EZCORP INC annual report, FY2016

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EZCORP, Inc. — FY2016 Form 10-K

Reporting period: Fiscal year ended September 30, 2016. This is an annual filing, not a quarterly report; fourth-quarter results are noted separately below. Amounts are in U.S. dollars.

Business context

EZCORP operates pawn stores in the U.S. and Mexico, plus CASHMAX financial-services locations in Canada, and holds an approximately 31% interest in Australia-based Cash Converters International. At year-end it operated 520 U.S. pawn stores, 239 Mexico pawn stores and 27 Canadian locations. The company completed the sale of Grupo Finmart in September 2016 and reports it as a discontinued operation. It had previously exited U.S. Financial Services and online lending operations.

Financial performance and liquidity

  • Revenue: Total revenue was $730.5 million, up 1% from $720.0 million. Net revenue was $428.2 million, up 6%. Pawn service charges rose 6% to $261.8 million; merchandise sales gross profit increased 12% to $150.8 million.
  • Margins and operations: Merchandise gross margin improved to 37% from 33%. Operating income was $29.2 million, versus an operating loss of $15.6 million in FY2015. Income from continuing operations before tax was $0.4 million, compared with a $66.2 million loss. The company recorded a $9.4 million income tax expense.
  • Profit/loss: Loss from continuing operations was $9.0 million; loss attributable to EZCORP from continuing operations was $8.0 million, or $0.15 per share. Total net loss attributable to EZCORP was $80.7 million, or $1.49 per share, including a $72.8 million attributable loss from discontinued operations.
  • Cash flow: Operating cash flow was $64.4 million, down from $79.4 million. Investing activities provided $6.7 million, including proceeds from the Finmart disposition; financing activities used $63.2 million. Cash and cash equivalents ended the year at $65.7 million. Capital expenditures were $9.6 million.
  • Balance sheet and liquidity: Total assets were $983.2 million and equity was $594.2 million. Working capital was $387.2 million. Pawn loans outstanding were $167.3 million and net inventory was $140.2 million. About $3.9 million of cash was held by foreign subsidiaries and management said it intended to keep foreign earnings invested abroad.
  • Debt: Year-end long-term debt, net, was $283.6 million. It included $230 million principal of 2.125% cash convertible notes due June 2019 and $50 million drawn on a senior secured term facility, with up to another $50 million available to draw. The term facility initially bears interest at LIBOR plus 7.5% (or the reference rate plus 6.5%), subject to reductions under specified conditions. Its stated maturity may accelerate to May 2019 if the convertible notes are not sufficiently repaid or refinanced.

Changes and fourth-quarter results

  • U.S. Pawn net revenue increased 7% to $369.4 million and segment contribution rose 25% to $100.1 million. Higher loan balances and merchandise margins supported growth; U.S. merchandise margin rose to 38% from 35%.
  • Mexico Pawn net revenue rose 3% on a GAAP basis to $52.0 million, while constant-currency net revenue increased 22%. The weaker peso materially reduced reported U.S.-dollar results. Mexico segment contribution was $8.5 million, versus a $1.0 million loss.
  • Consolidated operating expenses fell 5% to $399.1 million, largely reflecting lower restructuring, administrative and depreciation costs. Investment impairment fell to $11.0 million from $26.8 million, mainly driving lower non-operating expenses.
  • Fourth-quarter FY2016 revenue was $184.6 million and net revenue was $106.9 million. Continuing operations recorded a $17.5 million net loss, while discontinued operations recorded $19.6 million of income; net income attributable to EZCORP was $3.2 million, or $0.06 per share. In Q4 FY2015, attributable net loss was $92.3 million.

Outlook, risks and unusual items

  • Management said operating cash flow, cash on hand and available credit were expected to fund FY2017 operating needs, planned store growth, capital expenditures and working capital. No specific FY2017 revenue or earnings guidance was provided. Management said longer-term debt repayment will likely require refinancing.
  • Finmart sale proceeds included $40.9 million cash payable to EZCORP, subject to adjustments and escrow, and notes with approximately $89.8 million aggregate principal. The notes were recorded at fair value; their net carrying amount was $83.1 million. Collection depends on Finmart and AlphaCredit’s ability to pay. The filing says scheduled payments had been received through the report date.
  • Discontinued operations included a $73.2 million Finmart goodwill impairment and a $34.2 million gain on disposition, before transaction costs of approximately $9.8 million and a $2.1 million loss on assumed debt. Finmart’s deteriorating performance and delays in collections were also cited.
  • EZCORP recorded an $11.0 million impairment of its Cash Converters investment in FY2016, following a $26.8 million impairment in FY2015. Further declines could result in additional charges.
  • Key exposures include pawn and lending regulation, gold prices and transaction volumes, Mexican-peso and other foreign-exchange movements, Texas business concentration, competition, and the collectability of Finmart notes. Military Lending Act rules extending a 36% APR cap to pawn loans took effect in October 2016; management did not expect a material company-wide impact.
  • Litigation remains a contingency. After year-end, parties agreed in principle to settle the New York securities case for $5.9 million, expected to be covered by D&O insurance, subject to documentation and court approval. A separate Texas securities case continued, and the SEC investigation was ongoing. The company had not accrued losses for the described matters, stating that loss was not then considered probable or reasonably estimable.
  • The company disclosed prior-period accounting errors, including tax-related corrections and earlier restatements involving Finmart loan accounting. Management and the auditor reported effective internal control over financial reporting as of September 30, 2016, following remediation. The financial-statement audit opinion was unqualified.

Important facts for investors to verify

  • Finmart note repayment performance, guarantees, collateral, and remaining exposure, including the timing and amount of collections.
  • Available borrowing capacity, term-loan pricing and covenants, and the plan to refinance or repay the $230 million convertible notes due in 2019.
  • Whether pawn-loan growth and merchandise margins remain sustainable, particularly as gold prices and customer behavior change.
  • Mexico Pawn’s constant-currency growth versus reported results and the sensitivity of earnings and equity to further currency movements.
  • Status and ultimate cost of the securities litigation and SEC investigation, including settlement approval and insurance coverage.
  • Future financial reporting and control performance following the disclosed prior-period corrections and remediation.