June 30, 2016
|
|
June 30, 2015
|
|
December 31, 2015
|
Short-term loans
|
|
|
|
|
|
Current loans
|
$
|
23,726
|
|
|
$
|
25,573
|
|
|
$
|
26,304
|
|
Delinquent loans
|
2,539
|
|
|
3,519
|
|
|
2,723
|
|
Total consumer loans, gross
|
26,265
|
|
|
29,092
|
|
|
29,027
|
|
Less: Allowance for losses
|
(1,350
|
)
|
|
(2,106
|
)
|
|
(1,651
|
)
|
Consumer loans, net
|
$
|
24,915
|
|
|
$
|
26,986
|
|
|
$
|
27,376
|
|
|
|
|
|
|
|
Installment loans
|
|
|
|
|
|
Current loans
|
$
|
1,563
|
|
|
$
|
2,334
|
|
|
$
|
2,027
|
|
Delinquent loans
|
1,706
|
|
|
2,500
|
|
|
3,133
|
|
Total consumer loans, gross
|
3,269
|
|
|
4,834
|
|
|
5,160
|
|
Less: Allowance for losses
|
(958
|
)
|
|
(1,427
|
)
|
|
(1,245
|
)
|
Consumer loans, net
|
$
|
2,311
|
|
|
$
|
3,407
|
|
|
$
|
3,915
|
|
|
|
|
|
|
|
Total Company-owned consumer loans
|
|
|
|
|
|
Current loans
|
$
|
25,289
|
|
|
$
|
27,907
|
|
|
$
|
28,331
|
|
Delinquent loans
|
4,245
|
|
|
6,019
|
|
|
5,856
|
|
Total consumer loans, gross
|
29,534
|
|
|
33,926
|
|
|
34,187
|
|
Less: Allowance for losses
|
(2,308
|
)
|
|
(3,533
|
)
|
|
(2,896
|
)
|
Consumer loans, net
|
$
|
27,226
|
|
|
$
|
30,393
|
|
|
$
|
31,291
|
|
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Changes in the allowance for losses for Company-owned consumer loans and the liability for estimated losses on the Company’s guarantees of third-party lender-owned consumer loans through the CSO programs for the
three and six months ended June 30, 2016
and
2015
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Short-term loans
|
|
|
|
|
|
|
|
Allowance for losses for Company-owned consumer loans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
1,164
|
|
|
$
|
2,034
|
|
|
$
|
1,651
|
|
|
$
|
2,736
|
|
Consumer loan loss provision
|
2,319
|
|
|
1,767
|
|
|
4,692
|
|
|
5,073
|
|
Charge-offs
|
(2,657
|
)
|
|
(4,406
|
)
|
|
(6,228
|
)
|
|
(10,121
|
)
|
Recoveries
|
524
|
|
|
2,711
|
|
|
1,235
|
|
|
4,418
|
|
Balance at end of period
|
$
|
1,350
|
|
|
$
|
2,106
|
|
|
$
|
1,350
|
|
|
$
|
2,106
|
|
Liability for third-party lender-owned consumer loans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
26
|
|
|
$
|
215
|
|
|
$
|
30
|
|
|
$
|
402
|
|
Consumer loan loss provision
|
1
|
|
|
(56
|
)
|
|
(3
|
)
|
|
(243
|
)
|
Balance at end of period
|
$
|
27
|
|
|
$
|
159
|
|
|
$
|
27
|
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
Installment loans
|
|
|
|
|
|
|
|
Allowance for losses for Company-owned consumer loans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
1,087
|
|
|
$
|
1,191
|
|
|
$
|
1,245
|
|
|
$
|
1,426
|
|
Consumer loan loss provision
|
1,413
|
|
|
1,965
|
|
|
4,449
|
|
|
3,265
|
|
Charge-offs
|
(2,223
|
)
|
|
(2,007
|
)
|
|
(5,781
|
)
|
|
(3,914
|
)
|
Recoveries
|
681
|
|
|
278
|
|
|
1,045
|
|
|
650
|
|
Balance at end of period
|
$
|
958
|
|
|
$
|
1,427
|
|
|
$
|
958
|
|
|
$
|
1,427
|
|
Liability for third-party lender-owned consumer loans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
494
|
|
|
$
|
1,026
|
|
|
$
|
1,956
|
|
|
$
|
658
|
|
Consumer loan loss provision
|
(181
|
)
|
|
737
|
|
|
(1,643
|
)
|
|
1,105
|
|
Balance at end of period
|
$
|
313
|
|
|
$
|
1,763
|
|
|
$
|
313
|
|
|
$
|
1,763
|
|
|
|
|
|
|
|
|
|
Total consumer loans
|
|
|
|
|
|
|
|
Allowance for losses for Company-owned consumer loans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
2,251
|
|
|
$
|
3,225
|
|
|
$
|
2,896
|
|
|
$
|
4,162
|
|
Consumer loan loss provision
(a)
|
3,732
|
|
|
3,732
|
|
|
9,141
|
|
|
8,338
|
|
Charge-offs
|
(4,880
|
)
|
|
(6,413
|
)
|
|
(12,009
|
)
|
|
(14,035
|
)
|
Recoveries
|
1,205
|
|
|
2,989
|
|
|
2,280
|
|
|
5,068
|
|
Balance at end of period
|
$
|
2,308
|
|
|
$
|
3,533
|
|
|
$
|
2,308
|
|
|
$
|
3,533
|
|
Liability for third-party lender-owned consumer loans:
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
520
|
|
|
$
|
1,241
|
|
|
$
|
1,986
|
|
|
$
|
1,060
|
|
Consumer loan loss provision
(a)
|
(180
|
)
|
|
681
|
|
|
(1,646
|
)
|
|
862
|
|
Balance at end of period
|
$
|
340
|
|
|
$
|
1,922
|
|
|
$
|
340
|
|
|
$
|
1,922
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The sum of the consumer loan loss provision related to the allowance for losses for Company-owned consumer loans and the consumer loan loss provision related to the liability for third-party lender-owned consumer equals the consumer loan loss provision presented on the consolidated statements of income for the respective time periods.
|
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
In connection with its CSO programs, the Company guarantees consumer loan payment obligations to unrelated third-party lenders for short-term loans, unsecured installment loans and the remaining outstanding installment loans that are secured by a customer’s vehicle, which the Company ceased offering in the latter half of 2015. The guarantee represents an obligation to purchase specific loans that go into default.
Short-term loans that the Company guarantees generally have terms of
45
days or less.
Unsecured installment loans that the Company guarantees generally have terms of up to
twelve
months.
Secured installment loans that the Company guarantees, which the Company ceased offering in the latter half of 2015, have remaining terms of up to
23
months.
As of
June 30, 2016
and
2015
and December 31,
2015
,
the amount of consumer loans guaranteed by the Company, excluding unearned CSO fees, was
$7.4 million
,
$12.9 million
and
$11.1 million
, respectively,
representing amounts due under consumer loans originated by third-party lenders under the CSO programs.
The liability for estimated losses on consumer loans guaranteed by the Company of
$0.3 million
,
$1.9 million
and
$2.0 million
, as of
June 30, 2016
and
2015
and December 31,
2015
, respectively,
is included in “Accounts payable and accrued expenses” in the accompanying consolidated balance sheets.
4. Investment in Enova
Upon completion of the distribution of approximately 80% of the outstanding shares of Enova International, Inc. (“Enova”) common stock to the Company’s shareholders in November 2014 (the “Enova Spin-off”), the Company retained approximately 20 percent, or
6,596,927
shares of Enova common stock, and the Company agreed, pursuant to a private letter ruling it obtained in connection with the Enova Spin-off, to dispose of its retained shares of Enova common stock (other than the shares retained for delivery under the Company’s long-term incentive plans (the “LTIPs”) as described below) no later than November 13, 2016, which is two years after the date of the Enova Spin-off. At the time of the private letter ruling, Company management believed that the Company’s shares of Enova common stock would be registered with the SEC on approximately the same date as the Enova Spin-off in order to efficiently dispose of the shares in open market dispositions over a two-year period. Due to unanticipated delays in the registration process, the Company’s shares of Enova common stock were not registered until September 15, 2015. Shortly after the shares were registered, the Company filed a supplemental request with the Internal Revenue Service requesting an extension of the original two-year period to dispose of its retained shares of Enova common stock. In March 2016, the Internal Revenue Service granted the request and extended the date by which the Company was required to dispose of its shares of Enova common stock to September 15, 2017.
All of the retained shares of Enova common stock (including shares retained for delivery under the Company’s LTIPs as described below) are classified as “available-for-sale securities” in accordance with ASC 320,
Investments-Debt and Equity Securities
(“ASC 320”). The Company does not account for its investment in Enova common stock under the equity method for the following reasons. The Company does not have the ability to significantly influence the strategy or the operating or financial policies of Enova. The Company does not share employees or management with Enova and does not participate in any policy-making process of Enova. The Company does not have the right to vote on matters put before Enova stockholders because it has granted Enova a proxy to vote its shares in the same proportion as the other stockholders of Enova on all such matters. In addition, the Company has agreed to divest its ownership in Enova prior to September 15, 2017, as discussed above. While Daniel R. Feehan, the Company’s Executive Chairman of the Board, serves as one of nine members of Enova’s Board of Directors, he does not serve on any committees of Enova’s Board of Directors, and the Company is not able to influence his future election to Enova’s Board of Directors because it does not have voting power with respect to the shares of Enova that it owns. The Company also does not have any material business relationships with Enova.
The retained shares of Enova common stock include a portion of shares of Enova common stock that may be delivered by the Company, based on applicable vesting or deferral terms, to holders of certain outstanding unvested restricted stock units (“RSUs”), vested deferred RSUs, and unvested deferred RSUs that were granted by the Company under the LTIPs to certain of its officers, directors and employees, as well as shares that are deliverable to certain directors who have elected to defer a portion of their director fees to be paid in the form of
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
common stock of the Company (“Director Deferred Shares”), if such equity awards and Director Deferred Shares were outstanding under the LTIPs on the date of the Enova Spin-off.
Such RSU awards and Director Deferred Shares will be payable by the Company in both shares of Company common stock and Enova common stock, subject to the terms of the LTIPs and/or the applicable award agreements. The delivery of the Enova shares of common stock occurs periodically based on the vesting or deferral terms that are applicable to the RSU awards or Director Deferred Shares. In the event the award does not vest and shares are forfeited or if shares are withheld to pay taxes for vested awards, the Enova shares will be retained by the Company and sold.
As of
June 30, 2016
, the Company owned
6,424,231
shares and had allocated
425,096
of these retained shares for delivery under the LTIPs (as described above), resulting in the Company’s implied residual ownership in Enova equal to approximately
18 percent
of the outstanding Enova common stock as of
June 30, 2016
. See table below for additional information.
As of
June 30, 2016
, the Company’s cost basis in its investment in Enova common stock was approximately
$19.5 million
, and an unrealized gain of approximately
$27.6 million
was included in “Accumulated other comprehensive income.” For the six months ended
June 30, 2016
and
2015
, the Company recognized a gain of approximately
$0.1 million
and
$1.2 million
, respectively, for the disposition of Enova common stock as a result of the distribution of shares for payment of RSU awards, as well as the sale of shares that were withheld to pay taxes for issued awards. The Company’s investment in Enova common stock is included in “Investment in equity securities” in the consolidated balance sheets, and the unrealized gain on the Company’s investment in Enova common stock comprises the entire balance of “Accumulated other comprehensive income” as of
June 30, 2016
and
2015
and
December 31, 2015
. Activity during the
six months ended
June 30, 2016
for the Enova shares retained by the Company is shown below (shares in ones):
|
|
|
|
|
|
|
|
|
|
|
Enova Shares Attributed to the Company
(a)
|
|
Potential Enova Shares to be Delivered Under the LTIPs
(b)
|
|
Total Enova Shares Held by the Company
|
Enova shares at December 31, 2015
|
5,964,106
|
|
|
511,505
|
|
|
6,475,611
|
|
Forfeitures
(c)
|
35,029
|
|
|
(35,029
|
)
|
|
—
|
|
Shares delivered under the LTIPs
|
—
|
|
|
(33,458
|
)
|
|
(33,458
|
)
|
Shares withheld for taxes and sold
|
—
|
|
|
(17,922
|
)
|
|
(17,922
|
)
|
Shares held as of June 30, 2016
|
5,999,135
|
|
|
425,096
|
|
|
6,424,231
|
|
Approximate % ownership of Enova as of June 30, 2016
|
18.1
|
%
|
|
1.3
|
%
|
|
19.4
|
%
|
|
|
|
|
|
|
|
|
(a)
|
Does not include shares retained for delivery under the LTIPs.
|
|
|
(b)
|
The Enova shares payable for vested deferred RSUs and Director Deferred Shares are held in a rabbi trust.
|
|
|
(c)
|
Shares initially allocated for delivery under the LTIPs that were forfeited prior to vesting are attributed to the Company and are to be disposed of by the Company.
|
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
5. Long-term Debt
The Company’s long-term debt instruments and balance outstanding as of
June 30, 2016
and
2015
and
December 31, 2015
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
June 30,
|
|
December 31,
|
|
2016
|
|
2015
|
|
2015
|
Line of credit due 2018
|
$
|
3,839
|
|
|
$
|
—
|
|
|
$
|
27,108
|
|
5.75% senior unsecured notes due 2018:
|
|
|
|
|
|
5.75% senior unsecured notes due 2018, outstanding principal
|
181,450
|
|
|
184,450
|
|
|
184,450
|
|
Unamortized debt issuance costs
|
(2,009
|
)
|
|
(3,131
|
)
|
|
(2,587
|
)
|
5.75% senior unsecured notes due 2018, net of debt issuance costs
|
179,441
|
|
|
181,319
|
|
|
181,863
|
|
Total long-term debt
|
$
|
183,280
|
|
|
$
|
181,319
|
|
|
$
|
208,971
|
|
Line of Credit
The Company has a credit agreement with a syndicate of financial institutions as lenders that was entered into on March 30, 2011 and later amended (the “Credit Agreement”). The Credit Agreement, as amended, provides for a line of credit in an aggregate principal amount of up to
$280.0 million
permitting revolving credit loans (“Line of Credit”). The Credit Agreement is guaranteed by the Company’s domestic subsidiaries and matures on March 31, 2018. The Credit Agreement contains an accordion feature whereby the Line of Credit may be increased up to an additional
$100.0 million
with the consent of any increasing lenders.
