EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. EZCORP operates pawn stores in the U.S. and Latin America, a digital platform called Lana, and a small Canadian financial-services business. Amounts below are in U.S. dollars.
Key financial results
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 | Prior comparable period |
|---|---|---|---|
| Total revenue | $223.3 million | $445.7 million | $214.7 million and $430.4 million |
| Net revenues | $127.4 million | $257.4 million | $127.7 million and $257.7 million |
| Operating income (loss) | $(30.7) million | $(17.2) million | $16.8 million and $31.5 million |
| Net income (loss) attributable to EZCORP | $(40.9) million | $(39.6) million | $3.4 million and $0.03 million |
| Diluted EPS from continuing operations | $(0.74) | $(0.71) | $0.06 and approximately break-even |
Quarterly revenue increased 4%, but net revenues were essentially flat. The operating loss included $47.1 million of goodwill and intangible-asset impairment charges; excluding those charges, operating income was approximately $16.4 million. Net revenues were about 57% of revenue for the quarter, versus about 59% a year earlier. Merchandise sales rose 7% to $129.8 million, while pawn service charges fell 2% to $80.2 million. Six-month revenue rose 4%, while net revenues were flat.
- Cash flow: Six-month operating cash flow was $21.3 million, down from $50.6 million. Investing activities provided $28.6 million, versus $14.9 million; financing used $7.3 million, versus $2.7 million. Cash and restricted cash increased $35.3 million.
- Liquidity: March 31 cash and cash equivalents were $193.7 million, plus $4.0 million restricted cash. The company said $34.9 million of its cash balance was unavailable for domestic operations because it was intended to remain in foreign operations. Cash exceeded $250 million at the end of April.
- Debt and leases: Debt carrying value was $244.6 million, chiefly convertible notes due 2024 and 2025; only $0.3 million was classified as current. Lease liabilities totaled approximately $215.1 million net of interest, following adoption of the new lease accounting standard.
- Balance sheet: Total assets were $1.213 billion, total liabilities $535.6 million, and equity $677.6 million. Pawn loans were $160.2 million and inventory $173.3 million.
Material changes and operating trends
- COVID-19 effects began in mid-March. Store closures were more severe in Guatemala, El Salvador, Honduras and Peru; as of the report, 99% of U.S. stores and 90% of Latin America stores were open. The company reported 163 lost U.S. store operating days and 1,089 lost Latin America days in March.
- Pawn loan balances at quarter-end were down 6.6% in U.S. Pawn and 10.5% in Latin America Pawn year over year on a reported-currency basis. The decline accelerated after March 31, reflecting lower customer borrowing and originations.
- Merchandise sales increased, partly offsetting reduced lending revenue. U.S. merchandise gross margin was 36%, down 100 basis points; Latin America’s was 25%, down 600 basis points. Higher gold prices supported jewelry-scrapping margins.
- Goodwill and intangible impairment charges were $47.1 million: $41.3 million goodwill, $4.6 million acquired trade names, and $1.1 million long-lived assets. Latin America accounted for $35.9 million of the reported impairment.
- Cash Converters International’s class-action settlement resulted in a $7.1 million net-of-tax charge in the first quarter for EZCORP’s share. The investee’s settlement was subject to court approval.
- EZCORP adopted lease accounting standard ASC 842 on October 1, 2019, recording a $237.5 million net right-of-use asset and $246.0 million lease liability at adoption; this affects comparability with prior periods.
Outlook, risks and unusual items
Management expects the pandemic to adversely affect fiscal 2020 revenue and earnings, with possible further effects on results, financial position and liquidity. The duration and severity of the effects, reopening pace and customer behavior remain uncertain. Management stated that pawn-loan declines will weigh on revenue and earnings until balances recover; strong merchandise sales and liquidity measures provided offsets. No numerical earnings or revenue guidance was provided.
- The company suspended its share-repurchase program on March 20 to preserve liquidity. It had repurchased 943,149 shares for $5.2 million during the six months. It also delayed some capital spending, slowed Latin America store openings, renegotiated vendor arrangements and planned to defer certain tax payments where permitted.
- Management said operating businesses had been performing well before COVID-19, but the company could record further impairments as forecasts and market conditions change.
- Disclosure controls and internal control over financial reporting were deemed ineffective at March 31 because a previously reported material weakness in IT general controls had not been fully remediated. Management said additional procedures supported the fair presentation of the reported statements.
- Other risks include foreign exchange, gold and interest-rate movements, as well as litigation and regulatory matters. Management stated it could not determine the ultimate outcome of current proceedings, but did not expect their resolution to materially adversely affect the company.
Important facts for investors to verify
- Whether post-quarter pawn-loan balances, originations and store operations stabilized, and how those trends affected subsequent revenue and liquidity.
- Whether April cash above $250 million was sustained and how much remains available for domestic operations, given foreign cash restrictions and ongoing obligations.
- The assumptions behind the $47.1 million impairment and the potential for additional impairment charges.
- Progress in remediating the IT general-control material weakness and any effect on reporting reliability.
- The resolution and financial exposure related to the Cash Converters settlement and the AlphaCredit indemnity claim; $4.0 million of deferred consideration was placed in escrow pending the latter.
- Convertible-note terms, lease commitments and future financing or liquidity needs as business conditions evolve.