EZCORP, Inc. — Q3 FY2011 Form 10-Q
Business and period. The filing covers the quarter and nine months ended June 30, 2011, the third quarter of EZCORP’s fiscal year. EZCORP provides pawn loans and retail sales, signature and auto-title lending or related credit services, and operates in the United States, Mexico and Canada. At quarter-end it operated 1,083 company-owned locations and held minority investments in Albemarle & Bond and Cash Converters.
Financial performance and position
Amounts below are in millions of dollars, except per-share figures and percentages.
| Metric | Three months ended June 30, 2011 | Change vs. 2010 | Nine months ended June 30, 2011 | Change vs. 2010 |
|---|---|---|---|---|
| Total revenue | $203.2 | +17.1% | $635.2 | +18.8% |
| Net revenues | $123.0 | +17.4% | $388.2 | +18.5% |
| Operating income | $37.0 | +$8.2 | $121.3 | +$19.5 |
| Net income | $26.5 | +32.9% | $85.8 | +23.5% |
| Diluted EPS | $0.53 | vs. $0.40 | $1.71 | vs. $1.40 |
| Operating cash flow | Not separately reported | $107.0 | vs. $80.5 |
Revenue drivers and margins. In Q3, sales rose 18.8% to $115.3 million and pawn service charges rose 22.7% to $48.4 million; signature loan fees increased 5.9% to $34.2 million. Net revenues reflect revenue less cost of goods sold and signature- and auto-title-loan bad debt. U.S. Pawn store operating income rose to $43.0 million from $34.7 million; Empeño Fácil rose to $2.5 million from $1.3 million; EZMONEY declined to $10.7 million from $10.9 million. U.S. Pawn’s gross margin on total sales was 40.9% in Q3 (39.6% prior year). The filing does not provide a single consolidated gross-margin percentage.
Balance sheet and liquidity. At June 30, cash was $27.5 million, current assets $328.0 million and current liabilities $59.4 million. Total assets were $713.6 million and stockholders’ equity $624.3 million. Debt outstanding was $26.5 million, with no current maturities. A new four-year $175 million revolving facility replaced the prior agreement; $143.5 million remained available after outstanding borrowings and $5.0 million of bank letters of credit. EZCORP reported compliance with its financial covenants.
Cash flow and investment. Nine-month investing cash outflow was $100.6 million, including $64.8 million for acquisitions and $24.4 million of property and equipment additions. Financing cash outflow was $4.7 million. Cash increased $1.6 million over the period to $27.5 million.
Material changes and unusual items
- Q3 total revenue growth included 7% same-store growth; the remainder came from new and acquired stores. The company acquired 23 stores during Q3 for approximately $31.6 million. It acquired 32 pawn stores year to date and Canadian Cash Converters franchise rights for $1.7 million.
- Year-to-date administrative expense included a $10.9 million pre-tax charge tied to the former CEO’s retirement: $3.4 million cash and $7.5 million accelerated restricted-stock vesting. The company reported $85.8 million net income including this charge; excluding the charge and related tax benefit, management said net income was $92.9 million, up 34% from the prior-year period.
- Year-to-date signature-loan bad debt rose 17.5% to $26.0 million. In EZMONEY, signature-loan bad debt equaled 23.6% of related fees for the nine months, up from 21.4%; management attributed the increase largely to installment-loan mix and expected improvement as underwriting and operations were refined. Q3’s rate was 30.3%, versus 27.5%.
- Equity in income of unconsolidated affiliates increased to $12.2 million year to date from $7.5 million. Recorded values of Albemarle & Bond and Cash Converters were below their disclosed market fair values, but the investments are accounted for using the equity method.
Outlook, risks and contingencies
- Management expected to open approximately 30 stores in the remaining three months of FY2011, with about $3.6 million in capital expenditures plus working capital and start-up costs. It cautioned that new stores can weigh on earnings and liquidity until their second year.
- EZCORP expected to increase its Cash Converters ownership from about 33% to 53% for approximately $70 million in the quarter ending December 31, 2011, subject to shareholder approval. The planned transaction would lead to consolidation of Cash Converters and is linked to proposed global financial-services joint ventures.
- Management said operating cash flow, cash on hand and revolving-credit availability should fund obligations, growth, capital spending and working capital over the coming year. Contractual obligations included $159.3 million of operating leases and $26.5 million of debt; these amounts exclude potential losses under credit-service letters of credit.
- Maximum exposure under letters of credit for brokered signature and auto-title loans was $29.6 million if all loans defaulted and none was collected; the recorded expected-loss allowance was $1.7 million. Customers and lenders are subject to credit and collection risks.
- Other risks include changes in lending laws and regulation, competition, gold prices, foreign-exchange movements and variable interest rates. The filing says legal proceedings are not expected to have a material adverse effect, while noting outcomes cannot be assured. Business results are seasonal; management historically expects the fourth fiscal quarter to be strongest and the third weakest.
- Management reported disclosure controls were effective as of June 30, 2011 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the proposed Cash Converters share purchase and joint ventures received shareholder approval, closed on expected terms, and required the anticipated financing.
- Whether signature-loan bad-debt rates improved as management expected, particularly as installment lending expanded.
- Whether new and acquired stores achieved the expected maturation, margins and cash returns, and whether planned store openings proceeded.
- How gold prices, lending regulation, competitive conditions and foreign-currency movements affected subsequent results.
- Whether available revolver capacity and covenant compliance remained adequate after acquisitions, planned investment and contingent letter-of-credit exposure.