Interest on the Line of Credit is charged, at the Company’s option, at either the London Interbank Offered Rate (“LIBOR”) for one week or one-, two-, three- or six-month periods, as selected by the Company, plus a margin varying from
2.00%
to
3.25%
or at the agent’s base rate plus a margin varying from
0.50%
to
1.75%
. The margin for the Line of Credit is dependent on the Company’s cash flow leverage ratios as defined in the Credit Agreement. The Company also pays a fee on the unused portion of the Line of Credit ranging from
0.25%
to
0.50%
(
0.38%
as of
June 30, 2016
) based on the Company’s cash flow leverage ratios.
The Company had
$3.8 million
and
$27.1 million
of borrowings outstanding under the Line of Credit as of
June 30, 2016
and December 31,
2015
, respectively. As of
June 30, 2016
, borrowings under the Line of Credit consisted of
one
pricing tranche with a maturity date of
one
day. As of December 31,
2015
, borrowings under the Line of Credit consisted of
two
pricing tranches with maturity dates ranging from
five
to
eight
days. The Company had no borrowings outstanding under the Line of Credit as of
June 30,
2015
. The weighted average interest rate (including margin) on the Line of Credit was
3.69%
and
3.48%
as of
June 30, 2016
and December 31,
2015
, respectively. The Company may routinely refinance its borrowings pursuant to the terms of its Line of Credit. Therefore, these borrowings are considered part of the applicable line of credit and as long-term debt.
Letter of Credit Facility
When the Company entered into the Credit Agreement, it also entered into a Standby Letter of Credit Agreement (the “LC Agreement”) for the issuance of up to
$20.0 million
in letters of credit (the “Letter of Credit Facility”) that is guaranteed by the Company’s domestic subsidiaries and matures on March 31, 2018. In the event that an amount is paid by the issuing bank under a standby letter of credit, it will be due and payable by the Company on demand, and amounts due by the Company under the LC Agreement will bear interest annually at a rate that is the lesser of (a) 2% above the prime rate for Wells Fargo Bank, National Association or (b) the maximum rate of interest permissible under applicable laws. The LC Agreement also requires the Company to pay quarterly fees equal to the applicable margin set forth in the LC Agreement on the undrawn amount of the credit outstanding.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The Company had standby letters of credit of
$6.0 million
issued under its Letter of Credit Facility as of
June 30, 2016
.
$300.0 million 5.75% Senior Unsecured Notes
On May 15, 2013, the Company issued and sold $300.0 million in aggregate principal amount of the 2018 Senior Notes. The 2018 Senior Notes bear interest at a rate of
5.75%
annually on the principal amount, payable semi-annually in arrears on May 15 and November 15 of each year. The 2018 Senior Notes will mature on May 15, 2018, and there are no scheduled payments of principal due before the maturity date. The 2018 Senior Notes were originally sold to qualified institutional buyers under Rule 144A of the Securities Act and Regulation S of the Securities Act outside the United States, and all 2018 Senior Notes were subsequently registered under the Securities Act pursuant to an exchange offer.
The 2018 Senior Notes are senior unsecured debt obligations of the Company and are guaranteed by all of the Company’s subsidiaries (the “Guarantors”). The Guarantors have guaranteed fully and unconditionally, on a joint and several basis, the obligations to pay principal and interest for the 2018 Senior Notes. As of
June 30, 2016
, Cash America International, Inc., on a stand-alone unconsolidated basis (the “Parent Company”), had no independent assets or operations. As of
June 30, 2016
, all of the Guarantors were
100%
owned by the Company. The Indenture, dated as of May 15, 2013, that governs the 2018 Senior Notes, among the Company, the guarantors party thereto and the trustee (“2018 Senior Notes Indenture”), provides that if any of the Guarantors is released from its guarantees of the Company’s borrowings and obligations under the Credit Agreement, that Guarantor’s guaranty of the 2018 Senior Notes will also be released.
The 2018 Senior Notes are redeemable at the Company’s option, in whole or in part, at any time at
100%
of the aggregate principal amount of 2018 Senior Notes redeemed plus the applicable “make whole” redemption price specified in the 2018 Senior Notes Indenture, plus accrued and unpaid interest, if any, to the redemption date. In addition, if a change of control occurs, as that term is defined in the 2018 Senior Notes Indenture, the holders of 2018 Senior Notes will have the right, subject to certain conditions, to require the Company to repurchase their 2018 Senior Notes at a purchase price equal to
101%
of the aggregate principal amount plus accrued and unpaid interest, if any, as of the date of repurchase.
On August 2, 2016, the Company exercised its option to redeem the 2018 Senior Notes in full.
For additional information on the upcoming redemption, see
Note 9
.
Debt Agreement Compliance
The debt agreements for the Line of Credit and the 2018 Senior Notes require the Company to maintain certain financial ratios.
As of
June 30, 2016
, the Company believes it was in compliance with all covenants or other requirements set forth in its debt agreements.
On June 26, 2015, the Trustee under the 2018 Senior Notes Indenture, filed a lawsuit against the Company in the United States District Court for the Southern District of New York. The lawsuit alleges that the Enova Spin-off was not permitted by the 2018 Senior Notes Indenture, and the Trustee is seeking a remedy equal to principal and accrued and unpaid interest, plus a make-whole premium, to be paid to the holders of the 2018 Senior Notes. The Company disagrees with the assertion in the lawsuit that the Enova Spin-off was not permitted under the 2018 Senior Notes Indenture. The Company also disagrees that a make-whole premium would be due to the holders of the 2018 Senior Notes even if it is determined that the Enova Spin-off was not permitted under the 2018 Senior Notes Indenture.
Discovery in this lawsuit has been completed, and the parties have filed cross-motions for summary judgment that have not yet been ruled on by the court. The Company believes the position taken by the Trustee is without merit, and the Company intends to vigorously defend its position.
On August 2, 2016, the Company exercised its option to redeem the 2018 Senior Notes in full.
For additional information on the upcoming redemption, see
Note 9
.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
6. Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income 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 period.
RSUs issued under the Company’s stock-based employee compensation plans are included in diluted shares from the grant date of the award based on the treasury stock method. Performance-based RSU awards are included in diluted shares based on the level of performance that management estimates is the most probable outcome at the grant date. Throughout the requisite service period, management monitors the probability of achievement of the performance condition and adjusts the number of shares included in diluted shares accordingly.
The following table sets forth the reconciliation of numerators and denominators of basic and diluted net income per share calculations for the
three and six months ended June 30, 2016
and
2015
(dollars and shares in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
Net Income
|
$
|
2,098
|
|
|
$
|
2,071
|
|
|
$
|
12,731
|
|
|
$
|
9,916
|
|
Denominator:
|
|
|
|
|
|
|
|
Total weighted average basic shares
(a)
|
24,326
|
|
|
27,326
|
|
|
24,569
|
|
|
28,005
|
|
Shares applicable to stock-based compensation
(b)
|
388
|
|
|
182
|
|
|
339
|
|
|
119
|
|
Total weighted average diluted shares
(c)
|
24,714
|
|
|
27,508
|
|
|
24,908
|
|
|
28,124
|
|
Net Income - basic
|
$
|
0.09
|
|
|
$
|
0.08
|
|
|
$
|
0.52
|
|
|
$
|
0.35
|
|
Net Income - diluted
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.51
|
|
|
$
|
0.35
|
|
|
|
(a)
|
Includes vested and deferred RSUs of
291
and
299
for the
three months ended June 30,
2016
and
2015
, respectively, and
292
and
302
for the
six months ended June 30,
2016
and
2015
, respectively.
|
|
|
(b)
|
Includes the dilutive effect of shares related to unvested RSU awards.
|
|
|
(c)
|
Excludes
15
and
117
anti-dilutive shares for the
three months ended June 30,
2016
and
2015
, respectively, and
15
and
239
for the
six months ended June 30,
2016
and
2015
, respectively.
|
7. Fair Value Measurements
Recurring Fair Value Measurements
In accordance with ASC 820,
Fair Value Measurements and Disclosures
(“ASC 820”)
,
certain of the Company’s assets and liabilities, which are carried at fair value, are classified in one of the following three categories:
|
|
•
|
Level 1: Quoted market prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
|
|
|
•
|
Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.
|
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The Company’s financial assets that are measured at fair value on a recurring basis as of
June 30, 2016
and
2015
and
December 31, 2015
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Fair Value Measurements Using
|
|
2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
Nonqualified Savings Plan-related assets and Director Deferred Shares
(a)
|
$
|
11,679
|
|
|
$
|
11,679
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment in equity securities
|
47,069
|
|
|
47,069
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
58,748
|
|
|
$
|
58,748
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
June 30,
|
|
Fair Value Measurements Using
|
|
2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
Nonqualified Savings Plan-related assets and Director Deferred Shares
(a)
|
$
|
11,576
|
|
|
$
|
11,090
|
|
|
$
|
486
|
|
|
$
|
—
|
|
Investment in equity securities
|
109,140
|
|
|
—
|
|
|
109,140
|
|
|
—
|
|
Total
|
$
|
120,716
|
|
|
$
|
11,090
|
|
|
$
|
109,626
|
|
|
$
|
—
|
|
|
December 31,
|
|
Fair Value Measurements Using
|
|
2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
Nonqualified Savings Plan-related assets and Director Deferred Shares
(a)
|
$
|
10,767
|
|
|
$
|
10,767
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment in equity securities
|
42,613
|
|
|
42,613
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
53,380
|
|
|
$
|
53,380
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(a)
|
Only includes the portion of the Director Deferred Shares that are payable in Enova common stock.
|
Nonqualified Savings Plan-related assets and Director Deferred Shares have an offsetting liability of equal amount, which is included in “Accounts payable and accrued expenses” in the consolidated balance sheets. The Nonqualified Savings Plan-related assets include marketable equity securities, which are classified as Level 1 and based on net asset values. As a result of the Enova Spin-off, the portion of the Director Deferred Shares measured at fair value represented shares of Enova common stock. The Company’s investment in equity securities represented the Company’s available-for-sale shares of Enova common stock that it retained in connection with the Enova Spin-off. See
Note 4
. As of
June 30,
2016
and
December 31, 2015
, the equity securities representing Enova common stock, both those included in Director Deferred Shares and investment in equity securities in the table above, were classified as Level 1 and based on the market-determined stock price of Enova.
In September 2015, the equity securities representing Enova common stock, both those included in Deferred Director Shares and investment in equity securities in the table above, were transferred to Level 1 from Level 2 as a result of the registration of these shares with the SEC. As of June 30, 2015, the Enova common shares were classified as Level 2, as they were not-yet-registered securities with the SEC as of that date, and accordingly, were not carried at the fair value of the quoted Enova stock prices, but rather the Company valued these shares using the market determined stock price of Enova, less an adjustment factor due to the unregistered nature of the shares. During the
six months ended June 30, 2016
and
2015
, there were no transfers of assets in or out of Level 1 or Level 2 fair value measurements.
Fair Value Measurements on a Non-Recurring Basis
The Company measures non-financial assets and liabilities such as property and equipment and intangible assets at fair value on a nonrecurring basis or when events or circumstances indicate that the carrying amount of the assets may be impaired.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Financial Assets and Liabilities Not Measured at Fair Value
The Company’s financial assets and liabilities as of
June 30, 2016
and
2015
and
December 31, 2015
that are not measured at fair value in the consolidated balance sheets are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
June 30,
|
|
June 30,
|
|
Fair Value Measurement Using
|
|
2016
|
|
2016
|
|
Level 1
|
Level 2
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
20,029
|
|
|
$
|
20,029
|
|
|
$
|
20,029
|
|
$
|
—
|
|
$
|
—
|
|
Pawn loans
|
237,220
|
|
|
237,220
|
|
|
—
|
|
—
|
|
237,220
|
|
Consumer loans, net — Short-term
|
24,915
|
|
|
24,915
|
|
|
—
|
|
—
|
|
24,915
|
|
Consumer loans, net — Installment
|
2,311
|
|
|
2,311
|
|
|
—
|
|
—
|
|
2,311
|
|
Pawn loan fees and service charges receivable
|
49,800
|
|
|
49,800
|
|
|
—
|
|
—
|
|
49,800
|
|
Total
|
$
|
334,275
|
|
|
$
|
334,275
|
|
|
$
|
20,029
|
|
$
|
—
|
|
$
|
314,246
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Liability for estimated losses on consumer loans guaranteed by the Company
|
$
|
340
|
|
|
$
|
340
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
340
|
|
Line of credit
|
3,839
|
|
|
3,943
|
|
|
—
|
|
3,943
|
|
—
|
|
Senior unsecured notes, outstanding principal
|
181,450
|
|
|
184,172
|
|
|
—
|
|
184,172
|
|
—
|
|
Total
|
$
|
185,629
|
|
|
$
|
188,455
|
|
|
$
|
—
|
|
$
|
188,115
|
|
$
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
June 30,
|
|
June 30,
|
|
Fair Value Measurement Using
|
|
2015
|
|
2015
|
|
Level 1
|
Level 2
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
43,986
|
|
|
$
|
43,986
|
|
|
$
|
43,986
|
|
$
|
—
|
|
$
|
—
|
|
Pawn loans
|
247,381
|
|
|
247,381
|
|
|
—
|
|
—
|
|
247,381
|
|
Consumer loans, net — Short-term
|
26,986
|
|
|
26,986
|
|
|
—
|
|
—
|
|
26,986
|
|
Consumer loans, net — Installment
|
3,407
|
|
|
3,407
|
|
|
—
|
|
—
|
|
3,407
|
|
Pawn loan fees and service charges receivable
|
50,317
|
|
|
50,317
|
|
|
—
|
|
—
|
|
50,317
|
|
Total
|
$
|
372,077
|
|
|
$
|
372,077
|
|
|
$
|
43,986
|
|
$
|
—
|
|
$
|
328,091
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Liability for estimated losses on consumer loans guaranteed by the Company
|
$
|
1,922
|
|
|
$
|
1,922
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,922
|
|
Senior unsecured notes, outstanding principal
|
184,450
|
|
|
186,756
|
|
|
—
|
|
186,756
|
|
—
|
|
Total
|
$
|
186,372
|
|
|
$
|
188,678
|
|
|
$
|
—
|
|
$
|
186,756
|
|
$
|
1,922
|
|
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
December 31,
|
|
December 31,
|
|
Fair Value Measurement Using
|
|
2015
|
|
2015
|
|
Level 1
|
Level 2
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
23,153
|
|
|
$
|
23,153
|
|
|
$
|
23,153
|
|
$
|
—
|
|
$
|
—
|
|
Pawn loans
|
248,713
|
|
|
248,713
|
|
|
—
|
|
—
|
|
248,713
|
|
Consumer loans, net — Short-term
|
27,376
|
|
|
27,376
|
|
|
—
|
|
—
|
|
27,376
|
|
Consumer loans, net — Installment
|
3,915
|
|
|
3,915
|
|
|
—
|
|
—
|
|
3,915
|
|
Pawn loan fees and service charges receivable
|
52,798
|
|
|
52,798
|
|
|
—
|
|
—
|
|
52,798
|
|
Total
|
$
|
355,955
|
|
|
$
|
355,955
|
|
|
$
|
23,153
|
|
$
|
—
|
|
$
|
332,802
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Liability for estimated losses on consumer loans guaranteed by the Company
|
$
|
1,986
|
|
|
$
|
1,986
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,986
|
|
Line of credit
|
27,108
|
|
|
28,154
|
|
|
—
|
|
28,154
|
|
—
|
|
Senior unsecured notes, outstanding principal
|
184,450
|
|
|
185,603
|
|
|
—
|
|
185,603
|
|
—
|
|
Total
|
$
|
213,544
|
|
|
$
|
215,743
|
|
|
$
|
—
|
|
$
|
213,757
|
|
$
|
1,986
|
|
Pawn loans generally have maturity periods of less than
90 days
. Because of this short maturity period, the carrying value of pawn loans approximates the fair value of these loans.
