EZCORP, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are included below where reported. Financial amounts are in U.S. dollars unless noted.
Business context
EZCORP operates pawn, resale, short-term consumer lending and credit-services businesses. At year-end it had 1,262 company-owned locations in the U.S., Canada and Mexico, plus 10 Canadian franchises. It also held equity-method investments in U.K.-based Albemarle & Bond and Australia-based Cash Converters International. In FY2012, it acquired controlling interests in Mexican payroll lender Crediamigo (60%) and U.K. online lender Cash Genie (72% at year-end; increased to 95% after year-end).
Financial results and liquidity
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Total revenue | $992.5 million | $869.3 million | +14% |
| Net revenues | $624.2 million | $534.9 million | +17% |
| Operating income | $201.4 million | $174.0 million | +16% |
| Income before taxes | $221.6 million | $188.7 million | +17% |
| Net income attributable to EZCORP | $143.7 million | $122.2 million | +18% |
| Diluted EPS | $2.81 | $2.43 | +16% |
| Cash from operations | $150.4 million | $146.0 million | +3% |
Net margin attributable to EZCORP was about 14.5% of revenue, versus 14.0% in FY2011; operating income was about 20.3% of revenue, versus 20.0%. The effective tax rate declined to 32.1% from 35.3%, principally reflecting foreign earnings intended to be permanently reinvested and other tax items.
- Revenue mix included merchandise sales of $335.4 million, jewelry-scrapping sales of $208.3 million, pawn service charges of $235.6 million and consumer loan fees of $207.7 million.
- Consumer-loan bad debt was $41.4 million, up from $38.8 million; pawn-loan redemption was 82%, versus 81% in FY2011. U.S. & Canada consumer-loan bad debt equaled 22% of fees, compared with 23%.
- Cash and cash equivalents were $48.5 million, up from $24.0 million. Working capital was $373.6 million; current assets were $481.4 million and current liabilities $107.8 million.
- Total assets rose to $1.218 billion from $756.5 million, driven substantially by acquisitions and related goodwill and intangible assets. Stockholders’ equity was $834.8 million.
- Cash used in investing was $211.2 million, including $128.6 million of cash acquisitions and $45.8 million of property and equipment additions. Cash provided by financing was $84.2 million.
- EZCORP had $130.0 million drawn on its $175 million revolving facility, leaving $45.0 million available; it was in compliance with covenants. Crediamigo had $89.9 million of third-party debt, nonrecourse to EZCORP, including $32.7 million outstanding under its securitization facility. Contractual obligations included $219.6 million of operating lease payments.
Fourth quarter: Revenue was $258.4 million versus $234.1 million in FY2011 Q4; net income attributable to EZCORP was $38.6 million versus $36.4 million; diluted EPS was $0.75 versus $0.72.
Material changes versus FY2011
- Same-store total revenue declined 2% overall; new and acquired stores contributed $136.4 million. The U.S. & Canada segment’s same-store revenue decreased 2.1%.
- U.S. & Canada segment contribution increased modestly to $229.8 million from $225.7 million. Jewelry-scrapping gross profit fell 7%, as gold-scrap volume declined despite higher proceeds per gram; merchandise gross margin also eased.
- Latin America contribution rose to $32.2 million from $3.4 million, reflecting store growth and eight months of Crediamigo results. Other International contribution rose to $17.3 million from $15.6 million, including Cash Genie and higher equity income from affiliates.
- Reported FY2011 included a $10.9 million pre-tax charge related to the former CEO’s retirement. Excluding that charge, management said FY2012 pre-tax income increased 11%.
- Interest expense, depreciation and administrative spending increased as the company expanded and invested in growth infrastructure. Inventory valuation allowance fell to 4.9% of gross inventory from 9.5%.
Outlook, risks and unusual items
- For FY2013, management planned 25–30 new U.S. pawn stores, 70–80 Mexico pawn stores and 65–75 U.S. financial-services stores. Planned de novo capital expenditures were $26.3 million, plus working capital and start-up costs; management expected new stores to weigh on earnings and liquidity until their second year.
- Management expected operating cash flow, cash on hand and revolver availability to fund obligations, planned growth and working-capital needs over the coming year. No earnings or revenue guidance was provided.
- Management identified weaker gold prices and transaction volumes as a material FY2012 profitability headwind. Results remain exposed to gold prices, pawn redemption, consumer-loan defaults and collections, seasonality, foreign exchange and economic conditions.
- Regulatory risk is significant: short-term lending faces potential federal, state and local restrictions, CFPB oversight, and Texas municipal limits. The filing specifically notes adverse effects on the financial-services business in Austin, Dallas and San Antonio.
- Texas concentration and reliance on unaffiliated lenders for Texas credit-services products are risks. The company’s maximum exposure on credit-service letters of credit was $27.4 million, against a $1.8 million recorded allowance.
- Crediamigo acquisition accounting remained preliminary and included contingent consideration valued at $23.0 million; the acquired businesses’ internal controls were excluded from management’s and the auditor’s FY2012 control assessments. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
- After year-end, EZCORP acquired an additional 23% of Cash Genie for 592,461 shares valued at $10.4 million. The company also renewed its related-party advisory agreement with Madison Park, owned by controlling shareholder Phillip E. Cohen, at $600,000 per month for FY2013.
Most important facts for investors to verify
- How much of revenue and earnings growth came from acquisitions versus comparable-store performance, particularly given the 2% same-store revenue decline.
- Whether gold prices and scrap volumes, merchandise margins and pawn-loan balances recover or continue to pressure the U.S. business.
- Crediamigo’s loan quality, funding costs, securitization performance, contingent consideration and put-option obligations; also Cash Genie’s post-year-end ownership and operating performance.
- Actual availability under the revolver and compliance with covenants as debt and planned expansion spending increase.
- Potential effects of CFPB, state, municipal and international lending rules, including the Australian restrictions effective July 2013 and Texas city ordinances.
- The credit and governance implications of non-voting publicly traded Class A shares, Cohen’s control of all voting shares, and the $7.2 million annual Madison Park fee effective October 2012.