EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018. Amounts are in U.S. dollars; financial figures are in millions unless otherwise noted.
Business context and reporting period
EZCORP provides non-recourse pawn loans secured by personal property, sells used merchandise and operates a small Canadian financial-services business. It reports U.S. Pawn, Latin America Pawn and Other International segments. Results are seasonal, and the company says third-quarter earnings are generally its lowest of the year.
Financial results and liquidity
| Metric | Three months ended June 30, 2018 | Year-over-year | Nine months ended June 30, 2018 | Year-over-year |
|---|---|---|---|---|
| Total revenue | $199.9 | +$16.3; +8.9% | $607.2 | +$41.3; +7.3% |
| Net revenue | $115.1 | $105.6 prior year | $358.1 | $327.4 prior year |
| Operating income | $12.3 | $11.4 prior year | $50.6 | $41.5 prior year |
| Net income attributable to EZCORP | $14.6 | $5.3 prior year | $39.2 | $20.4 prior year |
| Diluted EPS from continuing operations | $0.25 | $0.10 prior year | $0.70 | $0.41 prior year |
| Operating cash flow | — | $69.1 | $35.5 prior year |
Quarterly interest expense was $7.4 million versus $5.7 million. For the nine-month period, cash used in investing was $117.1 million, including $93.2 million of acquisition spending, $33.9 million of property and equipment additions, and $14.0 million invested in Cash Converters International. Financing provided $170.2 million, principally from the May 2018 convertible-note issuance. Cash increased $120.6 million to $285.0 million; $12.7 million was intended to remain in foreign operations and was not available for domestic operations.
At June 30, carrying debt was $418.7 million, net of discounts and issuance costs; contractual principal and other debt obligations shown in the maturity schedule totaled $514.7 million. The $195.0 million principal amount of 2019 Convertible Notes was due in June 2019 and classified as current. Current assets were $734.0 million and current liabilities were $269.5 million.
Material changes versus the prior comparable period
- Latin America Pawn expanded substantially: EZCORP acquired 196 stores and opened 10 during the nine months, ending the period with 451 Latin America locations and 988 stores overall. Acquisitions included GPMX, which added 112 stores, and Mexican store groups.
- Quarterly Latin America net revenue rose 67% on a GAAP basis (73% constant currency), with segment contribution up 63% (66% constant currency). Growth was primarily acquisition-driven; Latin America merchandise gross margin declined to 30% from 33%.
- U.S. Pawn quarterly net revenue was essentially flat. Lower pawn service charges reflected lower average loan balances, while merchandise gross profit improved on stronger pricing and discounting discipline. U.S. Pawn segment contribution declined 10%, partly due to higher operating costs and depreciation.
- Nine-month Other International segment contribution fell to $0.3 million from $2.8 million, principally reflecting investment in a digital platform and a change in Canadian lending products following regulatory changes.
- Net income benefited from $5.2 million of net legal-settlement recoveries recorded in other income. Higher interest income on Grupo Finmart notes and lower quarterly income tax expense also supported results. The quarter’s tax expense included a $3.3 million benefit from expiration of a statute of limitations on uncertain tax positions.
Outlook, commentary, risks and unusual items
- Management expects cash from operations and cash on hand to fund contractual obligations, planned store growth, capital expenditures and working capital through fiscal 2019, excluding future material acquisitions. Repayment of longer-term debt may require refinancing or new financing.
- Management expects full-year U.S. merchandise gross margin within a 35%–38% target range and plans several additional Latin America de novo stores during the remainder of fiscal 2018. These are operating expectations, not full-year earnings guidance.
- Management anticipated approximately $2.0 million of additional tax expense in the quarter ending September 30, 2018, related to deferred-tax balances affected by the tax-rate reduction. The final impact of the Tax Cuts and Jobs Act remained subject to further analysis.
- The company’s investment in Cash Converters International had a carrying value $11.9 million above fair value at June 30, 2018. Management considered the shortfall temporary but said a further impairment could be recorded if the fair-value decline persisted.
- Risks include foreign-currency movements, gold prices, litigation and regulatory matters, and execution of rapid Latin America expansion. The company also reported approximately 700,000 authorized but unreserved Class A shares available for other uses, which may constrain equity or equity-linked financings and acquisitions.
- The shareholder derivative case was settled and dismissed with prejudice; the company received $5.2 million of the settlement fund after the plaintiff-attorney fee. A separate federal securities class action remained active, and the SEC investigation was ongoing. The company said it could not predict the outcome of the litigation or regulatory investigation.
- Management concluded disclosure controls were effective as of June 30, 2018, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the 2019 Convertible Notes were repaid, refinanced or otherwise addressed before their June 2019 maturity.
- How acquired Latin America stores perform organically, including store-level profitability, margins and integration costs.
- Whether pawn-loan balances in the U.S. recovered from the effects of Hurricanes Harvey and Irma, and whether merchandise margins remained within management’s target range.
- Cash availability and funding needs, especially if EZCORP pursues material acquisitions or must refinance longer-term obligations.
- Developments in the federal securities litigation and SEC investigation, along with any resulting costs or liabilities.
- Whether the Cash Converters International fair-value shortfall persists and leads to an impairment, and the final tax effects of the Tax Cuts and Jobs Act.