EZCORP, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. Although the request identifies “2018 Q4,” this is an annual filing; quarterly figures below are noted separately. Amounts are in U.S. dollars unless indicated.
Business context
EZCORP operates pawn stores in the United States and Latin America, plus 27 CASHMAX financial-services stores in Canada. At year-end it had 988 locations, including 508 U.S. pawn stores and 453 Latin American pawn stores. It also owned 34.75% of Australia-based Cash Converters International.
Fiscal 2018 expansion was driven by 196 acquired Latin American stores and 12 new stores. The largest transaction was the 112-store GPMX acquisition in Guatemala, El Salvador, Honduras and Peru.
Financial results and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenues | $813.5 million | $748.0 million | +8.8% |
| Net revenues | $482.9 million | $435.5 million | +10.9% |
| Operating income | $68.7 million | $53.6 million | +28.1% |
| Income from continuing operations, net of tax | $38.9 million | $32.0 million | +21.5% |
| Net income attributable to EZCORP | $39.1 million | $31.9 million | +22.6% |
| Diluted EPS from continuing operations | $0.69 | $0.62 | +$0.07 |
| Cash flow from operating activities | $88.7 million | $58.0 million | +53% |
- Pawn service charges rose 12% to $305.9 million, supported by acquisitions and loan-balance growth. Merchandise sales gross profit increased 9% to $161.8 million; merchandise gross margin improved to 37% from 36%.
- Operating income was approximately 14.2% of net revenues. Merchandise gross margin was 37%; jewelry-scrapping gross margin was 14%.
- U.S. Pawn segment contribution was essentially flat at $103.1 million. Latin America Pawn contribution increased 84% to $34.3 million, while net revenues rose 74%, primarily reflecting acquired stores.
- Cash and cash equivalents were $286.0 million, up from $164.4 million; $17.0 million was held by foreign subsidiaries. Current assets were $757.1 million and current liabilities $259.8 million. Reported working capital was $497.3 million and included $190.2 million of current debt maturities.
- Debt had $515.1 million of gross principal and $416.9 million of carrying value after discounts and issuance costs. The $195 million 2.125% convertible notes mature June 15, 2019; additional convertible notes include $143.75 million due 2024 and $172.5 million due 2025.
- Investing cash outflow was $134.2 million, including $93.2 million net acquisition spending, $40.5 million capital expenditures and $14.0 million invested in Cash Converters. Financing cash inflow was $167.6 million, substantially reflecting the 2025 note issuance.
Material changes and unusual items
- Latin America store count increased sharply following acquisitions; acquired businesses contributed $54.0 million of FY2018 revenue and $9.3 million of net income, as reported in the filing.
- EZCORP recorded an $11.7 million pre-tax impairment of its Cash Converters investment in Q4 (approximately $9.2 million after tax). The Other International segment reported a $10.0 million loss for the year, principally due to this impairment.
- A Q3 derivative-litigation settlement generated $5.2 million of other income for EZCORP after payment of attorneys’ fees.
- FY2018 income tax expense was $18.1 million, versus $11.2 million. The filing identifies tax-law-related charges, including $2.1 million from deferred-tax remeasurement and approximately $2.6 million for a foreign-tax-credit valuation allowance, alongside benefits from the expiration of certain tax statutes.
- In Q4, income from continuing operations after tax was $0.45 million and net income attributable to EZCORP was a loss of $0.14 million, compared with $10.1 million and $11.4 million, respectively, in Q4 FY2017. The Cash Converters impairment was a major unusual Q4 item.
Outlook, risks and contingencies
- Management expected cash on hand and operating cash flow to fund contractual obligations, planned de novo openings, capital expenditures and working capital through FY2019, as well as a limited amount of acquisitions. Repayment of the $195 million June 2019 maturity could require refinancing depending on cash generation and acquisition activity.
- Management described continued Latin American acquisition and de novo growth opportunities. CASHMAX was adding installment loans with six-to-18-month terms and an average stated yield of 47% per annum; a third-party facility of up to CAD $25 million was arranged after year-end to finance originations through November 2019.
- Cash Converters’ share price declined further after year-end. Its announced settlement of Queensland class-action litigation could result in an estimated $3.0 million charge to EZCORP’s share of affiliate earnings in Q1 FY2019. EZCORP said it would continue monitoring for additional impairment.
- A jewelry refiner entered Chapter 11 proceedings after year-end. EZCORP disclosed potential exposure of up to $3.4 million at September 30, 2018, with no reserve recorded because the loss, if any, could not then be estimated.
- The company reported ongoing securities litigation and an SEC investigation and said it could not predict their outcomes. Other major risks include regulation, foreign exchange, gold prices, Latin American political and security conditions, competition, cyber and data-security events, and collection of $37.4 million in Grupo Finmart notes receivable. The filing said scheduled note payments had been received through its report date.
- EZCORP’s publicly traded Class A shares are non-voting; one shareholder controls all voting shares. The company also disclosed limited authorized, unreserved Class A shares and a Nasdaq cure period to restore the audit committee to at least three independent members.
Most important facts to verify
- How EZCORP funded or refinanced the $195 million notes due June 2019, and the resulting cost and terms.
- Whether Latin American acquisitions sustain same-store pawn-loan growth and contribution after integration costs and currency effects.
- Cash Converters’ post-year-end valuation, class-action settlement impact and any further impairment.
- Recovery and collectability of the Grupo Finmart notes, and any eventual loss related to the jewelry refiner bankruptcy exposure.
- Developments in the securities litigation and SEC investigation, and restoration of audit committee composition.