EZCORP, Inc. — Fiscal Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2011; comparisons are with the corresponding 2010 periods. Unless noted otherwise, dollar amounts are in millions. EZCORP operates pawn and short-term consumer lending businesses in the U.S., Mexico and Canada, and holds equity-method investments in Albemarle & Bond and Cash Converters.
Financial performance
| Metric | Three months ended Mar. 31, 2011 | Change year over year | Six months ended Mar. 31, 2011 | Change year over year |
|---|---|---|---|---|
| Total revenue | $213.3 | +20.8% | $432.1 | +19.6% |
| Net revenue | $131.0 | +19.4% | $265.2 | +19.1% |
| Operating income | $44.9 | +$10.8 | $84.3 | +$11.3 |
| Income before taxes | $49.3 | — | $91.8 | — |
| Net income | $31.8 | +33.9% | $59.3 | +19.8% |
| Diluted EPS | $0.63 | vs. $0.48 | $1.18 | vs. $1.00 |
Quarterly operating and net margins were approximately 21.1% and 14.9% of revenue, respectively. The six-month effective tax rate was 35.5% (35.6% in the prior year period). Equity income from unconsolidated affiliates was $4.7 million for the quarter and $8.1 million year to date.
For the quarter, revenue growth reflected higher merchandise and jewelry-scrapping sales, pawn service charges, and signature and auto-title loan fees. Same-store total revenue grew 12% overall. Segment store operating income increased to $46.4 million in U.S. Pawn, $1.6 million in Empeño Fácil, and $16.9 million in EZMONEY.
Cash flow, balance sheet and debt
- Operating cash flow: $69.9 million for the six months, compared with $51.1 million in 2010. Investing activities used $26.8 million and financing activities used $9.1 million; cash increased $33.9 million to $59.8 million.
- Liquidity and assets: At March 31, cash was $59.8 million, current assets $319.3 million, and total assets $668.9 million. Current liabilities were $61.6 million.
- Debt and facility: Total debt was $20 million ($10 million current and $10 million long-term). The company had an $80 million revolving facility and reported $75 million available after $5 million of bank letters of credit. It was in compliance with debt covenants. The revolver matures December 31, 2011; the term loan matures December 31, 2012.
- Investments and acquisitions: Investments in unconsolidated affiliates were carried at $112.4 million. Goodwill was $143.4 million, up from $117.3 million at September 30, 2010, primarily reflecting acquisitions.
Material changes and unusual items
- For the six-month period, results included a $10.9 million pre-tax charge related to the former CEO’s retirement: $3.4 million cash and $7.5 million restricted-stock vesting. The related tax benefit was $3.8 million. Excluding this charge and benefit, management reported net income of $66.4 million, up 34% year over year.
- Quarterly U.S. Pawn revenue rose 19%; same-store revenue increased 11%. Merchandise gross margin improved to 42.7%, while jewelry-scrapping margin declined to 34.9% from 37.6%, partly reflecting more aggressive buying and lending. Gold prices and proceeds per gram affect sales and margins.
- EZMONEY revenue grew 15% in the quarter, but signature-loan bad debt rose to 15.4% of related fees from 13.8%. For the six months, signature-loan bad debt was 20.5% of fees versus 18.6%, and auto-title bad debt was 11.4% versus 10.7%.
- Store expansion and acquisitions contributed to growth and higher operating costs. During the six months, EZCORP acquired nine pawn stores for $31.5 million. The company had 1,057 locations at quarter-end.
Outlook, risks and contingencies
- No formal earnings guidance is provided. Management anticipated that operating cash flow, cash on hand and revolver availability would fund obligations, planned growth, capital expenditures and working capital for the coming year.
- For the rest of fiscal 2011, the company planned approximately 25–30 new Empeño Fácil stores, five to ten Cash Converters stores in Canada, and five U.S. pawn stores, with $5.3 million of capital expenditures plus working capital and start-up costs. Management cautioned that new stores may weigh on earnings and liquidity until their second year.
- EZCORP announced a proposed approximately $70 million purchase to raise its Cash Converters ownership from about 33% to 53%, subject to shareholder approval, with closing expected by September 30, 2011. Two planned joint ventures would support global financial-services products under that brand. The filing also describes a proposed acquisition of 15 pawn stores for $18.5 million, subject to seller approval.
- Colorado and Wisconsin law changes restricted payday lending; Wisconsin also prohibited auto-title loans. EZCORP introduced or continued modified installment products and warned that additional store closures or consolidations may follow if operations are not profitable under the new rules.
- Letters of credit backing brokered loans created maximum potential exposure of $26.5 million if all borrowers defaulted and none of the amounts were recovered; the accrued allowance was $0.9 million. Legal and regulatory proceedings were described as not expected to have a material adverse effect, though outcomes could not be assured.
- Other risks include credit losses and estimation uncertainty, gold-price and foreign-exchange movements, seasonality, and variable-rate debt. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the improvement in earnings persists after adjusting for the CEO retirement charge and as acquired and newly opened stores mature.
- Credit quality, default trends, and allowance adequacy for signature and auto-title lending, including the $26.5 million maximum letters-of-credit exposure.
- Regulatory developments in Colorado and Wisconsin and their effects on loan products, store economics, and closures.
- Shareholder approval, funding and completion terms for the proposed Cash Converters investment and 15-store acquisition; assess the associated capital and execution risks.
- Pawn and jewelry-scrapping margins, which are sensitive to gold values, inventory assessment and scrapping decisions, alongside the filing’s seasonal patterns.