What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-11-13 compared with 2023-11-15 · 85 added, 70 removed, 293 unchanged (35% of the section changed)

4 unchanged sentences

See “Part I, Item 1A — Risk Factors” and “Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results” below.

Business Development

On September 11, 2024, the Company announced entry into an acquisition agreement with Presta Dinero, S.A.

for the purchase of 53 pawn stores in Mexico.

While at the time we expected to complete the transaction by October 31, 2024, the transaction has not yet closed and the parties remain in discussion.

Results of Operations

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Gross margin on jewelry scrapping sales 15 % 10 % 500 bps

Other revenues, net 295 441 (33)%

Other revenues 239 295 (19)%

Gross profit 682,273 609,838 12%

Operating expenses:

Store expenses 461,055 418,574 10%

General and administrative 75,557 67,529 12%

Impairment of goodwill, intangible and other assets 4,343 — *

Impairment of other assets

843 4,343 (81)%

Depreciation and Amortization 33,069 32,131 3%

Loss (gain) on sale or disposal of assets and other 208 (674) (131)%

Other income (5,097) — *

(Gain) loss on sale or disposal of assets and other (16) 208 (108)%

Other operating income

(765) (5,097) (85)%

Total operating expenses 569,743 517,688 10%

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Interest income (10,575) (7,470) 42%

Equity in net loss (income) of unconsolidated affiliates 28,459 (1,779) *

Other expense (income) 3,072 (167) *

Total non-operating expenses 40,517 7,209 462%

Equity in net (income) loss of unconsolidated affiliates (4,711) 28,459 117%

Other (income) expense (1,377) 3,072 145%

Total non-operating (income) expenses

(3,078) 40,517 108%

Income before income taxes 115,608 51,633 124%

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Total net pawn earning assets $ 466,007 $ 412,243 13%

* Represents a percentage computation that is not mathematically meaningful.

Pawn loans outstanding (“PLO”) increased $28.3 million (12%) to $274.1 million due to improved operational performance and continued strong pawn demand.

Total revenues increased $112.6 million (11%) and gross profit increased 12%, reflecting improved pawn service charge (“PSC”) revenue, merchandise sales and merchandise sales gross profit.

PSC increased $62.9 million (20%) as a result of higher average PLO and yields.

Merchandise sales increased $82.6 million (15%), driven primarily by our continued focus on customer engagement, pricing merchandise to maintain strong inventory turnover and an increase in stores.

PSC increased $52.8 million (14%) as a result of higher average PLO.

Merchandise sales increased $48.3 million (8%).

Merchandise sales gross margin remains within our targeted range at 36%.

Operating expenses increased $64.5 million (14%) primarily due to (a) a $61.2 million increase in store expenses as a result of increased labor in-line with store activity, higher store count and, to a lesser extent, expenses related to our loyalty program and (b) a $3.2 million increase in general and administrative expenses primarily due to an increase in costs related to incentive compensation, insurance and our Workday implementation, partially offset by the litigation accrual charge of $2.0 million recorded in the prior period.

Total non-operating expenses increased $33.3 million (462%), primarily due to the net loss on our share of losses in Cash Converters’ net results related to their non-cash goodwill impairment charge and interest expense.

Interest expense increased $6.5 million, primarily driven by the net loss recorded on the partial extinguishments of the 2024 convertible notes and 2025 convertible notes, and higher average total debt outstanding at overall higher average effective interest rates due to the issuance of the 2029 convertible notes in December 2022.

Debt of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for further discussion.

Income tax expense decreased $4.4 million primarily due to the decrease in income before income taxes of $16.1 million, offset by an increase in tax expense for the non-deductible loss realized on the refinancing of the convertible notes in the current year.

Operating expenses increased $52.1 million (10%) primarily due to (a) a $42.5 million increase in store expenses as a result of increased labor driven by inflationary and minimum wage increases and, to a lesser extent, expenses related to rent and (b) a $8.0 million increase in general and administrative expenses, primarily due to labor, incentive compensation and to a lesser extent, cost related to the implementation and ongoing support for our Workday ERP system.

