Encore Capital Group, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing also reports fourth-quarter results. Encore purchases defaulted consumer debt portfolios, collects on owned receivables, and provides debt-servicing services. Its core operations are MCM in the U.S. and Cabot in Europe. The company sold Baycorp, its Australia and New Zealand operation, in August 2019.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Reported revenue | $1.406 billion | $1.321 billion |
| Net portfolio allowances / reversals | $8.1 million net charge | $41.5 million net reversal |
| Revenue adjusted for net allowances | $1.398 billion | $1.362 billion |
| Income from operations | $446.3 million; 31.9% of adjusted revenue | $405.3 million; 29.8% |
| Net income attributable to Encore shareholders | $167.9 million | $115.9 million |
| Diluted EPS | $5.33 | $4.06 |
| Operating cash flow | $244.7 million | $186.8 million |
| Cash and cash equivalents at year-end | $192.3 million | $157.4 million |
| Total borrowings at year-end | $3.513 billion | $3.491 billion |
Gross collections from purchased receivables rose 3.0% to $2.027 billion. Portfolio purchases, at cost, declined 11.7% to $999.9 million; the average purchase price was 8.6% of face value, versus 13.3% in 2018. Overall cost-to-collect improved to 37.0% from 37.9%. Year-end assets were $4.910 billion, and stockholders’ equity was $1.022 billion.
Fourth-quarter 2019 adjusted revenue was $347.8 million, net income attributable to Encore was $43.1 million, and diluted EPS was $1.36. Gross collections were $498.8 million.
Liquidity included $272.3 million available under Encore’s revolving facility and approximately $211.5 million under Cabot’s facility. Management stated liquidity was sufficient for at least the next 12 months, citing expected operating cash flow, cash, capital-market access, and facility availability. The company reported compliance in all material respects with its debt covenants.
Material changes versus FY2018
- Reported revenue increased 6.5%, while adjusted revenue increased 2.6%. Higher portfolio revenue reflected improved collections and higher portfolio IRRs; servicing revenue fell, partly due to currency translation and the Baycorp and Refinancia disposals.
- Shareholder net income rose approximately 45%, supported by higher operating income and a lower effective tax rate (16.1%, versus 29.9%). The 2019 tax rate included discrete benefits, including an IRS settlement/tax accounting method benefit.
- Operating cash flow increased by $58.0 million. Net cash used in investing fell to $202.3 million from $397.5 million, including $107.9 million of proceeds from portfolio sales. Financing used $19.8 million, compared with $166.4 million provided in 2018.
- U.S. purchases increased, while European purchases declined as Encore pursued selective buying and a gradual reduction in European debt leverage. In Q4, Cabot entered co-investment framework agreements to share portfolio investment while remaining lead servicer.
Outlook, risks, and unusual items
- No formal earnings guidance: Encore says it generally does not issue specific earnings projections. Management’s stated strategy is to invest in U.S. and U.K. core operations, develop the wider European business, and strengthen the balance sheet through cash generation and debt reduction.
- Portfolio estimates and collections: Revenue and portfolio values depend on forecasts of future collections. Actual cash flows below estimates may reduce revenue or require valuation allowances. FY2019 recorded $8.1 million of net portfolio allowance charges, mainly for certain European portfolios, versus $41.5 million of reversals in FY2018.
- Baycorp disposal: The sale produced a $12.5 million loss and a $10.7 million goodwill impairment. The company also reported a $9.3 million gain on the sale of certain European portfolios. Management’s adjusted metrics exclude specified unusual items; review the GAAP-to-non-GAAP reconciliations.
- Debt and interest exposure: Borrowings were substantial at $3.513 billion, with variable-rate debt and significant maturities, including approximately $900 million scheduled for 2021 and $1.670 billion for 2023. The filing identifies refinancing, covenant, interest-rate, and LIBOR-transition risks. Interest-rate and foreign-exchange hedges mitigate but do not eliminate exposure.
- Accounting change in 2020: Adoption of CECL was expected to reduce opening retained earnings by approximately $40–$50 million, write off existing deferred court costs, and change the timing and presentation of portfolio revenue and court-cost expense. Management expected higher reported operating expenses from expensing court costs as incurred.
- Regulatory and legal risks: The CFPB’s 2015 consent order was due to terminate in September 2020; proposed federal debt-collection rules were expected to be finalized in 2020. The company faces consumer-protection regulation, litigation, licensing, and compliance risks in the U.S. and Europe. It reported no material legal reserves at year-end and stated that known matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
- Other exposures: Brexit’s future effects were uncertain; currency movements affected reported European results. The filing also highlights economic sensitivity, portfolio pricing and supply, model accuracy, third-party servicing, cybersecurity, and consumer bankruptcy risks.
Important facts for investors to verify
- Whether collections and estimated remaining collections from recent portfolio vintages meet management’s forecasts, particularly for Europe.
- How CECL adoption affected opening equity, reported revenue, allowances, and court-cost accounting in 2020.
- Debt maturities, refinancing plans, borrowing-base availability, covenant headroom, and exposure to variable rates and benchmark-rate transitions.
- Final implementation and business impact of U.S. debt-collection rules, the CFPB consent-order conclusion, and any material litigation or regulatory developments.
- The recurring earnings and cash-flow impact of portfolio-sale gains, Baycorp disposal effects, tax benefits, and management’s non-GAAP adjustments.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2019.