EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2016; comparative periods ended March 31, 2015. Amounts are U.S. dollars. The filing is unaudited. EZCORP operates pawn businesses in the U.S. and Mexico, Mexican payroll-deduction lending through Grupo Finmart, and holds an approximately 32% interest in Cash Converters International.
Financial results and liquidity
| Metric | Three months 2016 | Three months 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $201.9M | $205.2M | $400.4M | $417.9M |
| Net revenue | $113.8M | $113.6M | $225.3M | $230.6M |
| Operating income | $9.9M | $12.4M | $6.1M | $28.5M |
| Net loss attributable to EZCORP | $(74.1)M | $1.3M income | $(81.6)M | $13.0M income |
| EPS attributable to EZCORP | $(1.35) | $0.03 | $(1.48) | $0.24 |
- Quarterly merchandise sales gross profit rose 16% to $41.0M, and merchandise margin increased to 38% from 33%. Pawn service charges rose 8% to $64.1M. Jewelry scrapping gross profit fell 58% to $1.7M.
- Consumer loan bad-debt expense increased to $8.7M from $4.8M for the quarter and to $21.3M from $13.3M for six months. Six-month consumer loan fees and interest fell to $28.8M from $37.5M.
- Quarterly results included a $73.9M non-cash impairment of all Grupo Finmart goodwill. Excluding this unusual charge, the reported loss would have been substantially lower; the filing does not provide a single adjusted earnings figure.
- Six-month operating cash flow was $55.7M, versus $37.8M. It included a $34.2M tax refund from carrying back fiscal 2015 net operating losses. Investing cash flow was $14.0M; financing cash flow was a $49.9M use. Cash increased $16.2M to $75.3M.
- At March 31, cash was $75.3M, restricted cash was $16.1M, current assets were $456.1M and current liabilities were $188.6M. Debt was approximately $335.0M, including $82.2M current maturities and $252.8M long-term debt. Debt declined $36.5M, or 10%, from September 30, 2015.
Material changes versus the prior period
- Core pawn operations improved: six-month pawn service charges increased 5%, merchandise sales gross profit increased 15%, and merchandise margin rose to 38% from 33%. U.S. and Mexico Pawn segment contributions increased.
- Grupo Finmart weakened materially amid collection delays and higher credit losses. Its non-performing loans were 42% of its portfolio at March 31, compared with 29% at September 30, 2015. Originations fell 49% year over year for the six-month period.
- The six-month net loss also reflects higher operating costs, including increased administrative, labor, professional-fee and restructuring expenses. Jewelry scrapping revenue and gross profit declined as the company emphasized selling jewelry rather than scrapping it.
- EZCORP repurchased for $11.8M redeemable shares issued in the 2015 Cash Pawn acquisition and acquired six Houston-area pawn stores for $6.2M.
Outlook, risks and unusual items
- After quarter-end, the board’s special committee selected a sale of Grupo Finmart as the preferred alternative and authorized a process to solicit buyers. EZCORP expected to classify the business as held for sale in fiscal Q3 and anticipated a possible disposition in fiscal Q4 2016, subject to an acceptable proposal. The $73.9M impairment valuation is not an estimate of sale proceeds.
- Management expected cash and operating cash flow to cover obligations, planned capital expenditures and working capital for the remainder of fiscal 2016, and said liquidity could support Grupo Finmart into fiscal Q1 2017. If the business is not disposed of by fiscal year-end, additional financing, restructuring or other liquidity measures may be needed.
- Grupo Finmart’s debt default exceeding $25M could trigger an event of default under EZCORP’s cash convertible notes. EZCORP has also guaranteed future cash outflows under Grupo Finmart-related currency forwards, then totaling $36.4M. Management stated the convertible notes were not convertible at March 31; their principal matures in 2019.
- Disclosure controls were deemed ineffective at March 31 because of material weaknesses involving complex accounting, Grupo Finmart loan-portfolio monitoring and other accounting errors. Management was implementing remediation and expected completion, including testing, by fiscal year-end.
- Contingencies include shareholder derivative litigation, two securities class actions and an SEC investigation. The company said it could not predict outcomes and had not recorded liabilities for these matters, as it did not consider losses probable and estimable. The prior CFPB settlement accrual included $7.5M remaining, primarily expected to be paid in fiscal 2016, though some settlement timing could extend into fiscal 2017.
- Cash Converters International disclosed up to $8.5M of future pre-tax strategic-review costs that could affect EZCORP through its equity-method investment; EZCORP expected most to be recognized in its fiscal Q4 but could not quantify exact timing or impact.
- Operating results are seasonal and interim results may not indicate full-year performance. Management also cited foreign-exchange, interest-rate, gold-price, credit-collection and regulatory risks.
Important facts for investors to verify
- Progress and terms of the Grupo Finmart sale process, expected proceeds, and whether any financing or liquidity support is required if a sale is delayed.
- Grupo Finmart collection performance, non-performing loan trends, reserve adequacy and the recoverability of loans already reserved or written off.
- Cash available for general corporate use, including restricted and foreign-subsidiary cash, debt maturities, and the potential effects of a Grupo Finmart default on the convertible notes.
- Completion and independent effectiveness testing of remediation for the disclosed material weaknesses; review the company’s prior-period restatement disclosures.
- Developments in the securities and derivative lawsuits, SEC investigation, CFPB-related payments and the guaranteed currency-forward obligations.