EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019. Comparisons are with the periods ended June 30, 2018. EZCORP provides pawn loans and sells merchandise in the United States and Latin America, with consumer finance activities in Canada.
Financial performance
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Nine months ended June 30, 2019 | Nine months ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $202.5 million | $199.6 million | $632.9 million | $606.2 million |
| Operating income | $8.8 million | $12.1 million | $40.3 million | $49.9 million |
| Income from continuing operations, net of tax | $3.4 million | $14.0 million | $2.4 million | $38.0 million |
| Net income attributable to EZCORP | $3.2 million | $14.5 million | $3.2 million | $38.7 million |
| Diluted EPS from continuing operations | $0.06 | $0.25 | $0.06 | $0.69 |
- Quarterly revenue increased about 1%, while net income attributable to EZCORP declined 78%. Operating margin was about 4.3%, versus 6.1% a year earlier.
- For the nine months, revenue rose about 4%, but net income attributable to EZCORP fell about 92%, chiefly reflecting a $19.7 million impairment of an investment in Cash Converters International, the Latin America tax adjustment, higher interest and administrative costs, and lower other income than in the prior year.
- U.S. Pawn quarterly segment contribution increased 11% to $23.6 million, supported by 6% growth in pawn service charges. Latin America Pawn contribution declined 76% to $2.1 million, including the $6.1 million tax adjustment. Other International contribution was $0.9 million, compared with a $0.3 million loss.
- Quarterly merchandise sales gross margin was 37% in U.S. Pawn. Latin America’s reported margin was 13%, materially affected by the tax adjustment; excluding it, management reported a 29% margin.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $65.0 million, compared with $69.3 million. Investing activities used $13.2 million, versus $117.1 million, principally because acquisition spending was lower. Financing activities used $198.1 million, primarily reflecting repayment at maturity of $195.0 million of 2.125% convertible notes in June 2019.
- Cash and cash equivalents were $138.9 million at June 30, 2019, down from $285.3 million at September 30, 2018 and $284.5 million at June 30, 2018. Management said $25.4 million of the June 2019 balance was intended to remain permanently invested in foreign operations.
- Debt carrying value was $235.7 million, including $109.9 million of 2024 convertible notes and $124.5 million of 2025 convertible notes. Current maturities were $0.2 million. The company reported $318.2 million of gross debt principal and related obligations before debt discounts and issuance costs.
- Current assets were $588.4 million and current liabilities were $72.9 million. Management expected operating cash flow and cash on hand to fund contractual obligations, planned store growth, capital spending, working capital and limited acquisitions through fiscal 2019.
Material changes, outlook and risks
- A $6.1 million Latin America adjustment for prior-period transaction tax liabilities reduced merchandise sales by $4.6 million and increased interest expense by $1.5 million. Management said results excluding this adjustment were stronger.
- EZCORP recorded $19.7 million of impairment charges on its Cash Converters International investment in the first half of fiscal 2019. At June 30, it identified a further $3.8 million decline as not other-than-temporary, but said further declines could result in additional impairment.
- A principal jewelry refiner entered Chapter 11 proceedings. EZCORP had a $3.6 million reserve against receivables from the refiner and said future recoveries, if any, remained uncertain.
- Management expected interest expense to decrease in future periods following repayment of the 2019 notes. It also expected U.S. merchandise sales margin for the full fiscal year to remain within a 35%–38% target range. No broader earnings or revenue guidance was provided.
- The company settled the remaining claims in a federal securities class action for $4.875 million, expected to be covered by insurance. Court approval remained outstanding at the filing date.
- Disclosure controls were deemed ineffective as of June 30, 2019 because of an unremediated material weakness in IT general controls, including controls over system access and changes. Management described remediation efforts and said it performed additional procedures to support the financial statements.
- EZCORP corrected previously reported errors, primarily involving pawn service-charge receivables. It said the errors were not material to prior periods; the errors had overstated October 1, 2017 retained earnings by $3.8 million.
- Management cited exposure to gold prices, foreign exchange rates, interest rates, regulatory changes, seasonal operating patterns and acquisition execution. It also anticipated a material balance-sheet impact from adopting lease accounting in fiscal 2020.
Important facts for investors to verify
- Whether the Latin America operating trend excluding the $6.1 million tax adjustment is sustained, and whether related tax liabilities are fully resolved.
- Progress and effectiveness of remediation of the IT-controls material weakness.
- Cash Converters International’s share price, litigation developments and any further investment impairment.
- Recoverability of the jewelry-refiner receivable and status of the refiner’s bankruptcy process.
- Cash availability and the company’s ability to meet longer-term convertible-note obligations and fund expansion.
- Final court approval and insurance coverage for the securities-litigation settlement.