Short-term loans and installment loans, collectively, represent “Consumer loans, net” on the consolidated balance sheet and are carried net of the allowance for estimated loan losses, which is calculated by applying historical loss rates combined with recent default trends to the gross consumer loan balance. The unobservable inputs used to calculate the fair value of these loans include historical loss rates, recent default trends and estimated remaining loan terms; therefore, the carrying value approximates the fair value.
Pawn loan fees and service charges revenue includes interest, service charges and extension fees and are typically calculated as a percentage of the pawn loan amount based on the size and duration of the transaction, as permitted by applicable laws. Other fees, such as origination fees, storage fees and lost ticket fees are generally a fixed amount per pawn loan. Pawn loan fees and service charges revenue and the related pawn loan fees and service charges receivable are accrued ratably over the term of the loan for the portion of those pawn loans estimated to be collectible. The Company uses historical performance data to determine collectability of pawn loan fees and service charges receivable. Additionally, pawn loan fee and service charge rates are determined by regulations and bear no valuation relationship to the capital markets’ interest rate movements. Therefore, the carrying value approximates the fair value.
In connection with its CSO programs, the Company guarantees consumer loan payment obligations to unrelated third-party lenders for short-term loans, unsecured installment loans and installment loans secured by the customer’s vehicle (which the Company has ceased offering) and is required to purchase any defaulted loans it has guaranteed. The Company measures the fair value of its liability for third-party lender-owned consumer loans under Level 3 inputs. The fair value of these liabilities 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 of these liabilities approximate the fair value.
The Company measures the fair value of long-term debt instruments using Level 2 inputs. The fair values of the Company’s long-term debt instruments are estimated based on market values for debt issues with similar characteristics or rates currently available for debt with similar terms. As of
June 30, 2016
, the 2018 Senior Notes had a
higher
fair market value than the carrying value due to the difference in yield when compared to similar senior unsecured notes.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The Company’s cost-method investment in a non-publicly traded entity amounted to
$3.8 million
,
$3.1 million
and
$3.5 million
as of
June 30, 2016
and
2015
and
December 31, 2015
, respectively, and is included in “Other assets” on the Company’s consolidated balance sheets. The Company has not estimated the fair value of this investment because its fair value is not readily determinable. Under the cost method, the investment is carried at initial value, is adjusted for cash contributions and distributions, and is subject to evaluation for impairment. When circumstances indicate there may have been a reduction in the value of an investment in an unconsolidated entity, the Company evaluates whether the loss in value is other than temporary. If the loss is other than temporary, the Company recognizes an impairment charge to reflect the cost-method investment at fair value. No impairment indicators for this investment were noted as of
June 30, 2016
.
8. Merger Agreement
On April 28, 2016, the Merger Agreement was executed. Pursuant to the Merger Agreement, the Company and FCFS will combine in an all-stock merger of equals. Upon completion of the transaction, the combined company will be named FirstCash, Inc., will be headquartered in Fort Worth, Texas, and will have one of the largest retail pawn store footprints in Latin America and the United States, with over 2,000 locations across four countries.
Under the terms of the Merger Agreement, which was unanimously approved by the boards of directors of both the Company and FCFS, the Company’s shareholders will receive a fixed exchange ratio of 0.84 FCFS shares for each Company share they own. Following the close of the transaction, FCFS shareholders will own approximately 58% of the combined company, and the Company’s shareholders will own approximately 42%. Pending completion of the transaction, both companies expect to continue paying quarterly cash dividends under each company’s existing dividend policy, and the respective stock repurchase programs of the Company and FCFS will be suspended.
In connection with the proposed merger between the Company and FCFS, the Company filed, with the
SEC
on August 1, 2016, a joint definitive proxy statement with FCFS. The joint definitive proxy statement was also included in a registration statement on Form S-4/prospectus that was filed by FCFS and declared effective by the SEC on July 29, 2016. The joint definitive proxy statement relates to a special meeting of shareholders to be held by each of FCFS and Cash America on August 31, 2016 to vote on matters in connection with the proposed merger, including the approval of the merger by the Company’s shareholders.
The transaction is expected to close in the third quarter of 2016, subject to certain approvals by the shareholders of both the Company and FCFS and the satisfaction of customary closing conditions. See Part II, “Item 1A. Risk Factors” for additional information.
9. Subsequent Events
On August 2, 2016, the Company sent an irrevocable notice to all holders of the 2018 Senior Notes indicating that it will redeem the 2018 Senior Notes in full on September 1, 2016. The 2018 Senior Notes will be redeemed at 100% of the aggregate principal amount of the 2018 Senior Notes outstanding plus the applicable “make whole” redemption price specified in the 2018 Senior Notes Indenture, plus accrued and unpaid interest up to the redemption date.
As of
June 30, 2016
, the Company had
$181.5 million
in aggregate principal amount of 2018 Senior Notes outstanding.
The total amount estimated to be paid upon redemption is
$198.5 million
, which will be paid with borrowings under the Company’s Line of Credit. Following the redemption, no 2018 Senior Notes will remain outstanding.
|
|
|
ITEM 2. MANAGEMENT
’
S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
The following discussion of financial condition, results of operations, liquidity, capital resources and certain factors that may affect future results of Cash America International, Inc. and its subsidiaries (the “Company”) should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included under Part 1—Item 1 of this Quarterly Report on Form 10-Q, as well as with the Company’s consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
THE COMPANY’S BUSINESS
The Company provides specialty financial services to individuals in the United States through its storefront lending locations and franchised check cashing centers. The Company has one reportable operating segment. The Company’s products and services are described below.
Pawn Lending
The Company offers secured non-recourse loans, commonly referred to as pawn loans, as its primary line of business. Pawn loans are short-term loans made on the pledge of tangible personal property. Pawn loan fees and service charges are generated from the Company’s pawn loan portfolio. In relation to its pawn lending operations, the Company also disposes of collateral from unredeemed pawn loans and liquidates a smaller volume of merchandise purchased directly from customers or from third parties. Pawn-related total revenue accounted for
93%
of consolidated total revenue for both the
three and six months ended June 30, 2016
.
Consumer Loan Activities
Another component of the Company's business is originating, arranging, guaranteeing or purchasing consumer loans in some of its locations. Consumer loans provide customers with cash, typically in exchange for an obligation to repay the amount advanced plus fees and any applicable interest. Consumer loans that the Company offers include short-term loans (commonly referred to as payday loans) and installment loans. Consumer loan total revenue accounted for
7%
of consolidated total revenue for both the
three and six months ended June 30, 2016
.
Short-term consumer loan products that the Company offers include unsecured short-term loans written by the Company or by a third-party lender through the Company’s credit services organization and credit access business programs (“CSO programs”). Installment consumer loans are longer-term, multi-payment loans that require the pay-down of the outstanding principal balance in multiple installments. Installment loan products that the Company offers are unsecured and can either be written by the Company or by a third-party lender through the CSO programs. The Company previously offered installment loans secured by a customer’s vehicle, but it ceased offering that product in the latter half of 2015.
Through the Company’s CSO programs, the Company provides services and receives fees related to a third-party lender’s consumer loan products by acting as a credit services organization or credit access business on behalf of consumers in accordance with applicable state laws. Services offered under the CSO programs include credit-related services such as arranging loans with third-party lenders (“CSO loans”). In addition, the Company guarantees consumer loan payment obligations to the third-party lender in the event that the customer defaults on the loan. CSO loans are not included in the Company’s consolidated financial statements, but the Company has established a liability for the estimated losses in support of the guarantee on these loans in its consolidated balance sheets. In the event that the customer defaults on a CSO loan, the Company purchases the specific loan, and the outstanding loan balance and related allowance for estimated losses is then included in “Consumer loans, net” in the Company’s consolidated financial statements.
Check Cashing and Other Financial Services
A small component of the Company’s business includes the offering of check cashing services through franchised check cashing centers, for which the Company receives franchise fees. In addition, in some of its Company-operated lending locations, the Company offers check cashing services, as well as prepaid debit cards that are issued and serviced through a third party. Total revenue from check cashing and other ancillary products and services accounted for less than 1% of consolidated total revenue for both the
three and six months ended June 30, 2016
.
Locations
The following table sets forth, as of June 30, 2016 and 2015, the number of Company-operated locations that offered pawn lending, consumer lending, and other services, in addition to franchised locations that offered check cashing services.
The Company provides these services in the United States primarily under the names “Cash America Pawn,” “SuperPawn,” “Cash America Payday Advance,” “Cashland” and “Mr. Payroll.”
The Company’s pawn and consumer lending locations operated in 20 states in the United States as of both
June 30, 2016
and
2015
,
respectively.
As of both
June 30, 2016
and
2015
,
the franchised check cashing centers operated in 12 states.
|
|
|
|
|
|
|
|
As of June 30,
|
|
2016
|
|
2015
|
Company-operated locations offering:
|
|
|
|
Pawn lending only
|
590
|
|
|
549
|
|
Both pawn and consumer lending
|
206
|
|
|
255
|
|
Consumer lending only
|
21
|
|
|
22
|
|
Total Company-operated locations
|
817
|
|
|
826
|
|
Franchised check cashing centers
|
72
|
|
|
78
|
|
Total
|
889
|
|
|
904
|
|
During the twelve months ended
June 30, 2016
, the Company closed or sold
12
locations. Consistent with the Company’s strategy to deemphasize its consumer lending activities, the Company eliminated the consumer loan product in
46
of its pawn lending locations during the twelve months ended
June 30, 2016
. Including consumer-loan-lending locations closed or sold and locations where the consumer loan product was eliminated, consumer lending activities were discontinued in
50
of the Company’s locations during the twelve months ended
June 30, 2016
.
For the six months ended
June 30, 2016
, the Company closed
six
locations and eliminated the consumer loan product in 45 of its pawn lending locations.
Recent Developments
Merger Agreement
On April 28, 2016, the Company and First Cash Financial Services, Inc., a Delaware corporation (“FCFS”), announced the execution of an Agreement and Plan of Merger (the “Merger Agreement”) entered into among the Company, FCFS and Frontier Merger Sub, LLC, a Texas limited liability company and a direct wholly owned subsidiary of FCFS. Pursuant to the Merger Agreement, the companies will combine in an all-stock merger of equals (the “Merger”). Upon completion of the transaction, the combined company will be named FirstCash, Inc., will be headquartered in Fort Worth, Texas, and will have one of the largest retail pawn store footprints in Latin America and the United States, with over 2,000 locations across four countries.
Under the terms of the Merger Agreement, which was unanimously approved by the boards of directors of both the Company and FCFS, the Company’s shareholders will receive a fixed exchange ratio of 0.84 FCFS shares for each Company share they own. Following the close of the transaction, FCFS shareholders will own approximately 58% of the combined company, and the Company’s shareholders will own approximately 42%. Pending completion of the transaction, both companies expect to continue paying quarterly cash dividends under each company’s existing dividend policy, and the respective stock repurchase programs of the Company and FCFS will be suspended.
In connection with the proposed merger between the Company and FCFS, the Company filed, with the
Securities and Exchange Commission (the “SEC”)
on August 1, 2016, a joint definitive proxy statement with FCFS. The joint definitive proxy statement was also included in a registration statement on Form S-4/prospectus that was filed by FCFS and declared effective by the SEC on July 29, 2016. The joint definitive proxy statement relates to a special meeting of shareholders to be held by each of FCFS and Cash America on August 31, 2016 to vote on matters in connection with the proposed merger, including the approval of the merger by the Company’s shareholders.
The transaction is expected to close in the third quarter of 2016, subject to certain approvals by the shareholders of both the Company and FCFS and the satisfaction of customary closing conditions. See Part II, “Item 1A. Risk Factors” for additional information.
