EZCORP, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015; filed December 23, 2015. This is an annual report, not a standalone quarterly report. Unless otherwise noted, amounts are U.S. dollars.
Business context
EZCORP operated pawn businesses in the United States and Mexico, Mexico payroll-deduction consumer lending through 94%-owned Grupo Finmart, and 27 CASHMAX locations in Canada. It also held approximately 32% of Australia-based Cash Converters International. At year-end, EZCORP reported 834 company-operated locations. During FY2015 it exited U.S. payday, installment and auto-title lending, classifying those activities as discontinued operations, and shifted its focus to U.S. and Mexico pawn and Grupo Finmart.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $788.4 million | $800.3 million |
| Net revenue | $444.9 million | $456.8 million |
| Operating income (loss) | ($8.9 million) | $18.3 million |
| Continuing-operations net income (loss) | ($64.1 million) | ($4.0 million) |
| Net income (loss) attributable to EZCORP | ($86.4 million) | ($64.7 million) |
| Diluted loss per share | ($1.59) | ($1.19) |
| Cash flow from operating activities | $79.4 million | $74.7 million |
Net-revenue margin was approximately 56.4% of revenue, versus 57.1% in FY2014; operating margin was approximately (1.1)%, versus 2.3%. FY2015 total revenue fell 1%, while net revenue fell 3%. Excluding jewelry scrapping sales, revenue increased $26.3 million. Jewelry scrapping sales declined 40% to $58.0 million; consumer loan fees and interest increased 23% to $78.1 million. Operating expenses rose 4% to $453.9 million, and non-operating expenses rose to $81.9 million, including a $29.2 million impairment of the Cash Converters investment and higher interest expense.
Cash and cash equivalents were $59.1 million at year-end, up from $55.3 million; restricted cash was $18.0 million. Working capital was $347.8 million, down from $486.6 million. Total assets were $1.21 billion and equity was $676.7 million. Debt carrying amount was approximately $380.7 million, including $74.3 million of current maturities; the contractual-obligations table reports $406.2 million of long-term debt obligations before specified discounts and premiums. The $230 million 2.125% cash-convertible notes mature in 2019. Grupo Finmart third-party debt was $176.2 million, described as non-recourse to EZCORP. Management said cash on hand and operating cash flow should cover the next fiscal year’s obligations, growth, capital expenditures and working capital needs.
Material changes versus FY2014
- U.S. Pawn core revenue increased 1%, but segment contribution fell 33% to $79.8 million, reflecting lower merchandise and scrap margins, asset impairments, restructuring, and higher costs.
- Mexico Pawn core revenue increased 22% on a constant-currency basis; segment contribution was a $1.0 million loss on a reported basis. Currency translation materially affected reported results.
- Grupo Finmart revenue rose 25% reported (45% constant currency), but segment loss widened to $22.2 million. Bad-debt expense rose 35% reported (55% constant currency), and bad debt equaled 23% of average gross loan balances, up from 17%.
- Other International reported a $36.4 million segment loss, including investment impairment and weaker equity-method results. EZCORP recorded a $29.2 million impairment of its Cash Converters investment.
- Operating cash flow increased 6%, but net cash increased only $3.8 million, partly reflecting a $10.3 million adverse foreign-exchange effect on cash. The Mexican peso weakened significantly; foreign-currency translation reduced equity by $44.3 million.
- EZCORP acquired 25 U.S. pawn stores, increased its Grupo Finmart ownership from 76% to 94%, and closed or sold locations as part of restructuring. Aged inventory fell to 11% of inventory from 20%.
Outlook, unusual items and risks
- Management’s stated strategy is to concentrate on core pawn operations in the U.S. and Mexico and Grupo Finmart in Mexico. It cited opportunities to expand Mexican pawn operations and increase lending penetration within Grupo Finmart’s more than 100 active employer agreements; it did not provide quantified earnings or revenue guidance.
- FY2015 included $17.1 million of continuing-operations restructuring expense and $42.4 million of pre-tax costs associated with discontinued operations. Fourth-quarter discontinued-operations charges included a $10.5 million CFPB-related accrual. In December 2015, after year-end, EZCORP agreed to a CFPB consent order requiring $3 million in civil penalties and $7.5 million in customer restitution, and forgiveness of specified outstanding U.S. payday and installment debt.
- EZCORP restated prior financial statements, including FY2014, FY2013, FY2012 and FY2015 first-quarter results, to correct Grupo Finmart loan accounting. Management identified material weaknesses in internal control over financial reporting, which were not remediated at September 30, 2015. Management deemed disclosure controls ineffective, and the auditor issued an adverse opinion on internal control; the auditor gave an unqualified opinion on the FY2015 financial statements.
- Shareholder litigation and an SEC investigation were ongoing. Management said outcomes could not be predicted. Other key exposures include Grupo Finmart loan performance and payroll relationships, regulatory changes, gold prices and volumes, Mexican-peso and other currency movements, interest rates, Texas concentration, goodwill impairment, and controlled-company governance. The filing notes a 36% APR cap on certain pawn loans to covered military borrowers effective October 2016.
Important facts for investors to verify
- Review the restatement disclosures and remediation plan, and monitor whether the identified material weaknesses are resolved.
- Track Grupo Finmart’s non-performing loans, reserves, bad-debt expense, collections and funding costs; reported loan growth coincided with materially higher credit costs.
- Assess the sustainability of pawn revenue and margins, including gold exposure, aged-inventory liquidation and U.S. and Mexico loan redemption trends.
- Reconcile debt maturities, non-recourse subsidiary borrowing, restricted cash and the cash-convertible notes against operating cash flow and the stated liquidity outlook.
- Follow the CFPB consent-order payments, remaining litigation and SEC investigation, as well as the effect of the U.S. financial-services exit on future cash flows.
- Consider the non-voting status of publicly traded Class A shares and the fact that one beneficial owner controls all voting stock.