EZCORP INC annual report, FY2014

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EZCORP, Inc. — FY2014 Form 10-K

Reporting period: Fiscal year ended September 30, 2014. The filing also reports fourth-quarter results for July–September 2014. EZCORP operates pawn, resale and consumer-finance businesses in the U.S., Mexico and Canada, with an equity-method investment in Cash Converters International.

Business context and financial performance

  • At year-end, the company operated 1,358 locations and employed approximately 7,300 people. Its segments are U.S. & Canada, Latin America and Other International.
  • FY revenue: $988.5 million, up 1% from $980.1 million. Net revenues were $615.1 million, down 2%; operating income was $96.6 million, down from $150.1 million.
  • FY earnings: Income from continuing operations was $51.9 million, versus $72.9 million. Net loss attributable to EZCORP was $45.7 million, compared with net income of $34.1 million; diluted loss per share was $0.84, versus diluted earnings of $0.63.
  • Fourth quarter: Revenue was $242.2 million and net revenues were $142.8 million. Continuing-operations loss was $0.7 million; discontinued-operations loss was $86.6 million. Net loss attributable to EZCORP was $87.8 million, or $1.64 per diluted share.
  • Revenue mix and operating indicators: Merchandise sales were $387.3 million; jewelry scrapping sales $96.2 million; pawn service charges $248.4 million; consumer-loan fees and interest $219.5 million; and consumer-loan sales and other revenue $37.0 million. Consumer-loan bad debt rose 31% to $53.2 million. U.S. & Canada consumer-loan bad debt equaled 28% of consumer-loan fees, up from 24%.
  • Margins: Net revenues were 62.2% of revenue, versus 63.7% in FY2013; operating income was 9.8% of revenue, versus 15.3%. Retail sales gross margin fell to 36% from 41%.
  • Cash flow: Operating cash flow was $89.2 million, down from $126.5 million. Investing cash flow used $34.8 million and financing cash flow used $33.9 million. Ending cash was $56.3 million, up from $36.3 million.
  • Liquidity and debt: Working capital was $551.4 million; current assets were $676.4 million and current liabilities $125.0 million. Total debt and capital-lease obligations were $367.5 million, including $223.1 million recourse to EZCORP and $144.4 million non-recourse debt at Grupo Finmart. Restricted cash totaled $62.4 million current plus $4.3 million non-current; some cash is restricted to the Mexican securitization trust. Approximately $14.7 million of cash was held abroad and intended to remain permanently reinvested.

Material changes versus FY2013

  • Total revenue increased modestly, but same-store revenue declined 2%. Lower gold prices and volumes reduced jewelry-scrapping revenue 27% to $96.2 million; U.S. & Canada segment contribution fell 21% to $137.4 million.
  • Latin America revenue increased 24% to $185.5 million, principally reflecting Grupo Finmart loan growth and $33.0 million of gains from structured loan-portfolio sales. Segment contribution nevertheless declined to $25.4 million as expenses and bad debt increased.
  • Operating expenses rose 9% to $518.5 million, including $6.7 million of restructuring charges. Interest expense increased to $22.8 million from $15.2 million.
  • EZCORP exited its U.S. and U.K. online lending businesses in the fourth quarter and classified them as discontinued operations. FY2014 discontinued-operations loss was $93.4 million after tax, including $103.1 million in pre-tax termination and impairment charges, notably $84.2 million of goodwill impairment.
  • The company issued $230 million of 2.125% cash convertible senior notes due 2019 and used approximately $119.4 million of net proceeds to repay and terminate its revolving credit facility. It also repurchased 1 million shares for $11.9 million in connection with the notes offering.

Outlook, commentary and risks

  • Management’s strategy is to focus on an integrated, customer-centric model centered on pawn and unsecured lending. A company-wide overhead restructuring was expected to improve annual net income by approximately $9 million after reinvestment in existing stores.
  • Management expected Grupo Finmart to sell approximately 60% of its loan portfolio during FY2015 and described portfolio sales and local financing as sources of funding. It anticipated operating cash flow and cash on hand would cover the coming year’s contractual obligations, planned store growth, capital expenditures and working capital needs.
  • Key business risks include stricter short-term lending regulation, CFPB oversight, pending Texas legislative proposals, gold-price and gold-volume changes, loan defaults and collections, foreign-exchange exposure, and dependence on Mexican public-sector payroll agreements. The company’s Texas concentration heightens exposure to adverse local or state lending rules.
  • Regulatory and legal matters include CFPB civil investigative demands and a continuing investigation, a U.K. FCA-supervised review of legacy Cash Genie practices that could require customer redress, shareholder derivative litigation, consolidated securities litigation and an SEC investigation into matters including historical advisory relationships. Outcomes and potential financial effects were uncertain.
  • Governance and related-party matters are notable: one controlling shareholder owns all voting stock; the company paid Madison Park, an advisory firm owned by that shareholder, $5.2 million in FY2014 before terminating the agreement in June 2014. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.

Important facts for investors to verify

  • Reconcile the $93.4 million discontinued-operations loss to the $103.1 million pre-tax termination and impairment charges, tax benefits and remaining exit costs.
  • Assess whether core operating performance and cash generation can recover given weaker U.S. & Canada contribution, lower retail margins and higher consumer-loan bad debt.
  • Review the sustainability, cash realization and accounting treatment of Grupo Finmart’s loan-portfolio sales, and the expected FY2015 portfolio-sale level.
  • Evaluate debt service and liquidity, including the convertible notes’ terms, Grupo Finmart’s non-recourse borrowings, restricted cash, contractual commitments and contingent letter-of-credit exposure (maximum $29.5 million).
  • Track developments in the CFPB, FCA, Texas regulatory proposals, SEC investigation and litigation, including any customer restitution, penalties or required business changes.
  • Consider continuing exposure to gold prices, currency movements, Mexican payroll-deduction counterparties and controlled-company governance.