Total non-operating income increased $43.6 million (108%), primarily due to recognition in the prior year of our share of losses in Cash Converters’ net results related to their non-cash goodwill impairment charge, a reduction of interest expense and an increase in interest income.

Interest expense decreased $2.9 million, primarily driven by the prior year net loss recorded on the partial extinguishments of the 2024 convertible notes and 2025 convertible notes.

Debt of Notes to Consolidated Financial Statements in “Part II, Item 8 — Financial Statements and Supplemental Data” for further discussion.

The interest income increase is primarily due to our treasury management with increased market interest rates.

Income tax expense increased $19.3 million, primarily due to the increase in income before income taxes of $64.0 million, an increase in non-deductible expense in Latin America and accrued withholding taxes on prior earnings that are no longer permanently reinvested.

Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate.

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Pawn collateral - jewelry 66 % 66 % —%

* Represents a percentage computation that is not mathematically meaningful.

(a) Balance is calculated based on the average of the monthly ending balance averages during the applicable period.

PLO continued to increase, ending the year at $190.6 million, up 17% in total and 13% on a same store basis due to improved customer service and increased pawn demand.

Total revenues increased 16% and gross profit increased 12%, primarily due to increased PSC.

PSC increased 19% as a result of higher average PLO and yields.

Merchandise sales increased 10%, primarily driven by our continued focus on customer engagement and pricing merchandise to maintain strong inventory turnover.

Offsetting the sales increase, merchandise sales gross margin decreased 300 bps to 38%, reflecting a return to normalized margins.

Store expenses increased 12% (10% on a same store basis), primarily due to increased labor in-line with store activity, higher store count and, to a lesser extent, expenses related to our loyalty program.

PLO ended the year at $214.3 million, up 12% on a total and same store basis.

Total revenues increased 10% and gross profit increased 10%, primarily due to increased PSC and higher merchandise sales.

PSC increased 13% as a result of higher average PLO.

Merchandise sales increased 6%.

Offsetting the sales increase, merchandise sales gross margin decreased 100 bps to 37%.

Store expenses increased 9% (8% on a same store basis), primarily due to labor costs driven by inflation.

Segment contribution increased $18.8 million due to the changes described above.

During fiscal 2024, segment net store count in our U.S.

pawn segment increased by 14 due to the acquisition of 12 stores, the opening of 3 de novo stores and the consolidation of 1 store.

pawn segment increased by 13 due to the acquisition of 13 stores, the addition of one de novo store and the consolidation of one store.

Latin America Pawn

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Jewelry scrapping sales gross profit 738 (492) 250% 739 250%

Gross margin on jewelry scrapping sales (8) % 6 % (1,400) bps (8) % (1,400) bps

Gross margin on jewelry scrapping sales 11 % (8) % 238% 11 % 238%

Other revenues, net 78 121 (36)% 76 (37)%

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Depreciation and amortization 8,865 9,191 (4)% 8,599 (6)%

Other income (5,097) — 100% (4,481) 100%

Other operating income

— (5,097) 100% — 100%

Segment operating contribution 36,871 30,096 23% 36,307 21%

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* Represents a percentage computation that is not mathematically meaningful.

(a) Fiscal 2023 and 2022 constant currency amounts exclude net GAAP basis foreign currency transaction loss of $0.4 million and a minimal loss, respectively, resulting from movement in exchange rates.

(a) Fiscal 2024 and 2023 constant currency amounts exclude net GAAP basis foreign currency transaction loss of $0.1 million and $0.4 million, respectively, resulting from movement in exchange rates.

(b) Balance is calculated based on the average of the monthly ending balance averages during the applicable period.

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PLO improved to $59.8 million, up 8% (18% on constant currency basis).

On a same store basis, PLO increased 16% (4% on a constant currency basis) as consumer demand increased.

Total revenues were up 26% (16% on a constant currency basis), while gross profit increased by 25% (16% on a constant currency basis), primarily due to increased PSC, higher merchandise sales and improved gross profit.

PSC increased 22% (13% on constant currency basis) as a result of higher average PLO and yields.

On a same store basis, PLO increased 7% (16% on a constant currency basis) due to improved operational performance and increased loan demand.

