Encore Capital Group, Inc. — Q2 2023 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2023. Encore purchases and collects defaulted consumer receivables, primarily in the United States and Europe, and also provides European debt-servicing services. It reports one segment.
Key financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $323.0 | $356.9 | $635.7 | $856.6 |
| Operating income | $88.1 | $118.9 | $158.2 | $384.0 |
| Operating margin | 27.3% | 33.3% | 24.9% | 44.8% |
| Net income | $26.3 | $60.4 | $44.9 | $236.2 |
| Diluted EPS | $1.08 | $2.29 | $1.83 | $8.77 |
| Interest expense | $50.0 | $37.1 | $96.8 | $71.7 |
| Operating cash flow | — | — | $62.6 | $98.5 |
- Q2 revenue decreased 9.5% year over year; operating income declined 26% and net income 56%. For the first half, revenue fell 25.8% and net income 81%.
- Debt-purchasing revenue was $297.7 million in Q2, including a $3.5 million negative change in recoveries, versus $331.4 million and a $25.2 million positive change a year earlier. First-half debt-purchasing revenue fell 27.3%, with changes in recoveries moving from positive $192.4 million to negative $13.0 million.
- Gross collections from purchased receivables were $476.5 million in Q2, down 4.3%, and $938.9 million for the first half, down 7.7%. First-half collections underperformed forecast by about $15.8 million, largely reflecting timing shifts in recent U.S. vintages and Spanish court closures in Q1.
- Management cited lower portfolio revenue from recent purchases, reduced servicing demand, and currency translation as revenue pressures. It attributed higher interest expense principally to rising rates: up 34.9% in Q2 and 35.1% for the first half.
Financial position and liquidity
- At June 30, cash and cash equivalents were $184.9 million, receivable portfolios net were $3.331 billion, total assets were $4.877 billion, and total borrowings net of discounts and issuance costs were $3.203 billion. Cash includes $22.2 million collected for third-party clients.
- Cash from operations was $62.6 million for the first half. Investing used $214.2 million, including $544.7 million of net portfolio purchases partly offset by $342.0 million of collections applied to portfolio investment. Financing provided $190.6 million; cash ended the period up at $184.9 million.
- Available capacity under the Global Senior Facility was approximately $310.5 million. The company said it was in material compliance with financing covenants and believed liquidity was sufficient for at least the next 12 months.
- Debt increased from $2.899 billion at year-end 2022. In May, the Global Senior Facility was increased by $40 million to $1.180 billion and extended to September 2027. Its weighted-average rate was 7.51% in Q2, versus 3.32% a year earlier.
Changes, outlook, and risks
- U.S. portfolio purchases rose to $213.4 million in Q2 from $116.2 million, as supply increased; management said pricing improved. European purchasing remained constrained by competitive pricing and supply below pre-pandemic levels.
- In March, Encore issued $230 million of 4.00% convertible notes due 2029 and used approximately $192.5 million of proceeds to repurchase part of its 2023 exchangeable notes. The induced conversion generated $2.7 million of expense. The remaining $17.7 million of 2023 exchangeable notes were due September 2023.
- Forward portfolio purchase agreements had estimated minimum purchases of approximately $393 million; management expected actual purchases to be significantly higher. The filing gives no specific earnings guidance and states that the company generally does not make specific earnings projections.
- Key sensitivities include collection performance and revisions to expected recoveries, consumer payment behavior, interest rates, foreign exchange, portfolio supply and pricing, and regulation or litigation. Management reduced expected lifetime recoveries for certain pools in Q2, producing a $3.0 million negative reforecast adjustment for the quarter.
- The company described routine consumer-collection litigation and regulatory exposure, but reported no material new legal proceedings or developments and no material legal reserves. It reported no material change in its previously disclosed risk factors. Goodwill impairment remains a possible future non-cash risk if operating or market conditions deteriorate.
Investor verification points
- Track collections against forecasts and subsequent changes to expected recoveries, particularly for recent U.S. vintages and European portfolios.
- Assess whether higher U.S. portfolio purchases can deliver expected returns amid improved supply, pricing, and elevated funding costs.
- Monitor debt maturities, interest-rate exposure, revolver availability, and compliance with facility covenants.
- Review the timing and realization of estimated remaining collections, which depend on management’s portfolio cash-flow assumptions.
- Check developments in collection regulation, litigation, and consumer payment behavior, as well as foreign-exchange effects.