EZCORP, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. EZCORP operates pawn businesses in the U.S. and Latin America, with smaller Canadian financial-services operations. Comparisons below are against the corresponding 2018 periods.
Financial performance
| Metric | Three months ended Mar. 31, 2019 | Six months ended Mar. 31, 2019 |
|---|---|---|
| Total revenue | $214.7 million, up 6.1% | $430.4 million, up 5.9% |
| Net revenue | $127.7 million, up 6.2% | $257.7 million, up 6.4% |
| Operating income | $16.8 million, down 7.8% | $31.5 million, down 16.7% |
| Net income (loss) attributable to EZCORP | $3.4 million, versus $11.6 million | $28,000, versus $24.2 million |
| Diluted EPS from continuing operations | $0.06, versus $0.21 | Reported as $0.00, versus $0.44 |
| Operating cash flow | Not separately reported for the quarter | $50.6 million, versus $45.6 million |
Quarterly operating margin was approximately 7.8% of revenue, compared with 9.0% a year earlier. For the six-month period, operating margin was approximately 7.3%, versus 9.3%. Results include a $6.5 million second-quarter impairment of the Cash Converters International investment; the six-month impairment was $19.7 million. Six-month results also include a $2.9 million share of Cash Converters’ Queensland litigation settlement charge.
Balance sheet, liquidity and debt
- At March 31, cash and cash equivalents were $347.8 million; current assets were $777.8 million and current liabilities were $265.2 million. The company said $25.0 million of cash was intended to remain permanently invested in foreign operations.
- Total debt had a $425.6 million carrying value ($513.5 million gross principal), including $192.9 million current debt and $232.7 million long-term debt.
- $195.0 million principal of 2.125% convertible notes was due June 15, 2019. Management intended to repay the notes at maturity using cash on hand.
- Six-month investing cash flow was $14.9 million, compared with $49.5 million used in the prior-year period, largely reflecting lower acquisition spending. Financing cash flow was a $2.7 million use of cash. Cash increased by $62.2 million over the six months.
Material changes and operating trends
- U.S. Pawn quarterly net revenue rose 2% and segment contribution rose 1%. Pawn service charges increased 5%, supported by a 6% increase in average monthly pawn loan balances per store. Merchandise gross margin slipped to 37% from 38%; management attributed pressure partly to delayed tax refunds.
- Latin America Pawn quarterly net revenue rose 27% (31% in constant currency) and segment contribution increased 39%. Growth reflected acquired and new stores as well as higher pawn charges. For the six months, segment contribution rose 5% (9% in constant currency). The company operated 466 Latin America stores at quarter end and planned further openings.
- Other International reported a $8.2 million quarterly segment loss and a $24.1 million six-month loss, principally due to Cash Converters impairment charges and weaker affiliate results. EZCORP owned approximately 34.75% of Cash Converters International.
- Corporate administrative expense and interest expense increased. For the quarter, interest expense rose 44% to $8.6 million; for the six months it rose 46% to $17.4 million, primarily reflecting higher debt outstanding.
- EZCORP corrected previously reported financial information for errors, mainly overstatements of pawn service-charge receivables related to IT reporting configuration. The company said the errors were not material to prior periods; corrections included a $3.8 million overstatement of October 1, 2017 retained earnings.
Outlook, risks and unusual items
- Management expected operating cash flow and cash on hand to fund contractual obligations, planned store growth, capital spending and working capital, as well as limited acquisitions, through fiscal 2019. It targeted a 35%–38% U.S. merchandise gross margin for the full fiscal year.
- The company reported ineffective disclosure controls as of March 31, 2019, due to a material weakness in IT general controls. It was remediating the issue, including hiring a Chief Information Security Officer and developing a replacement logging system; management warned that insufficient remediation could lead to financial misstatements or restatement.
- A jewelry refiner entered Chapter 11 proceedings. The company reported $3.6 million of exposure at quarter end, fully reserved; it had recovered $0.8 million during the quarter and said further recovery remained uncertain.
- EZCORP identified risks of further impairment to its Cash Converters investment and to its interests in RDC, including a $9.1 million non-interest-bearing convertible note whose recovery depends on RDC’s performance and financing.
- Pending matters include a securities class action, for which the Fifth Circuit granted EZCORP’s request to appeal class certification, and an SEC investigation. The SEC’s March 2019 sanctions order concerned the company’s former CFO; the filing said the SEC had not raised claims against EZCORP or its current or former directors and officers other than that former CFO. The company recorded no liability for the described proceedings, stating loss was not considered probable or reasonably estimable.
- Seasonality affects results: management said pawn service charges typically peak in the fourth fiscal quarter, while merchandise sales are generally strongest in the first and second quarters. No specific earnings guidance was provided.
Important facts for investors to verify
- Whether EZCORP repaid or refinanced the $195.0 million notes due June 15, 2019, and the resulting impact on liquidity and interest expense.
- Progress and effectiveness of remediation for the material weakness in IT controls, including whether subsequent filings report any restatement or control improvement.
- Future recoveries, if any, from the bankrupt jewelry refiner and any additional impairment of Cash Converters or RDC-related assets.
- Underlying segment performance apart from acquisition effects, currency movements, impairment charges and other unusual items.
- Developments in the securities litigation and other contingencies, and any changes in the company’s assessment of potential losses.