EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014, compared with the corresponding 2013 periods. EZCORP operates pawn, buy/sell and consumer-lending businesses in the U.S., Mexico, Canada and U.K.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $241.4 million, up 3% | $770.4 million, down 1% |
| Operating income | $20.0 million, down 20% | $83.1 million, down 34% |
| Continuing income attributable to EZCORP | $11.3 million; $0.21 per diluted share, down 28% | $40.4 million; $0.74 per diluted share, down 52% |
| Net income attributable to EZCORP | $11.5 million, versus a $5.9 million loss | $42.1 million, down 28% |
| Cash from operating activities | Not separately presented for the quarter | $60.8 million, versus $99.4 million |
Quarterly operating margin was approximately 8.3%, compared with 10.7% a year earlier; continuing income margin was approximately 5.0%, versus 7.1%. Nine-month operating margin was approximately 10.8%, versus 16.3%; continuing income margin was approximately 5.2%, versus 11.2%. The filing does not provide a single consolidated gross-margin figure.
At June 30, cash was $50.0 million, restricted cash totaled $35.7 million, current assets were $646.2 million and current liabilities were $128.7 million. Reported long-term debt obligations, including current maturities and capital leases, were approximately $382.2 million, compared with $233.0 million a year earlier. The company reported $151.5 million of Grupo Finmart third-party debt as non-recourse to EZCORP. The debt increase reflects, among other items, issuance of convertible notes.
Material changes and drivers
- Quarterly revenue growth excluding jewelry scrapping was 6%; consumer-loan sales and other revenue rose to $10.9 million from $2.7 million, chiefly reflecting Grupo Finmart portfolio transactions. Consumer-loan bad-debt expense increased 38% to $17.2 million.
- For the nine-month period, revenue excluding jewelry scrapping grew 5%, but lower scrap revenue, higher loan losses, operating costs and corporate expenses weighed on results. Jewelry scrapping revenue fell 35% for the period, reflecting weaker gold proceeds and a strategy shift toward retailing jewelry.
- U.S. & Canada quarterly segment contribution declined to $25.6 million from $30.3 million; Latin America contribution rose to $8.6 million from $5.7 million; Other International contribution fell to $0.9 million from $5.5 million. For nine months, segment contribution was $110.5 million, $22.9 million and a loss of $8.0 million, respectively.
- Nine-month operating cash flow declined 39%, attributed to lower net income and working-capital changes, including higher prepaid and other assets and lower accrued payables. Investing cash outflow was $31.2 million, versus $108.9 million, including proceeds from store and loan-portfolio sales. Ending cash increased to $50.0 million.
Outlook, risks and unusual items
- Management said operating cash flow and cash on hand should be adequate for remaining-year contractual obligations, planned store growth, capital expenditures and working capital. It expects continued Mexican consumer-loan growth and anticipates using local financing and structured portfolio transactions. No numeric earnings guidance was disclosed.
- Management expects Houston and other Texas municipal loan restrictions to negatively affect financial-services operations. U.K. FCA rules effective July 1, 2014, and proposed fee and interest limits expected in 2015, may adversely affect Cash Genie. The company also cited potential regulatory risk from the CFPB and other jurisdictions.
- EZCORP issued $200 million of 2.125% cash convertible senior notes due 2019 in June; the additional $30 million was settled July 2, 2014. It used net proceeds to repay and terminate its $200 million revolving credit facility. The notes are cash-convertible subject to conditions, with an initial conversion price of about $16.07; associated hedges and warrants affect potential cash exposure and dilution.
- Unusual nine-month items included an $8.0 million executive-chairman retirement benefit, a $7.9 million pre-tax impairment that reduced the Albemarle & Bond investment to zero, and a $6.0 million gain on asset disposals, principally seven pawn stores. Grupo Finmart portfolio transactions generated reported gains, including $9.9 million in the quarter and $19.2 million for the nine months from structured sales.
- The company had closed 107 legacy stores under a prior restructuring plan; it recorded $3.9 million of pre-tax termination-related gains in the nine months ended June 30, 2014. It also disclosed a July 2014 shareholder derivative suit concerning advisory agreements with Madison Park; no liability was recorded because loss was not considered probable or estimable.
- Loan-loss estimates, gold prices, currency movements, regulation, online-lending performance and possible goodwill impairment are material risks. Goodwill was $436.8 million, approximately 29% of total assets. Management reported disclosure controls were effective; it implemented a new financial-consolidation system during the quarter.
Important facts for investors to verify
- Whether loan-portfolio sale gains and other asset-sale proceeds are repeatable, and how underlying lending profitability performs without them.
- Trends in consumer-loan delinquencies, charge-offs and reserves; nine-month consumer-loan bad-debt expense rose 34% to $46.1 million.
- The effect of Texas and U.K. regulatory changes, the CFPB investigation and FCA-supervised review, including any customer redress or enforcement costs.
- Convertible-note terms, the July 2 additional issuance, hedge coverage and potential dilution from approximately 14.3 million warrants.
- Cash availability and debt obligations, including restricted securitization cash, non-recourse Grupo Finmart debt and the $29.4 million maximum exposure under letters of credit.
- Performance of Cash Genie and the Cash Converters investment, and the potential for further impairment of goodwill or other assets.