EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2010; compared with the three months ended December 31, 2009. Unless noted otherwise, amounts are U.S. dollars. EZCORP operates pawn and short-term consumer lending businesses in the U.S., Mexico and Canada, and holds equity-method investments in Albemarle & Bond and Cash Converters.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Total revenue | $218.8 million | $184.8 million | +18.4% |
| Net revenue | $134.2 million | $112.9 million | +18.9% |
| Operating income | $39.4 million | $38.9 million | +1.3% |
| Net income | $27.4 million | $25.7 million | +6.7% |
| Diluted EPS | $0.55 | $0.52 | — |
| Operating cash flow | $35.2 million | $35.3 million | Nearly unchanged |
Revenue growth reflected higher merchandise and jewelry-scrapping sales, pawn service charges and auto-title fees. Same-store total revenue increased 13%. Net income included a $10.9 million pretax charge related to the former CEO’s retirement and a related $3.8 million tax benefit; excluding these items, management reported net income of $34.5 million, up 34% year over year. Reported net margin was approximately 12.5%, versus 13.9% in the prior-year quarter.
- U.S. Pawn: Segment revenue was $160.8 million and store operating income was $49.6 million, versus $138.2 million and $38.0 million. Pawn service charges rose 19%; same-store total revenue rose 12%. Merchandise gross margin improved to 38.7% from 37.7%, while jewelry-scrapping margin eased to 37.2% from 38.0%.
- Empeño Fácil: Segment revenue was $12.4 million and store operating income was $2.4 million, versus $5.8 million and $0.8 million. Expansion and new stores contributed to growth; approximately 47% of stores had been open less than a year.
- EZMONEY: Segment revenue was $45.6 million and store operating income was $17.7 million, versus $40.8 million and $15.9 million. Auto-title fees more than doubled, but related bad debt rose to 15.7% of fees from 14.8%. Signature-loan bad debt rose to 25.0% of fees from 22.6%.
Cash, debt and liquidity
- Cash was $23.9 million at December 31, 2010, compared with $17.0 million a year earlier and $25.9 million at September 30, 2010. Operating cash flow of $35.2 million was offset by $30.5 million of investing outflows and $6.6 million of financing outflows.
- Investing outflows included $13.7 million for four pawn-store acquisitions, $7.9 million of property and equipment additions, and net loan funding. The company repaid $2.5 million of term debt during the quarter.
- Total debt was $22.5 million: $10.0 million current and $12.5 million long-term. The $80 million revolving facility matures December 31, 2011; $75.0 million remained available. The company reported compliance with its debt covenants.
- Current assets were $317.0 million and current liabilities $70.2 million. Total assets were $645.0 million; stockholders’ equity was $558.3 million.
- Contractual obligations included $148.4 million of operating leases and $22.5 million of debt principal. Management expected operating cash flow, cash on hand and revolver availability to fund obligations, planned growth, capital spending and working capital needs for the coming year.
Material changes, outlook and risks
- Administrative expense increased to $26.1 million from $12.3 million, largely due to the CEO retirement charge; excluding that charge, management said administrative expense was 11% of net revenue in both quarters. Equity-method investment income increased to $3.4 million from $1.3 million, including a contribution from Cash Converters that was absent in the prior-year quarter.
- The company acquired four U.S. pawn stores for $13.7 million during the quarter. In January 2011 it acquired five additional Florida pawn stores for approximately $17.6 million. Management planned approximately 55–60 new Empeño Fácil stores, 35–40 CASHMAX locations and 10 U.S. pawn stores in fiscal 2011, including openings already completed in the quarter. It expected about $8 million of additional capital expenditures in the remainder of the fiscal year, plus working capital and startup costs.
- New stores are expected to weigh on earnings and liquidity until their second year of operation. The filing describes seasonal variation and cautions that this quarter’s results are not necessarily indicative of full-year results.
- Regulatory changes affected consumer lending in Colorado and Wisconsin. EZCORP replaced Colorado payday loans with installment loans; Wisconsin’s January 2011 law restricted payday loans and eliminated auto-title loans. Further store closures or consolidations may be considered if operations under the revised rules are not profitable.
- Letters of credit supporting brokered loans create off-balance-sheet exposure: maximum exposure was $27.9 million for signature loans and $8.0 million for auto-title loans, with a $2.0 million allowance for expected losses. These amounts assume all covered loans default and none is collected.
- Other disclosed risks include borrower defaults and allowance-estimation uncertainty, gold-price movements, foreign-exchange fluctuations, variable interest rates, and legal or regulatory proceedings. Management said current legal matters were not expected to have a material adverse effect, while noting outcomes cannot be assured. A 50-basis-point increase in interest rates was estimated to add approximately $66,000 of interest expense over the remaining nine months of fiscal 2011.
Important facts for investors to verify
- Reconcile the CEO retirement charge and tax effect: the MD&A cites a $10.9 million pretax charge and $3.8 million tax benefit, while the stock-compensation note describes $7.3 million of accelerated vesting expense and a $2.5 million related tax benefit.
- Track signature- and auto-title-loan defaults, collection recoveries, allowance adequacy and maximum letter-of-credit exposure, particularly as loan balances and bad-debt ratios change.
- Assess the profitability, funding needs and execution of planned store openings and acquisitions, alongside lease commitments and the revolving facility’s December 2011 maturity.
- Monitor the effects of Colorado and Wisconsin laws, gold prices, foreign exchange and seasonal patterns on reported revenue, margins and cash flow.
- Compare reported earnings with management’s adjusted $34.5 million net income figure and confirm the treatment of the retirement-related items.