EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2018; comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context and reporting period
EZCORP provides pawn loans and sells second-hand merchandise in the United States and Latin America, with a smaller financial-services business in Canada. At March 31, 2018, it operated 924 stores, up from 784 a year earlier, largely reflecting Latin American acquisitions.
Financial performance and liquidity
- Second-quarter revenue: $202.7 million, up 6.9%. Net revenue (revenue less merchandise, jewelry-scrapping and other costs of revenue) was $120.6 million, up 9.7%.
- Second-quarter earnings: Operating income was $18.5 million versus $16.1 million; net income attributable to EZCORP was $11.8 million versus $8.0 million. Diluted EPS from continuing operations was $0.21 versus $0.15.
- Six-month results: Revenue was $407.2 million, up 6.5%; net revenue was $243.0 million, up 9.5%. Operating income was $38.3 million versus $30.1 million, and net income attributable to EZCORP was $24.6 million versus $15.2 million. Diluted continuing-operations EPS was $0.45 versus $0.31.
- Margins and operating costs: U.S. Pawn merchandise gross margin improved to 38% in both the quarter and six-month period, from 37%. Latin America Pawn’s quarterly merchandise margin was 32%, unchanged; six-month margin was 32%, up from 31%. Consolidated operating expenses were $102.1 million in the quarter, up from $93.8 million.
- Cash flow: Six-month operating cash flow was $45.5 million, compared with $20.7 million. Investing activities used $49.5 million, including $63.8 million for acquisitions and $19.3 million of property, equipment and capitalized labor additions. Cash decreased $4.5 million during the period to $159.9 million; $18.1 million was intended to remain invested in foreign operations and was unavailable for domestic operations.
- Balance sheet and debt: Total assets were $1.075 billion and equity was $688.1 million. Debt carrying value was $301.6 million: $103.3 million classified current and $198.3 million long term. The current classification reflects holders’ temporary conversion right on the 2024 notes, not a stated change in maturity. Contractual obligations were reported at $631.0 million, with no material change from September 30, 2017 other than that reclassification.
Material changes versus prior periods
- Latin America Pawn grew sharply, supported by the acquisition of GPMX’s 112 stores in Guatemala, El Salvador, Honduras and Peru and 21 Bazareño stores in Mexico. The two acquisitions accounted for $66.6 million of allocated consideration; GPMX contributed $11.0 million of quarterly revenue and $1.8 million of quarterly net income since acquisition.
- Six-month Latin America Pawn net revenue increased 79% on a reported basis (71% constant currency), and segment contribution increased 116% (107% constant currency). Growth reflects acquisitions and same-store gains.
- U.S. Pawn net revenue increased 1% in the quarter and six-month period. Management cited stronger merchandise margins, while pawn service charges were affected by a slower recovery in loan balances at hurricane-affected locations.
- Other International segment contribution fell 70% in both the quarter and six-month comparison, due mainly to lower equity income from Cash Converters International; six-month operating expenses also rose with investment in a digital platform.
- Interest income rose as the company accrued interest and deferred compensation on notes related to the 2016 sale of Grupo Finmart. The company reported timely monthly principal and interest payments after the notes’ 2017 restructuring.
Outlook, commentary, risks and unusual items
- Management expects fiscal-year U.S. Pawn merchandise gross margin within a 35%–38% target range, noting it may accept somewhat lower margins to sell through more inventory. It planned five to seven additional Latin America de novo stores in the second half of fiscal 2018.
- Management said operating cash flow and cash on hand should fund fiscal 2018 contractual obligations, planned store growth, capital expenditures and working capital. It noted longer-term debt repayment may require refinancing. Management considered conversion of the 2024 notes during the third fiscal quarter unlikely, but stated that settlement could require cash, shares or both.
- The 2024 notes, with $143.8 million principal, became convertible at holders’ option during April–June 2018 after the share-price condition was met. They were classified current at March 31; convertibility is reassessed quarterly. The 2019 notes have $195.0 million principal and mature in June 2019.
- The Tax Cuts and Jobs Act produced a $2.8 million deferred-tax remeasurement charge in the first fiscal quarter. The company anticipated another charge in the quarter ending September 30, 2018; the final tax-law impact remained under evaluation.
- A Delaware derivative-litigation settlement was approved April 3, 2018, after quarter-end. The company expected approximately $5.1 million net proceeds after attorneys’ fees and administrative costs; it had not recorded the gain pending final resolution. Separately, securities litigation remained in discovery, with class certification pending, and an SEC investigation was ongoing. The company said outcomes were uncertain and it could not determine the ultimate outcome of current proceedings.
- Key exposures include foreign exchange, gold prices, consumer lending regulation and the fair value/collectability of notes receivable and the Cash Converters investment. Management warned that a prolonged peso weakening could adversely affect reported results and that further investment impairment could be recorded if value remains below carrying value.
- Management concluded disclosure controls were effective as of March 31, 2018 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether holders converted the 2024 notes during the third fiscal quarter, and the resulting cash, dilution and debt-classification effects.
- Progress on refinancing or repayment of the $195.0 million 2019 notes due in June 2019.
- Whether acquired Latin American stores sustain the reported revenue and contribution growth, including currency-adjusted performance and planned store openings.
- Collection performance and valuation assumptions for Grupo Finmart-related notes, and any impairment of the Cash Converters investment.
- Final tax-law adjustments and the amount and timing of proceeds from the approved derivative-litigation settlement; status and potential exposure from the securities litigation and SEC investigation.