Encore Capital Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results. Encore purchases and services defaulted consumer receivables internationally and finances delinquent property taxes through its tax-lien business.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $287.8 million | $273.3 million | $863.8 million | $796.2 million |
| Operating income | $34.5 million | $84.3 million | $207.5 million | $231.1 million |
| Operating margin | 12.0% | 30.9% | 24.0% | 29.0% |
| Net income (loss) attributable to Encore | ($11.0 million) | $30.3 million | $46.1 million | $77.1 million |
| Diluted EPS | ($0.43) | $1.11 | $1.71 | $2.79 |
| Operating cash flow | — | — | $63.4 million | $98.8 million |
Q3 revenue increased 5.3%, while operating income fell sharply, principally due to a $54.7 million CFPB-related operating charge. The company recorded an approximately $43 million after-tax one-time charge; management said it covers the Consent Order, related state matters, legal costs, and portfolio allowances. Excluding this charge, management reported adjusted Q3 income attributable to Encore of $34.5 million, or $1.30 per diluted share on an accounting basis ($1.34 on an economic basis). These are non-GAAP measures.
For the first nine months, revenue rose 8.5%, but operating income declined 10.2% and Encore-attributable income fell 40.2%. Portfolio revenue increased with a larger portfolio balance and stronger performance in certain pools; a CFPB-related $8.3 million portfolio allowance charge partly offset allowance reversals elsewhere. Collections were $421.8 million in Q3, up 3.6%, and $1.284 billion for nine months, up 5.9%.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $175.2 million, total assets $4.103 billion, and investment in receivable portfolios, net, $2.323 billion.
- Total debt was $3.116 billion, up from $2.774 billion at December 31, 2014. Debt increased partly to finance the June dlc acquisition and portfolio purchases; Q3 interest expense was $47.8 million versus $43.5 million a year earlier.
- Nine-month investing cash outflow was $354.9 million, including $236.2 million net cash paid for dlc and $550.0 million in portfolio purchases, partly offset by $488.2 million of portfolio collections applied to principal. Financing provided $345.9 million.
- Encore reported $116.6 million available under its senior secured credit facilities and Cabot reported $52.6 million available under its revolving facility, excluding Encore’s accordion feature. The company said it was covenant-compliant and had sufficient liquidity for at least 12 months.
- Of cash, $100.5 million was held by foreign entities and was generally treated as indefinitely reinvested; repatriation could have material tax effects. Certain VIE assets and liabilities are restricted to settling those entities’ obligations and are not available to general creditors.
Material developments, outlook and risks
- Cabot acquired U.K. debt collector dlc on June 1 for approximately $274.7 million. The acquisition contributed $11.7 million of Q3 revenue and $2.3 million of Q3 net income attributable to Encore; purchase-price allocation remained preliminary.
- In October, Encore completed the acquisition of a controlling stake in Baycorp, expanding into Australia and New Zealand, and acquired two Spanish credit-management providers. In November, Cabot priced €310 million of secured floating-rate notes; if completed, proceeds were expected to repay the dlc bridge facility and reduce Cabot revolver borrowings.
- The CFPB Consent Order requires consumer redress, a civil penalty, specified operating requirements, and CFPB review of a compliance plan. Ancillary state attorney general investigations are ongoing. Management expects future earnings impact after the recorded charge to be immaterial; this is an expectation, not a guarantee.
- Management noted elevated U.S. and U.K. portfolio prices, attributed partly to constrained supply and strong competition, and expected pricing to remain elevated for some time. The filing gives no specific earnings guidance.
- Other risks include evolving debt-collection regulation, possible changes to consumer contact rules, payment processors potentially withdrawing from the industry, collection performance and forecast uncertainty, foreign-currency exposure, and acquisition-related execution and leverage. Management described seasonal collection patterns across regions.
Investor facts to verify
- Whether CFPB and state-related obligations, consumer redress, and portfolio effects are fully covered by the recorded charge and whether further costs emerge.
- Collection trends, portfolio cash-flow forecasts, and the assumptions behind estimated remaining collections of $5.654 billion.
- Debt levels, refinancing of the dlc bridge facility, borrowing-base availability, and compliance with leverage covenants.
- Whether elevated portfolio purchase prices allow Encore to sustain collection returns and margins.
- Integration and performance of dlc, Baycorp, and the Spanish acquisitions, including final dlc purchase accounting.