EZCORP, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended December 31, 2020; comparison is the three months ended December 31, 2019. EZCORP provides pawn loans and sells merchandise, principally in the United States and Latin America. Amounts below are in U.S. dollars.
Financial results and liquidity
- Revenue: Total revenue was $178.1 million, down 20% from $222.4 million. Net revenue (after merchandise and jewelry-scrapping costs) was $108.4 million versus $130.1 million.
- Profit: Operating income was $9.0 million, down from $13.5 million; operating margin was approximately 5.1% versus 6.1%. Net income was $4.3 million, compared with $1.2 million; diluted EPS was $0.08 versus $0.02. The increase in net income was affected by the prior-year $5.9 million equity-method loss, primarily related to a Cash Converters class-action settlement.
- Segment contribution: U.S. Pawn contributed $20.7 million, down 27%; Latin America Pawn contributed $5.0 million, down 39% on a reported basis (down 38% constant currency); Other International contributed $0.8 million, versus a $6.5 million loss.
- Cash flow: Operating activities used $4.5 million, compared with $10.9 million used a year earlier. Investing activities used $15.1 million and financing activities used $0.8 million. Cash, cash equivalents and restricted cash decreased $14.1 million to $298.5 million; this included $8.0 million of restricted cash.
- Liquidity and debt: Cash and cash equivalents were $290.5 million at quarter-end. Current assets were $598.9 million and current liabilities were $123.2 million. Debt carrying value was $254.5 million, including $213,000 current; gross principal was $317.1 million, primarily convertible notes due 2024 and 2025. Operating lease liabilities totaled $189.0 million.
- Other metrics: Merchandise sales gross margin improved in both pawn segments: U.S. Pawn to 42% from 36%, and Latin America Pawn to 35% from 28% (constant-currency margin also 35%). The company had 1,007 stores at quarter-end, including two new Latin America locations.
Material changes versus prior-year quarter
- COVID-19-related changes in customer borrowing behavior reduced loan originations and pawn loan balances, lowering pawn service charges and merchandise available for sale. Revenue fell in both U.S. and Latin America Pawn.
- U.S. Pawn service charges declined 22%; Latin America Pawn service charges declined 36% reported and 32% constant currency. Average monthly pawn-loan balance per store fell 23% in the U.S. and 55% in Latin America reported (53% constant currency).
- Lower merchandise sales were partly offset by higher merchandise gross margins and improved inventory turnover. Store expenses declined 9% in U.S. Pawn and 14% in Latin America reported, primarily due to lower labor costs.
- Corporate general and administrative expense fell 34% to $12.5 million, reflecting cost-reduction initiatives. Prior-year results included a $5.9 million equity-method loss associated primarily with the Cash Converters settlement.
- Inventory declined to $95.0 million from $187.4 million a year earlier, and pawn loans declined to $147.9 million from $195.6 million.
Outlook, risks and unusual items
- Management expects the pandemic and its recovery to continue adversely affecting net revenue and earnings in fiscal 2021. The duration and financial effects are uncertain.
- Management stated that available capital resources and projected operating cash flow are expected to fund working capital, anticipated capital expenditures and growth, taxes, and debt service through fiscal 2021. It may adjust capital or other expenditures as conditions warrant.
- The company’s stock-repurchase program remained suspended to preserve liquidity; no shares were repurchased in the quarter. Management said resumption would depend on business conditions, liquidity and other factors.
- Management noted that refinancing may be needed to repay longer-term debt, including the 2024 and 2025 convertible notes, depending on acquisition activity and other factors. Holders’ conversion triggers for both notes were not met at December 31, 2020.
- Strategic restructuring charges of $20.4 million were recorded in fiscal Q4 2020; no similar charges were recorded in this quarter. Accrued restructuring charges remaining at December 31, 2020 were $6.1 million.
- The company disclosed various legal and regulatory matters but stated it did not believe resolution of any particular matter would materially adversely affect its financial condition, results or liquidity. A previously reported AlphaCredit indemnity claim concerning pre-closing taxes remained undetermined.
- Management described the quarter as seasonally strong historically, while cautioning that COVID-19 has affected historical patterns and that quarterly results are not necessarily indicative of the full fiscal year.
Important facts for investors to verify
- Whether pawn-loan originations, balances and service charges recover, particularly given the sharp Latin America balance decline.
- How sustained COVID-19 effects, store activity and merchandise availability affect fiscal 2021 revenue and earnings.
- The composition and accessibility of cash, including the $8.0 million restricted balance, and the effect of operating cash outflows on liquidity.
- Debt repayment or refinancing plans for the 2024 and 2025 convertible notes, and any future changes in conversion status.
- The remaining $6.1 million restructuring accrual and the status or potential financial exposure of disclosed legal matters, including the AlphaCredit claim.