Encore Capital Group, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. Encore purchases and services defaulted consumer receivables, principally in the United States and Europe; it reports one segment, portfolio purchasing and recovery. Amounts below are U.S. dollars.
Financial performance and position
- Total revenue was $499.7 million, up 19.9%. Debt purchasing revenue rose 23.2% to $471.3 million; servicing revenue declined 19.6% to $26.1 million.
- Operating income was $265.0 million, up from $168.3 million; operating margin was 53.0%, versus 40.4%. Net income attributable to Encore was $175.7 million, compared with $94.6 million; diluted EPS was $6.40 versus $2.97.
- Interest expense was $34.6 million, down 25.6%. Effective tax rate was 23.8%, up from 22.2%.
- Operating cash flow was $54.5 million, versus $69.1 million. Investing activities provided $37.1 million, versus $95.3 million; financing used $118.0 million. Cash declined to $160.2 million from $189.6 million.
- At March 31, total assets were $4.61 billion, borrowings $2.93 billion, and stockholders’ equity $1.25 billion. Available capacity under the Global Senior Facility was approximately $559.9 million. The company reported compliance with financing covenants.
- Receivable portfolio investment was $3.14 billion. Gross collections from purchased receivables were $519.4 million, down 14.4%; portfolio purchases were $169.5 million, approximately flat year over year.
Material changes and drivers
- Revenue and earnings growth were substantially influenced by a $167.2 million positive change in recoveries, compared with $44.5 million in Q1 2021. This included $46.4 million of collections above forecast and a $120.9 million positive revision to expected future recoveries. Management attributed outperformance to consumer behavior and collection initiatives.
- Despite the improvement, current-quarter collections were below the prior-year period, which management said had unusually high pandemic-related collections. Revenue from receivable portfolios declined 10.0%, partly reflecting lower portfolio balances and recent purchasing levels.
- Operating expenses fell 5.6%, including lower legal collection costs. Lower average debt, refinancing and currency translation contributed to the decline in interest expense.
- Foreign currency translation reduced international results; the stronger U.S. dollar, particularly against the British pound, also reduced goodwill.
Outlook, risks and unusual items
- The filing provides no specific earnings guidance. Management said it expects sufficient liquidity to fund operations for at least the next 12 months, relying on operating cash flows, portfolio collections, cash, capital-market access and credit-facility availability. Future cash needs depend partly on portfolio and business acquisitions.
- Management expects U.S. portfolio supply to increase with lending and delinquencies, but described U.S. purchases as below pre-pandemic levels. European supply remained below pre-pandemic levels and pricing was more competitive. These are expectations, not guaranteed outcomes.
- On March 29, 2022, Encore upsized its revolving facility by $90 million to $1.14 billion and extended maturity to September 2026, while transitioning U.S. dollar borrowings from LIBOR to Term SOFR. The facility bears the applicable benchmark plus 2.50%, subject to terms and covenants.
- Encore repaid the $150 million 2022 Convertible Notes at maturity through an all-cash settlement of $221.2 million; the $71.2 million conversion spread was recorded in equity. It also repurchased 399,522 shares for approximately $25.6 million.
- Forward-flow agreements carried estimated minimum aggregate purchase commitments of approximately $380.1 million; management expected actual purchases to be significantly higher. Legal and regulatory matters arise in the ordinary course, with no material legal reserves reported. Consumer ability to pay, inflation, regulation, litigation, collection estimates, interest rates and foreign exchange are relevant risks.
- Disclosure controls were deemed ineffective at quarter-end due to a previously disclosed material weakness. Remediation was underway, with completion expected no later than December 31, 2022; management said remediation is not complete until controls operate effectively and are tested.
Important facts for investors to verify
- How much of the earnings increase reflects the $120.9 million upward revision to estimated future recoveries, and whether subsequent collections support those assumptions.
- Whether collections and portfolio purchases recover from pandemic-related comparisons and constrained supply, especially in Europe.
- Debt maturities, variable-rate exposure, covenant headroom and available revolving capacity, including the effect of higher benchmark rates.
- Progress and testing results for remediation of the material weakness, and any updates to legal, regulatory or consumer-payment risks.
- Cash availability: $142.3 million of reported cash was held by foreign entities, most described as indefinitely reinvested, and $26.2 million was held for clients.