Total revenues were up 13% (11% on a constant currency basis), and gross profit increased by 18% (15% on a constant currency basis), reflecting increased PSC, higher merchandise sales and improved gross profit.

PSC increased 17% (14% on constant currency basis) as a result of higher average PLO.

Merchandise sales increased 12% (9% on a constant currency basis) and 11% on a same store basis (8% on a constant currency basis).

Merchandise sales increase was driven primarily by our continued focus on customer engagement, pricing merchandise to maintain strong inventory turnover and increase in stores.

Merchandise sales gross margin increased 100 bps to 31%, within our target range.

Store expenses increased $28.0 million, up 31% (20% on a constant currency basis), primarily due to increases in minimum wage and headcount, higher store count and, to a lesser extent, expenses related to our loyalty program and rent.

Merchandise sales gross margin increased 100 bps to 32%.

Store expenses increased $16.0 million, up 13% (11% on a constant currency basis), primarily due to increased labor headcount, in line with store activity and minimum wage increases and, to a lesser extent, rent associated with lease renewals..

Same-store expenses increased 12% (9% on a constant currency basis).

Segment contribution was up 32% to $31.7 million (24% on a constant currency basis).

This increase was primarily due to the reversal of contingent consideration liability in connection with a previously completed acquisition, which was recorded to “Other income,” and the changes in revenue and store expenses described above.

During fiscal 2023, net store count in our Latin America pawn segment increased by 42 due to the opening of 44 de novo stores and the consolidation of 2 stores.

Other Investments and Cash Converters

The following table presents selected summary financial data for our Other Investments and Cash Converters segments after translation to U.S.

Segment contribution was up 23% to $38.8 million (21% on a constant currency basis), due to the changes noted above, in addition to the impact of the prior year reversal of contingent consideration liability in connection with a previously completed acquisition, which was recorded to “Other operating income.”

During fiscal 2024, net store count in our Latin America pawn segment increased by 35 due to the opening of 40 de novo stores and the consolidation of five stores.

Other Investments

The following table presents selected summary financial data for our Other Investments segment after translation to U.S.

dollars from its functional currency of primarily Australian dollars:

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Gross profit:

Consumer loan fees and interest $ 55 $ 111 (50)%

Consumer loan fees, interest and other $ 35 $ 55 (36)%

Gross profit 35 55 (36)%

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Interest income (2,422) (1,500) 61%

Equity in net loss (income) of unconsolidated affiliates 28,459 (1,779) *

Segment operating (loss) contribution (26,904) 1,890 *

Other segment loss 31 52 (40)%

Segment (loss) contribution $ (26,935) $ 1,838 *

* Represents a percentage computation that is not mathematically meaningful.

Segment loss was $26.9 million, a decrease of $28.8 million, primarily due to the net loss on our share of Cash Converters’ net results related to their non-cash goodwill impairment charge.

The following table reconciles our consolidated segment contribution discussed above to net income, including items that affect our consolidated financial results but are not allocated among segments:

Equity in net (income) loss of unconsolidated affiliates (4,993) 28,459 118%

Segment operating contribution (loss) 7,450 (26,904) 128%

Other segment (income) loss

Segment contribution (loss) $ 7,450 $ (26,935) 128%

Segment income was $7.5 million, an increase of $34.4 million, primarily due to the prior year net loss on our share of Cash Converters’ net results related to their non-cash goodwill impairment charge.

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:

Fiscal Year Ended

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General and administrative 75,557 67,532 12%

Impairment of goodwill and intangibles 4,343 — *

Impairment of other assets

843 4,343 (81)%

Depreciation and amortization 14,057 12,558 12%

Loss (gain) on sale or disposal of assets and other 382 (688) (156)%

Loss on sale or disposal of assets and other

121 382 (68)%

Other operating income

Interest expense 13,585 16,456 (17)%

Interest income (6,541) (4,829) 35%

Other expense (income) 3,172 (71) *

Equity in net loss of unconsolidated affiliates 282 — *

Other (income) expense (1,166) 3,172 137%

Income before income taxes 115,608 51,633 124%

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* Represents a percentage computation that is not mathematically meaningful.

