EZCORP, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to inform the reader about matters affecting the financial condition and results of operations ofEZCORP, Inc. and its subsidiaries (collectively, "we," "us", "our", "EZCORP" or the "Company"). The following discussion should be read together with our condensed consolidated financial statements and related notes included elsewhere within this report. This discussion contains forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements. See "Part I, Item 1A - Risk Factors" of our Annual Report on Form 10-K for the year endedSeptember 30 , 20 20 , as supplemented by the information set forth in "Part I, Item 3 - Quantitative and Qualitative Disclosures about Market Risk" and "Part II, Item 1A - Risk Factors" of this Report for a discussion of certain risks, uncertainties and assumptions associated with these statements. Business OverviewEZCORP is aDelaware corporation headquartered inAustin, Texas . We are a leading provider of pawn loans inthe United States andLatin America . Pawn loans are non-recourse loans collateralized by personal property. We also sell merchandise, primarily collateral forfeited from unpaid loans or goods purchased directly from customers. We exist to serve our customers' short-term cash needs, helping them to live and enjoy their lives. We are focused on three strategic pillars: Strengthen the Core Renewed focus on the unique and
essential elements of our pawn
business
Cost Reduction and Significant and sustained adjustment of cost base through
Simplification ongoing simplification
Innovate and Grow Broaden customer engagement to service more customers more
frequently in more locations
Pawn Activities
At our pawn stores, we offer pawn loans, which are typically small, nonrecourse
loans collateralized by tangible personal property. We earn pawn service charges
on our pawn loans, which varies by state and loan size. Collateral for our pawn
loans consists of tangible personal property, generally jewelry, consumer
electronics, tools, sporting goods and musical instruments. Security for our
pawn loans is provided via the estimated resale value of the collateralized
personal property and the perceived probability of the loans' redemption.
Our ability to offer quality pre-owned goods at prices significantly lower than
original retail prices attracts value-conscious customers. The gross profit on
sales of inventory depends primarily on our assessment of the loan or purchase
value at the time the property is either accepted as loan collateral or
purchased and our ability to sell that merchandise in a timely manner. As a
significant portion of our inventory and sales involve gold and jewelry, our
results can be influenced by the market price of gold and diamonds.
Growth and Expansion
Our strategy is to expand the number of locations we operate through opening new
("de novo") locations and through acquisitions in both Latin America and the
United States and potential new markets. Our ability to add new stores is
dependent on several variables, such as projected achievement of internal
investment hurdles, the availability of acceptable sites or acquisition
candidates, the alignment of acquirer/seller price expectations, the regulatory
environment, local zoning ordinances, access to capital and the availability of
qualified personnel. We see opportunity for further expansion through
acquisitions and de novo openings in Latin America and acquisitions in the
United States .
Seasonality and Quarterly Results
In the United States , pawn service charges are historically highest in our
fourth fiscal quarter (July through September) due to a higher average loan
balance during the summer lending season and lowest in our third fiscal quarter
(April through June) following the tax refund season and merchandise sales are
highest in our first and second fiscal quarters (October through March) due to
the holiday season, jewelry sales surrounding Valentine's Day and the
availability of tax refunds. In Latin America , most of our customers receive
additional compensation from their employers in December, and many receive
additional compensation in June or July, applying downward pressure on loan
balances and fueling some merchandise sales in those periods. As a net effect of
these and other factors and excluding discrete charges, our consolidated profit
before tax is generally highest in our first fiscal quarter (October through
December) and lowest in our third
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fiscal quarter (April through June). These historical trends have been impacted
by COVID-19. However, we expect these historical trends to return in the future.
Financial Highlights
We remain focused on optimizing our balance of pawn loans outstanding ("PLO")
and the resulting higher pawn service charges ("PSC"). The following chart
presents sources of net revenues, including PSC, merchandise sales gross profit
("Merchandise sales GP") and jewelry scrapping gross profit ("Jewelry Scrapping
GP") for the three months ended December 31, 2020 and 2019:
[[Image Removed: ezpw-20201231_g2.jpg]]
The following chart presents sources of net revenues by geographic disbursement
for the three months ended
[[Image Removed: ezpw-20201231_g3.jpg]]
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Business Developments
COVID-19
The COVID-19 pandemic continues to affect the U.S. and global economies, and as
disclosed in our 2020 Annual Report on Form 10-K, the pandemic also affected our
business in a variety of ways beginning in the second quarter of fiscal 2020 and
continuing into fiscal 2021.