Redemption of $300.0 million 5.75% Senior Unsecured Notes
On August 2, 2016, the Company sent an irrevocable notice to all holders of the Company’s $300.0 million aggregate principal amount of 5.75% senior notes due May 15, 2018 (the “2018 Senior Notes”) indicating that it will redeem the 2018 Senior Notes in full on September 1, 2016. The 2018 Senior Notes will be redeemed at 100% of the aggregate principal amount of the 2018 Senior Notes outstanding plus the applicable “make whole” redemption price specified in the Indenture, dated as of May 15, 2013, that governs the 2018 Senior Notes, among the Company, the guarantors party thereto and the trustee (“2018 Senior Notes Indenture”), plus accrued and unpaid interest up to the redemption date. As of
June 30, 2016
, the Company had
$181.5 million
in aggregate principal amount of 2018 Senior Notes outstanding.
The total amount estimated to be paid upon redemption is
$198.5 million
, which will be paid with borrowings under the Company’s $280 million line of credit (the “Line of Credit”). Following the redemption, no 2018 Senior Notes will remain outstanding.
Highlights
The Company’s financial results for the
three months ended June 30,
2016
(the “current quarter”) compared to the
three months ended June 30,
2015
(the “prior year quarter”) are summarized below.
|
|
•
|
Total revenue was
$241.2 million
for the current quarter, representing an
increase
of
$4.7 million
, or
2.0%
, compared to the prior year quarter. Net revenue
decreased
$5.8 million
, or
4.3%
, to
$128.2 million
for the current quarter compared to the prior year quarter.
|
|
|
•
|
Income from operations was
$6.6 million
for the current quarter, representing an
increase
of
$0.2 million
, or
3.9%
, compared to the prior year quarter, primarily due to a
$4.7 million
decrease
in operations and administration expenses.
|
|
|
•
|
Net income was
$2.1 million
and diluted net income per share was
$0.08
for both the current quarter and prior year quarter. Net income and net income per share were affected by certain income and expense items in the current quarter and prior year quarter. See “Non GAAP Disclosure—Adjusted Earnings Measures” for additional information.
|
Net Revenue
Net revenue is composed of total revenue less the cost of disposed merchandise and the consumer loan loss provision. Net revenue is the income available to satisfy all remaining expenses and is the measure management uses to evaluate top-line performance.
The following table shows the components of net revenue for the Company’s operations for the
three and six months ended
June 30, 2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
|
Amount
|
|
% of
Total
|
Pawn loan fees and service charges
|
$
|
76,110
|
|
|
59.4
|
%
|
|
$
|
76,899
|
|
|
57.4
|
%
|
|
$
|
155,795
|
|
|
57.2
|
%
|
|
$
|
154,212
|
|
|
54.9
|
%
|
Proceeds from disposition of merchandise, net of cost of disposed merchandise
|
38,754
|
|
|
30.2
|
%
|
|
40,643
|
|
|
30.3
|
%
|
|
87,833
|
|
|
32.3
|
%
|
|
92,972
|
|
|
33.1
|
%
|
Pawn-related net revenue
|
$
|
114,864
|
|
|
89.6
|
%
|
|
$
|
117,542
|
|
|
87.7
|
%
|
|
$
|
243,628
|
|
|
89.5
|
%
|
|
$
|
247,184
|
|
|
88.0
|
%
|
Consumer loan fees, net of loss provision
|
12,514
|
|
|
9.8
|
%
|
|
14,898
|
|
|
11.1
|
%
|
|
26,678
|
|
|
9.8
|
%
|
|
30,430
|
|
|
10.8
|
%
|
Other revenue
|
837
|
|
|
0.6
|
%
|
|
1,551
|
|
|
1.2
|
%
|
|
1,953
|
|
|
0.7
|
%
|
|
3,468
|
|
|
1.2
|
%
|
Net revenue
|
$
|
128,215
|
|
|
100.0
|
%
|
|
$
|
133,991
|
|
|
100.0
|
%
|
|
$
|
272,259
|
|
|
100.0
|
%
|
|
$
|
281,082
|
|
|
100.0
|
%
|
For the current quarter, net revenue
decreased
$5.8 million
, or
4.3%
, from the prior year quarter. Consumer loan net revenue
decreased
$2.4 million
, or
16.0%
, from the prior year quarter to the current quarter, primarily due to the Company’s strategic decision to deemphasize and eliminate short-term and secured installment loan consumer lending activities in many of its locations. Proceeds from disposition of merchandise, net of cost of disposed merchandise,
decreased
$1.9 million
, or
4.6%
, from the prior year quarter to the current quarter, primarily due to negative gross profit on commercial disposition activities in the current quarter, partially offset by higher gross profit on jewelry and general merchandise retail sales in the Company’s storefront locations. Pawn loan fees and service charges
decreased
$0.8 million
, or
1.0%
, from the prior year quarter to the current quarter, primarily due to lower average pawn loan balances. Same-store net revenue
decreased
4.5%
for the current quarter compared to the prior year quarter. Same-store net revenue, excluding net revenue from commercial disposition activities and net
revenue from consumer loans, decreased
0.3%
for the current quarter compared to the prior year quarter. In comparison to pawn lending and the retail disposition of merchandise, commercial disposition activities and consumer lending activities represent sources of net revenue that are much less central to the Company’s core operations and strategy.
For the
six months ended June 30, 2016
(the “current
six-month period
”), net revenue
decreased
$8.8 million
, or
3.1%
, from the same period in
2016
(the “prior year
six-month period
”). Proceeds from disposition of merchandise, net of cost of disposed merchandise,
decreased
$5.1 million
, or
5.5%
, from the prior year
six-month period
to the current year
six-month period
, primarily due to negative gross profit on commercial disposition activities in the current
six-month period
, partially offset by higher gross profit on jewelry and general merchandise retail sales in the Company’s storefront locations. Consumer loan net revenue
decreased
$3.8 million
, or
12.3%
, from the prior year
six-month period
to the current year
six-month period
, primarily due to the Company’s strategic decision to deemphasize and eliminate short-term and secured installment loan consumer lending activities in many of its locations. Pawn loan fees and service charges
increased
$1.6 million
, or
1.0%
, from the prior year
six-month period
to the current year
six-month period
, primarily due to higher pawn loan yields. Same-store net revenue decreased 3.1% for the current
six-month period
compared to the prior year
six-month period
. Same-store net revenue, excluding net revenue from commercial disposition activities and net revenue from consumer loans, increased 1.9% for the current
six-month period
compared to the prior year
six-month period
.
Non-GAAP Disclosure
In addition to the financial information prepared in conformity with
generally accepted accounting principles in the United States of America (“GAAP”),
the Company has provided certain historical non-GAAP measures in the tables below, including (i) adjusted net income, adjusted diluted net income per share, adjusted earnings and adjusted earnings per share (collectively, the “Adjusted Earnings Measures”), and (ii) adjusted EBITDA, which the Company defines as earnings excluding depreciation, amortization, interest, foreign currency transaction gains or losses, loss on early extinguishment of debt, gain on disposition of equity securities and provision or benefit for income taxes.
Management believes that the presentation of these measures provides users of the financial statements with greater transparency and facilitates a more meaningful comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments and depreciation and amortization methods. In addition, management believes this information provides a more in-depth and complete view of the Company’s financial performance, competitive position and prospects for the future and may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. Management also believes that non-GAAP measures are frequently used by analysts and investors to analyze operating performance, evaluate the Company’s ability to incur and service debt and its capacity for making capital investments, and to help assess the Company’s estimated enterprise value.
Management believes the non-GAAP measures included herein, including the adjustments shown,
provide more meaningful information regarding the ongoing operating performance, provide more useful period-to-period comparisons of operating results, both internally and in relation to operating results of competitors, enhance analysts’ and investors’ understanding of the core operating results of the business and provide a more accurate indication of the Company’s ability to generate cash flows from operations.
Therefore, management believes it is important to clearly identify these measures for analysts and investors.
In calculating adjusted earnings and adjusted earnings per share, management excludes intangible asset amortization, non-cash equity-based compensation, and foreign currency transaction gains or losses.
In addition, management has determined that the adjustments to the Adjusted Earnings Measures and adjusted EBITDA, as applicable, included in the tables below are useful to analysts and investors in order to allow them to compare the Company’s financial results for the current period with the comparative period without the effect of the below items, which management believes are less frequent in nature:
|
|
•
|
costs related to the pending Merger;
|
|
|
•
|
the loss on early extinguishment of debt;
|
|
|
•
|
the gain on disposition of equity securities
;
|
|
|
•
|
severance and other employee-related costs for administrative and operations staff reductions in connection with the Company’s reorganization to better align the corporate and operating cost structure with its remaining storefront operations (the “Reorganization”) after the Company completed the distribution of approximately 80% of the outstanding shares of Enova International, Inc.
(“Enova”)
common stock to the Company’s shareholders in 2014
(the “Enova Spin-off “); and
|
|
|
•
|
the loss on significant divestitures of non-strategic operations.
|
Adjusted EBITDA is presented for the trailing twelve months ended June 30, 2016 and 2015. Therefore, certain adjusting items that occurred in the third and fourth quarters of 2015 and 2014 are presented in the adjusted EBITDA table.
Management provides non-GAAP financial information for informational purposes and to enhance understanding of the Company’s GAAP consolidated financial statements. Readers should consider the information in addition to, but not instead of or superior to, its financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
Adjusted Earnings Measures
The following table provides a reconciliation for the
three and six months ended
June 30, 2016
and
2015
,
between net income and diluted net income per share calculated in accordance with GAAP to the Adjusted Earnings Measures, which are shown net of tax (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
$
|
|
Per Diluted
Share
(a)
|
|
$
|
|
Per Diluted
Share
(a)
|
|
$
|
|
Per Diluted
Share
(a)
|
|
$
|
|
Per Diluted
Share
(a)
|
Net income and diluted net income per share
|
$
|
2,098
|
|
|
$
|
0.08
|
|
|
$
|
2,071
|
|
|
$
|
0.08
|
|
|
$
|
12,731
|
|
|
$
|
0.51
|
|
|
$
|
9,916
|
|
|
$
|
0.35
|
|
Adjustments (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger expenses
|
2,323
|
|
|
0.10
|
|
|
—
|
|
|
—
|
|
|
2,323
|
|
|
0.09
|
|
|
—
|
|
|
—
|
|
Loss on early extinguishment of debt
|
—
|
|
|
—
|
|
|
382
|
|
|
0.01
|
|
|
7
|
|
|
—
|
|
|
382
|
|
|
0.01
|
|
Gain on disposition of equity securities
|
(4
|
)
|
|
—
|
|
|
(709
|
)
|
|
(0.03
|
)
|
|
(79
|
)
|
|
—
|
|
|
(790
|
)
|
|
(0.02
|
)
|
Reorganization expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
537
|
|
|
0.02
|
|
Adjusted net income and adjusted diluted net income per share
|
4,417
|
|
|
0.18
|
|
|
1,744
|
|
|
0.06
|
|
|
14,982
|
|
|
0.60
|
|
|
10,045
|
|
|
0.36
|
|
Other adjustments (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset amortization
|
968
|
|
|
0.04
|
|
|
1,028
|
|
|
0.04
|
|
|
1,935
|
|
|
0.08
|
|
|
2,057
|
|
|
0.07
|
|
Non-cash equity-based compensation
|
684
|
|
|
0.03
|
|
|
1,038
|
|
|
0.04
|
|
|
1,801
|
|
|
0.07
|
|
|
2,044
|
|
|
0.07
|
|
Foreign currency transaction loss (gain)
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20
|
)
|
|
—
|
|
Adjusted earnings and adjusted earnings per share
|
$
|
6,069
|
|
|
$
|
0.25
|
|
|
$
|
3,814
|
|
|
$
|
0.14
|
|
|
$
|
18,718
|
|
|
$
|
0.75
|
|
|
$
|
14,126
|
|
|
$
|
0.50
|
|
|
|
(a)
|
Diluted shares are 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 period.
