EZCORP, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended December 31, 2011; comparison is with the three months ended December 31, 2010. EZCORP operates U.S. and Mexican pawn businesses and U.S., Canadian and online consumer-finance operations. Dollar amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $248.9 million | $218.8 million | +13.7% |
| Net revenue | $154.0 million | $134.2 million | +14.7% |
| Operating income | $54.8 million | $39.4 million | +39.0% |
| Net income | $39.4 million | $27.4 million | +43.5% |
| Diluted earnings per share | $0.78 | $0.55 | +41.8% |
| Cash from operations | $43.7 million | $35.1 million | +$8.6 million |
- Net margin was approximately 15.8%, versus 12.5% in the prior-year quarter. Operating margin was approximately 22.0%, versus 18.0%.
- Revenue growth reflected $26.5 million from new and acquired stores and $3.5 million of same-store growth. Management said net income growth was approximately 14% after excluding the prior-year CEO-retirement charge and related tax benefit.
- Cash used in investing was $67.2 million, including $49.4 million of acquisitions and $9.9 million of property and equipment additions. Financing provided $22.5 million; cash declined $1.1 million to $22.9 million.
- At December 31, 2011, assets were $825.9 million and stockholders’ equity was $698.4 million. Current assets were $382.7 million and current liabilities $76.3 million; current assets included substantial loans, receivables and inventory.
- Debt was $40.5 million, all under a $175 million revolving facility; $5.0 million of letters of credit were outstanding and $129.5 million remained available. The company reported covenant compliance. The facility may be increased to $225 million subject to its terms.
Material changes and segment results
- U.S. Pawn: Revenue rose 15% to $184.5 million and store operating income rose to $57.9 million from $49.6 million. Same-store revenue increased 2%. Pawn service charges increased 17%; the redemption rate was 81%, versus 80%.
- Empeño Fácil: Revenue rose 56% to $19.4 million and store operating income increased to $6.2 million from $2.4 million. Growth included new stores and same-store gains; reported results were affected by a weaker Mexican peso. A one-time inventory-reserve estimate change benefited merchandise margins.
- EZMONEY Operations: Revenue declined 1% to $45.0 million and store operating income fell to $15.5 million from $17.7 million. Management cited Texas competition, lower signature- and auto-title-loan revenue, and higher Canadian operating costs. Installment-loan fees rose 77% as the product expanded.
- The company acquired 25 stores during the quarter for a reported total purchase price of approximately $50.5 million, principally pawn and retail locations. Goodwill rose to $212.5 million from $173.2 million at September 30, largely reflecting acquisitions.
Outlook, risks and unusual items
- Management planned to open approximately 76 stores during the remaining nine months of FY2012, with about $11.8 million of capital expenditures plus working capital and start-up costs. It cautioned that new stores may weigh on earnings and liquidity until their second year.
- Management expected operating cash flow, cash on hand and revolving-credit availability to fund contractual obligations, planned growth, capital expenditures and working capital for the coming year. No formal earnings guidance was provided.
- The prior-year quarter included a $10.9 million pretax charge related to the former CEO’s retirement, including accelerated restricted-stock vesting. This materially affects the reported year-over-year net-income comparison.
- The company began using gold collars to manage gold-price exposure; these were not designated as accounting hedges. It recorded a $1.1 million gain in other income. The collars covered 19,000 ounces at quarter-end and limit participation in rising gold prices while providing some downside protection.
- Off-balance-sheet letters of credit supporting loans made by unaffiliated lenders had a maximum potential exposure of $34.9 million if all brokered loans defaulted and none was collected; the recorded expected-loss allowance was $2.1 million.
- Market and regulatory risks include variable-rate debt, gold-price movements, foreign-currency fluctuations, consumer-loan credit losses, and regulation of short-term lending. Proposed Australian lending legislation could adversely affect Cash Converters, an equity-method investee. The company disclosed ongoing legal and regulatory actions but said it did not expect them to have a material adverse effect; outcomes are uncertain.
- After quarter-end, EZCORP acquired a 60% interest in Mexican lender Crediamigo for $38.7 million cash and committed additional capital of $12 million alongside $8 million from minority shareholders. It also agreed to performance-based future payments. The filing said purchase-price allocations were incomplete.
- The quarter is seasonal and interim results are not necessarily indicative of the full fiscal year. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much reported earnings growth reflects underlying operations versus the prior-year CEO-retirement charge, tax-rate changes, the gold-collar gain and acquisition contributions.
- Whether same-store pawn and consumer-loan trends, credit losses, redemption rates and inventory margins remain sustainable, particularly in competitive Texas markets.
- Integration, performance and financing implications of the acquired stores and Crediamigo investment, including the additional capital commitment and contingent payments.
- Available revolver capacity and covenant headroom as acquisitions and planned store openings consume cash; also monitor the $34.9 million maximum letter-of-credit exposure and lease commitments.
- Effects of gold prices, foreign exchange and possible lending regulation on operating results and the value of strategic investments.