EZCORP INC annual report, FY2011

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EZCORP, Inc. — Fiscal 2011 Form 10-K

Reporting period: Fiscal year ended September 30, 2011. Although the request refers to 2011 Q4, this filing reports full-year results; selected fourth-quarter figures are included below. EZCORP operates pawn, consumer financial-services and second-hand retail businesses in the U.S., Mexico and Canada, and holds equity-method investments in Albemarle & Bond and Cash Converters.

Financial performance and position

  • Revenue: $869.3 million, up 19% from $733.0 million. Same-store revenue rose 10%; new and acquired stores contributed $65.9 million.
  • Net revenue: $534.9 million, up 20%. Merchandise and jewelry-scrapping sales were $494.6 million; pawn service charges were $201.1 million; signature-loan fees were $150.3 million; auto-title fees were $21.7 million.
  • Profit: Operating income was $174.0 million, up 23%; pretax income was $188.7 million, up 25%; net income was $122.2 million, up 26%. Diluted EPS rose to $2.43 from $1.96. Net income excluding the $10.9 million pretax former-CEO retirement charge and its related tax benefit was $129.3 million, up 33% year over year.
  • Margins: Net income was approximately 14.1% of revenue, versus 13.3% in fiscal 2010; net revenue was approximately 61.5% of revenue, versus 61.0%. Gross margin on total sales increased to 43% from 42%.
  • Cash flow: Operating cash flow was $148.4 million, compared with $124.7 million. Investing activities used $136.6 million, including $67.9 million for acquisitions, $34.8 million for property and equipment, and net lending investment. Cash declined $1.9 million to $24.0 million.
  • Liquidity and debt: Working capital was $292.0 million; current assets were $356.2 million and current liabilities $64.3 million. Debt was $17.5 million at year-end. The new four-year, $175 million revolving facility had $152.5 million available after borrowings and bank letters of credit; it may be increased to $225 million subject to the agreement. EZCORP reported compliance with all financial covenants.
  • Balance sheet: Total assets were $756.5 million, up from $606.4 million; stockholders’ equity was $664.2 million, up from $519.4 million. Pawn loans outstanding were $145.3 million and inventory, net, was $90.4 million.

Material changes and segment developments

  • U.S. Pawn revenue increased 17% to $640.8 million and store operating income rose to $194.5 million from $150.2 million. Higher pawn balances, sales and scrap proceeds contributed; pawn-loan redemption was 81.1%.
  • Empeño Fácil revenue rose 90% to $58.3 million and store operating income increased to $10.7 million from $4.4 million. Rapid store openings supported growth, but new stores generally weigh on earnings until their second year.
  • EZMONEY revenue increased 11% to $170.2 million and store operating income rose to $62.6 million from $56.2 million. Signature-loan bad debt increased to 24.0% of related fees from 22.6%; auto-title bad debt improved to 11.2% from 15.6%.
  • Store count increased to 1,111 from 1,006. Fiscal 2011 acquisitions included 34 U.S. and six Mexico pawn stores and Cash Converters Canadian franchise rights; acquisition consideration was approximately $75.2 million.
  • Inventory valuation allowance rose to 9.5% of gross inventory from 7.4%, reflecting a mix shift toward general merchandise; inventory aged over one year was broadly stable at 12.2% versus 12.0%.
  • For the fourth quarter, revenue was $234.1 million, net revenue $146.8 million, net income $36.4 million and diluted EPS $0.72. Management notes that the fourth quarter is typically the strongest for net revenue and income.

Outlook, commentary and risks

  • Management planned approximately 55–65 new Mexico pawn stores, 12–15 U.S. pawn stores and 10 Canadian Cash Converters locations in fiscal 2012; it estimated approximately $15.3 million of capital expenditures for about 90 new stores, plus working capital and start-up costs. New stores are expected to weigh on earnings and liquidity until their second year.
  • The filing provides no consolidated fiscal 2012 revenue or earnings guidance. It estimates a fiscal 2012 effective tax rate of approximately 35.2%.
  • Key exposures include changes to state, federal and international rules governing payday and auto-title lending; gold-price declines; concentration of financial-services and domestic pawn operations in Texas; foreign-exchange movements; loan defaults and collections; and dependence on unaffiliated Texas lenders. The company also cites competition, expansion execution, data-security and infrastructure risks.
  • Proposed Australian lending restrictions led EZCORP to terminate its planned transaction to increase its Cash Converters ownership to approximately 53%. Cash Converters’ fiscal 2011 market value was below EZCORP’s carrying value; management considered the decline temporary, citing the investee’s expected mitigation measures.
  • At year-end, maximum exposure under letters of credit supporting brokered loans was $30.3 million, against a recorded expected-loss allowance of $1.8 million. The filing states that legal and regulatory matters were not expected to materially affect financial condition, results or liquidity, but outcomes were uncertain.
  • Related-party and governance items include $4.8 million paid to Madison Park, owned by controlling shareholder Phillip E. Cohen, for fiscal 2011 advisory services; the new agreement effective October 1, 2011 provides for $500,000 monthly. Cohen controls all voting stock; publicly traded Class A shares are non-voting. EZCORP paid no dividends and did not anticipate near-term cash dividends.
  • After year-end, EZCORP acquired 17 pawn stores and eight Cash Converters locations for approximately $49.2 million. The filing’s purchase-price allocation was incomplete.

Important facts for investors to verify

  • Reconcile reported and adjusted earnings, including the $10.9 million CEO-retirement charge, its tax treatment and the $7.5 million stock-vesting component.
  • Track signature-loan credit losses and the performance of installment loans, as well as the $30.3 million maximum letter-of-credit exposure and adequacy of the allowance.
  • Assess proposed and enacted consumer-lending regulation, particularly in Texas, Australia and jurisdictions where EZCORP operates or plans to expand.
  • Monitor gold prices, inventory mix and valuation reserves, and their effect on pawn lending, scrap proceeds and retail margins.
  • Evaluate returns and integration of acquisitions and planned store openings, liquidity use, covenant headroom and growth in lease commitments.
  • Review the Madison Park related-party arrangement, the company’s non-voting public shares and the potential impact of foreign-exchange changes on operations and equity-method investments.

The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of September 30, 2011.