Segment contribution decreased $3.7 million or 2%, primarily due to the net loss on our share of losses in Cash Converters’s net results related to their non-cash goodwill impairment charge, partially offset by the improved operating results of the segments above.

General and administrative expenses increased $3.2 million (5%), primarily due to the impact related to the reversal of incentive compensation for the departed CEO in the prior year and to a lesser extent, an overall increase in incentive-based compensation, and costs primarily related to our Workday implementation, partially offset by the litigation accrual charge of $2.0 million recorded in the prior period.

Interest expense increased $6.5 million (65%), primarily driven by the net loss recorded on the partial extinguishments of the 2024 convertible notes and 2025 convertible notes, and higher average total debt outstanding at overall higher average effective interest rates due to the issuance of the 2029 convertible notes during December 2022.

Segment contribution increased $60.3 million or 40%, primarily due to the improved operating results of the segments, as discussed above.

General and administrative expenses increased $8.0 million (12%), primarily due to labor, incentive compensation and, to a lesser extent, costs related to the implementation and ongoing support of our Workday ERP system.

Interest expense decreased $2.9 million (17%), primarily driven by the prior year net loss recorded on the partial extinguishments of the 2024 convertible notes and 2025 convertible notes.

Debt of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data” for further discussion.

Interest income increased $1.7 million, due primarily to our treasury management with increased market interest rates.

Income tax expense decreased $4.4 million primarily due to a decrease in income before income taxes of $16.1 million, offset by an increase in tax expense for the non-deductible loss realized on the refinancing of the convertible notes in the current year.

Income tax expense increased $19.3 million primarily due to the increase in income before income taxes of $64.0 million, an increase in non-deductible expense in Latin America and accrued withholding taxes on prior earnings that are no longer permanently reinvested.

Income tax expense includes other items that do not necessarily correspond to pre-tax earnings and create volatility in our effective tax rate.

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Cash flows provided by operating activities

$ 113,600 $ 101,834 12%

Cash flows used in investing activities (111,853) (110,886) 1%

Cash flows provided by (used in) financing activities 23,692 (2,832) *

Cash flows (used in) provided by financing activities (50,183) 23,692 (312)%

Effect of exchange rate changes on cash and cash equivalents and restricted cash (725) (41) *

Net increase (decrease) in cash and cash equivalents and restricted cash $ 14,599 $ (49,255) 130%

Net (decrease) increase in cash and cash equivalents and restricted cash $ (49,161) $ 14,599 (437)%

* Represents a percentage computation that is not mathematically meaningful.

The $35.3 million increase in cash flows provided by operating activities was primarily due to an increase in net income (when considering adjustments for non-cash items affecting net income) as well as changes in working capital primarily related to the timing of payments of income taxes, inventory, prepaid expenses and accounts payable.

The $2.4 million decrease in cash flows used in investing activities was primarily due to an increase of $33.4 million in net pawn lending outflows and a $29.8 million net increase in cash flows used to fund acquisitions, strategic investments and capital expenditures, the largest of which is $15.0 million related to a note receivable from Founders, as discussed in Note 5:

Strategic Investments in Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” These were offset by a $61.9 million increase in cash inflows from the sale of forfeited collateral.

The $26.5 million increase 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 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.

The $11.8 million increase in cash flows provided by operating activities was primarily due to an increase in net income (when considering adjustments for non-cash items affecting net income) as well as changes in working capital primarily related to the timing of payments of income taxes, prepaid expenses, accounts payable and inventory.

The $1.0 million increase in cash flows used in investing activities was primarily due to an increase of $51.7 million in net pawn lending outflows, offset by a $27.0 million increase in cash inflows from the sale of forfeited collateral and a $23.7 million net decrease in cash flows used to fund strategic investments, capital expenditures and acquisitions.

The $73.9 million increase in cash flows used in financing activities was primarily related to the December 2022 financing of the 2029 Convertible Notes, in which we issued $230.0 million 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.

Further, the Company repurchased and retired 1,389,102 shares of our Class A Common Stock for $12.0 million under the Common Stock Repurchase Program during the fiscal year ended September 30, 2023.

