Encore Capital Group, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
Encore is an international specialty finance company that purchases defaulted consumer receivables and provides debt recovery and servicing. Its operations focus on the United States and Europe, with smaller Latin American and Asia-Pacific activities. This unaudited filing covers the quarter and six months ended June 30, 2021; amounts below are in U.S. dollars.
Financial and operating highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $427.7m | $426.0m | $844.6m | $715.1m |
| Operating income | $174.3m | $219.7m | $342.6m | $266.9m |
| Operating margin | 40.7% | 51.6% | 40.6% | 37.3% |
| Net income attributable to Encore shareholders | $96.5m | $130.3m | $191.1m | $119.9m |
| Diluted EPS | $3.07 | $4.13 | $6.04 | $3.79 |
| Interest expense | $44.2m | $50.3m | $90.7m | $105.0m |
- Q2 revenue was nearly flat year over year, while shareholder net income fell about 26%. Higher operating costs—especially legal collection costs, up 79%—and a $9.3m debt-extinguishment loss weighed on quarterly earnings.
- For the first half, revenue increased 18% and shareholder net income increased 59%. The prior-year comparison included a $32.7m negative change in expected recoveries, versus a positive $110.7m change in 2021.
- First-half collections from purchased receivables rose 18% to $1.219bn. Management attributed stronger collections primarily to consumer behavior during the pandemic, improved liquidation, and increased legal-channel collections. First-half portfolio purchases declined 14% to $312.9m.
- Cash and cash equivalents were $198.5m at June 30, 2021, versus $189.2m at year-end 2020. Reported borrowings were $2.999bn, down from $3.282bn; total liabilities were $3.325bn and equity was $1.354bn. The company reported $719.7m of available capacity under its $1.05bn Global Senior Facility and said it was in material compliance with financing covenants.
- First-half operating cash flow was $149.0m, compared with $209.7m in 2020. Investing activities provided $240.7m, chiefly as portfolio collections applied to principal exceeded purchases; financing activities used $369.6m. Cash at period-end was $198.5m.
- Receivable portfolios, net, were $3.154bn. Estimated remaining gross collections from portfolios and real-estate-owned assets (ERC) totaled $8.112bn; ERC is an estimate, not a guaranteed cash receipt.
Material changes, outlook, and risks
- Revenue from receivable portfolios declined 2% in Q2 and 4% for the first half, while servicing revenue rose 34% and 23%, respectively. Foreign-exchange translation, particularly the weaker U.S. dollar against the British pound, benefited reported international revenue and expenses.
- Q2 operating expenses increased 23%; legal collection costs rose to $66.9m as court-related activity and spending recovered from pandemic disruptions. The overall cost per dollar collected increased to 33.4% from 31.3% in Q2 2020, though it improved for the first half to 33.4% from 34.3%.
- Collections exceeded prior projections, but management reduced estimated remaining recoveries for certain portfolios after reassessing lifetime cash flows. This produced negative changes in expected future recoveries of $43.2m in Q2 and $90.1m for the first half. Management said future pandemic effects and recovery estimates remain uncertain.
- In June, Encore issued £250m of 4.25% senior secured notes due 2028 and used proceeds to redeem its remaining 7.5% notes due 2023. The refinancing resulted in a $9.3m loss on extinguishment. The company also repaid $161m of convertible notes at maturity and reported lower interest expense overall.
- The share-repurchase authorization was increased from $50m to $300m in May. Encore repurchased 1.12m shares for $47.4m in the first half and terminated its $50m at-the-market equity offering program.
- No specific earnings guidance was provided; management stated it generally does not make specific earnings projections. It expects liquidity to be sufficient for at least the next 12 months, based on anticipated operating cash flows, collections, cash, capital-market access, and facility availability.
- After quarter-end, subsidiaries agreed to sell the entities owning Encore’s Colombia and Peru portfolios. The sale was expected to close in Q3 2021, with an estimated after-tax loss of approximately $15m, largely related to accumulated currency translation losses.
- Risks include uncertainty in COVID-19 effects on collections and portfolio supply, changing recovery assumptions, foreign-exchange and interest-rate exposures, consumer-debt collection regulation, and litigation. The filing reported no material legal reserves and no material developments in previously disclosed proceedings. New U.S. Regulation F debt-collection rules were scheduled to take effect November 30, 2021; management did not expect a material incremental operational effect.
Investor facts to verify
- Whether elevated collections persist and how much reflects sustainable improvement versus a timing shift in consumer payments.
- Changes in portfolio recovery estimates, including the assumptions underlying the $8.112bn ERC measure and the negative future-recovery revisions.
- Debt maturities, refinancing costs, covenant headroom, and the effect of variable rates and foreign exchange on interest expense and liquidity.
- Execution and final financial impact of the Colombia and Peru portfolio sale, including the estimated $15m after-tax loss.
- Whether higher legal-collection spending and cost-to-collect translate into durable incremental collections and returns.