EZCORP, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the quarter and nine months ended June 30, 2015 (EZCORP’s fiscal third quarter, not fiscal Q1). EZCORP operated pawn, consumer-lending and buy/sell businesses in the U.S., Mexico and Canada, and held an approximately 32% equity interest in Cash Converters International. The filing was delayed while the company reviewed Grupo Finmart loan accounting. It restates comparative 2014 periods and reflects the restated first quarter of fiscal 2015.
Key financial metrics
Amounts below are in millions of U.S. dollars unless stated otherwise.
| Metric | Quarter ended June 30, 2015 | Quarter ended June 30, 2014 | Nine months ended June 30, 2015 | Nine months ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $213.0 | $223.1 | $707.2 | $722.0 |
| Net revenue | $129.3 | $135.6 | $415.3 | $436.9 |
| Operating income | $4.7 | $9.3 | $47.8 | $57.1 |
| Net income (loss) attributable to EZCORP | $(9.8) | $3.9 | $3.1 | $28.8 |
| Basic and diluted EPS | $(0.17) | $0.07 | $0.05 | $0.53 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $50.5 | $43.3 |
- Quarterly revenue fell 5%; jewelry-scrapping sales declined 48%, pawn service charges 4%, and consumer-loan fees and interest 4%. Merchandise sales rose 4%.
- The quarterly loss included a $10.6 million goodwill impairment for the U.S. Financial Services reporting unit. Lower net revenue also reflected reduced jewelry-scrapping gross profit and merchandise margins.
- Nine-month revenue fell 2% and net revenue fell 5%. The $25.7 million decrease in net income attributable to EZCORP was driven by lower net revenue, higher interest expense, lower affiliate earnings and the goodwill impairment.
- Quarterly merchandise gross margin in U.S. & Canada was 35% versus 38% a year earlier; jewelry-scrapping gross margin was 21% versus 27%. Management said inventory-reduction efforts pressured retail margins, with improvement expected over time as older inventory sells through.
- At June 30, cash and cash equivalents were $114.4 million; restricted cash was $31.0 million. Current assets were $608.3 million and current liabilities $168.8 million.
- Total debt and capital lease obligations were approximately $409.9 million, including $69.1 million current maturities. This included $108.1 million of Grupo Finmart third-party debt and $86.8 million of debt consolidated from securitization VIEs; such debt is non-recourse to EZCORP. The $191.8 million net carrying amount of EZCORP’s cash-convertible notes was classified as long-term.
- Nine-month investing cash flow was $(14.1) million and financing cash flow was $28.4 million. Cash increased $59.1 million to $114.4 million, including the effect of restricted-cash movements. About $21.2 million of ending cash was held by foreign subsidiaries and intended to be permanently reinvested.
Material changes versus the prior comparable period
- U.S. & Canada segment contribution fell 87% to $3.4 million for the quarter; lower merchandise and jewelry-scrapping gross profit, weaker consumer-loan revenue and the goodwill charge were key factors.
- Latin America’s quarterly segment loss narrowed to $0.8 million from $6.5 million; constant-currency revenue increased 23%, principally from Grupo Finmart lending and pawn activity. Nine-month constant-currency revenue increased 29%, while the segment still reported an $11.2 million loss.
- Cash Converters International’s performance weakened: its reported six-month result through December 2014 was a loss attributable to parent owners, versus a profit in the comparable period. EZCORP recorded a quarterly equity-method loss of $1.8 million from the affiliate.
- Goodwill declined to $331.8 million from $436.8 million at June 30, 2014, reflecting the $10.6 million impairment and currency translation, among other changes.
Outlook, risks, contingencies and unusual items
- U.S. Financial Services exit: After June 30, the board approved a restructuring plan to exit this business and streamline operations. EZCORP reported closing 480 U.S. Financial Services locations and eliminating about 1,000 related jobs, with exit activities expected to be substantially complete by December 31, 2015. Estimated exit costs and charges were $38–$44 million, of which $10.6 million was recorded in the June quarter; $9–$13 million of the estimate was expected to involve future cash expenditures.
- Further restructuring: The company also planned 54 additional store closures and approximately 300 job cuts. Estimated associated costs and charges were $37–$41 million, including $9–$11 million of potential future cash expenditures. Most costs were expected in fiscal Q4 2015, with some in fiscal Q1 2016. Estimates could differ materially from actual costs.
- Liquidity outlook: Management expected operating cash flow and cash on hand to fund contractual obligations, planned store growth, capital expenditures and working capital for the remainder of fiscal 2015. It also expected local financing to support Grupo Finmart and Mexican pawn growth. No earnings or revenue guidance was provided.
- Accounting and controls: Restatements arose from accounting errors involving the Grupo Finmart loan portfolio. Management reported material weaknesses in internal control over financial reporting and ineffective disclosure controls as of June 30, 2015; remediation was underway. The delayed filing also led to an event of default under the convertible-notes indenture. EZCORP elected to pay 0.50% additional annual interest during the permitted cure period and stated that filing the overdue reports would cure the default.
- Regulatory and legal exposure: The CFPB had asserted alleged violations in a notice-of-opportunity-to-respond process; fines, penalties or customer restitution remained possible. Securities and shareholder litigation and an SEC investigation were ongoing. The company said outcomes could not be predicted and unfavorable outcomes could materially affect results, liquidity or reputation.
- Affiliate and market risks: Cash Converters agreed to a $17.7 million settlement of a customer class action; EZCORP expected a $3.7 million impact in fiscal Q4 because of its reporting lag. Cash Converters also faced the loss of banking services from Westpac. EZCORP estimated its affiliate investment’s fair value could be about $29.4 million below carrying value at September 30, 2015 and warned a future other-than-temporary impairment could result.
- Other notable items included $3.3 million of incremental Cash Genie customer-redress expense in fiscal 2015 and an April acquisition of the remaining 41% interest in TUYO for $2.8 million cash plus a $0.3 million note. Subsequent to quarter-end, EZCORP acquired an additional 18% of Grupo Finmart for $29.6 million, increasing ownership to 94%.
Most important facts for investors to verify
- Review the amended annual and quarterly filings for the full Grupo Finmart restatement adjustments, loan-portfolio assumptions and remaining reporting risks.
- Track remediation of material weaknesses and whether subsequent filings are timely and reliable.
- Confirm actual costs, cash payments, timing and earnings impact from the U.S. Financial Services exit and broader restructuring.
- Assess liquidity after restricted cash, foreign-held cash, debt maturities, non-recourse financing and the convertible-note indenture default are considered.
- Monitor consumer-loan collections, bad-debt provisions and the carrying value and impairment risk of the Cash Converters investment.
- Follow outcomes of CFPB and other regulatory matters, securities and shareholder litigation, and the SEC investigation.