Our business was negatively impacted by COVID-19 during the current quarter
largely due to volume declines as compared to the prior year in pawn loan
originations and associated loan balances in both the U.S. and Latin America , as
a result of a change in customer borrowing behaviors. Additionally, the impact
of sustained lower pawn portfolios has led to reduced inventory available for
sale. As a result, our net revenues for the three months ended December 31, 2020
were down $21.7 million as compared to the prior year.
The full extent and duration of the COVID-19 impact on the global economy
generally, and on our business specifically, is currently unknown. We expect the
impact of the pandemic, and the recovery therefrom, will continue to adversely
affect net revenues and earnings in fiscal 2021. A prolonged pandemic and
recovery may have an adverse effect on our results of operations, financial
position and liquidity in future periods.
Results of Operations
Non-GAAP Constant Currency Financial Information
To supplement our condensed consolidated financial statements, which are
prepared and presented in accordance with GAAP, we provide certain other
non-GAAP financial information on a constant currency basis ("constant
currency"). We use constant currency results to evaluate our Latin America Pawn
operations, which are denominated primarily in Mexican pesos, Guatemalan
quetzals and other Latin American currencies. We believe presentation of
constant currency results is meaningful and useful in understanding the
activities and business metrics of our Latin America Pawn operations and reflect
an additional way of viewing aspects of our business that, when viewed with GAAP
results, provide a better understanding and evaluation of factors and trends
affecting our business. We provide non-GAAP financial information for
informational purposes and to enhance understanding of our GAAP consolidated
financial statements. We use this non-GAAP financial information to evaluate and
compare operating results across accounting periods. Readers should consider the
information in addition to, but not rather than or superior to, our financial
statements prepared in accordance with GAAP. This non-GAAP financial information
may be determined or calculated differently by other companies, limiting the
usefulness of those measures for comparative purposes.
Constant currency results reported herein are calculated by translating
consolidated balance sheet and consolidated statement of operations items
denominated in local currency to U.S. dollars using the exchange rate from the
prior-year comparable period, as opposed to the current period, in order to
exclude the effects of foreign currency rate fluctuations. We used the
end-of-period rate for balance sheet items and the average closing daily
exchange rate on a monthly basis during the appropriate period for statement of
operations items. Our statement of operations constant currency results reflect
the monthly exchange rate fluctuations and are not directly calculable from the
rates below. Constant currency results, where presented, also exclude the
foreign currency gain or loss. The end-of-period and approximate average
exchange rates for each applicable currency as compared to U.S. dollars as of
and for the three months ended December 31, 2020 and 2019 and September 30, 2020
and 2019 were as follows:
Three Months Ended Three Months Ended
December 31, December 31, September 30, September 30,
2020 2019 2020 2019 2020 2019 2020 2019
Mexican peso 19.9 18.9 20.5 19.2 21.6 19.7 22.1 19.4
Guatemalan quetzal 7.6 7.5 7.6 7.5 7.6 7.6 7.5 7.5
Honduran lempira 23.8 24.4 24.1 24.3 24.3 24.2 24.3 24.1
Peruvian sol 3.6 3.3 3.6 3.3 3.5 3.4 3.5 3.3
20-------------------------------------------------------------------------------- Table of Contents Operating Results Segments We manage our business and report our financial results in three reportable operating segments; •U.S. Pawn - Represents all pawn activities inthe United States ; •Latin America Pawn - Represents all pawn activities inMexico and other parts ofLatin America ; and •Other International - Represents our equity interest in the net income of Cash Converters International andRich Data Corporation and our financial services stores inCanada , operating under the CASHMAX brand. In the fourth quarter of fiscal 2020, we closed our stores inCanada , and operating activities related to CASHMAX are not material. See Note 12 - Segment Information, for information regarding changes in reportable segments. Our historical segment results have been recast to conform to current presentation. Three Months EndedDecember 31, 2020 vs. Three Months EndedDecember 31, 2019 Store Data by Segment
