EZCORP, Inc. — Form 10-Q Summary
Business context and reporting period
Fiscal 2013 second quarter and six months ended March 31, 2013. EZCORP operates pawn, retail and consumer lending businesses in the U.S., Canada, Mexico and the U.K., alongside equity-method investments in Albemarle & Bond and Cash Converters International. At quarter-end, it operated 1,403 company-owned locations and had 9 franchised stores.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Revenue | $272.1 million, up 6.2% | $549.2 million, up 8.7% |
| Operating income | $51.0 million, down from $55.7 million | $97.7 million, down from $110.5 million |
| Net income attributable to EZCORP | $34.0 million; diluted EPS $0.63, versus $37.3 million and $0.73 | $64.7 million; diluted EPS $1.22, versus $76.6 million and $1.51 |
| Operating margin | 18.7%, versus 21.7% | 17.8%, versus 21.9% |
| Net cash from operations | Not separately provided for the quarter | $94.2 million, versus $95.1 million |
Revenue growth reflected higher pawn service charges and consumer loan fees, partly offset by lower jewelry scrapping sales. Six-month consumer loan bad debt rose 31% to $23.0 million. Operations expense increased 26% to $212.8 million for the six months.
At March 31, cash was $41.4 million; current assets were $454.3 million and current liabilities $143.0 million. Total assets were $1.314 billion. Debt was approximately $172.3 million, excluding $1.2 million of capital lease obligations; $34.0 million of debt was securitization debt without recourse to EZCORP. The $175 million revolving facility had $74.0 million drawn and $99.3 million available after a letter of credit. The company reported compliance with debt covenants. Six-month investing cash outflow was $49.8 million and financing cash outflow was $51.7 million.
Material changes and management commentary
- U.S. & Canada segment contribution fell to $51.6 million for the quarter from $63.8 million, amid weaker jewelry-scrap profitability, higher operating costs and same-store revenue declines. Jewelry-scrap sales were down 18% in the quarter; segment operating expenses were 38% of revenue versus 33%.
- Latin America contribution rose to $6.4 million from $2.8 million, supported by store growth and Grupo Finmart. Other International contribution rose to $5.1 million from $4.4 million. Management said international markets represented nearly 18% of quarterly segment contribution, compared with 10% a year earlier.
- Acquisitions and expansion included Go Cash’s online lending business, 12 Arizona pawn stores and a 51% interest in Mexico’s TUYO. EZCORP increased its Cash Genie ownership from 72% to 95%. Go Cash contributed $3.1 million in revenue and $3.1 million in losses for the six-month period.
- The company invested $11.0 million in additional Cash Converters shares and added 114 de novo stores during the first six months. Management planned 2–5 U.S. pawn, 23–33 Mexico pawn and 12–22 U.S. financial-services store openings in the remaining six months, with about $7 million of capital spending plus working capital and start-up costs.
Outlook, risks and unusual items
- Management expected operating cash flow, cash on hand and revolving-facility availability to fund obligations, planned growth, capital expenditures and working capital for the coming year. It cautioned that new stores typically weigh on earnings and liquidity until their second year.
- Texas Senate legislation passed after quarter-end proposed fee caps and other restrictions on consumer lending; the bill still required House consideration. CFPB commentary indicated further scrutiny and possible rulemaking for small-dollar lending. The company warned that adverse regulation could require changes to or discontinuation of parts of its Texas business.
- Gold prices and competition affected scrap proceeds and jewelry margins. Market risks also include variable interest rates and foreign exchange. A 50-basis-point rise in rates was estimated to add approximately $288,000 to interest expense over the remaining six months of fiscal 2013.
- After quarter-end, Albemarle & Bond forecast full-year profits materially below market expectations, citing lower gold-buying profits and pawn-business pressure; its CEO transition was also announced. EZCORP said the subsequent fair-value decline in its investment was considered temporary.
- Effective tax rates were reduced by one-time benefits from foreign net operating losses in the quarter and state and foreign net operating losses year to date. A one-time inventory reserve adjustment affected reported gross margins. Legal and regulatory matters were described as not expected to have a material adverse effect, though outcomes are uncertain.
- EZCORP reported effective disclosure controls as of March 31, 2013. Management noted seasonal patterns and said interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Track U.S. same-store performance, gold-scrap volumes and realized prices, and whether operating-cost growth moderates.
- Review loan portfolio credit quality, bad-debt trends and the profitability of acquired online lending operations.
- Monitor Texas and CFPB regulatory developments and potential effects on consumer-lending revenue and the $22.7 million maximum exposure under letters of credit.
- Assess liquidity and debt maturities alongside planned store openings, acquisition-related payments and the $99.3 million of revolving availability.
- Verify the performance and valuation of Albemarle & Bond and Cash Converters investments, including the impact of currency movements and Albemarle & Bond’s weaker outlook.