EZCORP INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 of EZCORP, 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 ended September 30, 2023, 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 Overview EZCORP is a Delaware corporation headquartered in Austin, Texas. We are a leading provider of pawn services in the United States and Latin America. Pawn loans are nonrecourse 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 Relentless focus on superior execution and operational excellence in our core pawn business Cost Efficiency and Simplification Shape a culture of cost efficiency through ongoing focus on simplification and optimization Innovate and Grow Broaden customer engagement to service more customers more frequently in more locations Pawn Activities At our pawn stores, we advance cash against the value of collateralized tangible personal property. We earn pawn service charges (“PSC”) for those cash advances, and the PSC rate varies by state and transaction size. At the time of the transaction, we take possession of the pawned collateral, which consists of tangible personal property, generally jewelry, consumer electronics, tools, sporting goods or musical instruments. If the customer chooses to redeem their pawn, they will repay the amount advanced plus any accrued PSC. If the customer chooses not to redeem their pawn, the pawned collateral becomes our inventory, which we sell in our retail merchandise sales activities or, in some cases, scrap for its inherent gold or precious stone content. Consequently, the success of our pawn business is largely dependent on our ability to accurately assess the probability of pawn redemption and the estimated resale or scrap value of the collateralized personal property. Our ability to offer quality second-hand 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 estimated resale or scrap value at the time the property is either accepted as pawn 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. 21 Table of Contents Growth and Expansion Our strategy is to expand the number of locations we operate through opening new (“de novo”) locations and through acquisitions and investments in both Latin America, the United States and potential new markets. Our ability to open de novo stores, acquire new stores and make other related investments 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. Seasonality and Quarterly Results In the United States, PSC is historically highest in our fourth fiscal quarter (July through September) due to a higher average loan balance during the summer lending season. PSC is historically 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. In Mexico, we saw similar downward pressure in loan balances during the third quarter of prior year due to a recent change in law related to company profit sharing payments to employees. We believe this change will impact pawn loan balances in May and June going forward. As a net effect of these and other factors and excluding discrete charges, our consolidated income before tax is generally highest in our first fiscal quarter (October through December) and lowest in our third fiscal quarter (April through June). Financial Highlights We remain focused on optimizing our balance of pawn loans outstanding (“PLO”) and the resulting higher PSC. The following chart presents sources of gross profit, including PSC, merchandise sales gross profit (“Merchandise sales GP”) and jewelry scrapping gross profit (“Jewelry Scrapping GP”) for the three months ended December 31, 2023 and 2022: 22 Table of Contents The following chart presents sources of gross profit by geographic disbursement for the three months ended December 31, 2023 and 2022: Business Developments Founders During October 2023, we contributed an additional $15.0 million to Founders One, LLC (“Founders”) associated with our preferred interest, bringing our total equity investment in Founders to $45.0 million. See Note 5 of Notes to Condensed Consolidated Financial Statements included in “Part I, Item 1 — Financial Statements.” Results of Operations Non-GAAP Constant Currency and Same Store 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”) and “same store” basis. We use constant currency results to evaluate our Latin America Pawn operations, which are denominated primarily in Mexican pesos, Guatemalan quetzales and other Latin American currencies. We analyze results on a same store basis (which is defined as stores open during the entirety of the comparable periods) to better understand existing store performance without the influence of increases or decreases resulting solely from changes in store count. We believe presentation of constant currency and same store 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. In addition, we have an equity method investment that is denominated in Australian dollars and is translated into U.S. dollars. 