Encore Capital Group, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. Although the request refers to 2012 Q4, this is an annual filing; selected fourth-quarter results are shown separately below. Encore purchases and collects defaulted consumer receivables and, following its May 2012 acquisition of Propel, finances delinquent Texas property taxes through tax-lien payment agreements.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Total revenue | $555.9 million | $448.7 million | +23.9% |
| Operating income | $154.2 million | $120.1 million | +28.3% |
| Operating margin | 27.7% | 26.8% | +0.9 percentage points |
| Income from continuing operations | $78.6 million | $60.6 million | +29.7% |
| Net income | $69.5 million | $61.0 million | +14.0% |
| Diluted EPS | $2.69 | $2.37 | +13.5% |
| Operating cash flow | $98.5 million | $84.6 million | +16.5% |
| Portfolio purchases, at cost | $562.3 million | $386.9 million | +45.3% |
| Gross collections | $948.1 million | $761.2 million | +24.6% |
Operating expenses rose 22.3% to $401.7 million. Portfolio revenue increased 21.6% to $545.4 million; tax-lien net interest income contributed $10.5 million from acquisition through year-end. Encore recorded a $4.2 million net portfolio-allowance reversal, versus a $10.8 million provision in 2011. Net income included a $9.1 million loss from discontinued operations, principally associated with the Ascension bankruptcy-servicing business sale and related impairment and exit items. Continuing-operations diluted EPS was $3.04, up from $2.36.
Q4 2012: Revenue was $143.6 million versus $116.5 million in Q4 2011; income from continuing operations was $20.2 million versus $17.2 million; net income was $20.2 million versus $17.1 million; diluted EPS was $0.79 versus $0.67. Q4 gross collections were $230.5 million versus $185.9 million.
Balance sheet, debt and liquidity
- At December 31, 2012, cash was $17.5 million, total assets $1.171 billion, investment in receivable portfolios $873.1 million, total debt $706.0 million, and stockholders’ equity $405.8 million. Debt increased from $389.0 million at year-end 2011.
- Cash flows were $98.5 million provided by operations, $343.8 million used in investing, and $254.7 million provided by financing. Investing outflows included $562.3 million of portfolio purchases and $186.7 million net cash paid for Propel, partly offset by collections applied to portfolio principal.
- Financing included a $575 million amended revolving/term facility, later increased to $595 million of commitments; a separate $160 million Propel facility; and $115 million of 3.0% convertible notes due 2017. The notes’ initial conversion price was approximately $31.56 per share; concurrent hedge and warrant transactions raised the effective conversion price to $44.1875, subject to terms.
- Management reported compliance with financing covenants and stated it believed liquidity was sufficient for at least the next 12 months, based on expected operating cash flows, cash, capital-market access, and credit-facility availability. Contractual cash obligations totaled $811.1 million, including estimated interest.
Material changes, outlook and risks
- Encore acquired the Propel entities for approximately $187.6 million on May 8, 2012. Propel contributed 2% of consolidated revenue and 3% of operating income for its post-acquisition period. Encore sold substantially all Ascension assets on May 16, 2012; it recognized a $10.4 million impairment charge and agreed to fund up to $4.0 million of specified first-year operating losses. The filing reports no sale proceeds and a $1.8 million after-tax loss on sale.
- Portfolio purchases rose substantially, but management described rising prices for fresh portfolios amid constrained supply and strong demand. It expected elevated prices to persist for a period and cautioned that favorable 2013 purchasing opportunities could be adversely affected. Management said it might shift toward aged portfolios or alternative asset classes. The filing provides no specific earnings or revenue guidance.
- Management cited analytics, international operations, and improving collection efficiency as strengths. Adjusted cost per dollar collected declined to 40.4% from 42.2%; however, indirect costs rose as a share of collections, reflecting growth, legal expenses, and regulatory investment.
- Key risks include the accuracy of projected collections and portfolio valuations; availability and pricing of receivables; consumer economic conditions and bankruptcy; reliance on sellers, collection agencies, and law firms; litigation and court-cost recoverability; and extensive consumer-protection regulation. CFPB supervision of qualifying debt collectors, including Encore, took effect January 2, 2013.
- Several class-action matters remained pending, including consolidated TCPA claims alleging calls to cellular phones without prior consent; the filing reported no material litigation reserves and stated that some exposures could not yet be estimated. The Brent settlement appeal also remained pending.
- BDO issued an unqualified opinion on the financial statements and internal controls; management concluded internal control over financial reporting was effective at year-end.
Investor verification priorities
- Check subsequent collection performance against estimated cash flows, particularly on the large 2012 purchase vintages, and monitor allowance changes.
- Review portfolio purchase prices, supply conditions, seller concentration, and realized returns as fresh-account pricing rises.
- Assess debt maturities, borrowing-base capacity, covenant headroom, interest-rate exposure, and cash available to fund acquisitions and collections.
- Track CFPB examinations and regulatory developments, TCPA litigation, and any change to litigation reserves or collection practices.
- Verify Propel’s performance, asset quality and lien-to-value assumptions, and the final economic impact of the Ascension sale and loss-funding commitment.