EZCORP, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. This is an annual filing, not a standalone fourth-quarter report. Amounts are U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
EZCORP operates pawn stores in the United States and Mexico, selling merchandise and earning pawn service charges, and operates 27 payday-loan stores in Ontario, Canada. At year-end it had 786 locations: 513 in the U.S., 246 in Mexico and 27 in Canada. On October 6, 2017, after year-end, it acquired 112 pawn stores in Guatemala, El Salvador, Honduras and Peru for $53.4 million cash, plus up to $2.25 million contingent consideration.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $748.0 | $730.5 |
| Net revenue | $435.5 | $428.2 |
| Operating income | $53.6 | $29.2 |
| Income (loss) from continuing operations, net of tax | $32.0 | $(9.0) |
| Net income (loss) attributable to EZCORP | $31.9 | $(80.7) |
| EPS from continuing operations | $0.62 | $(0.15) |
| Cash from operating activities | $51.8 | $64.4 |
| Cash and cash equivalents at year-end | $164.4 | $65.7 |
| Working capital | $508.4 | $387.2 |
Pawn service charges rose 4% to $273.1 million. Merchandise sales gross profit fell 2% to $148.3 million; its margin declined to 36% from 37%, within management’s stated 35%–38% target range. Jewelry-scrapping gross profit decreased 10% to $7.3 million, with margin down to 14% from 16%. Year-end pawn loans were $169.2 million, up 1%, and net inventory was $154.4 million, up 10%.
Operating cash flow declined 20%; investing cash flow was a $7.3 million outflow and financing cash flow was a $53.4 million inflow. About $10.6 million of year-end cash was held by foreign subsidiaries and was not available for domestic operations. Long-term debt had a $284.8 million carrying amount; outstanding convertible-note principal was $338.75 million ($195 million due 2019 and $143.75 million due 2024). The company issued the 2.875% 2024 notes, repaid and terminated its term loan, and retired $35 million principal of 2019 notes. Management said cash on hand and operating cash flow should fund FY2018 obligations, planned store growth, capital spending and working capital; refinancing may be needed for longer-term debt repayment.
Changes, outlook and material items
- FY2017 results improved markedly from FY2016, when continuing operations recorded a loss and discontinued operations included the Grupo Finmart impairment and disposal effects. FY2017 also included a $1.8 million after-tax loss from discontinued operations.
- Mexico Pawn segment contribution increased 119% to $18.7 million; same-store loan growth and expense management supported performance. U.S. Pawn contribution rose 3% to $103.5 million.
- Cash Converters International equity-method income improved by $5.2 million, and EZCORP recorded no investment impairment in FY2017 versus an $11.0 million impairment in FY2016.
- The FY2017 results included a $3.0 million gain related to restructuring Grupo Finmart notes receivable and a $5.3 million debt-extinguishment charge. The restructured notes had $61.0 million outstanding at year-end, higher interest rates and a $14.0 million deferred compensation fee, and were guaranteed by AlphaCredit.
- Hurricanes Harvey and Irma temporarily closed U.S. stores in Texas and Florida during Q4. Management estimated a $2.9 million reduction in pretax continuing income and a $5.0 million reduction in year-end pawn loans. The Mexico earthquake had an immaterial Q4 impact. Management expected the U.S. loan balance to recover following the FY2018 tax-refund season, but said the lower balance could suppress FY2018 net revenue until rebuilt.
- Management planned approximately ten additional Mexico store openings in FY2018 and expected to begin offering installment loans in Canadian stores in FY2018’s second quarter. It described the GPMX acquisition as providing a platform for Latin American growth, while noting integration and execution risks. No specific consolidated FY2018 earnings or revenue guidance is provided.
Risks, contingencies and governance
Principal risks include changes in pawn lending regulation, concentration of U.S. stores in Texas and Florida, Latin American political and regulatory conditions, foreign-exchange movements, gold prices and transaction volumes, operating metrics, competition, store crime, natural disasters, cybersecurity and technology execution, and access to capital. Goodwill was $254.8 million, about 25% of assets; annual testing found no impairment, but the conclusion depends on forecasts and valuation assumptions. The company’s ability to collect the Grupo Finmart notes depends on the performance of Grupo Finmart and guarantor AlphaCredit.
Legal matters include a proposed $6.5 million settlement of derivative litigation, subject to court approval; ongoing securities litigation in discovery; and an SEC investigation with which the company said it was cooperating. The filing states that outcomes of litigation and regulatory matters are uncertain. The company reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls. All voting stock is controlled by one beneficial owner; publicly traded Class A shares are non-voting.
Important facts for investors to verify
- Whether the $61.0 million Grupo Finmart notes and contingent deferred compensation are collected as scheduled, and the creditworthiness of AlphaCredit.
- Post-acquisition GPMX purchase accounting, integration costs, store performance and the final cash and contingent consideration paid.
- The pace of recovery in U.S. pawn loan balances after the hurricanes and resulting effect on FY2018 revenue.
- Cash generation and refinancing plans for the $195 million of 2019 notes, plus potential conversion-related cash needs or dilution from convertible securities.
- Developments in the proposed derivative settlement, securities litigation and SEC investigation.
- Effects of gold prices, currency changes and regulatory developments on margins and international operations.