# FirstCash Holdings, Inc. (FCFS) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FirstCash Holdings, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/840489/000084048923000041/fcfs-20221231.htm
Accession: 0000840489-23-000041
Filing date: 2023-02-06
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/FCFS/
All MD&A years: /company/FCFS/mda/
Previous year: /company/FCFS/mda/fy2021/ (FY 2021)
Next year: /company/FCFS/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The Company’s primary business line is the operation of retail pawn stores, also known as “pawnshops,” which focus on serving cash and credit-constrained consumers. The Company is the leading operator of pawn stores in the U.S. and Latin America. Pawn stores help customers meet small short-term cash needs by providing non-recourse pawn loans and buying merchandise directly from customers. Personal property, such as jewelry, electronics, tools, appliances, sporting goods and musical instruments, is pledged and held as collateral for the pawn loans over the typical 30-day term of the loan. Pawn stores also generate retail sales primarily from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers.

With the AFF Acquisition, the Company is also a leading provider of technology-driven, retail POS payment solutions focused on serving credit-constrained consumers. The Company’s retail POS payment solutions business line consists solely of the operations of AFF, which focuses on LTO products and facilitating other retail financing payment options across a large network of traditional and e-commerce merchant partners in all 50 states in the U.S., the District of Columbia and Puerto Rico. AFF’s retail partners provide consumer goods and services to their customers and use AFF’s LTO and retail finance solutions to facilitate payments on such transactions.

The Company’s two business lines are organized into three reportable segments. The U.S. pawn segment consists of all pawn operations in the U.S. and the Latin America pawn segment consists of all pawn operations in Mexico, Guatemala, Colombia and El Salvador. The retail POS payment solutions segment consists of the operations of AFF in the U.S. and Puerto Rico. Financial information regarding the Company’s revenue and long-lived assets by geographic areas is provided in Note 17 of Notes to Consolidated Financial Statements.

Business operations in Mexico, Guatemala and Colombia are transacted in Mexican pesos, Guatemalan quetzales and Colombian pesos. The Company also has operations in El Salvador, where the reporting and functional currency is the U.S. dollar. The following table provides exchange rates for the Mexican peso, Guatemalan quetzal and Colombian peso for the current and prior-year periods:  

[[GREPCENT_TABLE]]
[["","","2022","","2021","","2020"],["","","Rate","","% Change Over Prior- Year Period Favorable / (Unfavorable)","","Rate","","% Change Over Prior- Year Period Favorable / (Unfavorable)","","Rate"],["Mexican peso / U.S. dollar exchange rate:"],["End-of-period","","19.4","","","6","%","","","20.6","","","(4)","%","","","19.9"],["Twelve months ended","","20.1","","","1","%","","","20.3","","","6","%","","","21.5"],["Guatemalan quetzal / U.S. dollar exchange rate:"],["End-of-period","","7.9","","","(3)","%","","","7.7","","","1","%","","","7.8"],["Twelve months ended","","7.7","","","\u2014","%","","","7.7","","","\u2014","%","","","7.7"],["Colombian peso / U.S. dollar exchange rate:"],["End-of-period","","4,810","","","(21)","%","","","3,981","","","(16)","%","","","3,433"],["Twelve months ended","","4,253","","","(14)","%","","","3,742","","","(1)","%","","","3,693"]]
[[/GREPCENT_TABLE]]

The Company’s management reviews and analyzes operating results in Latin America on a constant currency basis because the Company believes this better represents the Company’s underlying business trends. Constant currency results are non-GAAP financial measures, which exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates. The wholesale scrap jewelry sales in Latin America are priced and settled in U.S. dollars, and are not affected by foreign currency translation, as are a small percentage of the operating and administrative expenses in Latin America which are billed and paid in U.S. dollars. Amounts presented on a constant currency basis are denoted as such. See “Non-GAAP Financial Information” for additional discussion of constant currency operating results.

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Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, related revenue and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. Such estimates, assumptions and judgments are subject to a number of risks and uncertainties, which may cause actual results to differ materially from the Company’s estimates.

The critical accounting policies and estimates that could have a significant impact on the Company’s results of operations are described in Note 2 of Notes to Consolidated Financial Statements. The Company believes the following critical accounting policies describe the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Pawn loans and revenue recognition - Pawn loans are secured by the customer’s pledge of tangible personal property, which the Company holds during the term of the loan. If a pawn loan defaults, the Company relies on the sale of the pawned property to recover the principal amount of an unpaid pawn loan, plus a yield on the investment, as the Company’s pawn loans are non-recourse against the customer. The Company accrues pawn loan fee revenue on a constant-yield basis over the life of the pawn loan for all pawns for which the Company deems collection to be probable based on historical pawn redemption statistics, which is included in accounts receivable, net in the accompanying consolidated balance sheets. If the pawn loan is not repaid prior to the expiration of the pawn loan term, including any extension or grace period, if applicable, the principal amount loaned becomes the inventory carrying value of the forfeited collateral, which is typically recovered through sales of the forfeited items at prices well above the carrying value. The Company has determined no allowance related to credit losses on pawn loans is required, as the fair value of the pledged collateral is significantly in excess of the pawn loan amount.

Pawn inventories and revenue recognition - Pawn inventories represent merchandise acquired from forfeited pawn loans and merchandise purchased directly from the general public. The Company also retails limited quantities of new or refurbished merchandise obtained directly from wholesalers and manufacturers. Pawn inventories from forfeited pawn loans are recorded at the amount of the pawn principal on the unredeemed goods, exclusive of accrued interest. Pawn inventories purchased directly from customers, wholesalers and manufacturers are recorded at cost. The cost of pawn inventories is determined on the specific identification method. Pawn inventories are stated at the lower of cost or net realizable value and, accordingly, valuation allowances are established if pawn inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. Management has evaluated pawn inventories and determined that a valuation allowance is not necessary.

The Company’s merchandise sales are primarily retail sales to the general public in its pawn stores. The Company records sales revenue at the time of the sale. The Company presents merchandise sales net of any sales or value-added taxes collected. Some jewelry inventory is melted and processed at third-party facilities, and the precious metal and diamond content is sold at either prevailing market commodity prices or a previously agreed upon price with a commodity buyer. The Company records revenue from these wholesale scrap jewelry transactions when a price has been agreed upon and the Company ships the commodity to the buyer.

Leased merchandise and revenue recognition - The Company provides merchandise, consisting primarily of furniture and mattresses, appliances, jewelry, electronics and automotive products, to customers of its merchant partners for lease under certain terms agreed to by the customer. The customer has the right to acquire the title either through an early buyout option or through payment of all required lease payments. The Company maintains ownership of the leased merchandise until all payment obligations are satisfied under the lease agreement. The customer has the right to cancel the lease at any time by returning the merchandise and making all scheduled payments due through the minimum lease holding period, which is typically 60 days. Leased merchandise contracts can typically be renewed for between six and 24 months. Leased merchandise is stated at depreciated cost. The Company depreciates leased merchandise over the life of the lease and assumes no salvage value. Depreciation is accelerated upon an early buyout. All of the Company’s leased merchandise represents on-lease merchandise and all leases are operating leases.

Lease income is recognized over the lease term and is recorded net of any sales taxes collected. Charges for late fees and insufficient fund fees are recognized as income when collected. Initial direct costs related to the Companyʼs lease agreements are added to the basis of the leased property and recognized over the lease term in proportion to the recognition of lease income. The Company typically charges the customer a non-refundable processing fee at lease inception and may also receive a discount from or pay a premium to certain merchant partners for leases originated at their locations, which are deferred and amortized using the straight-line method, as adjustments to lease income over the contractual life of the related leased merchandise. Unamortized fees, discounts and premiums are recognized in full upon early buyout or charge-off.

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The Company accrues lease income earned but not yet collected as accrued rent receivable, which is included in accounts receivable, net in the accompanying consolidated balance sheets. Alternatively, lease payments received in excess of the amount earned are recognized as deferred revenue, which is included in customer deposits and prepayments in the accompanying consolidated balance sheets. Customer payments are first applied to applicable sales tax and scheduled lease payments, then applied to any uncollected fees, such as late fees and insufficient fund fees. The Company collects sales taxes on behalf of the customer and remits all applicable sales taxes collected to the respective jurisdiction.

