EZCORP, Inc. — Form 10-Q Summary
Business and period: EZCORP provides pawn loans and sells second-hand merchandise in the United States and Latin America, with smaller Canadian financial-services operations. This fiscal first-quarter report covers the three months ended December 31, 2017; comparisons are with the quarter ended December 31, 2016. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $204.5 | $192.6 | +6% |
| Net revenue | $122.4 | $112.0 | +9% |
| Operating income | $19.7 | $14.1 | +40% |
| Income from continuing operations, net of tax | $12.4 | $8.3 | +49% |
| Net income attributable to EZCORP | $12.7 | $7.2 | +78% |
| Diluted EPS from continuing operations | $0.23 | $0.15 | Up $0.08 |
| Operating cash flow | $17.4 | $(5.3) | Improved |
Pawn service charges were $76.4 million, up 11%; merchandise sales were $113.6 million, up 2%; jewelry scrapping sales were $12.2 million, up 25%. Net revenue was total revenue less merchandise, jewelry-scrapping and other cost of revenues. Merchandise gross margin improved to 39% from 37% as presented in the segment discussion; U.S. Pawn reported 39% versus 36%. Latin America Pawn reported a 32% merchandise margin versus 31%.
At December 31, cash and cash equivalents were $113.6 million, down from $164.4 million at September 30, 2017, primarily reflecting acquisition spending and other investing outflows. Of the quarter-end cash, $11.9 million was intended to remain invested in foreign operations. Current assets were $551.1 million and current liabilities $70.9 million. Long-term debt, net, was $294.8 million; the notes’ gross principal totaled $338.8 million, comprising $195.0 million due in 2019 and $143.75 million due in 2024. The filing says cash from operations and cash on hand are expected to fund fiscal 2018 obligations, growth, capital expenditures and working capital; repayment of longer-term debt may require refinancing or new securities or credit facilities.
Changes and operating developments
- EZCORP acquired GPMX, which operates 112 stores in Guatemala, El Salvador, Honduras and Peru, and 21 Bazareño pawn stores in Mexico. It also opened four stores. The reported store count rose to 923 from 786 at September 30, 2017. Acquired operations were included only from their respective acquisition dates, so results are not fully comparable; pro forma results were not presented.
- Latin America Pawn revenue rose 79% (73% on a constant-currency basis) and segment contribution rose 114% (106% constant currency), substantially reflecting the acquired stores and same-store growth. U.S. Pawn net revenue was approximately flat; its pawn service charges declined 2%, while merchandise gross profit increased 2%.
- Other International segment contribution fell 70%, primarily due to increased spending on a digital IT platform. U.S. Pawn results were affected by hurricanes in Texas and Florida in the prior fiscal quarter.
- Investing cash outflow was $66.7 million, including $62.2 million of net cash paid for acquisitions. Net cash decreased $50.8 million during the quarter.
Outlook, risks and unusual items
- Management expects full-year U.S. merchandise sales gross margin within its 35%–38% target range. It planned to open eight additional Latin America stores in fiscal Q2 and cited further growth opportunities through acquisitions and new stores.
- The Tax Cuts and Jobs Act prompted a provisional $2.8 million charge to revalue deferred tax balances. The company had not completed its tax accounting; it preliminarily expected foreign tax credits to cover any transition tax and anticipated another tax charge in the quarter ending September 30, 2018.
- The fair value of the Cash Converters International investment was $2.8 million below carrying value. Management did not consider the decline other-than-temporary but warned it could record an impairment if the decline persists or circumstances change.
- A proposed settlement in shareholder derivative litigation would provide the company $6.5 million, subject to court approval. A separate securities class action remained in discovery, and the company continued cooperating with an SEC investigation. The filing says outcomes of litigation and regulatory actions cannot be determined; unfavorable outcomes could materially affect financial condition, results or liquidity.
- Management identified foreign exchange, interest rates and gold prices as key market risks, with no material change in exposure since September 30, 2017. It also noted seasonal variation: pawn service charges generally peak in fiscal Q4, while merchandise sales tend to be stronger in fiscal Q1 and Q2.
- Management reported disclosure controls were effective as of December 31, 2017, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of Latin America’s growth and future performance reflects acquired stores versus organic same-store trends, and how integration is progressing.
- Cash generation, pawn-loan growth and liquidity after acquisition spending, including the company’s ability to address the $195 million 2019 note maturity and any refinancing needs.
- Whether the Cash Converters investment’s fair-value shortfall persists and whether an impairment is recorded.
- Final tax effects of the Tax Cuts and Jobs Act, including the provisional deferred-tax remeasurement and any later charge.
- Resolution and financial consequences, if any, of the derivative settlement, securities litigation and SEC investigation.
- Whether merchandise margins, store-opening plans and the stated fiscal 2018 funding outlook are achieved; results are seasonal and the quarter is not necessarily indicative of the full fiscal year.