EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2012; filed August 8, 2012. Comparisons are with the corresponding 2011 periods. EZCORP operates pawn, retail and consumer-finance businesses across the U.S., Canada, Mexico and the U.K., and holds equity-method investments in pawnbroking and financial-services companies.
Financial performance
- Quarter revenue: $229.0 million, up 12.7%. Net revenues were $145.3 million, up 18.1%; operating income was $39.2 million versus $37.0 million; net income attributable to EZCORP was $28.5 million versus $26.5 million. Diluted EPS was $0.56 versus $0.53.
- Nine-month revenue: $734.1 million, up 15.6%. Net revenues were $460.9 million, up 18.7%; operating income was $149.6 million versus $121.3 million; net income attributable to EZCORP was $105.1 million versus $85.8 million. Diluted EPS was $2.06 versus $1.71.
- Quarter margins: Net revenue was 63.4% of revenue versus 60.6% a year earlier; operating margin was 17.1% versus 18.2%; net income attributable to EZCORP margin was 12.5% versus 13.1%. For nine months, operating margin was 20.4% versus 19.1%, and attributable net margin was 14.3% versus 13.5%.
- Cash flow: Nine-month operating cash flow was $104.1 million, compared with $107.3 million. Investing used $162.0 million, including $125.2 million for acquisitions and $33.2 million in property and equipment additions. Financing provided $84.4 million. Cash and cash equivalents ended at $50.8 million, up from $24.0 million at September 30, 2011; restricted cash was an additional $1.1 million.
- Liquidity and debt: The company had $114.7 million drawn on its $175 million revolving facility, leaving $60.3 million available, and reported compliance with its covenants. Balance-sheet long-term debt, including current maturities, was $206.9 million; capital lease obligations were $1.2 million. Management said cash from operations, cash on hand and revolver availability should fund expected obligations, growth, capital spending and working capital for the coming year.
Material changes and operating developments
- Quarter revenue growth included higher pawn service charges (+16%) and consumer loan fees (+38%); sales rose 2%. Jewelry-scrapping sales fell 17%, partly offsetting growth. Quarter revenue also included $17.8 million from Crediamigo and $3.9 million from Cash Genie.
- U.S. and Canada segment contribution declined to $44.4 million from $46.3 million, amid weaker jewelry and gold-scrap activity. Same-store total revenue declined 5% in the quarter. Management cited lower gold volume, rising pawn-loan redemption rates and a shift in merchandise mix.
- Latin America contribution rose to $6.5 million from $0.8 million, reflecting store growth and Crediamigo, acquired in January 2012. Other International contribution was $4.3 million, including $4.2 million of equity-method income and Cash Genie’s post-acquisition results; Cash Genie approximately broke even in the quarter.
- During the nine months, EZCORP acquired a 60% interest in Mexican lender Crediamigo, a 72% interest in U.K. online lender Cash Genie, and 49 retail or financial-services locations. Acquisitions increased goodwill and intangible assets; the Crediamigo purchase-price allocation remained preliminary.
- Consolidated results include noncontrolling interests: $1.2 million of quarter income and $1.3 million for nine months were attributable to redeemable noncontrolling interests.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management planned to open approximately 36 stores in the remaining fiscal quarter, with about $6.2 million of capital expenditures, plus working capital and start-up costs. It expects new stores to weigh on earnings and liquidity until their second year.
- Crediamigo’s June refinancing reduced its interest rate and produced a one-time $2.8 million reduction in interest expense from accelerated recognition of a debt premium. The company said lower rates should reduce future interest expense and that Crediamigo was pursuing further refinancing.
- EZCORP faces exposure to variable interest rates, gold prices and foreign exchange movements. It began using gold-price collars in fiscal 2012; these are not designated as accounting hedges, and fair-value changes flow through earnings. A 50-basis-point interest-rate increase was estimated to add about $143,000 of interest expense over the remaining three months of fiscal 2012.
- Credit-service letters of credit were off balance sheet. Maximum exposure if all brokered loans defaulted and none were collected was $24.8 million; the recorded expected-loss allowance was $1.8 million. Consumer lending, including Crediamigo payroll loans, is exposed to defaults and collection performance.
- Management cited seasonality: net revenue and net income are typically strongest in the fourth fiscal quarter and weakest in the third. The filing also notes regulatory and legal uncertainty; management did not expect current legal and regulatory actions to have a material adverse effect but could not assure their outcome.
- Australia’s proposed consumer-credit legislation was expected to take effect July 1, 2013, subject to approval, and could affect Cash Converters’ lending business. The filing said amendments increased permitted fees and charges for microlending.
- The prior-year nine-month period included a $10.9 million pre-tax charge related to the former CEO’s retirement, including accelerated restricted-stock vesting; this makes year-over-year expense comparisons less directly comparable. Currency translation reduced comprehensive income in the current period.
Key facts for investors to verify
- Separate acquired-business contributions from organic growth, especially Crediamigo and Cash Genie, and assess the preliminary acquisition valuations, goodwill and contingent consideration.
- Monitor U.S. same-store trends, gold-scrap volumes and margins, pawn-loan balances and redemption rates, and consumer-loan bad-debt performance.
- Track debt maturities, revolver availability, covenant headroom, Crediamigo refinancing and the $24.8 million maximum letters-of-credit exposure.
- Assess regulatory developments affecting short-term lending and the effects of gold prices, interest rates and foreign exchange movements.
- Reconcile the quarter effective tax rate: the tax note reports 29.8%, while MD&A cites 30.1%; the filing text does not provide a clear single value.