Provision for lease losses - The Company records a provision for lease losses on an allowance method, which estimates the leased merchandise losses incurred but not yet identified by management as of the end of the accounting period. The allowance for lease losses is based primarily upon historical loss experience, with consideration given to recent and forecasted business trends including, but not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices.

The Company charges off leased merchandise when a lease is 90 days or more contractually past due. If an account is deemed to be uncollectible prior to this date, the Company will charge off the leased merchandise at the point in time it is deemed uncollectible.

Finance receivables and revenue recognition - The Company purchases and services retail finance receivables, the term of which typically range from six and 24 months, directly from its merchant partners or from its bank partner. The Company has a partnership with a Utah state-chartered bank that requires the Company to purchase the rights to the cash flows associated with finance receivables marketed to retail consumers on the bank’s behalf. The bank establishes the underwriting criteria for the finance receivables originated by the bank.

Interest income is recognized using the interest method over the life of the finance receivable for all loans for which the Company deems collection to be probable based on historical loan redemption statistics and stops accruing interest upon charge-off. Charges for late fees and insufficient fund fees are recognized as income when collected. The Company receives an origination fee on newly purchased bank loans and may receive a discount from or pay a premium to certain merchant partners for finance receivables purchased from them, which are deferred and amortized using the interest method as adjustments to yield over the contractual life of the related finance receivable. Unamortized origination fees, discounts and premiums are recognized in full upon early payoff or charge-off.

The Company offers customers an early payoff discount on most of its finance receivables, whereby the customer has between 90 and 105 days to pay the full principal balance without incurring any interest charge. If the borrower does not pay the full principal balance prior to the expiration of the early payoff discount period, interest charges are applied retroactively to the inception date of the loan. The Company accrues interest income during the early payoff discount period but records a reserve for loans expected to pay the full principal balance prior to the expiration of the early payoff discount period based on historical payment patterns.

Provision for loan losses - Expected lifetime losses on finance receivables are recognized upon loan purchase, which requires the Company to make its best estimate of probable lifetime losses at the time of purchase. The Company segments its finance receivable portfolio into pools of receivables with similar risk characteristics, which include loan product and monthly origination vintage, and evaluates each pool for impairment.

The Company calculates the allowance for loan losses based on historical loss information and incorporates observable and forecasted economic conditions over a reasonable and supportable forecast period covering the full contractual life of finance receivables. Incorporating observable and forecasted economic conditions could have a material impact on the measurement of the allowance to the extent that forecasted economic conditions change significantly. The Company may also consider other qualitative factors to address recent and forecasted business trends in estimating the allowance, as necessary, including, but not limited to, loss trends, delinquency levels, economic conditions, underwriting and collection practices. The allowance for loan losses is maintained at a level considered appropriate to cover expected lifetime losses on the finance receivable portfolio, and the appropriateness of the allowance is evaluated at each period end.

The Company charges off finance receivables when a receivable is 90 days or more contractually past due. If an account is deemed to be uncollectible prior to this date, the Company will charge off the finance receivable at the point in time it is deemed uncollectible.

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Business combinations - Business combination accounting requires the Company to determine the fair value of all assets acquired, including identifiable intangible assets, liabilities assumed and contingent consideration issued in a business combination. The total consideration of the acquisition is allocated to the assets and liabilities in amounts equal to the estimated fair value of each asset and liability as of the acquisition date, and any remaining acquisition consideration is classified as goodwill. This allocation process requires extensive use of estimates and assumptions. When appropriate, the Company utilizes independent valuation experts to advise and assist in determining the fair value of the assets acquired and liabilities assumed in connection with a business acquisition, in determining appropriate amortization methods and periods for identified intangible assets and in determining the fair value of contingent consideration, which is reviewed at each subsequent reporting period with changes in the fair value of the contingent consideration recognized in the consolidated statement of income. See Note 3 of Notes to Consolidated Financial Statements.

Goodwill and other indefinite-lived intangible assets - Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination. The Company performs its goodwill impairment assessment annually and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company historically assessed goodwill for impairment as of December 31 each year. In 2022, the Company changed the date of its annual goodwill impairment assessment to October 1 to allow for operational expediency. The Company believes the change in goodwill impairment testing date does not represent a material change to its method of applying an accounting principle in light of its internal controls and requirements to assess goodwill impairment upon certain triggering events. The Company’s reporting units, which are tested for impairment, are U.S. pawn, Latin America pawn and retail POS payment solutions. The Company assesses goodwill for impairment at a reporting unit level by first assessing a range of qualitative factors, including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company’s products and services, regulatory and political developments, entity specific factors, such as strategy and changes in key personnel, and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company proceeds to the quantitative impairment testing methodology. See Note 14 of Notes to Consolidated Financial Statements.

The Company’s other material, indefinite-lived intangible assets consist of certain trade names and pawn licenses. The Company performs its indefinite-lived intangible asset impairment assessment annually as of December 31, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of an indefinite-lived intangible asset below its carrying amount. See Note 14 of Notes to Consolidated Financial Statements.

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Results of Operations

2022 Consolidated Operating Results Highlights

The following table sets forth revenue, net income, diluted earnings per share, adjusted net income, adjusted diluted earnings per share, EBITDA and adjusted EBITDA for the year ended December 31, 2022 as compared to the year ended December 31, 2021 (in thousands, except per share amounts):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","As Reported (GAAP)","","Adjusted (Non-GAAP)"],["","","2022","","2021","","2022","","2021"],["Revenue","","$","2,728,942","","","$","1,698,965","","","$","2,771,599","","","$","1,700,673"],["Net income","","$","253,495","","","$","124,909","","","$","245,737","","","$","161,479"],["Diluted earnings per share","","$","5.36","","","$","3.04","","","$","5.19","","","$","3.94"],["EBITDA (non-GAAP measure)","","$","496,860","","","$","244,098","","","$","437,344","","","$","289,631"],["Weighted-average diluted shares","","47,330","","","41,024","","","47,330","","","41,024"]]
[[/GREPCENT_TABLE]]

See “Non-GAAP Financial Information—Adjusted Net Income and Adjusted Diluted Earnings Per Share and —Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA” below.

The following charts present net income, adjusted net income, diluted earnings per share, adjusted diluted earnings per share, EBITDA, adjusted EBITDA and earning assets, which consist of pawn loans, finance receivables, inventories and leased merchandise, as of and for the years ended December 31, 2022, 2021 and 2020 (in millions, except per share amounts):

* Non-GAAP financial measures. See “Non-GAAP Financial Information” for additional discussion of non-GAAP financial measures.

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Operating Results for the Twelve Months Ended December 31, 2022 Compared to the Twelve Months Ended December 31, 2021

The COVID-19 pandemic and government responses thereto had an initial adverse and material impact on pawn loan demand in 2020, which negatively impacted pawn receivables, inventories and revenues. This initial adverse impact in pawn loan demand was offset in large part by a positive impact in merchandise sales, especially among stay-at-home products, which were enhanced by federal stimulus payments directly to consumers. Throughout 2021 and 2022, as the contributory impacts of the pandemic normalized, pawn loan demand steadily recovered and pawn receivables, inventories and revenues are now ahead of pre-pandemic levels. Inflationary pressures on the Company’s customer base helped drive further demand for consumer credit, especially among its customer base, which contributed to the recovery in pawn loan demand.

The following tables and related discussion set forth key operating and financial data for the Company’s operations by reporting segment as of and for the years ended December 31, 2022 and 2021. For similar operating and financial data and discussion of the Company’s 2021 results compared to its 2020 results, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 28, 2022.

Stores included in the same-store calculations presented in the U.S. pawn segment and Latin America pawn segment sections below are those stores that were opened or acquired prior to the beginning of the prior-year comparative period and remained open through the end of the reporting period. Also included are stores that were relocated, during the applicable period, within a specified distance and are serving the same market, where there is not a significant change in store size, and where there is not a significant overlap or gap in timing between the opening of the new store and the closing of the existing store.

