EZCORP, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 31, 2013, compared with the three months ended December 31, 2012, unless otherwise noted. EZCORP operates pawn, retail and consumer lending businesses across the U.S., Canada, Mexico and the U.K.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total revenue | $269.4 million | $272.7 million | Down 1% |
| Net revenue | $167.3 million | $172.9 million | Down 3% |
| Operating income | $35.7 million | $48.6 million | Down 27% |
| Continuing income attributable to EZCORP | $21.1 million | $32.4 million | Down 35% |
| Net income attributable to EZCORP | $22.6 million | $30.7 million | Down 27% |
| Diluted EPS | $0.42 | $0.59 | Down 29% |
| Operating cash flow | $17.5 million | $30.5 million | Down 43% |
| EBITDA from continuing operations | $44.7 million | $60.0 million | Down 25% |
| EBITDA margin | 17% | 22% | Down 5 percentage points |
Reported revenue was weighed down by lower jewelry scrapping sales. Excluding scrapping, revenue increased $13.7 million, or 6%, on retail sales and consumer loan fee growth. Consumer loan bad debt rose 36% to $18.4 million; the provision was $18.4 million versus $13.5 million in the prior-year quarter.
Cash and cash equivalents were $38.5 million at December 31, 2013. Total assets were $1.37 billion and total liabilities were $370.3 million. Debt and capital lease obligations totaled $252.8 million, including $146.5 million drawn on EZCORP’s $200 million revolving facility and $105.5 million of Grupo Finmart debt that is non-recourse to EZCORP. The company reported $50.4 million available under its revolver and compliance with all debt covenants. Current assets were $556.5 million and current liabilities were $111.8 million.
Material changes and drivers
- U.S. & Canada: Segment contribution fell to $44.6 million from $52.2 million. Jewelry scrapping revenue declined $16.1 million, reflecting lower gold proceeds per gram and reduced scrap volume as the company shifted toward jewelry retail. Merchandise sales increased, while consumer loan bad debt as a percentage of consumer loan fees rose to 31.9% from 24.7%.
- Latin America: Revenue rose 17% to $45.0 million, but segment contribution fell to $8.0 million from $9.7 million as expenses and bad debt increased. Revenue benefited from Grupo Finmart loan growth and a $4.6 million gain on sale of a loan portfolio; management said merchandise margins were pressured and expected pressure to continue for the remainder of the year.
- Other International: Segment reported a $0.7 million loss versus $4.6 million contribution. Equity income from affiliates declined $3.8 million, largely reflecting an estimated operating loss at Albemarle & Bond (A&B).
- Expenses and unusual gains: Operating expenses rose 6%, including higher store, labor, growth-initiative and amortization costs, and one-time administrative bonuses. A $6.3 million gain from selling seven U.S. pawn stores partly offset these increases. Discontinued operations included $2.6 million of pre-tax termination-related gains, contributing $1.5 million of after-tax income versus a $1.7 million loss a year earlier.
- Cash flows and financing: Operating cash flow declined amid lower earnings and working-capital movements. Investing cash use was $4.3 million, compared with $47.8 million in the prior-year quarter, which included an investment in Cash Converters International. Financing cash use was $11.0 million, including $11.5 million of deferred and contingent acquisition consideration payments.
Outlook, risks and contingencies
- Management expected operating cash flow, cash on hand and revolver availability to fund contractual obligations, planned store growth, capital expenditures and working capital for the rest of the fiscal year. No numerical earnings or revenue guidance was provided.
- Houston’s payday and auto-title lending ordinance was scheduled to take effect in July 2014; the El Paso ordinance took effect in January 2014. EZCORP expected these and similar Texas municipal restrictions to negatively affect its financial services business in affected cities.
- On January 27, 2014, A&B ended its formal sales process and indicated limited value may remain in its ordinary shares. EZCORP said it continued to assess the investment and might need to impair the remaining $7.9 million in Q2 FY2014. At December 31, the investment’s fair value was below its $7.9 million carrying value.
- Maximum exposure on letters of credit supporting loans made by unaffiliated lenders was $35.6 million; the recorded expected-loss allowance was $3.0 million. Legal and regulatory proceedings were ongoing; management did not expect them to have a material adverse effect, but could not assure their outcome.
- Gold prices and sales mix, credit losses and collections, foreign exchange and interest rates, and the seasonal pattern of pawn and consumer lending remain relevant risks. Management noted the business is seasonal and this quarter’s results are not necessarily indicative of the full fiscal year.
Key facts for investors to verify
- Whether the shift from jewelry scrapping to retail can sustain sales and margins amid lower gold prices and changing inventory levels.
- Consumer loan portfolio growth, delinquency trends, charge-offs and recoveries, particularly for Grupo Finmart and U.S. consumer lending.
- The financial impact of Texas municipal lending restrictions and any further regulatory changes.
- The ultimate recoverable value of the A&B investment and whether a further impairment was recorded after quarter-end.
- Debt maturities, revolver availability and covenant headroom, alongside the $35.6 million maximum off-balance-sheet letter-of-credit exposure.
- How recurring earnings compare with reported results after the store-sale gain, discontinued-operations gains and loan-portfolio sale gain.