|
The tables below outline the gross amounts, the impact of income taxes and the net amounts for each of the adjustments included in the previous table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
Pre-tax
|
|
Tax
|
|
After-tax
|
|
Pre-tax
|
|
Tax
|
|
After-tax
|
Merger expenses
|
$
|
3,688
|
|
|
$
|
1,365
|
|
|
$
|
2,323
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loss on early extinguishment of debt
|
—
|
|
|
—
|
|
|
—
|
|
|
607
|
|
|
225
|
|
|
382
|
|
Gain on disposition of equity securities
|
(6
|
)
|
|
(2
|
)
|
|
(4
|
)
|
|
(1,099
|
)
|
|
(390
|
)
|
|
(709
|
)
|
Reorganization expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Adjustments
|
$
|
3,682
|
|
|
$
|
1,363
|
|
|
$
|
2,319
|
|
|
$
|
(492
|
)
|
|
$
|
(165
|
)
|
|
$
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset amortization
|
$
|
1,536
|
|
|
$
|
568
|
|
|
$
|
968
|
|
|
$
|
1,631
|
|
|
$
|
603
|
|
|
$
|
1,028
|
|
Non-cash equity-based compensation
|
1,085
|
|
|
401
|
|
|
684
|
|
|
1,648
|
|
|
610
|
|
|
1,038
|
|
Foreign currency transaction loss
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
3
|
|
|
4
|
|
Total Other adjustments
|
$
|
2,621
|
|
|
$
|
969
|
|
|
$
|
1,652
|
|
|
$
|
3,286
|
|
|
$
|
1,216
|
|
|
$
|
2,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
Pre-tax
|
|
Tax
|
|
After-tax
|
|
Pre-tax
|
|
Tax
|
|
After-tax
|
Merger expenses
|
$
|
3,688
|
|
|
$
|
1,365
|
|
|
$
|
2,323
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loss on early extinguishment of debt
|
11
|
|
|
4
|
|
|
7
|
|
|
607
|
|
|
225
|
|
|
382
|
|
Gain on disposition of equity securities
|
(123
|
)
|
|
(44
|
)
|
|
(79
|
)
|
|
(1,225
|
)
|
|
(435
|
)
|
|
(790
|
)
|
Reorganization expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
853
|
|
|
316
|
|
|
537
|
|
Total Adjustments
|
$
|
3,576
|
|
|
$
|
1,325
|
|
|
$
|
2,251
|
|
|
$
|
235
|
|
|
$
|
106
|
|
|
$
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset amortization
|
$
|
3,072
|
|
|
$
|
1,137
|
|
|
$
|
1,935
|
|
|
$
|
3,265
|
|
|
$
|
1,208
|
|
|
$
|
2,057
|
|
Non-cash equity-based compensation
|
2,859
|
|
|
1,058
|
|
|
1,801
|
|
|
3,247
|
|
|
1,203
|
|
|
2,044
|
|
Foreign currency transaction gain
|
—
|
|
|
—
|
|
|
—
|
|
|
(32
|
)
|
|
(12
|
)
|
|
(20
|
)
|
Total Other adjustments
|
$
|
5,931
|
|
|
$
|
2,195
|
|
|
$
|
3,736
|
|
|
$
|
6,480
|
|
|
$
|
2,399
|
|
|
$
|
4,081
|
|
Adjusted EBITDA
The following table provides a reconciliation between net income, which is the nearest GAAP measure presented in the Company’s financial statements, to adjusted EBITDA (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Trailing 12 Months Ended
|
|
June 30,
|
|
2016
|
|
2015
|
Net income
|
$
|
30,381
|
|
|
$
|
8,038
|
|
Provision for income taxes
|
15,744
|
|
|
9,623
|
|
Gain on disposition of equity securities
|
(586
|
)
|
|
(1,225
|
)
|
Loss on early extinguishment of debt
|
11
|
|
|
6,598
|
|
Foreign currency transaction gain
|
—
|
|
|
(28
|
)
|
Interest expense, net
|
14,498
|
|
|
15,254
|
|
Depreciation and amortization expenses
|
53,706
|
|
|
59,696
|
|
Adjustments:
|
|
|
|
Merger expenses
|
3,688
|
|
|
—
|
|
Reorganization expenses
|
—
|
|
|
8,391
|
|
Loss on divestitures
|
—
|
|
|
5,176
|
|
Adjusted EBITDA
|
$
|
117,442
|
|
|
$
|
111,523
|
|
Adjusted EBITDA margin calculated as follows:
|
|
|
|
Total revenue
|
$
|
1,039,621
|
|
|
$
|
1,064,679
|
|
Adjusted EBITDA
|
$
|
117,442
|
|
|
$
|
111,523
|
|
Adjusted EBITDA as a percentage of total revenue
|
11.3
|
%
|
|
10.5
|
%
|
|
|
|
|
|
|
QUARTER ENDED JUNE 30, 2016 COMPARED TO QUARTER ENDED JUNE 30, 2015
|
Pawn Lending Activities
The following table sets forth selected data related to the Company’s pawn lending activities as of and for the three months ended
June 30, 2016
and
2015
(dollars in thousands except where otherwise noted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Pawn loan fees and service charges
|
$
|
76,110
|
|
|
$
|
76,899
|
|
|
$
|
(789
|
)
|
|
(1.0
|
)%
|
Ending pawn loan balance (as of June 30,)
|
$
|
237,220
|
|
|
$
|
247,381
|
|
|
$
|
(10,161
|
)
|
|
(4.1
|
)%
|
Average pawn loan balance outstanding
|
$
|
223,360
|
|
|
$
|
228,140
|
|
|
$
|
(4,780
|
)
|
|
(2.1
|
)%
|
Amount of pawn loans written and renewed
|
$
|
245,608
|
|
|
$
|
257,430
|
|
|
$
|
(11,822
|
)
|
|
(4.6
|
)%
|
Average amount per pawn loan (in ones)
|
$
|
124
|
|
|
$
|
124
|
|
|
$
|
—
|
|
|
—
|
%
|
Annualized yield on pawn loans
|
137.0
|
%
|
|
135.2
|
%
|
|
|
|
|
Average pawn loan balances outstanding
decrease
d
$4.8 million
, or
2.1%
, in the current quarter compared to the prior year quarter, primarily due to lower average pawn loan balances in same-store pawn locations and a decrease in the number of stores offering pawn loans following the closure or sale of certain less profitable store locations. Same-store pawn loan balances were
3.6%
lower at
June 30, 2016
compared to
June 30, 2015
.
Pawn loan fees and service charges
decrease
d by
$0.8 million
, or
1.0%
, in the current quarter compared to the prior year quarter. This
decrease
was primarily driven by lower average pawn loan balances in the current quarter compared to the prior year quarter, partially offset by a higher pawn loan yield of
137.0%
in the current quarter compared to
135.2%
in the prior year quarter. The higher pawn loan yield was primarily due to a shift in the geographic concentrations of pawn loans into states with higher statutory pawn loan yields, as well as an increase in the permitted statutory loan fees in some markets.
Merchandise Sales Activities
Proceeds from Disposition of Merchandise and Gross Profit
Profit from the disposition of merchandise represents the proceeds received from the disposition of merchandise in excess of the cost of disposed merchandise, which is generally the principal amount loaned on an item or the amount paid for purchased merchandise.
Management separates proceeds from disposition of merchandise and gross profit on disposition of merchandise into two groups, retail sales and commercial sales. Retail sales include the sale of jewelry and general merchandise direct to consumers through the Company’s locations. Commercial sales represent a secondary source of disposition and include the sale of refined gold, diamonds, platinum, and silver to brokers or manufacturers.
The following table summarizes the proceeds from the disposition of merchandise and the related gross profit for pawn operations for the current quarter and the prior year quarter (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
Retail
|
|
Commercial
|
|
Total
|
|
Retail
|
|
Commercial
|
|
Total
|
Proceeds from disposition
|
$
|
122,588
|
|
|
$
|
25,550
|
|
|
$
|
148,138
|
|
|
$
|
119,323
|
|
|
$
|
19,380
|
|
|
$
|
138,703
|
|
Gross profit on disposition
|
$
|
39,431
|
|
|
$
|
(677
|
)
|
|
$
|
38,754
|
|
|
$
|
38,798
|
|
|
$
|
1,845
|
|
|
$
|
40,643
|
|
Gross profit margin
|
32.2
|
%
|
|
(2.6
|
)%
|
|
26.2
|
%
|
|
32.5
|
%
|
|
9.5
|
%
|
|
29.3
|
%
|
Percentage of total gross profit
|
101.7
|
%
|
|
(1.7
|
)%
|
|
100.0
|
%
|
|
95.5
|
%
|
|
4.5
|
%
|
|
100.0
|
%
|
Proceeds from disposition for pawn operations
increased
$9.4 million
, or
6.8%
, in the current quarter compared to the prior year quarter. Retail proceeds from disposition comprised
$3.3 million
of the total increase, primarily due to an increase in jewelry sales in the Company’s storefront locations. The Company’s merchandise turnover ratio remained stable at
2.0
times in both the current and prior year quarters. Management expects merchandise turnover to remain at or below the current quarter level going forward, as the merchandise turnover ratio will be more closely tied to traditional retail jewelry merchandise turnover levels.
Gross profit on disposition for pawn operations
decreased
$1.9 million
, or
4.6%
, in the current quarter compared to the prior year quarter, primarily due to a
$2.5 million
decrease in gross profit on commercial dispositions as a result of lower gold and diamond yields, which produced a negative gross profit margin on commercial dispositions in the current quarter. Partially offsetting the loss on commercial dispositions was a
$0.6 million
, or
1.6%
, increase in gross profit on retail dispositions, primarily due to the Company’s emphasis on retail jewelry sales in storefront locations. The increase in gross profit on retail dispositions was achieved while maintaining a stable gross profit margin on retail dispositions of
32.2%
in the current quarter, compared to
32.5%
in the prior year quarter. Management plans to continue emphasizing retail jewelry sales and believes that an increased amount of jewelry sales as a percentage of overall retail sales could improve overall retail gross profit margins gradually over time.
The table below summarizes the age of merchandise held for disposition related to the Company’s pawn lending operations
as of
June 30, 2016
and
2015
, and
December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
As of December 31,
|
|
2016
|
|
2015
|
|
2015
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
Jewelry - held for one year or less
|
$
|
128,509
|
|
|
58.1
|
%
|
|
$
|
117,254
|
|
|
57.0
|
%
|
|
$
|
135,215
|
|
|
55.3
|
%
|
Other merchandise - held for one year or less
|
87,094
|
|
|
39.4
|
%
|
|
77,659
|
|
|
37.8
|
%
|
|
93,498
|
|
|
38.3
|
%
|
Total merchandise held for one year or less
|
215,603
|
|
|
97.5
|
%
|
|
194,913
|
|
|
94.8
|
%
|
|
228,713
|
|
|
93.6
|
%
|
Jewelry - held for more than one year
|
3,014
|
|
|
1.4
|
%
|
|
5,233
|
|
|
2.5
|
%
|
|
8,935
|
|
|
3.7
|
%
|
Other merchandise - held for more than one year
|
2,595
|
|
|
1.1
|
%
|
|
5,460
|
|
|
2.7
|
%
|
|
6,701
|
|
|
2.7
|
%
|
Total merchandise held for more than one year
|
5,609
|
|
|
2.5
|
%
|
|
10,693
|
|
|
5.2
|
%
|
|
15,636
|
|
|
6.4
|
%
|
Merchandise held for disposition, gross
|
$
|
221,212
|
|
|
100.0
|
%
|
|
$
|
205,606
|
|
|
100.0
|
%
|
|
$
|
244,349
|
|
|
100.0
|
%
|
Less: Inventory valuation allowance
|
$
|
(2,950
|
)
|
|
|
|
$
|
(2,600
|
)
|
|
|
|
$
|
(2,800
|
)
|
|
|
Merchandise held for disposition, net of allowance
|
$
|
218,262
|
|
|
|
|
$
|
203,006
|
|
|
|
|
$
|
241,549
|
|
|
|
Merchandise held for disposition, net of allowance,
increased
$15.3 million
, or
7.5%
, from
June 30, 2015
to
June 30, 2016
, primarily due to an increase in unredeemed pawn loans. The allowance for merchandise held for disposition
increased
by
$0.4 million
from
June 30, 2015
to
June 30, 2016
, primarily due to increased inventory levels.
Consumer Loan Activities
Combined Consumer Loans
In addition to reporting consumer loans owned by the Company and consumer loans guaranteed by the Company, which are either items accounted for in accordance with
GAAP
or disclosures required by GAAP, the Company has provided combined consumer loans, which is a non-GAAP measure that combines the consumer loans owned by the Company and those guaranteed by the Company. In addition, the Company has reported combined consumer loans written and renewed, which is statistical data that is not included in the Company’s financial statements.
References throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations to renewed consumer loans include both renewals and extensions made by customers to their existing loans in accordance with applicable laws.
Management believes these measures provide investors with important information needed to evaluate the magnitude of potential loan losses and the opportunity for revenue performance of the consumer loan portfolio on an aggregate basis. Management also believes that the comparison of the aggregate amounts from period to period is more meaningful than comparing only the amounts reflected on the Company’s balance sheet since both revenue and the loss provision for consumer loans are impacted by the aggregate amount of consumer loans owned by the Company and those guaranteed by the Company as reflected in its financial statements.
Consumer Loan Fees, Net of Loss Provision
The following table sets forth interest and fees on consumer loans, the consumer loan loss provision and consumer loan fees, net of the loss provision
, for the current quarter and the prior year quarter (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
Short-term loans
|
|
Installment loans
|
|
Total
|
|
Short-term loans
|
|
Installment loans
|
|
Total
|
Consumer loan fees
|
$
|
10,805
|
|
|
$
|
5,261
|
|
|
$
|
16,066
|
|
|
$
|
13,362
|
|
|
$
|
5,949
|
|
|
$
|
19,311
|
|
Less: consumer loan loss provision
|
2,320
|
|
|
1,232
|
|
|
3,552
|
|
|
1,711
|
|
|
2,702
|
|
|
4,413
|
|
Consumer loan fees, net of loss provision
|
$
|
8,485
|
|
|
$
|
4,029
|
|
|
$
|
12,514
|
|
|
$
|
11,651
|
|
|
$
|
3,247
|
|
|
$
|
14,898
|
|
Year-over-year change - $
|
$
|
(3,166
|
)
|
|
$
|
782
|
|
|
$
|
(2,384
|
)
|
|
$
|
(2,837
|
)
|
|
$
|
1,684
|
|
|
$
|
(1,153
|
)
|
Year-over-year change - %
|
(27.2
|
)%
|
|
24.1
|
%
|
|
(16.0
|
)%
|
|
(19.6
|
)%
|
|
107.7
|
%
|
|
(7.2
|
)%
|
Consumer loan loss provision
as a % of consumer loan fees
|
21.5
|
%
|
|
23.4
|
%
|
|
22.1
|
%
|
|
12.8
|
%
|
|
45.4
|
%
|
|
22.9
|
%
|
Consumer loan fees represented only
7%
of consolidated total revenue for the current quarter, compared to
8%
of consolidated total revenue for the prior year quarter. Management expects consumer loan fees to continue to decline, primarily due to the continuation of the Company’s strategy to eliminate consumer lending activities in many of its locations.
Consumer loan fees, net of the loss provision,
decrease
d
$2.4 million
, or
16.0%
, in the current quarter compared to the prior year quarter, primarily due to a
$3.2 million
, or
16.8%
,
decrease
in consumer loan fees. The
decrease
in total consumer loan fees was primarily due to a
decrease
in short-term consumer loan fees of
$2.6 million
, or
19.1%
, as a result of the closure and sale of certain store locations and the Company’s strategic decision to deemphasize and eliminate short-term consumer lending activities in many of its locations. For more information, see “The Company’s Business—Locations.” In addition, consumer loan fees decreased due to reduced consumer loan fees from installment loans secured by a customer’s vehicle, which the Company ceased offering in the latter half of 2015.