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U.S. Pawn Segment

The following table details earning assets, which consist of pawn loans and inventories as well as other earning asset metrics of the U.S. pawn segment, as of December 31, 2022 as compared to December 31, 2021 (dollars in thousands, except as otherwise noted):

[[GREPCENT_TABLE]]
[["","As of December 31,"],["","2022","","2021","","Increase"],["U.S. Pawn Segment"],["Earning assets:"],["Pawn loans","$","282,089","","","$","256,311","","","","10","%"],["Inventories","","202,594","","","","197,486","","","","3","%"],["","$","484,683","","","$","453,797","","","","7","%"],["Average outstanding pawn loan amount (in ones)","$","247","","","$","222","","","","11","%"],["Composition of pawn collateral:"],["General merchandise","30","%","","34","%"],["Jewelry","70","%","","66","%"],["","100","%","","100","%"],["Composition of inventories:"],["General merchandise","41","%","","45","%"],["Jewelry","59","%","","55","%"],["","100","%","","100","%"],["Percentage of inventory aged greater than one year","1","%","","1","%"],["Inventory turnover (trailing twelve months cost of merchandise sales divided by average inventories)","2.7 times","","2.8 times"]]
[[/GREPCENT_TABLE]]

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The following table presents segment pre-tax operating income and other operating metrics of the U.S. pawn segment for the year ended December 31, 2022 compared to the year ended December 31, 2021 (dollars in thousands). Operating expenses include salary and benefit expense of pawn-store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 31,"],["","2022","","2021","","Increase"],["U.S. Pawn Segment"],["Revenue:"],["Retail merchandise sales","$","818,548","","","$","742,374","","","","10","%"],["Pawn loan fees","","373,416","","","","305,350","","","","22","%"],["Wholesale scrap jewelry sales","","63,004","","","","27,163","","","","132","%"],["Total revenue","","1,254,968","","","","1,074,887","","","","17","%"],["Cost of revenue:"],["Cost of retail merchandise sold","","478,718","","","","416,039","","","","15","%"],["Cost of wholesale scrap jewelry sold","","54,893","","","","22,886","","","","140","%"],["Total cost of revenue","","533,611","","","","438,925","","","","22","%"],["Net revenue","","721,357","","","","635,962","","","","13","%"],["Segment expenses:"],["Operating expenses","","407,039","","","","380,895","","","","7","%"],["Depreciation and amortization","","23,205","","","","22,234","","","","4","%"],["Total segment expenses","","430,244","","","","403,129","","","","7","%"],["Segment pre-tax operating income","$","291,113","","","$","232,833","","","","25","%"],["Operating metrics:"],["Retail merchandise sales margin","42","%","","44","%"],["Net revenue margin","57","%","","59","%"],["Segment pre-tax operating margin","23","%","","22","%"]]
[[/GREPCENT_TABLE]]

Retail Merchandise Sales Operations

U.S. retail merchandise sales increased 10% to $818.5 million during 2022 compared to $742.4 million for 2021. Same-store retail sales increased 8% during 2022 compared to 2021. The increase in total and same-store retail sales was primarily due to increased inventory levels during 2022 compared to 2021 and greater demand for value-priced consumer goods, with such demand driven in part by inflationary pressures on the Company’s customers. During 2022, the gross profit margin on retail merchandise sales in the U.S. was 42% compared to a margin of 44% during 2021. The comparative margin in 2021 was historically high as a result of lower inventory levels in 2021, especially in the first half of the year, which limited the need for normal discounting.

U.S. inventories increased 3% from $197.5 million at December 31, 2021 to $202.6 million at December 31, 2022. The increase was primarily due to the increase in store count. Inventories aged greater than one year in the U.S. were 1% at both December 31, 2022 and 2021.

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Pawn Lending Operations

U.S. pawn loan receivables as of December 31, 2022 increased 10% in total and 8% on a same-store basis compared to December 31, 2021. The increase in total and same-store pawn receivables was primarily due to the continued recovery in pawn loan demand to pre-pandemic levels, combined with inflationary pressures driving additional demand for consumer credit.

U.S. pawn loan fees increased 22% to $373.4 million during 2022 compared to $305.4 million for 2021. Same-store pawn fees increased 20% during 2022 compared to 2021. The increase in total and same-store pawn loan fees was primarily due to higher average pawn receivables which reflected the continued recovery in pawn loan receivables to pre-pandemic levels, combined with inflationary pressures driving additional demand for consumer credit.

Segment Expenses

U.S. store operating expenses increased 7% to $407.0 million during 2022 compared to $380.9 million during 2021, and same-store operating expenses increased 5% compared with the prior-year period. The increase in operating expenses was primarily due to inflationary increases in wages and other certain operating costs and increased store-level incentive compensation driven by increased revenues and segment profit during 2022.

Segment Pre-Tax Operating Income

The U.S. segment pre-tax operating income for 2022 was $291.1 million, which generated a pre-tax segment operating margin of 23% compared to $232.8 million and 22% in the prior year, respectively. The increase in the segment pre-tax operating income and margin reflected a 13% increase in net revenue, further leveraged by a 7% increase in segment expenses.

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Latin America Pawn Segment

Latin American results of operations for 2022 compared to 2021 benefited from a 1% favorable change in the average value of the Mexican peso compared to the U.S. dollar. The translated value of Latin American earning assets as of December 31, 2022 compared to December 31, 2021 also benefited from a 6% favorable change in the end-of-period value of the Mexican peso compared to the U.S. dollar.

The following table details earning assets, which consist of pawn loans and inventories as well as other earning asset metrics of the Latin America pawn segment as of December 31, 2022 as compared to December 31, 2021 (dollars in thousands, except as otherwise noted):

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","Constant Currency Basis"],["","","","","","","","","","","","As of"],["","","","","","","","","","","","December 31,"],["","As of December 31,","","","","2022","","Increase"],["","2022","","2021","","Increase","","(Non-GAAP)","","(Non-GAAP)"],["Latin America Pawn Segment"],["Earning assets:"],["Pawn loans","$","108,528","","","$","91,662","","","","18","%","","","$","102,573","","","","12","%"],["Inventories","","85,745","","","","65,825","","","","30","%","","","81,013","","","","23","%"],["","$","194,273","","","$","157,487","","","","23","%","","","$","183,586","","","","17","%"],["Average outstanding pawn loan amount (in ones)","$","83","","","$","77","","","","8","%","","","$","79","","","","3","%"],["Composition of pawn collateral:"],["General merchandise","67","%","","67","%"],["Jewelry","33","%","","33","%"],["","100","%","","100","%"],["Composition of inventories:"],["General merchandise","71","%","","68","%"],["Jewelry","29","%","","32","%"],["","100","%","","100","%"],["Percentage of inventory aged greater than one year","1","%","","1","%"],["Inventory turnover (trailing twelve months cost of merchandise sales divided by average inventories)","4.2 times","","4.2 times"]]
[[/GREPCENT_TABLE]]

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The following table presents segment pre-tax operating income and other operating metrics of the Latin America pawn segment for the year ended December 31, 2022 as compared to the year ended December 31, 2021 (dollars in thousands). Operating expenses include salary and benefit expense of pawn-store-level employees, occupancy costs, bank charges, security, insurance, utilities, supplies and other costs incurred by the pawn stores.

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","Constant Currency Basis"],["","","","","","","","","Year Ended"],["","Year Ended","","","","","","December 31,"],["","December 31,","","","","2022","","Increase"],["","2022","","2021","","Increase","","(Non-GAAP)","","(Non-GAAP)"],["Latin America Pawn Segment"],["Revenue:"],["Retail merchandise sales","$","447,523","","","$","391,875","","","","14","%","","","$","444,463","","","","13","%"],["Pawn loan fees","","187,974","","","","170,432","","","","10","%","","","186,673","","","","10","%"],["Wholesale scrap jewelry sales","","39,969","","","","30,027","","","","33","%","","","39,969","","","","33","%"],["Total revenue","","675,466","","","","592,334","","","","14","%","","","671,105","","","","13","%"],["Cost of revenue:"],["Cost of retail merchandise sold","","288,449","","","","247,425","","","","17","%","","","286,487","","","","16","%"],["Cost of wholesale scrap jewelry sold","","33,411","","","","26,243","","","","27","%","","","33,162","","","","26","%"],["Total cost of revenue","","321,860","","","","273,668","","","","18","%","","","319,649","","","","17","%"],["Net revenue","","353,606","","","","318,666","","","","11","%","","","351,456","","","","10","%"],["Segment expenses:"],["Operating expenses","","193,254","","","","179,020","","","","8","%","","","192,151","","","","7","%"],["Depreciation and amortization","","18,325","","","","17,834","","","","3","%","","","18,283","","","","3","%"],["Total segment expenses","","211,579","","","","196,854","","","","7","%","","","210,434","","","","7","%"],["Segment pre-tax operating income","$","142,027","","","$","121,812","","","","17","%","","","$","141,022","","","","16","%"],["Operating metrics:"],["Retail merchandise sales margin","36","%","","37","%","","","","","36","%"],["Net revenue margin","52","%","","54","%","","","","","52","%"],["Segment pre-tax operating margin","21","%","","21","%","","","","","21","%"]]
[[/GREPCENT_TABLE]]

Retail Merchandise Sales Operations

Latin America retail merchandise sales increased 14% (13% on a constant currency basis) to $447.5 million during 2022 compared to $391.9 million for 2021. Same-store retail sales increased 13% (12% on a constant currency basis). The increase in total and same-store retail sales was primarily due to increased inventory levels during 2022 compared to 2021 and greater demand for value-priced consumer goods, with such demand driven in part by inflationary pressures on the Company’s customers. The gross profit margin on retail merchandise sales was 36% during 2022 compared to 37% during 2021.