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, 2023 and 2022 were as follows: 23 Table of Contents December 31, Three Months Ended December 31, 2023 2022 2023 2022 Mexican peso 17.0 19.5 17.5 19.7 Guatemalan quetzal 7.7 7.7 7.6 7.7 Honduran lempira 24.3 24.4 24.4 24.3 Australian dollar 1.5 1.5 1.5 1.5 Operating Results Segments We manage our business and report our financial results in three reportable segments: • U.S. Pawn — Represents all pawn activities in the United States; • Latin America Pawn — Represents all pawn activities in Mexico and other parts of Latin America; and • Other Investments — Represents our equity interest in the net income of Cash Converters along with our investment in Rich Data Corporation (“RDC”) and our investment in and notes receivable from Founders. Store Count by Segment Three Months Ended December 31, 2023 U.S. Pawn Latin America Pawn Consolidated As of September 30, 2023 529 702 1,231 New locations opened — 5 5 Locations acquired 1 — 1 As of December 31, 2023 530 707 1,237 Three Months Ended December 31, 2022 U.S. Pawn Latin America Pawn Consolidated As of September 30, 2022 515 660 1,175 New locations opened — 2 2 Locations acquired 10 — 10 Locations sold, combined or closed — (1) (1) As of December 31, 2022 525 661 1,186 24 Table of Contents Three Months Ended December 31, 2023 vs. Three Months Ended December 31, 2022 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 our U.S. Pawn segment: Three Months Ended December 31, Change (in thousands) 2023 2022 Gross profit: Pawn service charges $ 79,073 $ 69,310 14% Merchandise sales 125,513 118,314 6% Merchandise sales gross profit 46,804 45,058 4% Gross margin on merchandise sales 37 % 38 % (100)bps Jewelry scrapping sales 12,815 7,176 79% Jewelry scrapping sales gross profit 1,531 960 59% Gross margin on jewelry scrapping sales 12 % 13 % (100)bps Other revenues 37 25 48% Gross profit 127,445 115,353 10% Segment operating expenses: Store expenses 77,255 73,304 5% Depreciation and amortization 2,624 2,755 (5)% Loss on sale or disposal of assets and other 26 3 * Segment contribution $ 47,540 $ 39,291 21% Other data: Net earning assets (a) $ 317,774 $ 284,880 12% Inventory turnover 2.7 2.6 4% Average monthly ending pawn loan balance per store (b) $ 359 $ 315 14% Monthly average yield on pawn loans outstanding 14 % 14 % —bps General merchandise as a % of PLO 33 % 34 % (100)bps Jewelry as a % of PLO 67 % 66 % 100bps * 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. PLO ended the quarter at $190.8 million, up 14% (13% on a same store basis). Total revenue was up 12% and gross profit increased 10%, reflecting increased PSC and higher merchandise sales. PSC increased 14% as a result of higher average PLO. Merchandise sales increased 6% and gross margin decreased to 37% from 38%. Aged general merchandise was 1.1% of total general merchandise inventory. Net inventory increased 8%, as expected with the growth in PLO. Inventory turnover increased to 2.7x from 2.6x. Store expenses increased 5%, primarily due to wage inflationary pressures, higher store count and, to a lesser extent, rent. Segment contribution increased 21% to $47.5 million, due to the changes noted above. Segment store count increased by 1 store during the quarter due to an acquisition. 25 Table of Contents 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 Constant Currency and Same Store Financial Information.” Three Months Ended December 31, (in thousands) 2023 (GAAP) 2022 (GAAP) Change (GAAP) 2023 (Constant Currency) Change (Constant Currency) Gross profit: Pawn service charges $ 27,376 $ 23,283 18% $ 25,212 8% Merchandise sales 53,890 45,473 19% 49,065 8% Merchandise sales gross profit 17,389 13,852 26% 15,816 14% Gross margin on merchandise sales 32 % 30 % 200bps 32 % 200bps Jewelry scrapping sales 1,267 708 79% 1,159 64% Jewelry scrapping sales gross profit 343 (29) * 308 * Gross margin on jewelry scrapping sales 27 % (4) % * 27 % * Other revenues, net 16 16 —% 14 (13)% Gross profit 45,124 37,122 22% 41,350 11% Segment operating expenses: Store expenses 33,300 27,499 21% 30,363 10% Depreciation and amortization 2,339 2,215 6% 2,128 (4)% Gain on sale or disposal of assets and other (196) (19) * (188) * Segment operating contribution 9,681 7,427 30% 9,047 22% Other segment income (468) (102) * (544) * Segment contribution $ 10,149 $ 7,529 35% $ 9,591 27% Other data: Net earning assets (a) $ 90,405 $ 81,107 11% $ 81,509 —% Inventory turnover 3.8 3.3 15% 3.9 18% Average monthly ending pawn loan balance per store (b) $ 78 $ 70 11% $ 72 3% Monthly average yield on pawn loans outstanding 17 % 17 % —bps 17 % —bps General merchandise as a % of PLO 65 % 70 % (500)bps 63 % (700)bps Jewelry as a % of PLO 35 % 30 % 500bps 37 % 700bps * 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. 2023 Change (GAAP) 2023 Change (Constant Currency) Same Store data: PLO 19% 8% PSC 15% 6% Merchandise Sales 14% 4% Merchandise Sales Gross Profit 25% 14% Store Expenses 16% 6% 26 Table of Contents PLO improved to $52.5 million, up 22% (11% on constant currency basis). On a same store basis, PLO increased 19% (8% on a constant currency basis). Total revenue was up 19% (9% on constant currency basis) and gross profit increased 22% (11% on a constant currency basis), reflecting increased PSC, higher merchandise sales and improved merchandise sales gross profit. PSC increased 18% (8% on a constant currency basis) as a result of higher average PLO. Merchandise sales gross margin increased from 30% to 32%. Aged general merchandise was 1.6% of total merchandise inventory. Net inventory remained flat (decreased 11% on a constant currency basis) due to PLO growth, offset by increased inventory turnover at 3.8x, up from 3.3x. Store expenses increased 21% (10% on a constant currency basis), primarily due to increases in minimum wage and headcount, higher store count and, to a lesser extent, rent. Same-store expenses increased 16% (6% on a constant currency basis). Segment contribution increased 35% (27% on a constant currency basis) to $10.1 million, due to the changes noted above. Segment store count increased by 5 de novo stores opened during the quarter. Other Investments The following table presents selected financial data for our Other Investments segment after translation to U.S. dollars from its functional currency of primarily Australian dollars: Three Months Ended December 31, Change (in thousands) 2023 2022 Gross profit: Consumer loan fees, interest and other $ 4 $ 22 (82)% Gross profit 4 22 (82)% Segment operating expenses: Interest income (573) — * Equity in net income of unconsolidated affiliates (1,153) (1,584) (27)% Segment operating contribution 1,730 1,606 8% Other segment loss 1 4 (75)% Segment contribution $ 1,729 $ 1,602 8% * Represents a percentage computation that is not mathematically meaningful. Segment contribution was $1.7 million, an increase of $0.1 million due to interest income on our notes receivable to Founders, partially offset by the decrease in our share of equity in income of Cash Converters. 