The consumer loan loss provision decreased
$0.9 million
, or
19.5%
, in the current quarter compared to the prior year quarter. The consumer loan loss provision as a percentage of consumer loan fees
decreased
to
22.1%
in the current quarter compared to
22.9%
in the prior year quarter, primarily due to an improvement in the performance of the unsecured installment loan portfolio, which benefited from more refined underwriting and the maturity of the portfolio. In addition, the consumer loan loss provision in the prior year quarter was reduced by $2.3 million in sales of delinquent loans to third parties, compared to delinquent loan sales of $0.6 million in the current quarter. Sales of delinquent consumer loans relates to consumer loans that had previously been charged off. Therefore, the sale of these loans increased recoveries, resulting in a decrease in the loss provision. The high amount of delinquent consumer loan sales in the prior year quarter resulted from the initiation of the program to sell delinquent consumer loans to unaffiliated third parties.
Consumer Loan Information by Product
The following tables provide additional information related to each of the Company’s consumer loan products as of and for the
three months ended June 30,
2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
Short-term loans
|
|
Installment loans
|
|
Total
|
|
Short-term loans
|
|
Installment loans
|
|
Total
|
Consumer loans written and renewed
(a)
|
|
|
|
|
|
|
|
|
|
|
|
Company owned
|
$
|
93,624
|
|
|
$
|
1,419
|
|
|
$
|
95,043
|
|
|
$
|
107,026
|
|
|
$
|
1,501
|
|
|
$
|
108,527
|
|
Guaranteed by the Company
(b)
|
3,833
|
|
|
11,661
|
|
|
15,494
|
|
|
6,811
|
|
|
23,783
|
|
|
30,594
|
|
Combined consumer loans written and renewed
|
$
|
97,457
|
|
|
$
|
13,080
|
|
|
$
|
110,537
|
|
|
$
|
113,837
|
|
|
$
|
25,284
|
|
|
$
|
139,121
|
|
|
As of June 30,
|
|
2016
|
|
2015
|
Ending consumer loan balances, gross
|
|
|
|
|
|
|
|
|
|
|
|
Company owned
|
$
|
26,265
|
|
|
$
|
3,269
|
|
|
$
|
29,534
|
|
|
$
|
29,092
|
|
|
$
|
4,834
|
|
|
$
|
33,926
|
|
Guaranteed by the Company
(b)
|
819
|
|
|
6,572
|
|
|
7,391
|
|
|
1,659
|
|
|
11,223
|
|
|
12,882
|
|
Combined ending consumer loan balances, gross
(d)
|
$
|
27,084
|
|
|
$
|
9,841
|
|
|
$
|
36,925
|
|
|
$
|
30,751
|
|
|
$
|
16,057
|
|
|
$
|
46,808
|
|
Allowance and liability for losses
|
|
|
|
|
|
|
|
|
|
|
|
Company owned
|
$
|
1,350
|
|
|
$
|
958
|
|
|
$
|
2,308
|
|
|
$
|
2,106
|
|
|
$
|
1,427
|
|
|
$
|
3,533
|
|
Guaranteed by the Company
(b)
|
27
|
|
|
313
|
|
|
340
|
|
|
159
|
|
|
1,763
|
|
|
1,922
|
|
Combined allowance and liability for losses
|
$
|
1,377
|
|
|
$
|
1,271
|
|
|
$
|
2,648
|
|
|
$
|
2,265
|
|
|
$
|
3,190
|
|
|
$
|
5,455
|
|
Ending consumer loan balances, net
|
|
|
|
|
|
|
|
|
|
|
|
Company owned
|
$
|
24,915
|
|
|
$
|
2,311
|
|
|
$
|
27,226
|
|
|
$
|
26,986
|
|
|
$
|
3,407
|
|
|
$
|
30,393
|
|
Guaranteed by the Company
(b)
|
792
|
|
|
6,259
|
|
|
7,051
|
|
|
1,500
|
|
|
9,460
|
|
|
10,960
|
|
Combined ending consumer loan balances, net
(d)
|
$
|
25,707
|
|
|
$
|
8,570
|
|
|
$
|
34,277
|
|
|
$
|
28,486
|
|
|
$
|
12,867
|
|
|
$
|
41,353
|
|
Average amount outstanding per consumer loan (in ones)
(a)(c)
|
$
|
446
|
|
|
$
|
1,199
|
|
|
|
|
$
|
454
|
|
|
$
|
1,241
|
|
|
|
Allowance and liability for losses as a % of combined ending consumer loan balance, gross
(d)
|
5.1
|
%
|
|
12.9
|
%
|
|
7.2
|
%
|
|
7.4
|
%
|
|
19.9
|
%
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The disclosure regarding the amount of consumer loans written and renewed and the average amount per consumer loan is statistical data that is not included in the Company’s financial statements.
|
|
|
(b)
|
The consumer loan balances guaranteed by the Company represent loans originated by third-party lenders through the
CSO programs,
so these balances are not recorded in the Company’s financial statements. However, the Company has established a liability for estimated losses in support of its guarantee of these loans, which is reflected in the table above and included in the Company’s consolidated balance sheets
.
|
|
|
(c)
|
The average amount outstanding per consumer loan is calculated as the total amount of combined consumer loans outstanding as of the
end of the period divided by the total number of combined consumer loans outstanding as of the end of the period.
|
Consumer loans written and renewed
decrease
d
$28.6 million
, or
20.5%
, in the current quarter compared to the prior year quarter, primarily due a decrease in the number of storefront locations offering consumer loans, as well as elevated levels of unsecured installment loans written in the prior year quarter due to the initial expansion of the unsecured installment loan product in the state of Ohio in the first half of 2015. In addition, consumer loans written and renewed decreased due to the discontinuation of the installment loan product secured by a customer’s vehicle in the latter half of 2015.
Management estimates future consumer loan loss rates for all of its consumer loan products based on current and historical credit quality and trends. The allowance and liability for anticipated losses as a percentage of gross consumer loan balances decreased to
7.2%
as of
June 30, 2016
, compared to
11.7%
as of
June 30, 2015
, primarily due to an improvement in the performance of the unsecured installment loan portfolio, which benefited from more refined underwriting and the maturity of the portfolio.
The decrease in the average amount outstanding per installment loan as of
June 30, 2016
compared to
June 30, 2015
was due to the expansion of the unsecured installment loan product in certain store locations in the prior year quarter. The expansion of the unsecured installment loan product resulted in higher average balances per loan at
June 30, 2015
due to the high amount of new loans in the unsecured installment loan portfolio at that date, as these new loans were closer to the beginning of their term and, therefore, had higher average outstanding balances per loan. In addition, the average amount outstanding per installment loan decreased due to the discontinuation of the Company’s installment loan products secured by a customer’s vehicle that typically carried higher average balances than unsecured installment loans.
Operations and Administration Expenses
Operations expenses include all expenses directly related to the Company’s storefront locations, the operations management for each operating district and region, the Company’s centralized jewelry processing center and the Company’s call centers for customer service and collections. Administration expenses include expenses related to corporate service functions. Operations and administration expenses include expenses incurred for personnel, occupancy and other charges. Personnel expenses include salaries and wages, payroll taxes, incentive expenses and health insurance. Occupancy expenses include rent, property taxes, insurance, utilities, data communication expense and maintenance. Other expenses include marketing, legal, selling, travel and other office expenses.
The table below shows additional detail of the operations and administration expenses for the Company for the current quarter and the prior year quarter (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
Operations
|
|
Administration
|
|
Total
|
|
Operations
|
|
Administration
|
|
Total
|
Personnel
|
$
|
51,382
|
|
|
$
|
12,651
|
|
|
$
|
64,033
|
|
|
$
|
53,031
|
|
|
$
|
12,667
|
|
|
$
|
65,698
|
|
Occupancy
|
28,280
|
|
|
729
|
|
|
29,009
|
|
|
29,581
|
|
|
914
|
|
|
30,495
|
|
Other
|
8,069
|
|
|
7,503
|
|
|
15,572
|
|
|
9,081
|
|
|
8,032
|
|
|
17,113
|
|
Total
|
$
|
87,731
|
|
|
$
|
20,883
|
|
|
$
|
108,614
|
|
|
$
|
91,693
|
|
|
$
|
21,613
|
|
|
$
|
113,306
|
|
Consolidated operations and administration expenses
decrease
d
$4.7 million
, or
4.1%
, in the current quarter compared to the prior year quarter. This overall decline in expenses is consistent with management’s strategy and related initiatives to improve marginal profitability by optimizing the Company’s overall cost structure.
Operations expenses
decrease
d
$4.0 million
, or
4.3%
, in the current quarter compared to the prior year quarter, primarily due to lower personnel and occupancy costs that resulted from the Reorganization and decreased storefront locations. In addition, operations expenses in the prior year quarter included $0.7 million of expenses
related to store and office closures, compared to $0.1 million of expenses related to store and office closures in the current quarter.
Administration expenses
decrease
d
$0.7 million
, or
3.4%
, in the current quarter compared to the prior year quarter, despite the fact that administration expenses in the current quarter included $3.7 million of legal, professional, contract cancellation, severance and other expenses related to the Merger. Decreases in administration expenses that offset the Merger expenses and caused administration expenses to decrease for the current quarter were primarily related to decreased salaries and wages as a result of the Reorganization, and decreased consulting and miscellaneous administrative expenses, although these decreases were partially offset by higher employee benefit costs in the current quarter. In addition, other administration expenses decreased in the current quarter compared to the prior year quarter primarily due to a $1.9 million impairment loss in the prior year quarter related to a capitalized systems development project that the Company discontinued.
Depreciation and Amortization Expenses
The following table shows the Company’s depreciation and amortization expense for the
three months ended June 30,
2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Depreciation
|
$
|
11,492
|
|
|
$
|
12,928
|
|
|
$
|
(1,436
|
)
|
|
(11.1
|
)%
|
Amortization
|
1,536
|
|
|
1,631
|
|
|
(95
|
)
|
|
(5.8
|
)%
|
Total
|
$
|
13,028
|
|
|
$
|
14,559
|
|
|
$
|
(1,531
|
)
|
|
(10.5
|
)%
|
Depreciation and amortization expenses
decrease
d
$1.5 million
in the current quarter compared to the prior year quarter, primarily due to a reduction in capital investment activities beginning in 2015 as part of the Company’s strategy to improve marginal profitability, as well as a reduced number of pawn and consumer lending locations as a result of store closures and sales. Management expects this trend of lower depreciation expense to continue as management has reduced the level of capital investment related to the remodeling of stores, which will reduce the depreciation burden on net income in future periods.
Interest Expense and Interest Income
The following table shows the Company’s interest income and expense for the
three months ended June 30,
2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Interest expense accrued on debt and other obligations
|
$
|
2,679
|
|
|
$
|
2,793
|
|
|
$
|
(114
|
)
|
|
(4.1
|
)%
|
Debt related fees, issuance costs and discount amortization
|
757
|
|
|
764
|
|
|
(7
|
)
|
|
(0.9
|
)%
|
Total interest expense
|
$
|
3,436
|
|
|
$
|
3,557
|
|
|
$
|
(121
|
)
|
|
(3.4
|
)%
|
Less: interest income
|
—
|
|
|
(5
|
)
|
|
5
|
|
|
|
Interest expense, net
|
$
|
3,436
|
|
|
$
|
3,552
|
|
|
$
|
(116
|
)
|
|
(3.3
|
)%
|
Interest expense, net of interest income, decreased
$0.1 million
, or
3.3%
, in the current quarter compared to the prior year quarter.
Loss on Early Extinguishment of Debt
The Company incurred a loss on early extinguishment of debt of $0.6 million in the prior year quarter as a result of the Company repurchasing $12.0 million in principal amount of the 2018 Senior Notes for cash
consideration of $12.4 million. This repurchase resulted in a loss on early extinguishment of debt of $0.6 million, which consisted of a $0.4 million premium paid and a $0.2 million expense resulting from the write-off of deferred loan costs.
Gain on Disposition of Equity Securities
The Company incurred a gain on the disposition of equity securities of
$1.1 million
in the prior year quarter compared to an immaterial gain on the disposition of equity securities in the current quarter. These gains were recognized in connection with the delivery of Enova common stock to holders of vested restricted stock unit awards that are payable in shares of the Company and in Enova common stock. See
Note 4
of the consolidated financial statements for additional information.
Income Taxes
The Company’s effective tax rate was
33.2%
in the current quarter as compared to the effective tax rate of
36.5%
in the prior year quarter. The decrease in the effective tax rate in the current quarter was primarily due to a
$0.2 million
excess income tax benefit from stock compensation that reduced the income tax provision as a result of the prospective adoption of Accounting Standards Update (“ASU”) 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”)
.
See
Note 1
of the consolidated financial statements for additional information on the adoption of ASU 2016-09.
|
|
SIX MONTHS ENDED JUNE 30, 2016 COMPARED TO SIX MONTHS ENDED JUNE 30, 2015
|
Pawn Lending Activities
The following table sets forth selected data related to the Company’s pawn lending activities for the
six months ended
June 30, 2016
and
2015
(dollars in thousands, except where otherwise noted):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Pawn loan fees and service charges
|
$
|
155,795
|
|
|
$
|
154,212
|
|
|
$
|
1,583
|
|
|
1.0
|
%
|
Average pawn loan balance outstanding
|
$
|
230,148
|
|
|
$
|
231,748
|
|
|
$
|
(1,600
|
)
|
|
(0.7
|
)%
|
Amount of pawn loans written and renewed
|
$
|
473,961
|
|
|
$
|
479,606
|
|
|
$
|
(5,645
|
)
|
|
(1.2
|
)%
|
Average amount per pawn loan (in ones)
|
$
|
127
|
|
|
$
|
126
|
|
|
$
|
1
|
|
|
0.8
|
%
|
Annualized yield on pawn loans
|
136.1
|
%
|
|
134.2
|
%
|
|
|
|
|
Average pawn loan balances
decrease
d
$1.6 million
, or
0.7%
, in the current
six-month period
compared to the prior year
six-month period
, primarily due to a decrease in the number of stores offering pawn loans following the closure or sale of certain less profitable store locations. Partially offsetting this decrease, average pawn loan balances in same-store pawn locations increased slightly in the current
six-month period
compared to the prior year
six-month period
.