Latin America inventories increased 30% (23% on a constant currency basis) from $65.8 million at December 31, 2021 to $85.7 million at December 31, 2022. The increase was primarily due to lower-than-normal inventory balances at December 31, 2021 due to the impacts of the COVID-19 pandemic. Inventories aged greater than one year in Latin America were 1% at both December 31, 2022 and 2021.

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Pawn Lending Operations

Latin America pawn loan receivables increased 18% (12% on a constant currency basis) as of December 31, 2022 compared to December 31, 2021, on both a total and same-store basis. The increase in total and same-store pawn receivables was primarily due to the continued recovery in pawn loan demand during 2022 to pre-pandemic levels.

Latin America pawn loan fees increased 10% (also 10% on a constant currency basis), totaling $188.0 million during 2022 compared to $170.4 million for 2021. Same-store pawn fees increased 9% (also 9% on a constant currency basis) during 2022 compared to 2021. The increase in total and same-store constant currency pawn loan fees was primarily due to the continued recovery of pawn loan receivables.

Segment Expenses

Store operating expenses increased 8% (7% on a constant currency basis) to $193.3 million during 2022 compared to $179.0 million during 2021, reflecting continued store growth and inflationary pressure on labor and other operating expenses during the current period. Same-store operating expenses increased 7% (6% on a constant currency basis) compared to the prior-year period.

Segment Pre-Tax Operating Income

The segment pre-tax operating income for 2022 was $142.0 million, which generated a pre-tax segment operating margin of 21% compared to $121.8 million and 21% in the prior year, respectively. The increase in the segment pre-tax operating income reflected an 11% increase in net revenue, further leveraged by an 8% increase in segment expenses and a 1% favorable change in the average value of the Mexican peso.

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Retail POS Payment Solutions Segment

The Company completed the AFF Acquisition on December 17, 2021, and the results of operations of AFF have been consolidated since the acquisition date. As a result of purchase accounting, AFF’s as reported earning assets, consisting of finance receivables and leased merchandise, contain significant fair value adjustments as of December 31, 2021. The fair value adjustments to AFF’s acquired earning assets were fully amortized during 2022.

Finance Receivables, Net

The following tables provide a detail of finance receivables as reported and as adjusted to exclude the impacts of purchase accounting as of December 31, 2022 and 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","As Reported (GAAP)","","Adjustments","","Adjusted (Non-GAAP)"],["As of December 31, 2022"],["Finance receivables, before allowance for loan losses","$","188,327","","","$","\u2014","","","$","188,327"],["Less allowance for loan losses","(84,833)","","","\u2014","","","(84,833)"],["Finance receivables, net","$","103,494","","","$","\u2014","","","$","103,494"],["As of December 31, 2021"],["Finance receivables, before allowance for loan losses (1)","$","256,595","","","$","(42,657)","","","$","213,938"],["Less allowance for loan losses","(75,574)","","","\u2014","","","(75,574)"],["Finance receivables, net","$","181,021","","","$","(42,657)","","","$","138,364"]]
[[/GREPCENT_TABLE]]

(1)As reported acquired finance receivables were recorded at fair value in conjunction with purchase accounting. Adjustment represents the difference between the original amortized cost basis and fair value of the remaining acquired finance receivables.

Finance receivables, before allowance for loan losses decreased 27% as of December 31, 2022 compared to December 31, 2021. The decrease was primarily due to fair value purchase accounting related items included in the December 31, 2021 balance that were fully amortized during 2022 and therefore not included in the December 31, 2022 balance. On an adjusted basis, excluding the impacts of fair value purchase accounting, finance receivables, before allowance for loan losses decreased 12% as of December 31, 2022 compared to December 31, 2021, which was primarily due to a mix-shift in AFF’s earning assets towards the LTO product and macroeconomic retail headwinds experienced in many of AFF’s retail merchant partners during 2022, including elevated inflation and generally lower consumer spending. Those declines were partially offset by an increase in AFF’s active merchant locations offering AFF’s POS payment solutions during 2022.

The allowance for loan losses increased 12% as of December 31, 2022 compared to December 31, 2021. The increase was primarily due to a mix-shift in AFF’s finance receivables towards the bank-originated installment loans, which are typically utilized by merchant partners financing services as opposed to personal property and tend to have slightly higher charge-off rates than the RISA product, and the macroeconomic headwinds described above resulting in a more challenging credit environment in 2022 compared to 2021.

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Leased Merchandise, Net

The following tables provide a detail of leased merchandise as reported and as adjusted to exclude the impacts of purchase accounting as of December 31, 2022 and 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","As Reported (GAAP)","","Adjustments","","Adjusted (Non-GAAP)"],["As of December 31, 2022"],["Leased merchandise, before allowance for lease losses","$","233,974","","","$","\u2014","","","$","233,974"],["Less allowance for lease losses","(79,576)","","","\u2014","","","(79,576)"],["Leased merchandise, net (1)","$","154,398","","","$","\u2014","","","$","154,398"],["As of December 31, 2021"],["Leased merchandise, before allowance for lease losses (2)","$","149,386","","","$","53,829","","","$","203,215"],["Less allowance for lease losses (3)","(5,442)","","","(61,526)","","","(66,968)"],["Leased merchandise, net","$","143,944","","","$","(7,697)","","","$","136,247"]]
[[/GREPCENT_TABLE]]

(1)Includes $1.1 million of intersegment transactions related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores that are eliminated upon consolidation. For further detail, see earning assets detail in Note 17 of Notes to Consolidated Financial Statements.

(2)As reported acquired leased merchandise was recorded at fair value (which includes estimates for charge-offs) in conjunction with purchase accounting. Adjustment represents the difference between the original depreciated cost and fair value of the remaining acquired leased merchandise.

(3)As reported allowance for lease losses as of December 31, 2021 represents the provision for lease losses for leases originated between December 17, 2021 and December 31, 2021. Adjustment represents the remaining allowance for lease losses of acquired leased merchandise, which is included in the fair value of the acquired leased merchandise described in (2) above.

Leased merchandise, before allowance for lease losses increased 57% as of December 31, 2022 compared to December 31, 2021. The increase was primarily due to fair value purchase accounting as noted in the footnotes to the table above. On an adjusted basis, excluding the impacts of fair value purchase accounting, leased merchandise, before allowance for lease losses increased 15% as of December 31, 2022 compared to December 31, 2021, which was primarily due to a mix-shift in AFF’s earning assets towards the LTO product and an increase in AFF’s active merchant locations offering AFF’s POS payment solutions during 2022. Those increases were partially offset by macroeconomic retail headwinds experienced in many of AFF’s retail merchant partners during 2022, including elevated inflation and generally lower consumer spending.

The allowance for lease losses increased to $79.6 million as of December 31, 2022 compared to $5.4 million as of December 31, 2021. The increase was primarily due to fair value purchase accounting as noted in the footnotes to the table above. On an adjusted basis, excluding the impacts of fair value purchase accounting, the allowance for lease losses increased 19%, which was primarily due to the increase in the gross leased merchandise and the macroeconomic headwinds, described above, resulting in a more challenging credit environment in 2022 compared to 2021.

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AFF’s as reported results of operations contain significant purchase accounting impacts. The following table presents segment pre-tax operating income as reported and as adjusted to exclude the impacts of purchase accounting for the year ended December 31, 2022 (in thousands). Operating expenses include salary and benefit expenses of certain operations-focused departments, merchant partner incentives, bank and other payment processing charges, credit reporting costs, information technology costs, advertising costs and other operational costs incurred by AFF.

