EZCORP, Inc. — Fiscal 2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. The filing also reports the fourth quarter ended September 30, 2013; this is an annual report, not a standalone quarterly filing. Amounts below are in U.S. dollars unless noted.
Business context
EZCORP provides pawn loans, short-term consumer lending and credit services, and resale merchandise through 1,342 company-owned locations in the United States, Canada and Mexico, plus online lending in the U.S. and U.K. Its reportable segments are U.S. & Canada, Latin America and Other International. The company also holds equity-method investments in U.K.-based Albemarle & Bond and Australia-based Cash Converters International.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $1,010.3 million | $975.1 million |
| Net revenue | $640.7 million | $614.4 million |
| Operating income | $139.0 million | $206.2 million |
| Income from continuing operations, net of tax | $61.7 million | $155.1 million |
| Net income attributable to EZCORP | $34.1 million | $143.7 million |
| Diluted EPS | $0.63 | $2.81 |
| Cash from operations | $126.5 million | $140.9 million |
- Revenue increased 4%; net revenue increased 4%. Merchandise sales rose 11%, pawn service charges 8%, and consumer loan fees and interest 24%. Jewelry scrapping sales fell 35% to $131.7 million.
- Net income attributable to EZCORP fell 76%, reflecting lower segment contributions, higher operating costs and $44.6 million of investment impairment charges. The effective tax rate was 32%, unchanged from FY 2012.
- Consumer loan bad debt increased to $54.9 million from $39.4 million. As a share of consumer loan fees, bad debt was 25% in U.S. & Canada and 51% in Other International; Latin America reported a small benefit.
- Retail merchandise gross margin declined to 41% from 43%. The U.S. & Canada segment reported 41.0% merchandise margin and 28.0% jewelry-scrapping margin, down from 42.3% and 36.1%, respectively.
- At year-end, cash was $36.3 million, working capital $395.2 million, and total assets $1.345 billion. Current assets were $537.1 million and current liabilities $141.9 million.
- Total debt outstanding was $247.3 million: $141.8 million recourse to EZCORP and $105.5 million non-recourse Grupo Finmart debt. The $200 million revolving facility had $140.9 million drawn and $57.3 million available; the company reported compliance with covenants. The facility was scheduled to mature in May 2015.
- Cash from operations decreased 10%; investing activities used $160.4 million, including $46.7 million in property and equipment additions and $14.8 million in acquisitions. Year-end cash declined $12.2 million. About 60% of cash was held by foreign subsidiaries and management intended to keep foreign earnings permanently reinvested.
Material changes and unusual items
- Same-store total revenue declined 7% company-wide. New and acquired stores contributed $105.8 million, partially offsetting the decline.
- U.S. & Canada revenue declined 3% as lower gold-scrap activity outweighed growth in merchandise, pawn charges and lending. Segment contribution fell 28% to $165.7 million.
- Latin America revenue rose 45% to $150.0 million, including a full year of Grupo Finmart results and growth from new stores and acquisitions. Segment contribution declined to $26.7 million, partly because FY 2012 included a $9.3 million purchase-accounting benefit.
- Other International recorded a $35.5 million segment loss, including $44.6 million of investment impairment. Albemarle & Bond was written down by $42.5 million pre-tax ($28.7 million after tax); available-for-sale securities were impaired by $2.1 million. Cash Converters contributed $9.6 million of equity-method income.
- EZCORP closed 107 legacy locations and recorded $22.2 million of pre-tax exit charges, primarily lease termination costs and inventory and fixed-asset write-downs. The closures included 57 in Mexico, 29 in Canada and 20 financial-services stores in Dallas and Florida, plus one U.S. jewelry-only store. Discontinued operations produced a $23.3 million after-tax loss.
- Fourth-quarter revenue was $234.4 million and net revenue $144.9 million. Continuing operations recorded a $25.3 million after-tax loss; net loss attributable to EZCORP was $24.7 million. These results included the investment impairment and store-exit effects.
- The company disclosed a correction to its FY 2012 cash-flow statement: $15.1 million of refinancing-related debt-premium write-off had been incorrectly presented as a financing cash outflow and was reclassified as a non-cash operating adjustment. Restated operating cash flow was $140.9 million.
Outlook, commentary and risks
- Management expected operating cash flow, cash on hand and revolving-credit availability to fund contractual obligations, planned store growth, capital expenditures and working capital over the coming year. No quantified earnings or revenue guidance was provided.
- Management described ongoing growth plans through new locations, acquisitions, online lending and product development, with particular opportunity in Mexico and online channels. It also cited the challenging gold environment and investment in growth as factors behind FY 2013 underperformance.
- Key risks include tighter regulation of payday and auto-title lending, CFPB oversight, municipal restrictions and the concentration of financial-services locations in Texas; changes in gold prices and transaction volumes; loan defaults and collections; foreign exchange movements; and dependence on third-party lenders for some Texas and Ohio credit-service products.
- Management said current legal and regulatory proceedings were not expected to materially affect financial condition, results or liquidity, but noted outcomes could not be assured. Goodwill was $428.5 million, about 32% of total assets; annual testing found no material impairment at September 30, 2013.
- The company paid no dividends in the prior two fiscal years and did not expect to pay cash dividends in the immediate future; its credit agreement restricts dividends. Publicly traded Class A shares are non-voting, while an affiliate controlled all Class B voting shares.
- EZCORP renewed its related-party advisory agreement with Madison Park, wholly owned by controlling shareholder Phillip E. Cohen, at $600,000 per month through September 2014. The Audit Committee approved the arrangement after independent financial advice and a fairness opinion.
Important facts for investors to verify
- Reconcile reported FY and fourth-quarter earnings to the $44.6 million investment impairment, $22.2 million store-exit charges, tax effects and noncontrolling interests.
- Assess the performance and recoverability of consumer-loan portfolios, particularly rising bad debt, the 51% online/Other International bad-debt-to-fee ratio, and the $33.4 million maximum exposure under credit-service letters of credit.
- Review Albemarle & Bond’s subsequent financial condition and the assumptions behind its impairment valuation; EZCORP’s FY 2013 income estimate used investee information reported on a time lag.
- Confirm revolver availability, covenant headroom, debt maturities and the ability to refinance before the May 2015 facility expiry; consider that a significant portion of cash was held abroad.
- Track regulatory developments in Texas, other U.S. jurisdictions, Mexico, Australia and the U.K., and their effects on lending economics and store viability.
- Evaluate whether growth, acquisitions and online lending can offset weaker same-store performance and gold-related pressure, while monitoring goodwill, acquisition consideration and the Madison Park related-party fees.