Pawn loan fees and service charges
increase
d
$1.6 million
, or
1.0%
, in the current
six-month period
compared to the prior year
six-month period
. This
increase
was primarily driven by a higher pawn loan yield of
136.1%
in the current
six-month period
compared to
134.2%
in the prior year
six-month period
, primarily due to a shift in the geographic concentrations of pawn loans into states with higher statutory pawn loan yields, as well as an increase in the permitted statutory loan fees in some markets. Partially offsetting this increase, pawn loan fees and services were reduced by lower average pawn loan balances in the current
six-month period
compared to the prior year
six-month period
.
Proceeds from Disposition of Merchandise and Gross Profit
The following table summarizes the proceeds from the disposition of merchandise and the related gross profit for pawn operations for the current
six-month period
and the prior year
six-month period
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
Domestic pawn operations
|
Retail
|
|
Commercial
|
|
Total
|
|
Retail
|
|
Commercial
|
|
Total
|
Proceeds from disposition
|
$
|
273,315
|
|
|
$
|
53,120
|
|
|
$
|
326,435
|
|
|
$
|
267,472
|
|
|
$
|
43,444
|
|
|
$
|
310,916
|
|
Gross profit on disposition
|
$
|
89,031
|
|
|
$
|
(1,198
|
)
|
|
$
|
87,833
|
|
|
$
|
85,754
|
|
|
$
|
7,218
|
|
|
$
|
92,972
|
|
Gross profit margin
|
32.6
|
%
|
|
(2.3
|
)%
|
|
26.9
|
%
|
|
32.1
|
%
|
|
16.6
|
%
|
|
29.9
|
%
|
Percentage of total gross profit
|
101.4
|
%
|
|
(1.4
|
)%
|
|
100.0
|
%
|
|
92.2
|
%
|
|
7.8
|
%
|
|
100.0
|
%
|
Proceeds from disposition for pawn operations
increased
$15.5 million
, or
5.0%
, in the current
six-month period
compared to the prior year
six-month period
. Retail proceeds from disposition comprised
$5.8 million
of the total increase, primarily due to an increase in retail jewelry sales in the Company’s storefront locations. The Company’s merchandise turnover ratio remained relatively stable at
2.1
times in the current
six-month period
compared to
2.2
times in the prior year
six-month period
.
Gross profit on disposition for pawn operations
decreased
$5.1 million
, or
5.5%
, in the current
six-month
period
compared to the prior year
six-month period
, primarily due to a
$8.4 million
decrease in gross profit on commercial dispositions as a result of lower gold and diamond yields, which produced a negative gross profit margin on commercial dispositions in the current
six-month period
. Partially offsetting the loss on commercial dispositions was a
$3.3 million
, or
3.8%
, increase in gross profit on retail dispositions, primarily due to the Company’s emphasis on retail jewelry sales in storefront locations. The gross profit margin on retail dispositions increased to
32.6%
in the current
six-month period
, compared to
32.1%
in the prior year
six-month period
, primarily due to the emphasis in the prior year
six-month period
on the discounting of non-jewelry merchandise in an effort to reduce the levels of non-jewelry merchandise held for more than one year.
Consumer Loan Activities
Consumer Loan Fees, Net of Loss Provision
The following table sets forth interest and fees on consumer loans, the consumer loan loss provision and consumer loan fees, net of the loss provision
, for the current
six-month period
and prior year
six-month period
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
Short-term loans
|
|
Installment loans
|
|
Total
|
|
Short-term loans
|
|
Installment loans
|
|
Total
|
Consumer loan fees
|
$
|
22,436
|
|
|
$
|
11,737
|
|
|
$
|
34,173
|
|
|
$
|
30,425
|
|
|
$
|
9,205
|
|
|
$
|
39,630
|
|
Less: consumer loan loss provision
|
4,689
|
|
|
2,806
|
|
|
7,495
|
|
|
4,830
|
|
|
4,370
|
|
|
9,200
|
|
Consumer loan fees, net loss provision
|
$
|
17,747
|
|
|
$
|
8,931
|
|
|
$
|
26,678
|
|
|
$
|
25,595
|
|
|
$
|
4,835
|
|
|
$
|
30,430
|
|
Year-over-year change - $
|
$
|
(7,848
|
)
|
|
$
|
4,096
|
|
|
$
|
(3,752
|
)
|
|
$
|
(5,445
|
)
|
|
$
|
1,663
|
|
|
$
|
(3,782
|
)
|
Year-over-year change - %
|
(30.7
|
)%
|
|
84.7
|
%
|
|
(12.3
|
)%
|
|
(17.5
|
)%
|
|
52.4
|
%
|
|
(11.1
|
)%
|
Consumer loan loss provision
as a % of consumer loan fees
|
20.9
|
%
|
|
23.9
|
%
|
|
21.9
|
%
|
|
15.9
|
%
|
|
47.5
|
%
|
|
23.2
|
%
|
Consumer loan fees, net of the loss provision,
decreased
$3.8 million
, or
12.3%
, in the current
six-month period
compared to the prior year
six-month period
, primarily due to a
$5.5 million
, or
13.8%
,
decrease
in consumer loan fees. The
decrease
in consumer loan fees was primarily due to a
decrease
in short-term consumer loan fees of
$8.0 million
, or
26.3%
, as a result of the closure and sale of certain store locations and the Company’s strategic decision to deemphasize and eliminate short-term consumer lending activities in many of its locations. For more information, see “The Company’s Business—Locations.” In addition, consumer loan fees decreased due to reduced consumer loan fees from installment loans secured by a customer’s vehicle, which the Company ceased offering in the latter half of 2015. The decrease in consumer loan fees from the short-term and secured installment loan products was partially offset by an increase in fees from an unsecured installment loan product that began being offered more broadly in the state of Ohio in the prior year
six-month period
.
The consumer loan loss provision
decreased
by
$1.7 million
, or
18.5%
, in the current
six-month period
compared to the prior year
six-month period
. The consumer loan loss provision as a percentage of consumer loan fees
decreased
to
21.9%
in the current
six-month period
compared to
23.2%
in the prior year
six-month period
, primarily due to an improvement in the performance of the unsecured installment loan portfolio, which benefited from more refined underwriting and the maturity of the portfolio since the expansion of the product offering in the prior year
six-month period
. In addition, the consumer loan loss provision in the prior year
six-month period
was reduced by $2.3 million in sales of delinquent loans to third parties, compared to delinquent loan sales of $0.6 million in the current
six-month period
. Sales of delinquent consumer loans related to consumer loans that had previously been charged off. Therefore, the sale of these loans increased recoveries, resulting in a decrease in the loss provision. The high amount of delinquent consumer loan sales in the prior year
six-month period
resulted from the initiation of the program to sell delinquent consumer loans to unaffiliated third parties.
Consumer Loans Written and Renewed
The following table summarizes consumer loans written and renewed for the current
six-month period
and prior year
six-month period
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
Short-term loans
|
|
Installment loans
|
|
Total
|
|
Short-term loans
|
|
Installment loans
|
|
Total
|
Consumer loans written and renewed
|
|
|
|
|
|
|
|
|
|
|
|
Company owned
|
$
|
185,838
|
|
|
$
|
2,609
|
|
|
$
|
188,447
|
|
|
$
|
241,503
|
|
|
$
|
2,949
|
|
|
$
|
244,452
|
|
Guaranteed by the Company
(a)
|
8,043
|
|
|
20,290
|
|
|
28,333
|
|
|
14,868
|
|
|
37,786
|
|
|
52,654
|
|
Combined consumer loans written and renewed
|
$
|
193,881
|
|
|
$
|
22,899
|
|
|
$
|
216,780
|
|
|
$
|
256,371
|
|
|
$
|
40,735
|
|
|
$
|
297,106
|
|
(a)
The consumer loan balances guaranteed by the Company represent loans originated by third-party lenders through the
CSO programs,
so these balances are not recorded in the Company’s financial statements. However, the Company has established a liability for estimated losses in support of its guarantee of these loans, which is reflected in the table above and included in the Company’s consolidated balance sheets
.
Consumer loans written and renewed
decrease
d
$80.3 million
, or
27.0%
, in the current
six-month period
compared to the prior year
six-month period
, primarily due a decrease in the number of storefront locations offering consumer loans, as well as elevated levels of unsecured installment loans written in the prior year
six-month period
due to the initial expansion of the unsecured installment loan product in the state of Ohio in the first half of 2015. In addition, consumer loans written and renewed decreased due to the discontinuation of the installment loan product secured by a customer’s vehicle in the latter half of 2015.
Operations and Administration Expenses
The table below shows additional detail of the operations and administration expenses for the Company for the current
six-month period
and the prior year
six-month period
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
Operations
|
|
Administration
|
|
Total
|
|
Operations
|
|
Administration
|
|
Total
|
Personnel
|
$
|
104,977
|
|
|
$
|
26,191
|
|
|
$
|
131,168
|
|
|
$
|
108,959
|
|
|
$
|
28,897
|
|
|
$
|
137,856
|
|
Occupancy
|
57,989
|
|
|
1,374
|
|
|
59,363
|
|
|
59,255
|
|
|
1,813
|
|
|
61,068
|
|
Other
|
16,286
|
|
|
12,588
|
|
|
28,874
|
|
|
18,121
|
|
|
12,599
|
|
|
30,720
|
|
Total
|
$
|
179,252
|
|
|
$
|
40,153
|
|
|
$
|
219,405
|
|
|
$
|
186,335
|
|
|
$
|
43,309
|
|
|
$
|
229,644
|
|
Consolidated operations and administration expenses
decrease
d
$10.2 million
, or
4.5%
, in the current
six-month period
compared to the prior year
six-month period
. This overall decline in expenses is consistent with management’s strategy and related initiatives to improve marginal profitability by optimizing the Company’s overall cost structure.
Operations expenses
decrease
d
$7.1 million
, or
3.8%
, in the current
six-month period
compared to the prior year
six-month period
, primarily due to lower personnel and occupancy costs that resulted from the Reorganization and decreased storefront locations. In addition, operations expenses in the prior year
six-month period
included $1.1 million of expenses related to store and office closures, compared to $0.4 million of expenses related to store and office closures in the current
six-month period
. Furthermore, other operations expenses decreased in the current
six-
month period
compared to the prior year
six-month period
due to lower costs related to postage, shop systems, bank fees and travel.
Administration expenses
decrease
d
$3.2 million
, or
7.3%
, in the current
six-month period
compared to the prior year
six-month period
, despite the fact that administration expenses in the current
six-month period
included $3.7 million of legal, professional, contract cancellation, severance and other expenses related to the Merger. Decreases in administration expenses that offset the Merger expenses and caused administration expenses to decrease for the current
six-month period
were primarily related to decreased salaries and wages and performance-based incentive expense as a result of the Reorganization, although these decreases were partially offset by higher employee benefit costs in the current
six-month period
. In addition, other administration expenses decreased in the current
six-month period
compared to the prior year
six-month period
primarily due to a $1.9 million impairment loss in the prior year
six-month period
related to a capitalized systems development project that the Company discontinued.
Depreciation and Amortization Expenses
The following table shows the Company’s depreciation and amortization expense for the
six months ended June 30,
2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Depreciation
|
$
|
23,461
|
|
|
$
|
25,813
|
|
|
$
|
(2,352
|
)
|
|
(9.1
|
)%
|
Amortization
|
3,072
|
|
|
3,265
|
|
|
(193
|
)
|
|
(5.9
|
)%
|
Total
|
$
|
26,533
|
|
|
$
|
29,078
|
|
|
$
|
(2,545
|
)
|
|
(8.8
|
)%
|
Depreciation and amortization expenses decreased
$2.5 million
in the current
six-month period
compared to the prior year
six-month period
, primarily due to a reduction in capital investment activities beginning in 2015 as part of the Company’s strategy to improve marginal profitability, as well as a reduced number of pawn and consumer lending locations as a result of store closures and sales.
Interest Expense and Interest Income
The following table shows the Company’s interest income and expense for the
six months ended June 30,
2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Interest expense accrued on debt and other obligations
|
$
|
5,859
|
|
|
$
|
5,687
|
|
|
$
|
172
|
|
|
3.0
|
%
|
Debt related fees, issuance costs and discount amortization
|
1,496
|
|
|
1,514
|
|
|
(18
|
)
|
|
(1.2
|
)%
|
Total interest expense
|
$
|
7,355
|
|
|
$
|
7,201
|
|
|
$
|
154
|
|
|
2.1
|
%
|
Less: interest income
|
(20
|
)
|
|
(7
|
)
|
|
(13
|
)
|
|
(185.7
|
)%
|
Interest expense, net
|
$
|
7,335
|
|
|
$
|
7,194
|
|
|
$
|
141
|
|
|
2.0
|
%
|
Interest expense, net of interest income,
increased
$0.1 million
in the current
six-month period
compared to the prior year
six-month period
.
Loss on Early Extinguishment of Debt
The Company incurred a loss on early extinguishment of debt of $0.6 million in the prior year six-month period as a result of the Company repurchasing $12.0 million in principal amount of the 2018 Senior Notes for cash consideration of $12.4 million. This repurchase resulted in a loss on early extinguishment of debt of $0.6 million,
which consisted of a $0.4 million premium paid and a $0.2 million expense resulting from the write-off of deferred loan costs.
Gain on Disposition of Equity Securities
The Company incurred a gain on the disposition of equity securities of
$0.1 million
in the current
six-month period
and
$1.2 million
in the prior year
six-month period
in connection with the delivery of Enova common stock to holders of vested restricted stock unit awards that are payable in shares of the Company and in Enova common stock. See
Note 4
of the consolidated financial statements for additional information.
Income Taxes
The Company’s effective tax rate was
33.3%
in the current
six-month period
as compared to the effective tax rate of
38.1%
in the prior year
six-month period
. The effective tax rate in the current
six-month period
was lower primarily due to lower state income taxes and a
$0.7 million
excess income tax benefit from stock compensation that reduced the income tax provision as a result of the prospective adoption of ASU 2016-09
.