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2022"],["","As Reported","","","","Adjusted"],["","(GAAP)","","Adjustments","","(Non-GAAP)"],["Retail POS Payment Solutions Segment"],["Revenue:"],["Leased merchandise income","$","622,163","","","$","\u2014","","","$","622,163"],["Interest and fees on finance receivables","181,280","","","42,657","","","223,937"],["Total revenue","803,443","","","42,657","","","846,100"],["Cost of revenue:"],["Depreciation of leased merchandise","354,104","","","(7,697)","","","346,407"],["Provision for lease losses","140,118","","","\u2014","","","140,118"],["Provision for loan losses","118,502","","","\u2014","","","118,502"],["Total cost of revenue","612,724","","","(7,697)","","","605,027"],["Net revenue","190,719","","","50,354","","","241,073"],["Segment expenses:"],["Operating expenses","128,616","","","\u2014","","","128,616"],["Depreciation and amortization","2,912","","","\u2014","","","2,912"],["Total segment expenses","131,528","","","\u2014","","","131,528"],["Segment pre-tax operating income","$","59,191","","","$","50,354","","","$","109,545"]]
[[/GREPCENT_TABLE]]

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The following table presents segment pre-tax operating income as reported and as adjusted to exclude the impacts of purchase accounting for the period from December 17, 2021 through December 31, 2021 (in thousands).

[[GREPCENT_TABLE]]
[["","December 17, 2021 - December 31, 2021"],["","As Reported","","","","Adjusted"],["","(GAAP)","","Adjustments","","(Non-GAAP)"],["Retail POS Payment Solutions Segment"],["Revenue:"],["Leased merchandise income","$","22,720","","","$","\u2014","","","$","22,720"],["Interest and fees on finance receivables","9,024","","","1,708","","","10,732"],["Total revenue","31,744","","","1,708","","","33,452"],["Cost of revenue:"],["Depreciation of leased merchandise","12,826","","","(404)","","","12,422"],["Provision for lease losses","5,442","","","\u2014","","","5,442"],["Provision for loan losses (1)","48,952","","","(44,250)","","","4,702"],["Total cost of revenue","67,220","","","(44,654)","","","22,566"],["Net revenue (loss)","(35,476)","","","46,362","","","10,886"],["Segment expenses:"],["Operating expenses","4,917","","","\u2014","","","4,917"],["Depreciation and amortization","122","","","\u2014","","","122"],["Total segment expenses","5,039","","","\u2014","","","5,039"],["Segment pre-tax operating income (loss)","$","(40,515)","","","$","46,362","","","$","5,847"]]
[[/GREPCENT_TABLE]]

(1)As reported provision for loan losses includes the establishment of the initial allowance for expected lifetime credit losses for acquired finance receivables not considered purchased credit deteriorated, which is recorded as an expense in the provision for loan losses. See Note 3 of Notes to Consolidated Financial Statements.

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Consolidated Results of Operations

The following table reconciles pre-tax operating income of the Company’s U.S. pawn segment, Latin America pawn segment and retail POS payment solutions segment, discussed above, to consolidated net income for the year ended December 31, 2022 as compared to the year ended December 31, 2021 (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","Increase /"],["","","2022","","2021","","(Decrease)"],["Consolidated Results of Operations"],["Segment pre-tax operating income (loss):"],["U.S. pawn","","$","291,113","","","$","232,833","","","","25","%"],["Latin America pawn","","142,027","","","121,812","","","","17","%"],["Retail POS payment solutions (1)","","59,191","","","(40,515)","","","","246","%"],["Intersegment eliminations (2)","","(1,096)","","","\u2014","","","","\u2014","%"],["Consolidated segment pre-tax operating income","","491,235","","","314,130","","","","56","%"],["Corporate expenses and other income:"],["Administrative expenses","","147,943","","","111,259","","","","33","%"],["Depreciation and amortization","","59,390","","","5,716","","","","939","%"],["Interest expense","","70,708","","","32,386","","","","118","%"],["Interest income","","(1,313)","","","(696)","","","","89","%"],["(Gain) loss on foreign exchange","","(585)","","","436","","","","(234)","%"],["Merger and acquisition expenses","","3,739","","","15,449","","","","(76)","%"],["Gain on revaluation of contingent acquisition consideration","","(109,549)","","","(17,871)","","","","(513)","%"],["Other expenses (income), net","","(2,731)","","","949","","","","(388)","%"],["Total corporate expenses and other income","","167,602","","","147,628","","","","14","%"],["Income before income taxes","","323,633","","","166,502","","","","94","%"],["Provision for income taxes","","70,138","","","41,593","","","","69","%"],["Net income","","$","253,495","","","$","124,909","","","","103","%"]]
[[/GREPCENT_TABLE]]

(1)The AFF segment results are significantly impacted by certain purchase accounting adjustments, as noted in the retail POS payment solutions segment results of operations above. Adjusted retail POS payment solutions segment pre-tax operating income, excluding such purchase accounting adjustments, was $109.5 million for 2022 and $5.8 million for 2021. The year ended December 31, 2021 includes the results of operations for AFF for the period December 17, 2021 to December 31, 2021.

(2)Represents the elimination of intersegment transactions related to the Company offering AFF’s LTO payment solution as a payment option in its U.S. pawn stores. For further detail, see Note 17 of Notes to Consolidated Financial Statements.

Corporate Expenses and Taxes

Administrative expenses increased 33% to $147.9 million during 2022 compared to $111.3 million during 2021, primarily due to the AFF Acquisition. As a percentage of revenue, administrative expenses decreased from 7% during 2021 to 5% during 2022.

Corporate depreciation and amortization expenses increased 939% to $59.4 million during 2022 compared to $5.7 million in 2021, primarily due to $56.7 million in amortization expense during 2022, the majority of which related to identified intangible assets in the AFF Acquisition, compared to $2.1 million during 2021.

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Interest expense increased 118% to $70.7 million during 2022 compared to $32.4 million for 2021, primarily due to an increase in the Company’s outstanding senior unsecured notes and higher interest rates and higher average balances outstanding on the Company’s unsecured credit facilities. See Note 11 of Notes to Consolidated Financial Statements and “Liquidity and Capital Resources.”

Merger and acquisition expenses decreased to $3.7 million during 2022 compared to $15.4 million during 2021, reflecting timing of transaction costs primarily related to the AFF Acquisition in 2021. Approximately $1.5 million of the 2022 expense related to pawn acquisitions.

The Company revalues the contingent consideration related to the AFF Acquisition to fair value at the end of each reporting period, with changes in the fair value recognized in the consolidated statements of income. During 2022 and 2021, the Company recognized gains of $109.5 million and $17.9 million, respectively, as a result of a decrease in the liability for the estimated fair value of certain contingent consideration related to the AFF Acquisition. There was no remaining fair value for contingent consideration at December 31, 2022. See Note 3 and Note 6 of Notes to Consolidated Financial Statements for additional information about the contingent consideration related to the AFF Acquisition.

Consolidated effective income tax rates for 2022 and 2021 were 21.7% and 25.0%, respectively. The decrease in the effective tax rate was primarily due to an increase in U.S.-sourced income, primarily a result of the AFF Acquisition and increased earnings in 2022 from the U.S. pawn segment, which is taxed at a lower rate than the Latin American countries in which the Company operates. In addition, the Company realized an $8.0 million foreign permanent tax benefit in 2022, compared to $6.3 million in 2021, related to an increased inflation index adjustment allowed in Mexico as a result of elevated inflation in Mexico, which started during the latter half of 2021 and increased further in 2022. The Company also recognized a $4.6 million permanent domestic tax benefit during 2022 pursuant to the $109.5 million gain on revaluation of certain contingent consideration related to the AFF Acquisition as described above. See Note 12 of Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

Material Capital Requirements

The Company’s primary capital requirements include:

•Expand pawn operations through growth of pawn receivables and inventories in existing stores, new store openings, strategic acquisition of pawn stores and purchases of real estate at existing locations;

•Expand retail POS payment solutions operations through growth of the business generated from new and existing merchant partners; and

◦Return of capital to shareholders through dividends and stock repurchases.