Three Months Ended
U.S. Pawn Latin America Pawn Consolidated
As of September 30, 2020 505 500 1,005
New locations opened - 2 2
Locations sold, combined or closed - - -
As of December 31, 2020 505 502 1,007
Three Months Ended December 31, 2019
U.S. Pawn Latin America Pawn Other International Consolidated
As of September 30, 2019 512 480 22 1,014
New locations opened - 4 - 4
Locations sold, combined or closed - - - -
As of December 31, 2019 512 484 22 1,018
21-------------------------------------------------------------------------------- Table of Contents These tables, as well as the discussion that follows, should be read in conjunction with the accompanying condensed consolidated financial statements and related notes.U.S. Pawn The following table presents selected summary financial data for ourU.S. Pawn segment: Three Months Ended December 31, (in thousands) 2020 2019 Change Net revenues: Pawn service charges$ 50,220 $ 64,090 (22)% Merchandise sales 82,253 95,354 (14)% Merchandise sales gross profit 34,194 33,990 1% Gross margin on merchandise sales 42 % 36 % 600bps Jewelry scrapping sales 4,004 6,117 (35)% Jewelry scrapping sales gross profit 1,160 1,362 (15)% Gross margin on jewelry scrapping sales 29 % 22 % 700bps Other revenues 22 36 (39)% Net revenues 85,596 99,478 (14)% Segment operating expenses: Store expenses 62,092 68,059 (9)% Depreciation and amortization 2,736 2,865 (5)% Segment operating contribution 20,768 28,554 (27)% Other segment income 27 - * Segment contribution$ 20,741 $ 28,554 (27)% Other data: Net earning assets (a)$ 199,569 $ 305,336 (35)% Inventory turnover 2.6 1.8 44% Average monthly ending pawn loan balance per store (b) $ 233$ 301 (23)% Monthly average yield on pawn loans outstanding 14 % 14 % -bps Pawn loan redemption rate 84 % 84 % -bps
* Represents a percentage computation that is not mathematically meaningful. (a) Balance includes pawn loans and inventory. (b) Balance is calculated based upon the average of the monthly ending balances during the
applicable period.
Pawn service charges decreased by 22% due to a decrease in pawn loans
outstanding resulting from the effects of the COVID-19 pandemic. Same stores
pawn service charges also decreased by 22%.
Merchandise sales decreased 14%, but merchandise sales gross profit
increased 1% to $34.2 million driven by lower inventory levels and a 600 bps
improvement in merchandise sales gross profit margin, primarily driven by
reduced aged inventory levels and improved inventory turnover. Same stores
merchandise sales also decreased by 14%.
Store expenses decreased by 9% driven by a reduction in labor expense.
Segment contribution decreased $7.8 million primarily due to the changes in
revenue and store expenses described above.
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Latin America Pawn
The following table presents selected summary financial data for the Latin
America Pawn segment, including constant currency results, after translation to
U.S. dollars from its functional currencies noted above under "Results of
Operations - Non-GAAP Financial Information."
Three Months Ended
2020 (Constant Change (Constant
(in thousands) 2020 (GAAP) 2019 (GAAP) Change (GAAP) Currency) Currency)
Net revenues:
Pawn service charges $ 13,269 $ 20,635 (36)% $ 13,949 (32)%
Merchandise sales 25,530 31,374 (19)% 26,784 (15)%
Merchandise sales gross profit 9,046 8,662 4% 9,446 9%
Gross margin on merchandise sales 35 % 28 % 700bps 35 % 700bps
Jewelry scrapping sales 2,755 3,411 (19)% 2,855 (16)%
Jewelry scrapping sales gross profit 397 412 (4)% 417 1%
Gross margin on jewelry scrapping sales 14 % 12 % 200bps 15 % 300bps
Other revenues, net 7 25 (72)% 8 (68)%
Net revenues 22,719 29,734 (24)% 23,820 (20)%
Segment operating expenses:
Store Expenses 17,217 19,983 (14)% 18,097 (9)%
Depreciation and amortization 1,860 1,889 (2)% 1,956 4%
Segment operating contribution 3,642 7,862 (54)% 3,767 (52)%
Other segment income (a) (1,320) (265) 398% (1,281) 383%
Segment contribution $ 4,962 $ 8,127 (39)% $ 5,048 (38)%
Other data:
Net earning assets (b) $ 43,263 $ 77,619 (44)% $ 45,009 (42)%
Inventory turnover 3.8 2.7 41% 3.8 41%
Average monthly ending pawn loan balance
per store (c) $ 53 $ 119 (55)% $ 56 (53)%
Monthly average yield on pawn loans
outstanding 17 % 16 % 100bps 17 % 100bps
Pawn loan redemption rate (d) 83 % 79 % 400bps 83 % 400bps
(a) Fiscal 2021 constant currency amount excludes net GAAP basis foreign currency
transaction adjustment of
net foreign currency transaction gains for fiscal 2020 were nominal and are included
in the above results.