27 Table of Contents 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, Percentage Change (in thousands) 2023 2022 Segment contribution $ 59,418 $ 48,422 23% Corporate expenses (income): General and administrative 16,543 15,479 7% Depreciation and amortization 3,602 3,018 19% Gain on sale or disposal of assets and other (2) — * Interest expense 3,440 6,190 (44)% Interest income (1,646) (495) * Other income (224) (308) (27)% Income before income taxes 37,705 24,538 54% Income tax expense 9,235 7,760 19% Net income $ 28,470 $ 16,778 70% * Represents a percentage computation that is not mathematically meaningful. Segment contribution increased $11.0 million or 23% over the prior year quarter primarily due to improved operating results of the U.S. Pawn and Latin America Pawn segments above. General and administrative expense increased $1.1 million or 7%, primarily due to annual salary increases and an increase in costs related to the implementation of Workday. Interest expense decreased $2.8 million, primarily due to the loss on extinguishment of debt in the prior year quarter. In December 2022, the Company repurchased approximately $109.4 million aggregate principal amount of 2.875% Convertible Senior Notes Due 2024 for approximately $117.5 million plus accrued interest and approximately $69.1 million aggregate principal amount of 2.375% Convertible Senior Notes Due 2025 for approximately $62.9 million plus accrued interest and recorded a $3.5 million loss on extinguishment of debt. Interest income increased $1.2 million, due primarily to our treasury management with increased market interest rates. Income tax expense increased $1.5 million primarily due to an increase in income before income taxes of $13.2 million this quarter compared to the prior year quarter as a result of improved operating results within the U.S. Pawn segment and the Latin American Pawn segment. Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate. These items include the net effect of state taxes, non-deductible items and changes in valuation allowances for certain foreign operations. See Annual Report on Form 10-K for the year ended September 30, 2023 Note 11: Income Taxes of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for quantification of these items. Liquidity and Capital Resources Cash and Cash Equivalents Our cash and equivalents balance was $218.5 million at December 31, 2023 compared to $220.6 million at September 30, 2023. At December 31, 2023, our cash and equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments. 28 Table of Contents Cash Flows The table and discussion below presents a summary of the selected sources and uses of our cash: Three Months Ended December 31, Percentage Change (in thousands) 2023 2022 Net cash provided by operating activities $ 21,481 $ 11,668 84% Net cash used in investing activities (16,864) (44,618) (62)% Net cash (used in) provided by financing activities (6,392) 33,993 (119)% Effect of exchange rate changes on cash, cash equivalents and restricted cash (207) 605 (134)% Net (decrease) increase in cash, cash equivalents and restricted cash $ (1,982) $ 1,648 * The increase in cash flows provided by operating activities quarter-over-quarter was primarily due to an increase in net income as well as changes in working capital primarily related to the timing of payments of prepaid expenses and accounts payable. The $27.8 million decrease in cash flows used in investing activities year-over-year was primarily due to a $29.8 million decrease in cash flows used to fund acquisitions and strategic investments, offset by a $10.2 million increase in cash inflows from the sale of forfeited collateral and an increase of $14.0 million in net pawn lending outflows. The $40.4 million decrease in cash flows provided by financing activities was primarily related to the December 2022 financing of the 2029 Convertible Notes, in which we issued $230.0 million (less issuance costs) principal amount of 3.750% Convertible Senior Notes Due 2029 offset by the extinguishment of approximately $109.4 million aggregate principal amount of our 2024 Convertible Notes for approximately $117.5 million plus accrued interest and approximately $69.1 million aggregate principal amount of our 2025 Convertible Notes for approximately $62.9 million plus accrued interest. In addition, we used approximately $5.0 million of the net proceeds from the 2029 Convertible Notes offering to repurchase 578,703 shares of our Class A common stock from purchasers of the notes in privately negotiated transactions. The net effect of these changes was a $2.0 million decrease in cash on hand during the current year to date period, resulting in a $227.0 million ending cash and restricted cash balance. Sources and Uses of Cash In December 2022, we issued $230.0 million aggregate principal amount of 2029 Convertible Notes. In conjunction with the issuance of the 2029 Convertible Notes, we extinguished approximately $109.4 million aggregate principal amount