Other material capital requirements include operating expenses (see Note 4 of Notes to Consolidated Financial Statements regarding operating lease commitments), maintenance capital expenditures related to its facilities, technology-related capital expenditures, general corporate operating activities, income tax payments and debt service, among others. While the Company expects some level of net de-leveraging by the end of 2023, net interest expense is expected to increase in 2023 compared to 2022 due to higher floating interest rates on the borrowings under the revolving credit facilities. The Company believes that net cash provided by operating activities and available and unused funds under its revolving unsecured credit facilities will be adequate to meet its liquidity and capital needs for these items in the short-term over the next 12 months and also in the long-term beyond the next 12 months.

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Expand Pawn Operations

The Company intends to continue expansion through the growth of earning assets at existing locations, new store openings and acquisitions. For 2023, the Company expects approximately 60 new store additions, in Latin America through de novo openings, and another four stores are expected to be opened in the U.S. Future store openings are subject to the Company’s ability to identify locations in markets with attractive demographics, available real estate with favorable leases and limited competition. The Company evaluates potential acquisitions based upon growth potential, purchase price, available liquidity, strategic fit and quality of management personnel, among other factors. During 2022, the Company acquired 30 pawn stores in the U.S. and one store in Guatemala for an aggregate purchase price of $73.0 million, net of cash acquired and subject to future post-closing adjustments.

Although viewed by management as a discretionary expenditure not required to operate its pawn stores, the Company may continue to purchase real estate from its landlords at existing stores or in conjunction with pawn store acquisitions, as opportunities arise at reasonable valuations. The Company purchased the real estate at 44 store locations, primarily from landlords at existing stores, for a cumulative purchase price of $82.9 million during 2022.

Expand Retail POS Payment Solutions Operations

AFF expects to expand its business by promoting and expanding relationships with both new and existing customers and retail merchant partners. In addition, AFF has made, and intends to continue to make, investments in its customer and merchant support operations and facilities, its technology platforms and its proprietary decisioning platforms and processes. In addition to utilizing cash flows generated from their own operations to fund expected 2023 growth, AFF has access to the additional sources of liquidity described below if needed to fund further expansion activities.

Return of Capital to Shareholders

In February 2023, the Company’s Board declared a $0.33 per share first quarter cash dividend on common shares outstanding, or an aggregate of $15.3 million based on the December 31, 2022 share count, to be paid on February 28, 2023 to stockholders of record as of February 14, 2023. While the Company currently expects to continue the payment of quarterly cash dividends, the amount, declaration and payment of cash dividends in the future (quarterly or otherwise) will be made by the Board, from time to time, subject to the Company’s financial condition, results of operations, business requirements, compliance with legal requirements, debt covenant restrictions and other relevant factors.

During 2022, the Company repurchased 2,204,000 shares of common stock at an aggregate cost of $157.9 million and an average cost per share of $71.63, and during 2021, repurchased 688,000 shares of common stock at an aggregate cost of $49.6 million and an average cost per share of $72.10. The Company has approximately $14.4 million of remaining availability under its currently authorized stock repurchase program authorized in April 2022. In October 2022, the Board approved an additional share repurchase authorization of up to $100 million of common shares, of which the entire $100 million is currently remaining. While the Company intends to continue repurchases under its active share repurchase programs, future share repurchases are subject to a variety of factors, including, but not limited to, the level of cash balances, liquidity needs, credit availability, debt covenant restrictions, general business and economic conditions, regulatory requirements, the market price of the Company’s stock, the Company’s dividend policy and the availability of alternative investment opportunities.

Sources of Liquidity

The Company regularly evaluates opportunities to optimize its capital structure, including through consideration of the issuance of debt or equity, to refinance existing debt and to enter into interest rate hedge transactions, such as interest rate swap agreements. As of December 31, 2022, the Company’s primary sources of liquidity were $117.3 million in cash and cash equivalents and $278.8 million of available and unused funds under the Company's revolving unsecured credit facilities, subject to certain financial covenants (see Note 11 of Notes to Consolidated Financial Statements). The Company had working capital of $835.1 million as of December 31, 2022.

The Company’s cash and cash equivalents as of December 31, 2022 included $37.4 million held by its foreign subsidiaries. These cash balances, which are primarily held in Mexican pesos, are associated with foreign earnings the Company has asserted are indefinitely reinvested and which the Company primarily plans to use to support its continued growth plans outside the U.S. through funding of capital expenditures, acquisitions, operating expenses or other similar cash needs of the Company’s foreign operations. The Company elected to repatriate cash of $47.5 million from certain foreign subsidiaries during 2022.

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The Company’s liquidity is affected by a number of factors, including changes in general customer traffic and demand, pawn loan balances, loan-to-value ratios, collection of pawn fees, merchandise sales, inventory levels, LTO merchandise, finance receivable balances, collection of lease and finance receivable payments, seasonality, operating expenses, administrative expenses, expenses related to merger and acquisition activities, litigation-related expenses, interest rates, tax rates, gold prices, foreign currency exchange rates and the pace of new pawn store expansion and acquisitions. Additionally, a prolonged reduction in earnings and EBITDA could limit the Company’s future ability to fully borrow on its credit facilities under current leverage covenants. Regulatory developments affecting the Company’s operations may also impact profitability and liquidity. See “Item 1. Business—Governmental Regulation.”

If needed, the Company could seek to raise additional funds from a variety of sources, including, but not limited to, repatriation of excess cash held in Latin America, the sale of assets, reductions in operating expenses, capital expenditures and dividends, the forbearance or deferral of operating expenses, the issuance of debt or equity securities, the leveraging of currently unencumbered real estate owned by the Company and/or changes to its management of current assets. The characteristics of the Company’s current assets, specifically the ability to rapidly liquidate gold jewelry inventory, which accounts for 50% of total inventory, give the Company flexibility to quickly increase cash flow if necessary.

Cash Flows and Liquidity Metrics

The following tables set forth certain historical information with respect to the Company’s sources and uses of cash and other key indicators of liquidity (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","2020"],["Cash flow provided by operating activities","","$","469,305","","","$","223,304","","","$","222,264"],["Cash flow used in investing activities","","(336,443)","","","(744,637)","","","(20,352)"],["Cash flow (used in) provided by financing activities","","(139,273)","","","576,993","","","(186,502)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["","","2022","","2021","","2020"],["Working capital","","$","835,133","","","$","737,151","","","$","418,159"],["Current ratio","3.8:1","2.9:1","3.0:1"]]
[[/GREPCENT_TABLE]]

Cash Flow Provided by Operating Activities

Net cash provided by operating activities increased $246.0 million, or 110%, from $223.3 million for 2021 to $469.3 million for 2022, due to net changes in certain non-cash adjustments to reconcile net income to operating cash flow and net changes in other operating assets and liabilities (as detailed in the consolidated statements of cash flows), and an increase in net income of $128.6 million.

Cash Flow Used in Investing Activities

Net cash used in investing activities decreased $408.2 million, or 55%, from $744.6 million during 2021 to $336.4 million during 2022. Cash flows from investing activities are utilized primarily to fund acquisitions, purchases of furniture, fixtures, equipment and improvements, which includes capital expenditures for improvements to existing pawn stores and for new pawn store openings and other corporate assets, and discretionary purchases of store real property. In addition, cash flows related to the funding of new pawn loans, net of cash repayments and recovery of principal through the sale of inventories acquired from forfeiture of pawn collateral and finance receivables, are included in investing activities. The portion of the AFF Acquisition consideration paid in cash, net of cash acquired, was $25.0 million. The Company also paid $71.8 million in cash related to current and prior-year pawn store acquisitions, $35.6 million for furniture, fixtures, equipment and improvements and $82.9 million for discretionary pawn store real property purchases during 2022 compared to $462.1 million, $81.8 million, $42.0 million and $79.5 million in 2021, respectively. The Company funded a net increase in pawn loans of $35.8 million during 2022 and $73.3 million during 2021. The Company funded a net increase in finance receivables of $85.4 million during 2022 and $5.8 million during 2021.

Cash Flow Used in Financing Activities

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Net cash provided by financing activities decreased $716.3 million, or 124%, from net cash provided by financing activities of $577.0 million during 2021 to net cash used in financing activities of $139.3 million during 2022. Net borrowings on the credit facilities were $80.0 million during 2022 compared to net borrowings of $136.0 million during 2021. During 2022, the Company paid debt issuance costs of $1.8 million. During 2021, the Company received $550.0 million in proceeds from the private offering of senior unsecured notes which were used primarily to fund the AFF Acquisition and pay $10.6 million in debt issuance costs. The Company funded $157.9 million for share repurchases and paid dividends of $59.6 million during 2022, compared to funding $49.6 million of share repurchases and dividends paid of $47.5 million during 2021. During 2021, the Company paid $1.7 million in withholding taxes on net share settlements of restricted stock awards and stock options exercised and received $0.4 million in proceeds from the exercise of stock options.