(b) Balance includes pawn loans and inventory.
(c) Balance is calculated based upon the average of the monthly ending balances during
the applicable period.
(d) Rate is solely inclusive of results from Mexico Pawn.
In the current quarter, our Latin America pawn segment opened two de novo
stores.
Pawn service charges decreased 36% (32% on a constant currency basis). Same
stores pawn service charges also decreased by 36%. The average ending monthly
pawn loan balance outstanding during the current quarter was down 55% (53% on a
constant currency basis). We have experienced a substantial decline in new loans
activity and associated loan balances as a result of a change in customer
borrowing behaviors due to COVID-19.
Merchandise sales decreased 19% (15% on a constant currency basis). Same stores
merchandise sales decreased by 20%. This decrease in merchandise sales was
offset by an increase in merchandise sales gross profit of 4% to $9.0
million (9% to $9.4 million on a constant currency basis) driven by a 700 basis
points improvement in merchandise sales gross profit margin primarily due to
reduced aged inventory levels and improved inventory turnover.
Store expenses decreased by 14% (9% on a constant currency basis) driven by a
reduction in labor expense.
Segment contribution decreased $3.2 million primarily due to the changes in
revenue and store expenses described above.
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Other International
The following table presents selected financial data for our Other International
segment after translation to U.S. dollars from its functional currency of
primarily Australian and Canadian dollars:
Three Months Ended December 31,
(in thousands) 2020 2019 Change
Net revenues:
Consumer loan fees, interest and other $ 75 $ 1,393 (95)%
Consumer loan debt - 536 (100)%
Net revenues 75 857 (91)%
Segment operating expenses:
Operations - 1,233 (100)%
Equity in net (income) loss on unconsolidated affiliates (516) 5,897 (109)%
Segment operating contribution 591 (6,273) (109)%
Other segment expense (210) 203 (203)%
Segment contribution (loss) $ 801 $ (6,476) (112)%
Segment contribution was $0.8 million , an increase of $7.3 million from the
prior-year quarter primarily due to a $7.1 million charge, ($10.1 million , net
of a $3.0 million tax benefit) in the first quarter of fiscal 2020 for our share
of the Cash Converters International
settlement of a Queensland, Australia class action lawsuit.
We operated 22 financial services stores in Canada under the CASHMAX brand
during fiscal year 2020. During the fourth quarter of fiscal year 2020, we
closed our CASHMAX business and are no longer operating stores in Canada .
Other Items
The following table reconciles our consolidated segment contribution discussed
above to net income attributable to EZCORP, Inc. , including items that affect
our consolidated financial results but are not allocated among segments:
Three Months Ended December 31,
(in thousands) 2020 2019 Percentage Change
Segment contribution $ 26,504 $ 30,205 (12)%
Corporate expenses (income):
General and administrative 12,510 18,839 (34)%
Depreciation and amortization 2,976 2,945 1%
Gain on sale or disposal of assets and other 52 716 (93)%
Interest expense 5,455 5,131 6%
Interest income (57) (455) (87)%
Other expense 66 32 *
Income before income taxes 5,502 2,997 84%
Income tax expense 1,203 1,759 (32)%
Net income $ 4,299 $ 1,238 247%
* Represents a percentage computation that is not mathematically meaningful.
Segment contribution decreased$3.7 million or 12% over the prior-year quarter primarily due to reduced pawn service charges from a decline in new loans activity and associated loan balances as a result of a change in customer borrowing behaviors due to COVID-19, partially offset by increased merchandise sales gross profit and decreased store expenses. General and administrative expenses decreased$6.3 million or 34% due to strategic initiatives implemented in the fourth quarter of fiscal year 2020 to optimize our cost structure at the corporate level. 24
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Table of Contents Liquidity and Capital Resources We currently believe that, based on available capital resources and projected operating cash flow, we have adequate capital resources to fund working capital needs, currently anticipated capital expenditures, currently anticipated business growth and expansion, tax payments, and current and projected debt service requirements. Cash and Cash Equivalents Our cash and equivalents balance was$290.5 million atDecember 31, 2020 compared to$304.5 million atSeptember 30, 2020 . AtDecember 31, 2020 , our cash and equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments. Cash Flows The table and discussion below presents a summary of the selected sources and uses of our cash:
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