EZCORP, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2017. Dollar amounts below are in millions unless otherwise noted. EZCORP operates pawn businesses in the U.S. and Mexico, with smaller international activities.
Financial performance
| Metric | Three months ended March 31, 2017 | Prior-year quarter | Six months ended March 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Total revenue | $189.6 | $188.2 | $382.3 | $375.8 |
| Operating income | $16.1 | $13.0 | $30.1 | $20.4 |
| Continuing operations income, net of tax | $8.2 | $2.3 | $16.5 | $5.7 |
| Net income (loss) attributable to EZCORP | $8.0 | $(70.8) | $15.2 | $(78.3) |
| Operating cash flow | Not separately presented for the quarter | $18.0 | $55.7 |
- Quarterly revenue increased about 1%; operating income rose about 23%. Operating margin was approximately 8.5%, compared with 6.9% a year earlier.
- Six-month revenue increased about 2%; operating income rose about 48%. Six-month operating margin was approximately 7.9%, compared with 5.4%.
- Quarterly diluted EPS from continuing operations was $0.15, versus $0.05; six-month diluted EPS was $0.31, versus $0.11. Total reported earnings comparisons were heavily affected by discontinued operations.
- Quarterly pawn service charges increased 5% in U.S. Pawn; merchandise sales gross profit fell 4%, and its margin declined 2 percentage points to 37%. Mexico Pawn revenue grew 16% on a constant-currency basis, while reported revenue rose 3%.
- Operating cash flow fell 68% year over year for the six months, primarily reflecting the prior-year $34.2 million tax refund and $15.6 million of fiscal 2016 incentive compensation paid in the current period.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $120.1 million, including $10.9 million management intended to keep invested in foreign operations. Current assets were $488.4 million and current liabilities $73.3 million.
- Total assets were $962.0 million and total liabilities $348.5 million. Long-term debt, net, was $266.7 million. Principal outstanding was $230 million of convertible notes and $50 million under the term loan facility.
- The $230 million 2.125% convertible notes mature June 15, 2019. The term loan facility has $50 million drawn; its stated final maturity is September 2022, but may accelerate to May 15, 2019 if the notes are not sufficiently repaid or an approved refinancing plan is absent. EZCORP reported compliance with facility covenants at quarter end.
- Cash rose $54.4 million over the six months. Investing activities provided $36.5 million, including $15.1 million of principal collections on notes receivable. Financing activities used $0.8 million.
Management outlook, risks and significant items
- Management expected cash from operations, cash on hand and available credit facilities to fund fiscal 2017 obligations, planned store growth, capital spending and working capital. Management said repayment of longer-term debt, including the convertible notes, would likely require refinancing.
- Management planned to open eight additional Mexico stores during the remainder of fiscal 2017. The company had 784 stores at March 31, 2017.
- EZCORP held approximately 32% of Cash Converters International. Its fair value was $1.2 million below carrying value at March 31 and had declined further by the filing date; management warned a future impairment charge was possible.
- Mexico operations incurred approximately $0.5 million of losses, net of insurance recoveries, from looting of 12 stores, plus increased security costs. Management cited ongoing foreign-exchange exposure, including a prolonged weakening of the Mexican peso. Gold prices, interest rates and foreign exchange are principal market risks.
- Notes retained after the Grupo Finmart sale had a gross balance of $75.1 million. EZCORP collected $15.1 million principal in the six-month period and anticipated another $30.8 million during the remainder of fiscal 2017, with the balance due through fiscal 2019; collections and value are exposed to foreign-exchange and counterparty risk.
- Legal matters included a securities class action settlement for $5.9 million, covered by D&O insurance and approved by the court on April 25, 2017; a separate securities case remained pending; shareholder derivative litigation was in discovery; and an SEC investigation continued. The filing says outcomes of ongoing matters cannot be predicted and an unfavorable result could materially affect financial condition, results or liquidity.
- The prior-year comparison included substantial losses from discontinued Grupo Finmart operations, including goodwill impairment. EZCORP said discontinued operations had been substantially eliminated. No specific full-year earnings guidance was provided.
Key facts for investors to verify
- Progress and terms of refinancing the 2019 convertible notes and the related term-loan maturity condition.
- Timing and collectability of the Grupo Finmart notes, including foreign-exchange and counterparty exposure.
- Whether the Cash Converters International investment requires further impairment.
- Whether U.S. merchandise margins and pawn-loan growth remain sustainable, and whether Mexico’s constant-currency growth offsets peso weakness.
- Developments in the pending securities litigation, derivative case and SEC investigation, as well as any further store-security losses.