EZCORP, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 31, 2019, compared with the three months ended December 31, 2018. EZCORP operates pawn businesses in the U.S. and Latin America, a digital customer-engagement platform, and smaller international financial-services activities. Amounts below are in U.S. dollars.
Financial results and position
- Revenue: Total revenue was $222.4 million, up 3.1%. Net revenue, after merchandise and other costs of revenue, was $130.1 million, essentially unchanged.
- Profitability: Operating income was $13.5 million, down from $14.7 million; operating margin was approximately 6.1%, versus 6.8%. Net income attributable to EZCORP was $1.2 million, compared with a $3.4 million loss. Continuing-operations diluted EPS was $0.02, versus a loss of $0.06.
- Cash flow: Operating cash flow was a use of $10.9 million, compared with $23.4 million provided in the prior-year quarter. Investing activities used $6.8 million and financing activities used $2.9 million. Cash and cash equivalents fell $19.3 million during the quarter to $143.1 million.
- Liquidity and debt: Current assets were $601.9 million and current liabilities were $112.4 million. Debt had a $241.4 million carrying value, including $241.2 million long term; gross principal was $317.7 million. The company said cash and operating cash flow should cover anticipated repurchases, contractual obligations, planned store growth, capital expenditures and working capital needs through FY2020. It noted that $39.9 million of cash was intended to remain invested in foreign operations and was not available for domestic operations.
- Balance sheet changes: Total assets were $1.30 billion and total liabilities were $549.3 million at quarter end. Adoption of lease accounting added a $226.0 million right-of-use asset and recognized lease liabilities of $234.4 million at December 31.
Changes and operating performance
- U.S. Pawn net revenue declined 2% to $99.5 million. Segment contribution rose 4% to $28.6 million, partly because the prior-year period included a $2.9 million uncollectible-refiner-receivable charge. Merchandise gross margin fell 2 percentage points to 36%, while pawn-loan redemption improved to 84% from 83%.
- Latin America Pawn net revenue rose 8% to $29.7 million (6% on a constant-currency basis); segment contribution increased 20% to $8.1 million. Growth included new stores and higher pawn yield, while merchandise margin declined 3 percentage points to 28%. Management attributed weaker loan demand and increased sales activity in part to Mexican social-welfare payments.
- Other International reported a $6.5 million segment loss, improved from a $15.9 million loss. The prior-year period included a $13.3 million impairment of the Cash Converters International investment; the current quarter included EZCORP’s $10.1 million pre-tax share of a Queensland class-action settlement, or $7.1 million after tax.
- Interest expense declined to $5.3 million from $8.8 million, primarily because the $195 million 2019 Convertible Notes were repaid in June 2019. Equity-method losses increased to $5.9 million from $1.1 million. Corporate administrative expense rose to $17.5 million from $13.2 million.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management expects operating cash flow and cash on hand to fund anticipated FY2020 needs, and said it continues to consider acquisitions and potential future financing.
- Management expects Mexico’s social-welfare programs to continue, while anticipating customer needs may return to more traditional patterns in six to twelve months. It expects Lana, launched late in the quarter in select Florida locations, to support customer engagement and pawn-loan redemptions; discrete Lana revenue was minimal to date.
- Results are seasonal: merchandise sales are typically strongest in the first two fiscal quarters, while pawn service charges generally peak in the fourth quarter. Gold prices, foreign exchange rates, interest rates, consumer demand, regulation and execution of store growth may affect results.
- Disclosure controls and internal control over financial reporting were not effective at December 31, 2019 because a previously reported material weakness in IT general controls remained under remediation. Management reported additional procedures to support the reliability of the statements, but remediation was not complete.
- The company authorized a three-year share repurchase program of up to $60 million and repurchased $0.96 million of shares during the quarter. After quarter end, repurchases brought cumulative purchases to $2.47 million through January 29, 2020.
Important facts for investors to verify
- Whether operating cash flow recovers after the quarter’s working-capital outflow and how much cash is available for domestic uses.
- Progress and testing evidence for remediation of the IT general-controls material weakness.
- The ultimate cost and payment timing of the Cash Converters settlement, and the performance and valuation of the investment.
- Whether Latin America pawn demand, merchandise margins and the expected normalization of customer borrowing patterns develop as management anticipates.
- Cash deployment among share repurchases, store expansion, acquisitions and debt obligations.