Encore Capital Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Encore purchases and services defaulted consumer receivables, principally in the United States and Europe. Results reflect adoption of CECL on January 1, 2020; prior-year comparisons were not restated and are not fully comparable.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $289.1 million | $345.7 million |
| Operating income | $47.2 million | $111.1 million |
| Net income (loss) | $(10.6) million | $49.4 million |
| Net income (loss) attributable to Encore | $(10.5) million; $(0.33) diluted EPS | $49.3 million; $1.57 diluted EPS |
| Operating cash flow | $70.8 million | $11.0 million |
| Cash used in investing activities | $(43.3) million | $(69.5) million |
| Cash from (used in) financing activities | $(21.8) million | $71.5 million |
Revenue included $357.4 million from receivable portfolios and a negative $98.7 million adjustment for changes in expected current and future recoveries. Total operating expenses were $241.9 million. Operating margin was 16.3% in 2020 versus 32.0% in 2019, calculated against 2019 revenue adjusted for net portfolio allowances as presented by the company. Interest expense was $54.7 million. Adjusted EBITDA, a non-GAAP measure, was $62.6 million, down from $120.1 million.
Gross collections from purchased receivables were $527.3 million, up 2.6% year over year. Portfolio purchases were $214.1 million, down 18.4%; purchases had face value of $1.7 billion and averaged 12.6% of face value. The company reported $3.2 billion of net investment in receivable portfolios and $8.4 billion of estimated remaining collections.
At March 31, 2020, cash and equivalents were $188.2 million, total assets $4.615 billion, and total equity $905.8 million. Borrowings were $3.404 billion on the balance sheet. Cash at period end included $19.4 million collected for third-party clients; $132.5 million was held by foreign entities and may have tax consequences if repatriated. Encore reported $356.2 million of available capacity on its revolving facility and Cabot reported approximately $225.0 million available, both subject to borrowing bases and covenants. Management said it believed liquidity was sufficient for at least the next twelve months.
Material changes and notable items
- COVID-19 recovery estimate: Management revised expected collection timing, reducing forecast 2020 cash flows. Most of the near-term shortfall was expected to be recovered in 2021 and later; estimated remaining collections were described as largely unchanged. Discounting the delayed recoveries produced an approximately $109.0 million provision, contributing to the reported loss.
- CECL adoption: The new credit-loss accounting approach increased the opening receivable portfolio balance by $44.2 million, eliminated the $100.2 million deferred court-cost asset, and reduced opening retained earnings by $44.2 million, net of tax effects. Court costs are now expensed as incurred. These changes affect comparability of portfolio revenue and legal collection costs with 2019.
- Geographic performance: U.S. revenue was $208.2 million versus $189.4 million; international revenue was $80.9 million versus $157.7 million. The company cited lower European collections and portfolio purchases, COVID-19 impacts, currency translation, and the 2019 Baycorp sale as factors affecting comparisons.
- Equity and currency: Foreign currency translation loss of $61.0 million contributed to total other comprehensive loss of $64.6 million. Goodwill declined by $44.9 million, which the filing attributed to foreign currency translation; management did not perform an interim impairment test.
- Debt and maturities: Debt declined from $3.513 billion at year-end 2019. The $89.4 million 2020 convertible notes mature July 1, 2020; additional convertible notes include $161.0 million due in 2021. Cabot amended its securitization facility, increasing commitment to £350 million and extending repayment to March 2025.
- Forward commitments and subsequent event: The company had agreements to purchase portfolios with approximately $3.0 billion face value for $378.4 million. It reported the sale of its Brazil operation in April 2020.
Outlook, risks, and contingencies
The filing provides no specific earnings guidance or quantified full-year forecast. Management said COVID-19 was adversely affecting collections and expected to delay some near-term receipts; the duration and overall financial impact were uncertain. Portfolio sales by European banks had paused, and the company anticipated lower near-term European supply. Potential government restrictions, court closures, consumer financial distress, service-provider disruption, and constrained capital-market access could further affect operations, liquidity, and collection estimates.
Other risks include uncertainty in CECL forecasts, foreign exchange and interest-rate exposure, regulatory requirements and collection litigation, and the possibility of future goodwill impairment. The company was in material compliance with debt covenants and reported no material legal reserves or material new developments in previously disclosed proceedings. Portfolio purchase commitments and litigation or regulatory matters remain relevant contingencies.
Most important facts for investors to verify
- Whether actual portfolio collections recover as management’s revised forecasts assume, particularly the expected deferral of collections from 2020 into 2021 and later.
- How the $109.0 million CECL-related recovery adjustment and the new accounting presentation affect future portfolio revenue, earnings, and comparisons.
- Liquidity and refinancing plans for the July 2020 convertible-note maturity, and continued access to revolving facilities under borrowing-base and covenant limits.
- The pace of U.S. and European portfolio purchases, pricing, collections, and legal-channel costs as pandemic restrictions and market conditions evolve.
- Whether foreign exchange movements, tax valuation allowances, litigation or regulatory actions, or deterioration in operating forecasts lead to further losses or impairment charges.