Non-GAAP Financial Information

The Company uses certain financial calculations such as adjusted net income, adjusted diluted earnings per share, EBITDA, adjusted EBITDA, free cash flow, adjusted free cash flow, adjusted retail POS payment solutions segment metrics and constant currency results as factors in the measurement and evaluation of the Company’s operating performance and period-over-period growth. The Company derives these financial calculations on the basis of methodologies other than GAAP, primarily by excluding from a comparable GAAP measure certain items the Company does not consider to be representative of its actual operating performance. These financial calculations are “non-GAAP financial measures” as defined under the SEC rules. The Company uses these non-GAAP financial measures in operating its business because management believes they are less susceptible to variances in actual operating performance that can result from the excluded items, other infrequent charges and currency fluctuations. The Company presents these financial measures to investors because management believes they are useful to investors in evaluating the primary factors that drive the Company’s core operating performance and provide greater transparency into the Company’s results of operations. However, items that are excluded and other adjustments and assumptions that are made in calculating these non-GAAP financial measures are significant components in understanding and assessing the Company’s financial performance. These non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, the Company’s GAAP financial measures. Further, because these non-GAAP financial measures are not determined in accordance with GAAP and are thus susceptible to varying calculations, the non-GAAP financial measures, as presented, may not be comparable to other similarly-titled measures of other companies.

While acquisitions are an important part of the Company’s overall strategy, the Company has adjusted the applicable financial calculations to exclude merger and acquisition expenses, including the Company’s transaction expenses incurred in connection with its acquisition of AFF and the impacts of purchase accounting with respect to the AFF acquisition, in order to allow more accurate comparisons of the financial results to prior periods. In addition, the Company does not consider these merger and acquisition expenses to be related to the organic operations of the acquired businesses or its continuing operations, and such expenses are generally not relevant to assessing or estimating the long-term performance of the acquired businesses. Merger and acquisition expenses include incremental costs directly associated with merger and acquisition activities, including professional fees, legal expenses, severance, retention and other employee-related costs, contract breakage costs and costs related to the consolidation of technology systems and corporate facilities, among others.

The Company has certain leases in Mexico which are denominated in U.S. dollars. The lease liability of these U.S.-dollar-denominated leases, which is considered a monetary liability, is remeasured into Mexican pesos using current period exchange rates, resulting in the recognition of foreign currency exchange gains or losses. The Company has adjusted the applicable financial measures to exclude these remeasurement gains or losses (i) because they are non-cash, non-operating items that could create volatility in the Company’s consolidated results of operations due to the magnitude of the end of period lease liability being remeasured and (ii) to improve comparability of current periods presented with prior periods.

In conjunction with the Cash America Merger in 2016, the Company recorded certain lease intangibles related to above- or below-market lease liabilities of Cash America, which are included in the operating lease right of use asset on the consolidated balance sheets. As the Company continues to opportunistically purchase real estate from landlords at certain Cash America stores, the associated lease intangible, if any, is written off and gain or loss is recognized. The Company has adjusted the applicable financial measures to exclude these gains or losses given the variability in size and timing of these transactions and because they are non-cash, non-operating gains or losses. The Company believes this improves comparability of operating results for current periods presented with prior periods.

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Adjusted Net Income and Adjusted Diluted Earnings Per Share

Management believes the presentation of adjusted net income and adjusted diluted earnings per share provides investors with greater transparency and provides a more complete understanding of the Company’s financial performance and prospects for the future by excluding items that management believes are non-operating in nature and not representative of the Company’s core operating performance. In addition, management believes the adjustments shown below are useful to investors in order to allow them to compare the Company’s financial results for the current periods presented with the prior periods presented.

The following table provides a reconciliation between net income and diluted earnings per share calculated in accordance with GAAP to adjusted net income and adjusted diluted earnings per share, which are shown net of tax (unaudited, in thousands, except per share amounts):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","In Thousands","","Per Share","","In Thousands","","Per Share","","In Thousands","","Per Share"],["Net income and diluted earnings per share, as reported","$","253,495","","","$","5.36","","","$","124,909","","","$","3.04","","","$","106,579","","","$","2.56"],["Adjustments, net of tax:"],["Merger and acquisition expenses","2,878","","","0.06","","","11,872","","","0.29","","","991","","","0.02"],["Non-cash foreign currency (gain) loss related to lease liability","(930)","","","(0.02)","","","451","","","0.01","","","874","","","0.02"],["AFF purchase accounting adjustments (1)","82,432","","","1.74","","","37,278","","","0.91","","","\u2014","","","\u2014"],["Gain on revaluation of contingent acquisition consideration (2)","(90,035)","","","(1.91)","","","(13,761)","","","(0.33)","","","\u2014","","","\u2014"],["Other expenses (income), net","(2,103)","","","(0.04)","","","730","","","0.02","","","6,979","","","0.17"],["Loss on extinguishment of debt","\u2014","","","\u2014","","","\u2014","","","\u2014","","","9,037","","","0.22"],["Accrual of pre-merger Cash America income tax liability","\u2014","","","\u2014","","","\u2014","","","\u2014","","","693","","","0.02"],["Adjusted net income and diluted earnings per share","$","245,737","","","$","5.19","","","$","161,479","","","$","3.94","","","$","125,153","","","$","3.01"]]
[[/GREPCENT_TABLE]]

(1)See detail of the AFF purchase accounting adjustments in tables below.

(2)See Note 3 and Note 6 of Notes to Consolidated Financial Statements.

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The following table provides a reconciliation of the gross amounts, the impact of income taxes and the net amounts for the adjustments included in the table above (unaudited, in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["","Pre-tax","","Tax","","After-tax","","Pre-tax","","Tax","","After-tax","","Pre-tax","","Tax","","After-tax"],["Merger and acquisition expenses","$","3,739","","","$","861","","","$","2,878","","","$","15,449","","","$","3,577","","","$","11,872","","","$","1,316","","","$","325","","","$","991"],["Non-cash foreign currency (gain) loss related to lease liability","(1,329)","","","(399)","","","(930)","","","644","","","193","","","451","","","1,249","","","375","","","874"],["AFF purchase accounting adjustments (1)","107,055","","","24,623","","","82,432","","","48,413","","","11,135","","","37,278","","","\u2014","","","\u2014","","","\u2014"],["Gain on revaluation of contingent acquisition consideration","(109,549)","","","(19,514)","","","(90,035)","","","(17,871)","","","(4,110)","","","(13,761)","","","\u2014","","","\u2014","","","\u2014"],["Other expenses (income), net","(2,731)","","","(628)","","","(2,103)","","","949","","","219","","","730","","","9,064","","","2,085","","","6,979"],["Loss on extinguishment of debt","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","11,737","","","2,700","","","9,037"],["Accrual of pre-merger Cash America income tax liability","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(693)","","","693"],["Total adjustments","$","(2,815)","","","$","4,943","","","$","(7,758)","","","$","47,584","","","$","11,014","","","$","36,570","","","$","23,366","","","$","4,792","","","$","18,574"]]
[[/GREPCENT_TABLE]]

(1)The following table details AFF purchase accounting adjustments (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021"],["","Pre-tax","","Tax","","After-tax","","Pre-tax","","Tax","","After-tax"],["Amortization of fair value adjustment on acquired finance receivables","$","42,657","","","$","9,811","","","$","32,846","","","$","1,708","","","$","392","","","$","1,316"],["Amortization of fair value adjustment on acquired leased merchandise","7,697","","","1,772","","","5,925","","","404","","","93","","","311"],["Amortization of acquired intangible assets","56,701","","","13,040","","","43,661","","","2,051","","","472","","","1,579"],["Provision for loan losses (establish initial allowance for expected lifetime credit losses for non-purchase credit deteriorated (\u201dPCD\u201d) loans)","\u2014","","","\u2014","","","\u2014","","","44,250","","","10,178","","","34,072"],["Total AFF purchase accounting adjustments","$","107,055","","","$","24,623","","","$","82,432","","","$","48,413","","","$","11,135","","","$","37,278"]]
[[/GREPCENT_TABLE]]

The fair value adjustments on acquired finance receivables and leased merchandise resulted from the recognition of these acquired assets at fair value in purchase accounting, the amortization of which is non-cash. The fair value adjustments related to acquired finance receivables and acquired leased merchandise were fully amortized as of December 31, 2022. The acquired intangible assets will be amortized through 2028.

