EZCORP, Inc. — Fiscal 2015 Second Quarter Form 10-Q
Reporting period: Three and six months ended March 31, 2015. Amounts below are in U.S. dollars; financial statements are unaudited. EZCORP operates pawn, consumer lending and retail businesses in the U.S., Mexico and Canada, and holds an approximately 32% investment in Cash Converters International.
Financial performance and position
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total revenue | $241.4 million vs. $245.1 million in 2014 | $494.2 million vs. $498.9 million in 2014 |
| Net revenue | $142.4 million vs. $149.9 million | $286.0 million vs. $301.3 million |
| Operating income | $20.8 million vs. $19.9 million | $43.1 million vs. $47.8 million |
| Income from continuing operations, net of tax | $3.2 million vs. $5.2 million | $11.8 million vs. $24.9 million |
| Net income attributable to EZCORP | $1.3 million vs. $6.1 million | $13.0 million vs. $24.9 million |
| Operating cash flow | Not separately presented | $38.0 million vs. $43.6 million |
- For the quarter, jewelry scrapping revenue fell 30%; merchandise revenue rose 4%, while pawn service charges were roughly flat. Consumer loan bad debt expense increased 11%.
- For the six-month period, net income attributable to EZCORP fell 48%. Management cited weaker merchandise and jewelry-scrapping gross profit, increased interest expense, a loss from Cash Converters International and foreign-currency-related expense. Lower administrative expense partly offset these pressures.
- At March 31, cash and cash equivalents were $138.2 million, restricted cash was $50.8 million, current assets were $632.7 million and current liabilities were $178.0 million. Approximately $16.6 million of cash was held by foreign subsidiaries and intended to be permanently reinvested.
- Debt and capital lease obligations were approximately $428.0 million, including $210.9 million of Grupo Finmart debt described as non-recourse to EZCORP. Current maturities were $71.5 million; long-term debt, less current maturities, was $356.4 million. The company reported $230.0 million principal amount of 2.125% cash convertible notes due 2019; effective interest was approximately 7% for the six-month period.
Material changes and management commentary
- The filing was delayed pending review of accounting issues in the Grupo Finmart loan portfolio. EZCORP restated fiscal 2012–2014 statements and first-quarter fiscal 2015 statements; comparative periods presented here reflect restated figures. The supplied filing text does not provide a clear total value for the restatement adjustments.
- U.S. & Canada segment contribution declined 25% for the quarter and 30% for the six-month period. Management attributed weakness in part to lower jewelry-scrapping proceeds and consumer lending revenue, including effects of Texas ordinance changes, and lower retail margins as it worked to reduce aged inventory. Management expected further retail margin pressure during the rest of fiscal 2015.
- Latin America revenue increased, reflecting demand for Grupo Finmart loans, but the segment reported losses of $3.1 million for the quarter and $9.2 million for six months. Bad debt and interest costs increased.
- Management stated that operating cash flow and cash on hand should be adequate for contractual obligations, planned store growth, capital expenditures and working capital for the remainder of the fiscal year. It expected to continue seeking local financing for Grupo Finmart lending and Mexican pawn growth. No earnings guidance was provided.
- After quarter-end, EZCORP discontinued U.S. consumer lending and approved an exit of its U.S. Financial Services business, closing 480 locations and eliminating approximately 1,000 associated jobs. It estimated $38–$44 million of exit costs and charges. A separate operating-model restructuring, including 54 additional location closures and approximately 300 job reductions, was estimated at $37–$41 million. These are subsequent-event estimates, not March 31 liabilities or results.
- Subsequent events also included an indenture default resulting from the late 10-Q filing. EZCORP elected to pay additional interest of 0.50% annually on its cash convertible notes during the applicable cure period. It also disclosed a potential impairment of its Cash Converters investment following a post-period fair-value decline, a $17.7 million settlement by Cash Converters of a customer class action, and notice that Westpac would cease providing it banking and financial services.
Risks, contingencies and controls
- Management concluded disclosure controls were ineffective as of March 31, 2015, and identified material weaknesses in internal control over financial reporting connected to complex accounting and monitoring Grupo Finmart loan performance. Remediation was underway. Management said additional procedures supported fair presentation of the included statements.
- The company disclosed shareholder derivative and securities litigation, an SEC investigation, and CFPB and U.K. FCA matters. It stated that outcomes could not be predicted; it had not accrued liabilities for specified litigation because losses were not considered probable or reasonably estimable at the time. The FCA redress scheme included an incremental $3.3 million charge in the quarter.
- Letters of credit supporting loans made by unaffiliated lenders created maximum potential exposure of $19.8 million if all brokered loans defaulted and none were collected; $2.7 million of expected losses was accrued.
- The filing discussed proposed CFPB rules that management said could adversely affect the profitability or viability of the U.S. Financial Services business as then operated. The business was subsequently discontinued.
Investor verification priorities
- Review the restatement disclosures and confirm the final accounting adjustments, particularly for Grupo Finmart loan recognition, collectibility and reserves.
- Track remediation of material weaknesses, audit and filing timeliness, and any further restatements or control findings.
- Assess Grupo Finmart portfolio performance, bad debt, funding structure and the extent to which its debt is genuinely non-recourse to EZCORP.
- Verify the cash costs, impairment charges, execution progress and expected savings from the U.S. lending exit and broader restructuring.
- Monitor the cash-convertible-note indenture default and additional-interest period, as well as litigation, regulatory matters and potential impairment of the Cash Converters investment.