EZCORP, Inc. — Form 10-Q summary
Reporting period: Third quarter and nine months ended June 30, 2017. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise. EZCORP operates pawn businesses in the United States and Mexico, a small Canadian financial-services business, and holds an investment in Cash Converters International.
Financial results and liquidity
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Nine months ended June 30, 2017 | Nine months ended June 30, 2016 |
|---|---|---|---|---|
| Total revenue | $183.6 | $170.2 | $565.9 | $545.9 |
| Operating income | $11.4 | $6.5 | $41.5 | $26.9 |
| Income from continuing operations, net of tax | $5.5 | $2.8 | $22.0 | $8.5 |
| Net income (loss) attributable to EZCORP | $5.3 | $(5.7) | $20.4 | $(84.0) |
| Continuing-operations diluted EPS | $0.10 | $0.05 | $0.41 | $0.16 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $30.0 | $57.9 |
- Quarter revenue rose about 8%; nine-month revenue rose about 4%. Pawn service charges were $65.9 million for the quarter and $202.0 million year to date. Merchandise sales were $97.9 million and $319.7 million, respectively.
- Quarter operating income increased to $11.4 million from $6.5 million. Nine-month operating income rose to $41.5 million from $26.9 million. The prior-year net loss principally reflected discontinued operations, including Grupo Finmart; nine-month discontinued-operations losses were $1.9 million in 2017 versus $99.1 million in 2016.
- For the quarter, U.S. Pawn segment contribution increased 18% to $23.8 million. Mexico Pawn contribution increased 100% to $5.4 million as reported (104% on a constant-currency basis). Other International contribution fell 51% to $0.8 million, primarily reflecting lower Cash Converters International earnings.
- Quarter merchandise gross margin was 37% in U.S. Pawn and 33% in Mexico Pawn. Nine-month U.S. merchandise margin declined to 37% from 38%; Mexico’s reported margin was 32% versus 33%.
- At June 30, cash and cash equivalents were $113.7 million, current assets $501.6 million, and current liabilities $75.9 million. The company said $11.9 million of cash was held in foreign operations and intended to be permanently reinvested there.
- June 30 long-term debt, net, was $260.4 million, including $230 million principal of 2.125% cash convertible notes due 2019 and a $50 million term loan. Nine-month operating cash flow declined 48% to $30.0 million; cash nevertheless increased $48.0 million, with investing activities providing $18.0 million and financing activities using $0.8 million.
Material changes and management commentary
- Pawn loan balances and pawn service charges grew. U.S. Pawn average monthly ending loan balance per store increased 4% year over year in the quarter; Mexico’s increased 10% as reported, or 13% constant currency. Management attributed growth to its focus on customer access to cash and market leadership.
- Management cited expense discipline and operating leverage. Nine-month administrative expense declined 18% to $41.3 million, mainly due to lower professional fees and corporate labor costs. Management said it remained on track to reduce administrative expenses to no more than $50 million in fiscal 2018.
- Mexico’s reported growth was affected by peso weakness: nine-month net revenue grew 3% as reported versus 15% constant currency. Management noted further peso weakening could adversely affect reported results. Mexico Pawn plans four additional store openings in the remainder of fiscal 2017; the company also cited potential U.S. and Latin American acquisitions.
- Cash Converters International earnings fell $1.9 million for the nine-month period. EZCORP’s approximately 32% investment had a June 30 fair value $4.4 million below its carrying value. The company did not consider the decline other-than-temporary but warned that an impairment may be recorded if the shortfall persists or its intent or ability to hold changes.
Outlook, subsequent events, and risks
- In July 2017, EZCORP issued $143.75 million of 2.875% convertible senior notes due 2024. It used proceeds to repay and terminate the $50 million term loan facility and its delayed-draw commitment, repurchase and retire $35 million principal of its 2019 notes, and add to cash reserves. Approximately $54 million of net proceeds remained for general corporate purposes and potential acquisitions. The company expected approximately $5 million of one-time charges in fiscal Q4 related to these transactions.
- Management said operating cash flow, cash on hand, and available credit were expected to cover contractual obligations, planned store growth, capital expenditures, and working capital for the rest of fiscal 2017. It also stated that cash, operating cash flow, and expected collections on Grupo Finmart notes receivable—absent significant acquisitions or other investments—should be sufficient to repay longer-term debt, including the 2019 notes.
- At June 30, Grupo Finmart-related notes receivable had a gross outstanding balance of $67.1 million; $23.3 million of principal had been collected during the nine months. The company anticipated another $24.4 million of principal collections during the remainder of fiscal 2017, with the balance due through fiscal 2019. It received $6.2 million, including interest, on certain notes in July.
- Risks include pawn-loan and inventory valuation, gold prices, foreign exchange movements, regulation, seasonal results, and the collectability and currency exposure of Grupo Finmart notes. The filing also describes shareholder derivative litigation, a securities class action in discovery, and an ongoing SEC investigation. The company said it could not predict litigation outcomes; unfavorable outcomes could materially affect financial condition, results, or liquidity.
- A related-party asset purchase agreement provides for an estimated $735,000 cash acquisition of assets used by two Central Texas pawn stores. The CFO owns a 28% interest in the seller; the Audit Committee approved the transaction, which was expected to close in fiscal Q4 subject to conditions.
- Management reported effective disclosure controls as of June 30, 2017, with no quarter changes to internal control over financial reporting that materially affected, or were reasonably likely to materially affect, those controls.
Important facts for investors to verify
- Whether the July refinancing, remaining 2019 notes, and roughly $54 million in residual proceeds improve liquidity without creating undue dilution or refinancing risk.
- Actual collections on Grupo Finmart notes receivable, including the impact of Mexican peso movements and any remaining guarantee exposure.
- Whether the Cash Converters International investment recovers or requires an impairment charge.
- Progress on fiscal 2018 administrative-expense targets, Mexico store openings, and any acquisitions or related-party transaction closing.
- Developments in the securities litigation, derivative litigation, and SEC investigation, and any resulting financial or operational consequences.