Cash America 2013 Annual Report Download - page 58

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If the Company’s allowance for losses and liability for estimated losses on third-party lender-owned consumer loans
are not adequate to absorb losses or if the Company does not successfully manage its credit risk for unsecured
consumer loans, the Company’s business, results of operations and financial condition may be adversely affected.
As more fully described under “Item 8. Financial Statements and Supplementary Data—Note 5,” the Company
utilizes a variety of underwriting criteria, monitors the performance of its consumer loan portfolios and maintains either
an allowance or liability for estimated losses on consumer loans (including fees and interest) at a level estimated to be
adequate to absorb credit losses inherent in the receivables portfolio and expected losses from loans guaranteed under
the CSO programs. The allowance deducted from the carrying value of consumer loans was $87.9 million at December
31, 2013, and the liability for estimated losses on third-party lender-owned consumer loans was $3.1 million at
December 31, 2013. These reserves are estimates, and if actual loan losses are materially greater than the Company’s
reserves, the Company’s results of operations and financial condition could be adversely affected. In addition, if the
Company does not successfully manage credit risk for its unsecured consumer loans through its loan underwriting, it
could incur substantial credit losses due to customers being unable to repay their loans. Any failure to manage credit risk
could materially adversely affect the Company’s business, results of operations, financial condition and cash flows.
There can be no assurance that the Company will be able to operate at an acceptable level of profitability in Mexico
following the reorganization of its Mexico-based pawn operations.
During the third and fourth quarters of 2012, the Company substantially completed the reorganization of its
Mexico-based pawn operations that comprise the foreign component of the Company’s retail services segment so that
they now include only full-service pawn locations that offer pawn loans based on the pledge of general merchandise and
jewelry-based collateral (the “Mexico Reorganization”). The Company recognized $28.9 million of charges related to
the Mexico Reorganization during the year ended December 31, 2012. The Company is operating 47 full-service pawn
locations in Mexico as of December 31, 2013. There is no assurance that these remaining full-service pawn locations
will be able to operate in Mexico at an acceptable level of profitability. If these remaining pawn locations have to be
closed in the future, the Company will incur additional charges, which could adversely affect the Company’s results of
operations in the period when it takes such charges.
The Company is subject to impairment risk.
At December 31, 2013, the Company had goodwill totaling $705.6 million, consisting of $495.2 million related
to the retail services segment and $210.4 million related to the e-commerce segment, on its consolidated balance sheets,
all of which represent assets capitalized in connection with the Company’s acquisitions and business combinations. In
addition, at December 31, 2013, the Company had intangible assets, net of accumulated amortization, of $52.3 million,
consisting of $52.3 million which related to its retail services segment. Accounting for goodwill and intangible assets
requires significant management estimates and judgment. Events may occur in the future and the Company may not
realize the value of its goodwill or intangible assets. Management performs periodic reviews of the carrying values of its
goodwill and intangible assets to determine whether events and circumstances indicate that impairment in value may
have occurred. A variety of factors could cause the carrying value of goodwill or an intangible asset to become impaired.
Should a review indicate impairment, a write-down of the carrying value of the goodwill or intangible asset would
occur, resulting in a non-cash charge, which could adversely affect the Company’s results of operations and could also
lead to the Company’s inability to comply with certain covenants in the Company’s financing documents, which could
cause a default under those agreements.
Certain tax positions taken by the Company require the judgment of management and could be challenged by the
Internal Revenue Service.
Management’s judgment is required in determining the provision for income taxes, the deferred tax assets and
liabilities and any valuation allowance recorded against deferred tax assets. Management’s judgment is also required in
evaluating whether tax benefits meet the more-likely-than-not threshold for recognition under ASC 740-10-25, Income
Taxes. For example, in connection with the liquidation of Creazione Estilo, S.A. de C.V., a Mexican sociedad anónima
de capital variable (“Creazione”), the Company will include a deduction on its 2013 federal income tax return for the
Company’s tax basis in the stock of Creazione and has recognized a tax benefit of approximately $33.2 million as a
result of the deduction. Management believes that the Company meets the requirements for this deduction and that it
should be treated as an ordinary loss, which has reduced the Company’s cash taxes paid in 2013. The Company has