EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2018; comparisons are with the three months ended December 31, 2017. EZCORP operates pawn businesses in the U.S. and Latin America, with consumer finance activities in Canada and an investment in Cash Converters International. Figures below are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Total revenue | $215.9 million | $204.5 million |
| Net revenues after merchandise and other costs | $130.2 million | $122.4 million |
| Operating income | $13.9 million | $19.7 million |
| Income (loss) from continuing operations before tax | $(5.6) million | $19.8 million |
| Net income (loss) attributable to EZCORP | $(4.2) million | $12.7 million |
| Basic and diluted EPS from continuing operations | $(0.07) | $0.24 basic; $0.23 diluted |
| Cash from operating activities | $22.8 million | $19.3 million |
| Cash, cash equivalents and restricted cash at period end | $297.3 million | $113.8 million |
Total revenue increased about 6%, while operating income declined about 30%. The operating margin was approximately 6.4% of total revenue, versus 9.7% a year earlier. The company reported an attributable net loss, principally reflecting investment impairment and other unusual charges, as well as higher interest expense.
At December 31, 2018, current assets were $763.3 million and current liabilities were $259.6 million (a current ratio of approximately 2.9). Debt had a carrying value of $420.2 million, including $190.2 million classified as current and $229.9 million long-term. Cash was $297.0 million on the balance sheet; $22.2 million was intended to remain permanently invested in foreign operations and was not available for domestic operations. Cash flow from investing activities was $(8.3) million, compared with $(68.3) million, largely reflecting substantially lower acquisition spending. Financing cash flow was $(2.6) million.
Material changes and segment performance
- U.S. Pawn: Net revenues rose 5% to $101.3 million and segment contribution was $27.4 million, down 1%. Pawn service charges grew 8%, supported by higher average loan balances. Merchandise gross margin was 38%, down 1 percentage point; management expected full-year margin in the 35%–38% range. Segment contribution included a $2.9 million reserve related to a scrap refiner receivable.
- Latin America Pawn: Net revenues increased 15% to $27.6 million, or 20% on a constant-currency basis, but segment contribution fell 31% to $6.2 million. Higher operating costs, including staffing and wage costs, and a $1.5 million reserve against a refiner-related receivable and inventory balance contributed to the decline. Constant-currency figures are non-GAAP measures.
- Other International: Segment loss was $15.9 million versus contribution of $0.4 million a year earlier. This included a $13.3 million other-than-temporary impairment of the Cash Converters International investment and a $2.9 million estimated share of charges relating to Queensland class-action litigation.
- Store count increased to 997 from 923 a year earlier, including 462 Latin America Pawn stores versus 383. The comparison is affected by acquisitions, including GPMX, whose prior-year results were included only from October 6, 2017.
- Interest expense increased 49% to $8.8 million, primarily because of higher debt outstanding. Administrative expense rose 16%, including $2.1 million of costs associated with development of a digital platform.
Outlook, risks and unusual items
- Management said operating cash flow and cash on hand were expected to fund contractual obligations, planned store growth, capital expenditures and working capital needs through fiscal 2019. It cautioned that repayment of the $195 million convertible notes due June 2019 may require refinancing or new debt, equity or convertible securities, depending on acquisition activity and other factors.
- Management planned to open at least ten additional Latin America stores during the remainder of fiscal 2019. It also cited further expansion opportunities through new stores and acquisitions.
- In November 2018, the principal jewelry refiner processing the company’s scrap entered U.S. Chapter 11 proceedings. EZCORP fully reserved $4.4 million of potential exposure in the quarter; future recoveries, if any, may be recorded as more information becomes available.
- The company warned that the Cash Converters investment could incur further impairment if its fair value remains below carrying value. Its share-price decline and uncertainty surrounding the Queensland class action were cited in the quarter’s impairment assessment.
- Risks include the pending federal securities class action and ongoing SEC investigation; EZCORP said it could not predict outcomes, intended to defend the litigation and continued to cooperate with the SEC. No liability was recorded for the described matters because management did not consider a loss probable or reasonably estimable at that time.
- Management identified risks to the digital platform’s development and commercial success, as well as exposure to interest rates, gold prices, foreign exchange movements and seasonal operating patterns. The company anticipated a material balance-sheet impact from adopting lease accounting in fiscal 2020.
Key facts for investors to verify
- How the company will repay or refinance the $195 million notes maturing in June 2019, and the resulting cost and terms.
- Whether pawn-loan growth and merchandise margins can be sustained while operating expenses rise, particularly in Latin America.
- Potential recoveries or additional losses associated with the refiner bankruptcy and Cash Converters investment.
- Developments in the securities litigation, SEC investigation and Queensland class-action matter.
- Actual spending, customer adoption and returns from the digital-platform initiative, and the balance-sheet effect of lease-standard adoption.