EZCORP, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. Although the request references 2019 Q4, this is an annual filing; selected fourth-quarter results are noted below. EZCORP operates pawn stores in the U.S. and Latin America, Canadian financial-services stores, and holds a 34.75% equity investment in Cash Converters International. At year-end it operated 1,014 locations.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Total revenues | $847.2 million | $812.2 million | +4% |
| Net revenues | $494.4 million | $481.6 million | +3% |
| Operating income | $47.0 million | $67.1 million | -30% |
| Income from continuing operations before tax | $4.2 million | $55.5 million | -92% |
| Net income attributable to EZCORP | $2.5 million | $37.3 million | -93% |
| Diluted EPS from continuing operations | $0.05 | $0.66 | — |
| Cash flow from operating activities | $103.5 million | $89.0 million | +16% |
- Pawn service charges rose 7% to $327.4 million, supported by higher average pawn-loan balances. Merchandise sales gross profit fell 4% to $155.9 million; merchandise gross margin declined to 34% from 37%. Jewelry-scrapping gross profit declined 11% to $7.5 million.
- Operating expenses increased 8% to $447.4 million. Non-operating costs included a $19.7 million impairment of the Cash Converters investment; total non-operating expenses rose to $42.8 million from $11.6 million.
- Year-end cash and cash equivalents were $157.6 million, down from $285.3 million; cash including restricted cash was $162.4 million. Approximately $30.8 million of cash was held by foreign subsidiaries and was not available for domestic operations.
- Cash used in financing was $198.3 million, principally reflecting repayment at maturity of $195.0 million of 2019 convertible notes using cash on hand. Gross debt obligations were $318.0 million; reported long-term debt, net, was $238.4 million. Working capital was $514.7 million.
- Pawn loans outstanding were $199.1 million, essentially unchanged from $198.5 million; inventory, net, rose to $179.4 million from $167.0 million.
Material changes and fourth-quarter results
- U.S. Pawn net revenues increased 2% to $386.0 million; segment contribution was down 1% to $101.7 million, including a $2.9 million reserve against a receivable from a bankrupt gold refiner.
- Latin America Pawn net revenues increased 9% to $105.2 million, but segment contribution fell 27% to $24.1 million. Results included a $6.1 million prior-period transaction-tax adjustment; excluding that item, management reported stronger revenue growth. Operating costs rose with store expansion and higher labor, security and licensing costs.
- Other International recorded a $26.8 million segment loss, versus a $10.0 million loss, reflecting the Cash Converters impairment, lower equity-method earnings and lower Canadian loan revenue.
- In Q4 FY2019, net revenues were $120.9 million and net loss attributable to EZCORP was $0.6 million, compared with $124.5 million and a $1.4 million loss in Q4 FY2018.
Outlook, risks and unusual items
- Management said cash on hand and operating cash flows were expected to fund fiscal 2020 obligations, planned store openings, capital expenditures and working capital. It anticipated lower operating cash flow in Q1 FY2020 versus the prior-year quarter due to payment of accounts payable after year-end. No earnings or revenue forecast was provided.
- The board authorized a share-repurchase program of up to $60 million over three years in December 2019. EZCORP continued to consider acquisitions and Latin American store growth, and was developing its Lana digital platform. The POS2 system rollout in U.S. and Mexico stores was completed in October 2019.
- Cash Converters agreed on October 21, 2019 to settle an Australian class action for AUD $42.5 million, subject to court approval. EZCORP estimated its share would result in an approximately $10 million charge in FY2020.
- Management identified a material weakness in IT general controls, including access, user administration, program changes and database monitoring. Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end; the auditor issued an adverse opinion on internal control. The auditor nevertheless gave an unqualified opinion on the financial statements.
- Other significant exposures include pawn and consumer-lending regulation, gold prices, foreign exchange, Latin American political and operating conditions, store crime, cyber and IT risks, litigation, and potential impairment of goodwill or investments. Goodwill was $300.5 million; the GPMX reporting unit had only 7% estimated fair-value headroom at year-end. A $0.6 million trade-name impairment was recorded.
- Prior-period financial statements were corrected for errors, primarily involving pawn service-charge receivables and IT reporting. The company stated the errors were not material to previously reported periods; opening retained earnings was reduced by $3.4 million.
- The proposed $4.9 million securities-litigation settlement, covered by insurance, had been placed in escrow and remained subject to final court approval scheduled for December 2019.
Key facts for investors to verify
- Whether remediation of the IT-control material weakness is effective and independently validated, and whether further reporting corrections are needed.
- Whether core pawn-loan growth can sustain service-charge gains while merchandise margins recover, particularly in Latin America.
- Cash availability and debt service capacity after the $195 million note repayment, including future convertible-note terms and maturities.
- The final cost and funding consequences of the Cash Converters settlement and any further impairment of that investment.
- Collection of the remaining $8 million Grupo Finmart deferred compensation and the nature and potential exposure of AlphaCredit’s pre-closing tax indemnity claim.