Encore Capital Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; financial statements are unaudited. Encore purchases and services defaulted consumer receivables, primarily in the United States and Europe. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $412.6m | $403.7m | $1,257.2m | $1,118.8m |
| Operating income | $166.6m | $142.5m | $509.2m | $409.3m |
| Net income attributable to Encore shareholders | $83.6m | $54.7m | $274.7m | $174.5m |
| Diluted EPS | $2.66 | $1.72 | $8.71 | $5.51 |
| Interest expense | $40.9m | $53.0m | $131.6m | $158.0m |
- Q3 revenue increased 2.2%; nine-month revenue increased 12.4%. Nine-month debt purchasing revenue rose 12.2%, including $176.6m of positive changes in recoveries versus a $2.2m decline in the prior-year period.
- Operating margin was 40.4% in Q3 versus 35.3% a year earlier, and 40.5% for nine months versus 36.5%. Shareholder net margin was 20.3% and 21.8%, respectively, compared with 13.6% and 15.4% in 2020.
- Q3 collections from purchased receivables were $566.7m, up 5.0%; nine-month collections were $1,785.6m, up 13.4%. Management attributed performance to collection improvements, consumer behavior during the pandemic and, in Europe, currency translation.
- Management’s non-GAAP adjusted EBITDA was $184.8m for Q3 and $559.6m for nine months, compared with $171.9m and $470.8m, respectively, in 2020.
Cash flow, balance sheet and financing
- At September 30, cash and cash equivalents were $158.2m, receivable portfolios net were $3,083.3m, total assets were $4,550.0m and total equity was $1,398.8m. Cash included $28.3m collected on behalf of third-party clients.
- Total borrowings were $2,796.2m, down from $3,281.6m at December 31, 2020. The company reported material compliance with financing covenants. Its $1.05bn Global Senior Facility had $186.2m drawn and approximately $863.8m available.
- For the first nine months, operating cash flow was $212.0m, investing cash flow was $312.8m and financing cash flow was negative $564.7m. Cash declined by $39.9m to $158.2m. Investing cash flow benefited from $803.2m of collections applied to portfolio investment, against $473.0m of portfolio purchases.
- Encore issued £250m of 4.25% senior secured notes due 2028 in June, using proceeds in part to redeem its remaining 2023 Cabot notes. It amended its Global Senior Facility in August, extending maturity to September 2025 and reducing specified rate floors.
- The board expanded the share repurchase authorization to $300m. Encore repurchased $88.1m of shares in the first nine months. On November 3, after quarter-end, it announced an intended cash tender offer for up to $300m of shares.
Material changes, outlook and risks
- Portfolio recoveries exceeded forecast by $277.9m for the first nine months, while revisions to expected future recoveries reduced revenue by $101.2m. In Q3, the respective amounts were $77.1m above forecast and an $11.2m negative revision. Estimates remain sensitive to collection performance and economic conditions.
- Portfolio purchases were $481.1m for nine months, down 9.6% year over year; U.S. purchases fell while European purchases rose. Management said supply remained below pre-pandemic levels, with U.S. supply expected eventually to increase; European supply and portfolio pricing could fluctuate.
- Management stated it does not generally provide specific earnings projections. It said it expects sufficient liquidity to fund operations for at least the next 12 months, subject to collections, portfolio purchases, market access and other risks.
- COVID-19 continues to create uncertainty for collection forecasts and operations. New U.S. CFPB Regulation F collection rules were scheduled to take effect November 30, 2021; management did not expect a material incremental operational effect.
- Unusual items included a $17.4m loss on the August sale of investments in Colombia and Peru, recorded in other expense, and a $9.3m nine-month loss on extinguishment of debt. The 2020 comparison included a $15.0m CFPB settlement charge.
- The company faces routine consumer-collection litigation and regulatory matters, including claims involving debt collection practices and licensing. It reported no material legal reserves and no material developments in matters disclosed in its 2020 Form 10-K. Forward-flow purchase agreements had an estimated minimum aggregate purchase price of approximately $238m.
- Encore adopted convertible-debt accounting guidance in January 2021, recording a $17.9m cumulative equity adjustment and lowering subsequent interest expense on convertible and exchangeable notes. The company reported disclosure controls effective at the reasonable-assurance level.
Key facts for investors to verify
- Whether elevated collections and recoveries persist, and how future revisions to expected portfolio cash flows affect earnings and portfolio carrying value.
- Portfolio supply, purchase prices and returns by geography, particularly given below-pre-pandemic supply and changing European pricing.
- Liquidity available for portfolio purchases, debt service and the announced tender offer; distinguish unrestricted cash from client funds and consider foreign cash repatriation constraints.
- Debt maturities, interest-rate and foreign-exchange exposures, covenant headroom, and the impact of the facility amendment and refinancing activity.
- Potential effects of Regulation F and ongoing litigation or regulatory proceedings on collection practices, costs and liabilities.