EZCORP, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2020; comparative periods ended June 30, 2019. Amounts are in U.S. dollars. EZCORP operates pawn businesses in the U.S. and Latin America, a digital platform, and smaller international consumer-finance activities.
Financial results and liquidity
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Total revenue | $210.2 million | $202.5 million | $656.0 million | $632.9 million |
| Net revenue | $102.2 million | $115.9 million | $359.6 million | $373.6 million |
| Operating income (loss) | $(4.3) million | $8.8 million | $(21.5) million | $40.3 million |
| Net income (loss) attributable to EZCORP | $(5.5) million | $3.2 million | $(45.1) million | $3.2 million |
| Continuing-operations diluted EPS | $(0.10) | $0.06 | $(0.81) | $0.06 |
- Q3 revenue rose about 4%, but net revenue fell about 12%; operating margin was approximately negative 2.0%, versus positive 4.3% a year earlier. Lower pawn service charges outweighed stronger merchandise sales.
- Nine-month operating results included $47.1 million of goodwill and intangible-asset impairment charges: $41.3 million goodwill, $4.6 million acquired trade names, and $1.1 million long-lived assets. The charges were recorded in Q2.
- Cash provided by operating activities was $56.4 million for nine months, compared with $65.0 million. Investing activities provided $110.4 million, versus using $13.2 million, primarily reflecting lower net investment in customer loans and more proceeds from sale of forfeited collateral. Financing used $7.4 million, compared with $198.1 million, which included the prior-year repayment of $195.0 million of 2019 notes.
- At June 30, cash and cash equivalents were $311.1 million, with another $4.0 million restricted; $49.0 million of cash was intended to remain permanently invested in foreign operations. Total current assets were $598.6 million and current liabilities $119.4 million.
- Debt carrying value was $247.9 million, including $115.7 million of 2024 convertible notes and $131.4 million of 2025 convertible notes. Their aggregate principal was $316.3 million. Operating lease liabilities totaled $216.6 million, of which $48.8 million was current.
Material changes versus the prior comparable period
- Pawn loan balances at quarter-end declined year over year by $61.8 million, or 42%, in U.S. Pawn and $15.3 million, or 37%, in Latin America Pawn (28% on a constant-currency basis). Lower originations and increased U.S. redemptions reduced pawn service charges.
- Q3 U.S. Pawn service charges fell 30%, while merchandise sales increased 39%; merchandise gross profit rose 30% to $40.4 million. U.S. Pawn segment contribution declined 30% to $16.6 million.
- Q3 Latin America Pawn service charges fell 44% reported and 35% constant currency; segment contribution was a $0.7 million loss. Store restrictions and closures affected operations in several countries.
- Q3 merchandise gross-margin pressure in the U.S. included $2.2 million of looting-related losses. Excluding those losses, the filing says U.S. merchandise margin was flat year over year at 37%. Higher gold prices supported U.S. jewelry-scrapping profit.
- Cash increased from $157.6 million at September 30, 2019, alongside lower pawn lending and stronger merchandise sales. The company suspended its share-repurchase program in March; it had repurchased 943,149 shares for $5.2 million during the nine months.
Outlook, risks, contingencies and unusual items
- Management said COVID-19 is expected to adversely affect net revenue and earnings for the remainder of fiscal 2020 and into fiscal 2021. The duration and full effect were not reasonably estimable. A sustained decline in pawn portfolios could also constrain merchandise inventory and sales.
- Management stated that operating cash flows and cash on hand were expected to fund contractual obligations, planned store growth, capital expenditures, working capital and any future repurchases through fiscal 2020. This outlook is subject to pandemic-related uncertainty; no specific earnings or revenue guidance was provided.
- In July 2020, the company selected a shutdown of its CashMax business in Canada, expected to be completed in Q4 FY2020, with estimated charges of $8–$10 million. The business represented about 1% of revenue and less than 1% of assets at June 30.
- Civil unrest damaged 30 stores; four suffered total losses, with reopening under review. Q3 losses included $1.8 million of inventory, $0.4 million of loan restitution, and $0.2 million of property and equipment.
- EZCORP recorded a $7.1 million after-tax charge in Q1 for its share of a Cash Converters International class-action settlement. A separate $4.0 million deferred-compensation payment was placed in escrow pending resolution of an AlphaCredit indemnity claim concerning pre-sale taxes; the claim’s nature, extent and validity remained undetermined.
- The filing reports no current litigation or regulatory matter expected to have a material adverse effect, while noting that ultimate outcomes cannot be determined. The company also disclosed that disclosure controls and internal control over financial reporting were not effective because an IT general-controls material weakness identified in 2019 remained unremediated.
Important facts for investors to verify
- Whether pawn originations, loan balances and service-charge revenue recover, and how customer behavior and government support affect that trajectory.
- Whether merchandise sales and margins remain strong as lower pawn balances may reduce future collateral inventory; also monitor gold prices and Latin American operating restrictions.
- The assumptions underlying the $47.1 million impairment and whether subsequent operating trends trigger further impairments.
- The final timing and $8–$10 million cost of the CashMax shutdown, and resolution of the $4.0 million escrow and related tax-indemnity claim.
- Progress remediating the IT-controls material weakness and the effect of lease obligations, convertible-note terms and foreign cash restrictions on available liquidity.