EZCORP, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 31, 2014; comparisons are with the three months ended December 31, 2013. Amounts are in U.S. dollars unless noted. EZCORP operates pawn, consumer lending and buy/sell businesses in the U.S., Canada and Mexico, and holds an equity-method investment in Cash Converters International.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $252.6 million | $263.0 million | Down 4% |
| Net revenue | $150.3 million | $163.9 million | Down 8% |
| Operating income | $27.2 million | $40.7 million | Down 33% |
| Income from continuing operations, net of tax | $14.1 million | $27.9 million | Down 50% |
| Net income attributable to EZCORP | $15.3 million | $22.6 million | Down 32% |
| Diluted EPS | $0.28 | $0.42 | Down 33% |
| Operating cash flow | $10.9 million | $17.5 million | Down 37% |
Revenue mix included merchandise sales of $109.6 million, pawn service charges of $64.9 million, consumer loan fees and interest of $52.2 million, jewelry scrapping sales of $18.5 million, and consumer loan sales and other revenue of $7.3 million. The filing reports no consolidated gross-margin percentage; net revenue was $150.3 million on $252.6 million of revenue.
At December 31, 2014, total assets were $1.35 billion, total liabilities $451.3 million, and stockholders’ equity $868.2 million. Cash and cash equivalents were $77.6 million, alongside $63.7 million of restricted cash (current and non-current). Current liabilities were $116.5 million. Reported debt and capital lease obligations totaled $349.1 million, including $115.9 million of Grupo Finmart debt described as non-recourse to EZCORP. The $230 million principal amount of 2.125% cash convertible notes is due in 2019; its net carrying amount was $187.7 million, with a separately recorded embedded derivative.
Material changes versus the prior-year quarter
- Total revenue fell $10.4 million. Jewelry scrapping sales declined 33% to $18.5 million, and consumer loan fees and interest declined 13% to $52.2 million. Merchandise sales rose 4%, and pawn service charges were broadly unchanged.
- Management attributed the lower continuing-operations income principally to weaker merchandise and jewelry-scrapping gross profit, lower consumer loan fees, and $4.5 million more interest expense. The prior-year period included a $6.3 million gain on the sale of seven U.S. pawn stores.
- U.S. & Canada segment contribution declined 35% to $30.8 million; Latin America contribution declined 48% to $4.2 million. Other International contribution rose to $2.2 million, primarily reflecting the absence of the prior-year Albemarle & Bond loss.
- Cash from investing activities was $38.9 million versus cash use of $4.3 million, mainly reflecting proceeds from asset sales, including Grupo Finmart loan portfolios. Financing activities used $26.1 million. Cash increased $21.3 million during the quarter.
- Other comprehensive loss was $24.7 million, largely due to foreign currency translation losses of $27.1 million.
Outlook, risks and unusual items
- Management said cash flow from operations and cash on hand should be adequate for contractual obligations, planned store growth, capital expenditures and working capital during the remainder of fiscal 2015. No quantified earnings or revenue guidance was provided.
- Management expects to continue Grupo Finmart loan growth using local financing and structured loan sales. It also expects to continue efforts to increase inventory turnover and reduce aged inventory through the fiscal year. The company reported 13 de novo openings in the quarter and, after quarter-end, signed an agreement to acquire 12 U.S. pawn stores.
- Restructuring followed a company-wide operational review. The remaining $3.9 million accrual primarily relates to severance, with payments expected during fiscal 2015. The company said further expense-reduction actions may be considered.
- The company exited its U.S. and U.K. online lending businesses; discontinued operations produced $1.0 million of income, compared with a $3.5 million loss in the prior-year quarter. Grupo Finmart recognized a $6.6 million gain on a structured loan-portfolio sale.
- Legal and regulatory matters include consolidated securities litigation, shareholder derivative litigation, an SEC investigation into matters including advisory relationships, a CFPB investigation, and an FCA-supervised review of legacy Cash Genie practices. EZCORP said outcomes could not be predicted; it had not accrued losses for the matters described in the financial-statement note because it did not consider losses probable or reasonably estimable. The FCA review’s potential financial effect was undetermined.
- Letters of credit supporting loans from unaffiliated lenders created maximum potential exposure of $28.1 million if all covered loans defaulted and none was collected; $3.3 million of expected losses was accrued. The filing also disclosed a $550,000 personal loan from controlling shareholder Phillip Cohen to CEO Stuart Grimshaw; the company said it was not involved.
- The filing identified seasonality and exposure to interest rates, gold prices and foreign currency movements. Management reported no material change in market-risk exposure since September 30, 2014. Disclosure controls were concluded effective as of December 31, 2014.
Important facts for investors to verify
- Whether weaker consumer lending revenue, Texas regulatory effects and lower jewelry-scrapping proceeds persist, and whether inventory markdowns or margin pressure continue.
- The quality and repeatability of Grupo Finmart’s loan-sale gains, portfolio collections, funding access and non-recourse debt structure.
- How much reported cash is available for general corporate purposes, given restricted cash and management’s stated intention to permanently reinvest some foreign earnings.
- Developments and potential costs from the SEC, CFPB, FCA and litigation matters, including insurance limits and the company’s $1 million retention for specified litigation.
- Convertible-note conversion conditions, debt service and future contractual commitments, including $292.1 million of operating lease obligations shown in the filing’s payment schedule.