Encore Capital Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Encore purchases discounted defaulted consumer receivables and collects them across the U.S. and international markets. Following the March 31 sale of Propel, its tax-lien business, the company reported one segment: portfolio purchasing and recovery.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $289.0 million | $277.8 million |
| Operating income / margin | $83.5 million / 28.9% | $82.9 million / 29.8% |
| Income from continuing operations | $29.8 million | $28.1 million |
| Net income attributable to Encore | $25.7 million | $29.4 million |
| Diluted EPS, continuing operations / total | $1.12 / $0.99 | $1.01 / $1.08 |
| Operating cash flow | $31.9 million | $19.4 million |
| Cash and cash equivalents, March 31 | $144.6 million | $136.2 million |
| Debt, March 31 | $2.893 billion | $2.944 billion at December 31, 2015 |
Portfolio revenue was $270.1 million, up 2.3%; other revenue was $18.9 million. Total revenue rose 4.0%, while operating expenses increased 5.4% to $205.5 million. Interest expense climbed 19.8% to $50.7 million, largely reflecting higher European debt. The effective tax rate fell to 25.4% from 34.6%, including the effect of an IRS audit settlement and lower-tax international earnings. Net income included a $3.2 million after-tax loss from discontinued operations.
Gross collections increased 5.3% to $447.8 million, led by Europe and other geographies; U.S. collections declined slightly. Receivable portfolio purchases totaled $256.8 million, compared with $125.2 million a year earlier; face value was $3.5 billion and average purchase cost was 7.2% of face value, versus 12.0%. The reported overall cost-to-collect improved to 37.7% from 38.8%. Management’s non-GAAP measures were adjusted diluted continuing-operations EPS of $1.31 versus $1.12 and adjusted EBITDA of $287.0 million versus $262.8 million.
Balance sheet, cash flow and funding
Net cash provided by investing activities was $18.8 million, including $106.0 million of net proceeds from the Propel divestiture; financing activities used $61.5 million. Portfolio investment on the balance sheet was $2.487 billion. Propel sale consideration was $144.4 million before $38.4 million of divested cash and customary post-closing adjustments; the company recorded a $3.0 million pretax sale loss and wrote off $49.3 million of Propel goodwill.
At quarter-end, Encore reported $228.2 million of availability under its secured credit facilities, subject to borrowing-base and covenant limits, plus $195.0 million of remaining accordion capacity. Cabot had approximately $143.1 million of availability under its revolving facility. The company stated it was in compliance with financing covenants and believed liquidity was sufficient for at least 12 months. Of cash on hand, $117.4 million was held by foreign entities and was generally treated as indefinitely reinvested; repatriation could have material tax effects.
Material changes, outlook and risks
- Encore completed the Propel divestiture on March 31, 2016, ending its tax-lien segment. Management said the sale would reduce debt and provide liquidity and investment flexibility.
- The company amended its revolving and term loan agreement in March. The facilities mature principally in February 2019, while two term-loan subtranches mature in 2017.
- Management reported elevated portfolio prices in the U.S. and U.K., citing limited supply and continued buyer demand, and expected pricing to remain elevated for some time. It emphasized international expansion and continued investment in collection channels; it did not provide specific earnings guidance.
- Management cautioned that results may vary with portfolio pricing and collection estimates, seasonality, acquisition integration, foreign exchange, and regulatory or legislative changes. CFPB oversight and debt-collection litigation are ongoing risks. The filing reported no material developments in previously disclosed legal proceedings and no material legal reserves beyond previously disclosed CFPB and state regulatory reserves; some exposure could not yet be estimated.
- Management noted that first-quarter U.S. collections are typically seasonally strong and that interim results are not necessarily indicative of full-year results. It also identified potential future goodwill impairment if operating results, market conditions, or other factors deteriorate.
Investor verification priorities
- Track portfolio collection performance and forecast revisions, particularly given the sharp increase in purchases and elevated market prices.
- Review debt maturities, borrowing-base availability, covenant headroom, and the use of Propel proceeds; confirm the stated liquidity outlook.
- Assess whether higher interest expense and operating costs are offset by collections, revenue growth, and cost-to-collect performance.
- Monitor CFPB and other regulatory matters, litigation exposure, and any changes to collection practices or reserves.
- Verify the Propel sale’s final post-closing adjustments and the effects of foreign-currency movements and international cash repatriation constraints.