EZCORP, Inc. — Form 10-Q summary
Business and period: EZCORP provides pawn loans and sells merchandise in the U.S. and Latin America. This report covers the quarter and six months ended March 31, 2023 (fiscal Q2 and first half of fiscal 2023). Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance
| Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Six months ended March 31, 2023 | Six months ended March 31, 2022 |
|---|---|---|---|---|
| Revenue | $258.4m | $216.0m | $522.8m | $437.0m |
| Gross profit | $149.2m | $128.9m | $301.7m | $261.0m |
| Operating income | $26.7m | $24.2m | $55.0m | $46.4m |
| Net income (loss) | $(6.8)m | $14.9m | $10.0m | $30.6m |
| Operating cash flow | Not reported separately for the quarter | Not reported separately for the quarter | $46.8m | $30.6m |
- Revenue grew about 20% in both the quarter and first half. Pawn service charges and merchandise sales were the largest revenue sources.
- Gross margin was approximately 57.7% in both the quarter and first half, versus approximately 59.7% in each prior-year comparable period. Merchandise sales margin was 38% in U.S. Pawn in the quarter (41% prior year) and 32% in Latin America Pawn (29% prior year).
- Quarterly operating income increased about 10%, but the company reported a net loss because it recorded a $32.5m equity-method loss on Cash Converters, including its share of a non-cash goodwill impairment. First-half net income fell to $10.0m from $30.6m.
- U.S. Pawn quarterly segment contribution rose 12% to $37.8m. Latin America Pawn contribution rose 68% to $8.0m, including a $2.5m benefit from reducing an acquisition-related contingent liability. Other Investments recorded a $32.5m quarterly loss.
Liquidity, cash flow and debt
- At March 31, 2023, cash and cash equivalents were $243.1m and restricted cash was $8.5m. Total cash, cash equivalents and restricted cash increased $37.2m from September 30, 2022.
- For the first half, operating cash flow was $46.8m; investing cash outflow was $40.6m; and financing cash inflow was $30.0m. Investing uses included $18.4m of capital expenditures, $13.0m for acquisitions, and a $15.5m note receivable issued to Founders.
- Long-term debt had a $359.3m carrying value ($367.8m gross principal) at March 31, 2023, compared with $312.9m carrying value at September 30, 2022. Debt comprises $34.4m of 2024 notes, $103.4m of 2025 notes and $230.0m of 2029 notes. Cash exceeded debt by approximately $116m, excluding lease obligations.
- The December 2022 refinancing issued $230m of 3.75% convertible notes due 2029 and repurchased portions of the 2024 and 2025 notes. The first half included a net $3.5m debt-extinguishment loss. Operating lease liabilities were $245.8m net of imputed interest.
Changes, outlook and risks
- Pawn loan balances and store footprint expanded. At March 31, the company operated 1,199 stores, up from 1,152 a year earlier; it acquired 10 U.S. stores and opened 15 locations during the first half.
- Management said higher pawn loan balances supported service-charge growth. It described merchandise margins as returning toward more normalized levels and cited higher labor costs, store activity and store count as drivers of expense growth.
- Management expects cash on hand and operating cash flows to fund operations, debt service, planned store growth, capital expenditures and working capital through fiscal 2023. No quantified earnings or revenue guidance was provided. Management noted future debt maturities may require refinancing.
- Australian legislation limiting small-amount credit contracts takes effect in June 2023 and could adversely affect Cash Converters, in which EZCORP held a 43.7% interest. Cash Converters recorded a one-time, non-cash AUD$110.5m goodwill impairment; EZCORP recognized its $32.5m share of the loss.
- Other relevant exposures include gold prices, foreign exchange and interest rates; the valuation and collectability of the $30m Founders equity investment and $15m demand note; and execution of store expansion. A Florida text-message class action settlement was approved, and the $2.0m settlement charge had been paid. Management said it did not expect resolution of other matters to materially affect the company.
Investor verification points
- Assess whether the Cash Converters impairment is isolated or signals ongoing pressure on the investment, particularly after the Australian law change.
- Track pawn loan growth, service-charge yields, inventory turnover and merchandise margins as inventory and store counts expand.
- Review upcoming 2024 and 2025 note maturities, refinancing capacity, lease obligations and the company’s stated liquidity outlook.
- Evaluate the recoverability and valuation assumptions for the Founders investment and demand note, as well as other strategic investments.
- Separate recurring operating performance from the $32.5m investment loss, the $2.5m contingent-liability reversal and debt-extinguishment items.