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Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA

The Company defines EBITDA as net income before income taxes, depreciation and amortization, interest expense and interest income and adjusted EBITDA as EBITDA adjusted for certain items, as listed below, that management considers to be non-operating in nature and not representative of its actual operating performance. The Company believes EBITDA and adjusted EBITDA are commonly used by investors to assess a company’s financial performance, and adjusted EBITDA is used as a starting point in the calculation of the consolidated total debt ratio as defined in the Company’s senior unsecured notes. The following table provides a reconciliation of net income to EBITDA and adjusted EBITDA (unaudited, in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["Net income","$","253,495","","","$","124,909","","","$","106,579"],["Income taxes","","70,138","","","","41,593","","","","37,120"],["Depreciation and amortization","","103,832","","","","45,906","","","","42,105"],["Interest expense","","70,708","","","","32,386","","","","29,344"],["Interest income","","(1,313)","","","","(696)","","","","(1,540)"],["EBITDA","","496,860","","","","244,098","","","","213,608"],["Adjustments:"],["Merger and acquisition expenses","","3,739","","","","15,449","","","","1,316"],["Non-cash foreign currency (gain) loss related to lease liability","","(1,329)","","","","644","","","","1,249"],["AFF purchase accounting adjustments (1)","","50,354","","","","46,362","","","","\u2014"],["Gain on revaluation of contingent acquisition consideration","","(109,549)","","","","(17,871)","","","","\u2014"],["Other expenses (income), net","","(2,731)","","","","949","","","","9,064"],["Loss on extinguishment of debt","","\u2014","","","","\u2014","","","","11,737"],["Adjusted EBITDA","$","437,344","","","$","289,631","","","$","236,974"]]
[[/GREPCENT_TABLE]]

(1)Excludes $56.7 million and $2.1 million of amortization expense related to identifiable intangible assets as a result of the AFF Acquisition for the twelve months ended December 31, 2022 and 2021, respectively, which is already included in the add-back of depreciation and amortization to net income used to calculate EBITDA.

Free Cash Flow and Adjusted Free Cash Flow

For purposes of its internal liquidity assessments, the Company considers free cash flow and adjusted free cash flow. The Company defines free cash flow as cash flow from operating activities less purchases of furniture, fixtures, equipment and improvements and net fundings/repayments of pawn loan and finance receivables, which are considered to be operating in nature by the Company but are included in cash flow from investing activities. Adjusted free cash flow is defined as free cash flow adjusted for merger and acquisition expenses paid that management considers to be non-operating in nature.

Free cash flow and adjusted free cash flow are commonly used by investors as additional measures of cash, generated by business operations, that may be used to repay scheduled debt maturities and debt service or, following payment of such debt obligations and other non-discretionary items, that may be available to invest in future growth through new business development activities or acquisitions, repurchase stock, pay cash dividends or repay debt obligations prior to their maturities. These metrics can also be used to evaluate the Company’s ability to generate cash flow from business operations and the impact that this cash flow has on the Company’s liquidity. However, free cash flow and adjusted free cash flow have limitations as analytical tools and should not be considered in isolation or as a substitute for cash flow from operating activities or other income statement data prepared in accordance with GAAP. The following table reconciles cash flow from operating activities to free cash flow and adjusted free cash flow (unaudited, in thousands):

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["Cash flow from operating activities","$","469,305","","","$","223,304","","","$","222,264"],["Cash flow from investing activities:"],["Pawn loans, net (1)","","(35,817)","","","","(73,340)","","","","105,418"],["Finance receivables, net","","(85,353)","","","","(5,844)","","","","1,590"],["Purchases of furniture, fixtures, equipment and improvements","","(35,586)","","","","(42,022)","","","","(37,543)"],["Free cash flow","","312,549","","","","102,098","","","","291,729"],["Merger and acquisition expenses paid, net of tax benefit","","2,878","","","","11,872","","","","991"],["Adjusted free cash flow","$","315,427","","","$","113,970","","","$","292,720"]]
[[/GREPCENT_TABLE]]

(1)Includes the funding of new loans net of cash repayments and recovery of principal through the sale of inventories acquired from forfeiture of pawn collateral.

Retail POS Payment Solutions Segment Purchase Accounting Adjustments

Management believes the presentation of certain retail POS payment solutions segment metrics, adjusted to exclude the impacts of purchase accounting, provides investors with greater transparency and provides a more complete understanding of AFF’s financial performance and prospects for the future by excluding the impacts of purchase accounting, which management believes is non-operating in nature and not representative of AFF’s core operating performance. See the retail POS payment solutions segment tables in “Results of Operations” above for additional reconciliation of certain amounts adjusted to exclude the impacts of purchase accounting to as reported GAAP amounts.

Additionally, the following table provides a reconciliation of consolidated total revenue, presented in accordance with GAAP, to adjusted total revenue, which excludes the impacts of purchase accounting (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","2021","","2020"],["Total revenue, as reported","$","2,728,942","","","$","1,698,965","","","$","1,631,284"],["AFF purchase accounting adjustments (1)","","42,657","","","","1,708","","","","\u2014"],["Adjusted total revenue","$","2,771,599","","","$","1,700,673","","","$","1,631,284"]]
[[/GREPCENT_TABLE]]

(1)Adjustment relates to the net amortization of the fair value premium on acquired finance receivables, which is recognized as an adjustment to interest income on an effective yield basis over the lives of the acquired finance receivables. See the retail POS payment solutions segment tables in “Results of Operations” above for additional segment-level reconciliations.

Constant Currency Results

The Company’s reporting currency is the U.S. dollar. However, certain performance metrics discussed in this report are presented on a “constant currency” basis, which is considered a non-GAAP financial measure. The Company’s management uses constant currency results to evaluate operating results of business operations in Latin America, which are primarily transacted in local currencies.

The Company believes constant currency results provide valuable supplemental information regarding the underlying performance of its business operations in Latin America, consistent with how the Company’s management evaluates such performance and operating results. Constant currency results reported herein are calculated by translating certain balance sheet and income statement items denominated in local currencies using the exchange rate from the prior-year comparable period, as opposed to the current comparable period, in order to exclude the effects of foreign currency rate fluctuations for purposes of evaluating period-over-period comparisons. Business operations in Mexico, Guatemala and Colombia are transacted in Mexican pesos, Guatemalan quetzales and Colombian pesos. The Company also has operations in El Salvador, where the reporting and functional currency is the U.S. dollar. See the Latin America pawn segment tables in “Results of Operations” above for additional reconciliation of certain constant currency amounts to as reported GAAP amounts.

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Effects of Inflation

During 2022, the Company does not believe inflation had a material effect on the Company’s results of operations or on the volume of pawn loans originated by the Company or AFF’s transaction volume. Widely reported inflation has occurred, however, and may be ongoing into the foreseeable future. Depending on the severity and persistence of these inflationary pressures, the Company could see a negative impact on its customers’ ability to pay for its goods and services, including an impact on the collectability of its accounts receivable which could result in increased charge-offs of AFF’s finance receivables and leased merchandise, as well as increases in wages and other operating costs. However, inflationary economic environments could also benefit the Company by increasing customer demand for value-priced products, lending services in its pawn stores and demand for POS payment solutions provided by AFF.

Seasonality

The Company’s business is subject to seasonal variations, and operating results for each quarter and year-to-date periods are not necessarily indicative of the results of operations for the full year. Typically, the Company experiences seasonal growth of pawn service fees in the third and fourth quarter of each year due to pawn loan balance growth. Pawn service fees generally decline in the first and second quarter of each year after the typical repayment period of pawn loans due to statutory bonuses received by customers in the fourth quarter in Mexico and with tax refund proceeds received by customers in the first quarter in the U.S. In addition, AFF customers generally exercise the early buyout option on their existing lease or finance receivable more frequently during the first quarter due to tax refund proceeds. Retail sales are seasonally higher in the fourth quarter associated with holiday shopping and, to a lesser extent, in the first quarter due to tax refunds in the U.S.

Recent Accounting Pronouncements

See discussion in Note 2 of Notes to Consolidated Financial Statements.