of our 2024 Convertible Notes for approximately $117.5 million plus accrued interest and approximately $69.1 million aggregate principal amount of our 2025 Convertible Notes for approximately $62.9 million plus accrued interest. In addition, we used approximately $5.0 million of the net proceeds from the 2029 Convertible Notes offering to repurchase 578,703 shares of our Class A common stock from purchasers of the notes in privately negotiated transactions. See Note 7 of Notes to Condensed Consolidated Financial Statements included in “Part I, Item 1 — Financial Statements.” The shares repurchased in conjunction with the transactions discussed above were authorized separately from, and not considered part of, the publicly announced share repurchase program referred to below. On May 3, 2022, our Board authorized the repurchase of up to $50 million of our Class A Common Stock over three years. As of December 31, 2023, we have repurchased 1,981,927 shares of our Class A Common Stock under the program for $17.0 million. Execution of the program will be responsive to fluctuating market conditions and valuations, liquidity needs and the expected return on investment compared to other opportunities. Under the stock repurchase program, we may purchase Class A Non-Voting common stock from time to time at management’s discretion in accordance with applicable securities laws, including through open market transactions, block or privately negotiated transactions, or any combination thereof. In addition, we may purchase shares pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934. The amount and timing of purchases will be dependent on a variety of factors, including stock price, trading volume, general market conditions, legal and regulatory requirements, general business conditions, the level of cash flows and corporate considerations determined by management and the Board, such as liquidity and capital needs and the availability of attractive alternative investment opportunities. The Board of Directors has reserved the right to modify, suspend or terminate the program at any time. See Note 8 of Notes to Condensed Consolidated Financial Statements included in “Part I, Item 1 — Financial Statements.” 29 Table of Contents We anticipate that cash flows from operations and cash on hand will be adequate to fund ongoing operations, current debt service requirements, tax payments, any future stock repurchases, strategic investments, our contractual obligations, planned de novo store growth, capital expenditures and working capital requirements through the next twelve months. We continue to explore acquisition opportunities, both large and small, and may choose to pursue additional debt, equity or equity-linked financings in the future should the need arise. Depending on the level of acquisition activity and other factors, our ability to repay our longer-term debt obligations, including the convertible debt maturing in 2025 and 2029, may require us to refinance these obligations through the issuance of new debt securities, equity securities, convertible securities or through new credit facilities. Contractual Obligations In “Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended September 30, 2023, we reported that we had $736.6 million in total contractual obligations as of September 30, 2023. There have been no material changes to this total obligation since September 30, 2023. We are responsible for the maintenance, property taxes and insurance at most of our locations. In the fiscal year ended September 30, 2023, these collectively amounted to $16.3 million. Recently Adopted Accounting Policies and Recently Issued Accounting Pronouncements See Note 1 of the Notes to Condensed Consolidated Financial Statements included in “Part I, Item 1 — Financial Statements” of this Quarterly Report for recently issued accounting pronouncements including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements. Cautionary Statement Regarding Risks and Uncertainties that May Affect Future Results This Quarterly Report on Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements, other than statements of historical facts, regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives are forward-looking statements. These statements are often, but not always, made with words or phrases like “may,” “should,” “could,” “will,” “predict,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “projection” and similar expressions. Such statements are only predictions of the outcome and timing of future events based on our current expectations and currently available information and, accordingly, are subject to substantial risks, uncertainties and assumptions. Actual results could differ materially from those expressed in the forward-looking statements due to a number of risks and uncertainties, many of which are beyond our control. In addition, we cannot predict all of the risks and uncertainties that could cause our actual results to differ from those expressed in the forward-looking statements. Accordingly, you should not regard any forward-looking statements as a representation that the expected results will be achieved. Important risk factors that could cause results or events to differ from current expectations are identified and described in “ Part I, Item 1A — Risk Factors ” of our Annual Report on Form 10-K for the year ended September 30, 2023 and “Part II, Item 1A — Risk Factors” of this Report. We specifically disclaim any responsibility to publicly update any information contained in a forward-looking statement except as required by law. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.