See
Note 1
of the consolidated financial statements for additional information on the adoption of ASU 2016-09.
|
|
|
|
|
|
LIQUIDITY AND CAPITAL RESOURCES
|
Cash Flows Highlights
The Company’s cash flows and other key indicators of liquidity are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
Net cash provided by operating activities
|
$
|
62,495
|
|
|
$
|
62,227
|
|
Pawn activities, net
|
$
|
13,785
|
|
|
$
|
5,968
|
|
Consumer loan activities, net
|
(5,031
|
)
|
|
4,291
|
|
Acquisitions, net of cash acquired
|
(867
|
)
|
|
—
|
|
Purchases of property and equipment
|
(7,622
|
)
|
|
(6,883
|
)
|
Other investing
|
(139
|
)
|
|
1,566
|
|
Net cash provided by investing activities
|
$
|
126
|
|
|
$
|
4,942
|
|
Net payments under debt instruments
|
$
|
(26,269
|
)
|
|
$
|
(12,411
|
)
|
Treasury shares purchased and accelerated share repurchases forward contract
|
(35,569
|
)
|
|
(60,975
|
)
|
Dividends paid
|
(3,907
|
)
|
|
(2,798
|
)
|
Net cash used in financing activities
|
$
|
(65,745
|
)
|
|
$
|
(76,184
|
)
|
|
|
|
|
Net decrease in cash and cash equivalents
|
$
|
(3,124
|
)
|
|
$
|
(9,056
|
)
|
|
|
|
|
Working capital
|
$
|
542,719
|
|
|
$
|
621,685
|
|
Cash and cash equivalents
|
$
|
20,029
|
|
|
$
|
43,986
|
|
Total debt (includes current maturities of long-term debt)
|
$
|
183,280
|
|
|
$
|
181,319
|
|
Net debt (Total debt less cash and cash equivalents)
|
$
|
163,251
|
|
|
$
|
137,333
|
|
|
|
|
|
Current ratio
|
7.5 x
|
|
|
7.8 x
|
|
Merchandise turnover
|
2.1 x
|
|
|
2.2 x
|
|
Total debt to Adjusted EBITDA ratio
(a)
|
1.6 x
|
|
|
1.6 x
|
|
Net debt to Adjusted EBITDA ratio
(a)
|
1.4 x
|
|
|
1.2 x
|
|
|
|
(a)
|
Non-GAAP measure. See “The Company’s Business—Non-GAAP Disclosure—Adjusted EBITDA” section above for a reconciliation of adjusted EBITDA for the trailing twelve months ended
June 30, 2016
and
2015
to net income.
|
Cash Flows from Operating Activities
Net cash provided by operating activities was
$62.5 million
for the current
six-month period
, which represented an
increase
of
$0.3 million
, or
0.4%
, from
$62.2 million
in the prior year
six-month period
. The increase primarily included a
$12.6 million
increase due to a reduction in the balance of merchandise purchased from customers, a
$6.1 million
increase in prepaid expenses and other assets primarily due to an increase of a receivable from a third-party consumer loan lender in the prior year
six-month period
, and a
$2.8 million
increase in net income. Largely offsetting this increase, net cash provided by operating activities decreased due to a
$10.1 million
decrease in accounts payable and accrued expenses, primarily due to decreases in customer deposits and accrued personnel costs in the current
six-month period
compared to increases in these items in the prior year
six-month period
. In addition, current and deferred income taxes payable decreased by
$7.1 million
, primarily due to additional estimated tax payments due in 2016.
Management believes that its expected cash flows from operations and available cash balances and borrowings will be sufficient to fund the Company’s operating liquidity needs.
Cash Flows from Investing Activities
Net cash provided by investing activities was
$0.1 million
in the current
six-month period
, which represented a
decrease
of
$4.8 million
from net cash provided by investing activities in the prior year
six-month period
. Net cash provided by consumer loan activities decreased
$9.3 million
in the current
six-month period
compared to the prior year
six-month period
, primarily due to a decrease in the volume of consumer loans written as a result of the Company’s strategic reduction of its consumer lending activities and lower proceeds received from the sale of delinquent loans to third parties. Partially offsetting this decrease, net cash provided by pawn activities increased
$7.8 million
in the current
six-month period
compared to the prior year
six-month period
, primarily due to an increase in pawn loan principal recovered through the disposition of forfeited merchandise.
In addition, expenditures for property and equipment increased
$0.7 million
in the current
six-month period
compared to the prior year
six-month period
. Management anticipates that expenditures for property and equipment, excluding acquisitions of stores, for the remainder of 2016 will be between
$7.0 million
and
$12.0 million
, primarily for the remodeling of stores, facility upgrades and technology infrastructure.
With respect to the Enova shares retained by the Company in connection with the Enova Spin-off, the Company has agreed, pursuant to a private letter ruling and a supplemental request approved by the Internal Revenue Service, to dispose of its Enova shares (other than shares retained for delivery under the Company’s long-term incentive plans) before September 15, 2017. The sale of the Enova shares will generate additional cash flows. The Company’s investment in Enova common stock was
$47.1 million
as of
June 30, 2016
based on a quoted market price per share of $7.36. See
Note 4
of the consolidated financial statements for additional information.
Cash Flows from Financing Activities
Net cash flows used in financing activities was
$65.7 million
in the current
six-month period
, which represented a
decrease
of
$10.4 million
from
$76.2 million
in the prior year
six-month period
. The decrease in net cash flows used in financing activities was primarily due to a
$22.1 million
decrease in cash used to repurchase the Company’s common stock in the current
six-month period
compared to the prior year
six-month period
. The Company used cash to repurchase
$35.6 million
of its common stock in the current
six-month period
, compared to
$57.7 million
in share repurchases in the prior year
six-month period
. See “Share Repurchases” below for additional information.
Cash used for debt repayments, net of borrowings, increased by
$13.9 million
in the current
six-month period
compared to the prior year
six-month period
. Debt repayment activity in the current
six-month period
totaled $26.3 million and included
$23.3 million
in net payments under the Line of Credit and the repurchase of
$3.0 million
in principal amount of the 2018 Senior Notes. In the prior year
six-month period
, the Company used $12.4 million in cash to repurchase $12.0 million in principal amount of the 2018 Senior Notes.
As of
June 30, 2016
, the Company had
$276.2 million
in available borrowings under the Line of Credit. Management believes that the borrowings available under the Line of Credit, anticipated cash generated from operations and current working capital of
$542.7 million
is sufficient to meet the Company’s anticipated capital requirements for its business. See
Note 5
of the consolidated financial statements for additional information regarding the Company’s debt instruments, including the Line of Credit.
In addition, the Company had standby letters of credit of
$6.0 million
issued under its $20.0 million standby Letter of Credit Facility as of
June 30, 2016
.
On August 2, 2016, the Company sent an irrevocable notice to all holders of the 2018 Senior Notes indicating that it will redeem the 2018 Senior Notes in full on September 1, 2016. The 2018 Senior Notes will be redeemed at 100% of the aggregate principal amount of the 2018 Senior Notes outstanding plus the applicable “make whole” redemption price specified in the 2018 Senior Notes Indenture, plus accrued and unpaid interest up to the redemption date.
As of
June 30, 2016
, the Company had
$181.5 million
in aggregate principal amount of 2018 Senior Notes outstanding.
The total amount estimated to be paid upon redemption is
$198.5 million
, which will be paid with borrowings under the Company’s Line of Credit. Following the redemption, no 2018 Senior Notes will remain outstanding.
As of
June 30, 2016
, the Company believes it was in compliance with all covenants or other requirements set forth in its debt agreements.
On June 26, 2015, the Trustee under the 2018 Senior Notes Indenture, filed a lawsuit against the Company in the United States District Court for the Southern District of New York. The lawsuit alleges that the Enova Spin-off was not permitted by the 2018 Senior Notes Indenture, and the Trustee is seeking a remedy equal to principal and accrued and unpaid interest, plus a make-whole premium, to be paid to the holders of the 2018 Senior Notes. The Company disagrees with the assertion in the lawsuit that the Enova Spin-off was not permitted under the 2018 Senior Notes Indenture. The Company also disagrees that a make-whole premium would be due to the holders of the 2018 Senior Notes even if it is determined that the Enova Spin-off was not permitted under the 2018 Senior Notes Indenture.
The Company believes the position taken by the Trustee is without merit, and the Company intends to vigorously defend its position.
On August 2, 2016, the Company exercised its option to redeem the 2018 Senior Notes in full.
For additional information on the upcoming redemption, see the previous paragraph.
In the event of a significant decline in demand for the Company’s products and services or other unexpected changes in financial condition, management would evaluate several alternatives to ensure that it is in a position to meet its liquidity requirements. Such actions could include the sale of assets, the sale of the Enova shares held by the Company, reductions in capital spending and/or the issuance of debt or equity securities, all of which could be expected to generate additional liquidity. 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, give the Company flexibility to quickly modify its business strategy to increase cash flow from its business, if necessary.
Share Repurchases
In October 2015, the Board of Directors authorized a share repurchase program for the repurchase of up to 3.0 million shares of the Company’s common stock (the “October 2015 Authorization”), which took effect in December 2015 after all shares under the Company’s previous authorization dated January 2015 to repurchase up to 4.0 million shares of Company stock was completed.
During the current
six-month period
, the Company purchased
1,027,800
shares in open market transactions under the October 2015 Authorization for a total investment of
$33.6 million
, including commissions. In connection with the Merger with FCFS, the Company agreed to suspend its share repurchase activity, and there has been no share repurchase activity since April 2016. See “The Company’s Business—Recent Developments” and Part II, “Item 1A. Risk Factors” for additional information.
All shares that have been repurchased have been placed in treasury and are not considered outstanding for earnings per common share calculation purposes. As of
June 30, 2016
, there were
1,956,334
shares remaining under the October 2015 Authorization to repurchase shares. For additional information regarding the Company’s share repurchases during the current
six-month period
, see Part II, “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
.”
Off-Balance Sheet Arrangements
In certain markets, the Company arranges for consumers to obtain consumer loan products from independent third-party lenders through the CSO programs. For consumer loan products originated by third-party lenders under the CSO programs, each lender is responsible for providing the criteria by which the consumer’s
application is underwritten and, if approved, determining the amount of the consumer loan. The Company, in turn, is responsible for assessing whether or not it will guarantee such loans. When a consumer executes an agreement with the Company under the CSO programs, the Company agrees, for a fee payable to the Company by the consumer, to provide certain services to the consumer, one of which is to guarantee the consumer’s obligation to repay the loan received by the consumer from the third-party lender if the consumer fails to do so. The guarantee represents an obligation to purchase specific loans that go into default.
Short-term loans that the Company guarantees generally have terms of
45
days or less.
Unsecured installment loans that the Company guarantees generally have terms of up to
twelve
months.
Secured installment loans that the Company guarantees, which the Company ceased offering in the latter half of 2015, have remaining terms of up to
23
months.
As of
June 30, 2016
and
2015
and December 31,
2015
,
the amount of consumer loans guaranteed by the Company, excluding unearned CSO fees, was
$7.4 million
,
$12.9 million
and
$11.1 million
, respectively,
representing amounts due under consumer loans originated by third-party lenders under the CSO programs.
The liability for estimated losses on consumer loans guaranteed by the Company of
$0.3 million
,
$1.9 million
and
$2.0 million
as of
June 30, 2016
and
2015
and December 31,
2015
, respectively,
is included in “Accounts payable and accrued expenses” in the accompanying consolidated balance sheets.
|
|
|
|
|
|
CRITICAL ACCOUNTING POLICIES
|
Except as described below, there have been no changes in critical accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2015
.
Goodwill and Other Indefinite Lived Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination and is not amortized. In accordance with Accounting Standards Codification (“ASC”) 350-20-35,
Goodwill-Subsequent Measurement
(“ASC 350”), the Company tests goodwill and intangible assets with an indefinite life for potential impairment annually as of June 30 and between annual tests 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, which would result in impairment. The Company has one reportable operating segment, which serves as the only reporting unit for goodwill assessment.
The Company completed its annual assessment of goodwill as of June 30, 2016. The Company elected to perform a qualitative assessment in accordance with ASU 2012-02,
Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
(“ASU 2012-02”), and, based on the results of this assessment, determined that no conditions existed that would make it more likely than not that goodwill was impaired.
As part of the goodwill assessment, the Company also considers certain observable quantitative factors in its assessment, such as the market value of its equity, which is the observable market value of the Company based on the quoted market prices of the Company’s common stock at the measurement date. The Company compares the market value of its equity to the carrying value of its equity. As of June 30, 2016, the market value of the Company’s equity was higher than the carrying value of equity. In addition, as part of the
Merger Agreement
entered into by the Company,
FCFS
and Frontier Merger Sub, LLC, a Texas limited liability company, the estimated merger consideration based on the stock price of FCFS as of June 30, 2016 was in excess of the Company’s carrying value of equity. See
Note 8
of the consolidated financial statements
for a description of the Merger Agreement with FCFS. Therefore, the Company’s goodwill is not considered to be at risk of being impaired at this time. However, a decline in general economic, market or business conditions, significant unfavorable changes in the Company’s forecasted revenue, expenses, cash flows, weighted-average cost of capital, and/or market transaction multiples, or a termination of the Merger Agreement could represent a potential triggering event that may indicate an impairment review should be performed. The Company will continue to monitor for events and circumstances that could negatively impact the key assumptions in determining its fair value.
The Company performed its annual indefinite-lived intangible asset impairment test as of June 30, 2016. The Company’s indefinite-lived intangible assets consist of trademarks, trade names, and licenses and had a carrying amount of
$15.0 million
as of June 30, 2016. The Company elected to perform a qualitative assessment in accordance with
ASU
2012-02 and determined that no conditions existed that would make it more likely than not that the indefinite-lived intangible assets were impaired. Therefore, no further quantitative assessment was required.
|
|
|
|
|
|
RECENT ACCOUNTING PRONOUCEMENTS
|
See Note 1 of the consolidated financial statements for a discussion of recent accounting pronouncements that the Company has adopted or will adopt in future periods.