EZCORP, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended September 30, 2021. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Amounts are U.S. dollars unless otherwise stated.
Business context
EZCORP operates pawn stores in the United States and Latin America. At year-end it had 1,148 locations: 516 in the U.S., 508 in Mexico and 124 in Guatemala, El Salvador and Honduras. Its principal revenue sources are pawn service charges (PSC), merchandise sales and jewelry scrapping. PSC represented about 58% of net revenues.
Financial and operating highlights
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenues | $729.6 million | $822.8 million |
| Net revenues | $449.5 million | $449.2 million |
| Operating income (loss) | $31.2 million | $(48.4) million |
| Income (loss) before taxes | $16.1 million | $(70.1) million |
| Net income (loss) attributable to EZCORP | $8.6 million | $(68.5) million |
| Basic and diluted EPS | $0.15 | $(1.24) |
| Cash flow from operating activities | $46.4 million | $49.1 million |
- Total revenues fell 11%, while net revenues were essentially flat. The difference reflects merchandise and jewelry scrapping costs deducted in arriving at net revenues.
- Merchandise sales gross profit rose 13% to $185.6 million; gross margin improved to 42% from 33%, which the company attributed primarily to inventory management.
- PSC declined 5% to $260.2 million, reflecting lower average pawn loan balances and transaction activity amid pandemic-related changes in customer borrowing. Year-end pawn loans outstanding (PLO) increased 34% to $175.9 million.
- Jewelry scrapping gross profit declined 68% to $3.2 million. U.S. and Latin America pawn redemption rates were 86% and 80%, respectively.
- Operating expenses fell 16% to $418.3 million, largely because FY2020 included $54.7 million of impairment charges and $20.4 million of other charges. FY2021 reported no goodwill impairment; other charges were $0.2 million.
- FY2021 effective tax rate was 46%, versus 2% in FY2020; the company cites non-deductible items, foreign and state taxes, and other tax adjustments as sources of rate volatility.
Liquidity, debt and cash flow
- Year-end cash and cash equivalents were $253.7 million, plus $10.0 million of restricted cash; combined cash and restricted cash was $263.6 million, down $48.9 million during the year.
- Current assets were $610.9 million and current liabilities $155.1 million. These include pawn loans and related operating balances.
- Long-term debt had $316.3 million principal outstanding, comprising convertible notes due 2024 and 2025; the balance-sheet carrying amount, net of discounts and issuance costs, was $264.2 million. No current debt maturities were reported at year-end.
- Investing cash outflow was $84.6 million, including acquisition spending and pawn lending activity; financing cash outflow was $16.3 million, primarily reflecting repayment of debt assumed in the Mexico acquisition.
- Lease liabilities totaled $213.6 million. Contractual lease payments were $260.3 million before the deduction for imputed interest.
Changes and significant events
- Net income recovered from the prior-year loss, while net revenues were broadly unchanged. Excluding the prior-year impairment, restructuring and other identified unusual charges, management said operating costs decreased through cost optimization and store-level efficiency measures.
- In June 2021, EZCORP acquired 128 Cash Apoyo Efectivo stores in Mexico for reported consideration of approximately $23.6 million, including cash, shares and contingent consideration; it also repaid $14.9 million of acquired debt. Sellers may receive up to $4.6 million in additional performance-contingent payments.
- In May 2021, the company acquired 11 Houston-area pawn stores and opened 15 stores in Latin America during the year.
- At September 30, EZCORP owned 35.65% of Cash Converters; subsequent to year-end it bought additional shares, increasing its stake to 37.72%. In October 2021, it also invested $15 million in an entity with an interest in Simple Management Group, a Caribbean pawn operator.
- Fiscal 2021 Q4 reported revenue of $192.4 million, net revenue of $119.3 million and net income of $1.6 million. FY2020 Q4 net income was a loss of $23.3 million.
Outlook, risks and contingencies
Management provided no specific quantitative financial guidance. It said operating activity and PLO improved during the latter part of FY2021 and that the resulting lag in PSC generation could support accelerating PSC revenue in coming quarters. Management expected operating cash flow and cash on hand to fund planned FY2022 needs, including contractual obligations, capital expenditures, working capital and planned store growth; it also cautioned that pandemic effects and recovery remained uncertain.
- Key risks include continued COVID-19 disruption; changes in pawn regulation; gold price and transaction-volume movements; customer borrowing and redemption trends; currency fluctuations; competition; Latin American political and economic conditions; cybersecurity and operational disruptions; and natural disasters, especially in Texas, Florida, Mexico and Central America.
- The company disclosed an $8.0 million escrow related to a potential indemnity claim for pre-closing taxes associated with the 2016 sale of Grupo Finmart. The claim’s nature, extent and validity had not been determined.
- EZCORP reported ongoing litigation and regulatory matters but stated it did not believe resolution of any particular matter would materially adversely affect financial condition, results or liquidity.
- Convertible-note conversion could require cash settlement or dilute shareholders. The notes were not convertible as of September 30, 2021, but conversion status and balance-sheet classification are assessed each quarter.
- The publicly traded Class A shares are non-voting; Phillip E. Cohen beneficially owns all Class B voting shares and controls shareholder voting.
Important facts for investors to verify
- Whether the post-pandemic recovery in PLO and pawn activity sustains PSC growth, and how redemption rates evolve.
- Whether improved merchandise margins persist and how inventory valuation and gold-price movements affect profits.
- Performance and integration of the 128 acquired Mexico stores, including any contingent earn-out payments and goodwill risk.
- Cash generation and liquidity after acquisition, lending and investment spending; also monitor the 2024 and 2025 convertible notes and their conversion conditions.
- Resolution of the Grupo Finmart tax-indemnity claim and release or use of the related escrowed funds.
- Terms, performance and carrying-value risk of the post-year-end Cash Converters and SMG-related investments.