The net effect of these changes was a $14.6 million increase in cash on hand during the current year, resulting in a $229.0 million ending cash and restricted cash balance.

Further, on July 1, 2024, the 2024 Convertible Notes matured and the remaining $34.4 million aggregate principal amount outstanding plus accrued interest was repaid using cash on hand.

During 2024, the Company repurchased and retired 1,218,503 shares of our Class A Common Stock for $12.0 million under the Common Stock Repurchase Program.

The net effect of these changes was a $49.2 million decrease in cash on hand during the current year, resulting in a $179.8 million ending cash and restricted cash balance.

Sources and Uses of Cash

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Debt of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” 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.

In May 2022, our Board of Directors (the “Board”) authorized the repurchase of up to $50 million of our Class A Common Stock over 3 years.

Debt of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.” 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 September 30, 2024, we have repurchased 2,845,548 shares of our Class A Common Stock under the program for $26.0 million which amount was allocated between “Additional paid-in capital” and “Retained earnings” in our Consolidated Balance Sheets.

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 has reserved the right to modify, suspend or terminate the program at any time.

Through September 30, 2023, we have repurchased and retired 1,627,045 shares of our Class A Common Stock for $14.0 million, which amount was allocated between “Additional paid-in capital” and “Retained earnings” in our Consolidated Balance Sheets.

We anticipate that cash flows from operations and cash on hand will be adequate to fund ongoing operations, deb 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 fiscal 2024.

On July 1, 2024, the 2024 Convertible Notes matured and the remaining $34.4 million aggregate principal amount outstanding plus accrued interest was repaid using cash on hand.

We anticipate that cash flows from operations and cash on hand will be adequate to fund ongoing operations, 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 fiscal 2025.

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 2024, 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.

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 May 2025 and December 2029, may require us to refinance these obligations through the issuance of new debt securities, equity securities, convertible securities or through new credit facilities.

Convertible Notes

For a description of the terms of our convertible notes, including the associated conversion and other related features and transactions, see Note 7:

Debt of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.”

Debt of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

Contractual Obligations

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(c) No provision for uncertain tax benefits has been reflected in the contractual obligations table as the timing of any such payment is uncertain.

Income Taxes of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” Additionally, no provision for insurance reserves, deferred compensation arrangements, or other liabilities totaling $6.6 million has been included as the timing of such payments are uncertain.

(d) Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities, except for the accrued portions of interest and lease obligations which are included in interest on long-term debt obligations and lease obligations captions above.

Income Taxes of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.” Additionally, no provision for insurance reserves, deferred compensation arrangements, or other liabilities totaling $8.5 million has been included as the timing of such payments are uncertain.

(d) Total excludes contractual obligations already recorded on our consolidated balance sheets as current liabilities, except for current maturities of long-term debt, which are included in the debt obligations caption above and accrued portions of interest and lease obligations, which are included in the interest on long-term debt obligations and lease obligations captions above.

In addition to the lease obligations in the table above, we are responsible for the maintenance, property taxes and insurance at most of our locations.

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The critical accounting policies and estimates that could have a significant impact on our results of operations, as well as relevant recent accounting pronouncements, are described in Note 1:

Organization and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.” Certain accounting policies regarding the quantification of the sensitivity of certain critical estimates are discussed further below.

Organization And Summary Of Significant Accounting Policies of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.” Certain accounting policies regarding the quantification of the sensitivity of certain critical estimates are discussed further below.

Pawn Loan Revenue Recognition

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Furthermore, we consider the assumptions discussed above pertaining to the income approach we use in the quantitative testing of impairment to be critical estimates.

The results of the impairment analyses for fiscal year 2023 and fiscal year 2022 are discussed in Note 8:

Goodwill and Intangible Assets of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplemental Data.”

The results of the impairment analyses for fiscal 2024 and fiscal 2023 are discussed in Note 6:

Goodwill And Intangible Assets of Notes to Consolidated Financial Statements included in “Part II, Item 8 — Financial Statements and Supplementary Data.”

Management believes that it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the net recorded deferred tax assets.

59 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis