EZCORP, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended December 31, 2015 (EZCORP’s fiscal 2016 first quarter), compared with the three months ended December 31, 2014. EZCORP operates pawn businesses in the U.S. and Mexico, Mexican payroll-deduction lending through Grupo Finmart, and other international consumer-finance activities. Results exclude businesses classified as discontinued operations, including the exited U.S. financial services business.
Financial results and liquidity
- Revenue and earnings: Revenue was $198.5 million, down 7% from $212.7 million. Net revenue was $111.5 million, down 5%. The company reported an operating loss of $3.9 million versus operating income of $16.1 million, and a net loss attributable to EZCORP of $7.5 million, or $0.13 per share, versus net income of $11.6 million, or $0.22 per share.
- Margins and costs: Merchandise sales gross margin improved to 39% from 34%; merchandise sales gross profit rose to $42.3 million from $37.2 million. However, operating expenses increased 14% to $115.4 million. Consumer loan bad debt rose 48% to $12.6 million.
- Cash flow: Operating activities used $4.5 million, compared with $5.5 million provided a year earlier. Investing activities used $9.4 million and financing activities used $21.7 million. Cash and cash equivalents fell by $36.3 million during the quarter to $22.8 million. Of ending cash, $7.4 million was held by foreign subsidiaries and management said it was not available to fund domestic operations. Restricted cash was $16.2 million current and $2.7 million non-current.
- Debt and balance sheet: Debt and capital lease obligations totaled $357.1 million, down $92.6 million, or 21%, from a year earlier. Balance-sheet debt included $75.6 million of current maturities and $281.5 million of long-term debt. Total assets were $1.15 billion and total liabilities were $466.9 million at December 31, 2015.
- Business indicators: Pawn loans outstanding were $157.9 million, up 5% year over year; inventory was $133.0 million, essentially flat. Net consumer loans were $32.2 million current and $71.5 million non-current, down year over year.
Material changes versus the prior-year quarter
- Grupo Finmart was the main operating concern: consumer loan fees and interest fell, bad debt expense increased, and the segment recorded a $16.9 million loss versus an $8.2 million loss. Non-performing loans were 34% of its portfolio at December 31, 2015, up 19 percentage points from September 30, 2015. The company attributed much of the deterioration to delayed collections and reversal of previously accrued interest.
- Management said 75% of the $55.9 million non-performing loan balance related to delayed cash receipts on in-payroll loans, while 25% related to out-of-payroll loans for which significant future collections were not expected. Management expected recovery of a majority of payment delays, but did not quantify the timing or amount.
- Pawn performance improved in several areas: U.S. merchandise margin increased to 40% from 34%, and Mexico Pawn margin increased to 35% from 31%. Aged inventory fell to 11% of U.S. Pawn inventory and 3% of Mexico Pawn inventory, from 16% in each segment a year earlier.
- Jewelry scrapping sales fell 48%, reflecting lower gold proceeds and lower volumes as EZCORP continued its strategy to sell rather than scrap jewelry. Consumer-loan revenue declined partly because the U.S. financial services business had been exited.
- Corporate administrative expense rose 59%, largely due to higher labor and professional fees, including costs associated with completing the restatement of previously issued financial statements. Restructuring expense was $1.7 million.
Outlook, risks, contingencies, and unusual items
- Management stated that cash on hand and operating cash flow were expected to be adequate for contractual obligations, planned capital expenditures, and working capital needs for the remainder of fiscal 2016. This is forward-looking and subject to the risks described in the filing.
- EZCORP expected Grupo Finmart to continue pursuing new government-employer contracts and local financing, while noting it had begun a strategic review of the segment and expected completion by the third quarter of fiscal 2016. No specific outcome was provided.
- The sellers of the 1,168,456 shares issued in the Cash Pawn acquisition notified EZCORP of their intent to exercise a put option on February 19, 2016, requiring an $11.8 million cash repurchase, payable within 20 days after formal exercise.
- Grupo Finmart’s debt includes non-recourse obligations, but a default on more than $25 million could potentially trigger an event of default under EZCORP’s convertible notes. EZCORP also guaranteed future cash outflows on Grupo Finmart currency forwards, then totaling $47.3 million.
- EZCORP reported ineffective disclosure controls at December 31, 2015 and material weaknesses in internal control over financial reporting, involving complex transactions, monitoring Grupo Finmart loan performance, and accounting errors. Management described remediation efforts, including additional accounting resources and stronger oversight and controls.
- Legal matters include shareholder derivative and securities litigation and an SEC investigation. The company said outcomes could not be predicted, intended to defend the cases, and had not recorded liabilities because it did not consider a loss probable or reasonably estimable. The filing also reports a remaining $7.5 million accrual related to settlement of issues with the CFPB.
- The quarter included a $3.7 million income tax benefit, foreign-currency translation losses, and discontinued-operation costs. The company noted that seasonal variations mean quarterly results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether Grupo Finmart’s collection delays resolve, how its non-performing loans and allowance develop, and whether management’s recovery expectations are realized.
- Progress and conclusions from the Grupo Finmart strategic review, expected by the third quarter of fiscal 2016.
- Cash availability after the anticipated $11.8 million Cash Pawn share repurchase, and the company’s ability to fund domestic needs given foreign-held and restricted cash.
- Debt maturities, Grupo Finmart refinancing and default risks, and potential effects of the guaranteed $47.3 million currency-forward obligations.
- Remediation of material control weaknesses, any further restatements, and developments in the SEC investigation, securities litigation, derivative litigation, and CFPB settlement.
- Whether improved pawn margins and inventory quality can offset higher operating costs and continued weakness in consumer lending.