Encore Capital Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. Encore is a specialty finance company that purchases defaulted consumer receivables and provides debt recovery and servicing, primarily through MCM in the U.S. and Cabot in Europe.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue, adjusted for net portfolio allowances | $347.1 million | $326.8 million | +6.2% |
| Revenue from receivable portfolios | $311.2 million | $281.0 million | +10.7% |
| Operating income | $111.1 million | $88.5 million | +25.6% |
| Operating margin on adjusted revenue | 32.0% | 27.1% | +4.9 points |
| Net income attributable to Encore shareholders | $49.3 million | $21.8 million | More than doubled |
| Diluted EPS | $1.57 | $0.83 | +$0.74 |
| Adjusted diluted EPS (non-GAAP) | $1.46 | $0.98 | +49% |
| Adjusted EBITDA (non-GAAP) | $120.1 million | $103.6 million | +15.9% |
Collections were $513.9 million, up 5.1%. Portfolio purchases were $262.3 million, down 5.2%, for portfolios with $1.7 billion face value; the average purchase price was 15.1% of face value. Cost-to-collect improved to 36.4% from 38.5%.
Operating cash flow was $11.0 million, versus $1.0 million. Investing activities used $69.5 million, including portfolio purchases net of collections applied to principal; financing activities provided $71.5 million. Cash rose to $167.1 million from $157.4 million.
At March 31, total assets were $4.814 billion, debt net of issuance costs and discounts was $3.593 billion, and equity was $874.6 million. Cash was $167.1 million, of which $127.5 million was held outside the U.S. Available capacity was $138.8 million on Encore’s revolving facility and approximately $182.2 million on Cabot’s facility. The company reported compliance with financing covenants.
Changes and notable items
- Revenue growth reflected higher portfolio revenue and collections, which management attributed to increased purchase volume and collection improvements. U.S. collections increased; European collections declined modestly, with currency translation a headwind.
- Operating expenses fell 1.0% to $236.0 million. Lower legal and other operating costs were partly offset by higher salaries and collection agency commissions.
- Interest expense declined to $55.0 million from $57.5 million, principally because Cabot preferred equity certificates were purchased in July 2018 and no related interest was incurred in Q1 2019. Higher debt balances and interest rates partly offset the reduction.
- The effective tax rate fell to 6.9% from 28.5%. Q1 2019 included an approximately $9.1 million tax benefit from an IRS-approved revenue accounting method change. Adjusted net income also excludes this discrete tax benefit.
- Adoption of the new lease standard on January 1, 2019 added operating lease right-of-use assets and liabilities; at quarter-end these were $91.0 million and $106.0 million, respectively. Management reported no material effect on operations, cash flows, or covenant compliance.
Outlook, risks, and contingencies
- The filing gives no specific earnings guidance. Management said it expects liquidity to be sufficient for at least the next 12 months, based on expected operating cash flows, cash, capital-market access, and credit-facility availability. Future cash needs depend partly on portfolio and business acquisitions.
- Management described U.S. portfolio supply and pricing as favorable and cited potential European purchasing and servicing opportunities, while noting elevated European pricing and plans to reduce European debt leverage over time.
- On May 7, 2019, after quarter-end, the CFPB proposed debt-collection rules covering disclosures, debt validation, newer communication technologies, and telephone contact limits. The proposal was open for comment; final rules and timing remained uncertain.
- Routine litigation and regulatory matters include claims involving collection practices, licensing, time-barred debt, and consumer communications. The company reported no material legal reserves and no material developments in previously disclosed proceedings.
- Outstanding purchase commitments covered portfolios with approximately $2.8 billion face value and an estimated purchase price of $358.0 million. The company noted that adoption of the expected-credit-loss standard could significantly affect how it measures and records portfolio income.
- Foreign exchange, floating interest rates, portfolio collection forecasts, regulatory change, and the company’s substantial debt are key risks. Management reported no material change in the market-risk disclosures from its 2018 Form 10-K.
Important facts for investors to verify
- How much of the earnings improvement persists after separating the $9.1 million tax benefit and other non-GAAP adjustments.
- Whether collection growth and portfolio forecast performance support the carrying value and expected collections of the $3.212 billion receivable portfolio investment.
- Debt levels, borrowing availability, interest-rate exposure, covenant headroom, and the use of cash held outside the U.S.
- Potential effects and implementation details of the CFPB proposal and the expected-credit-loss accounting standard.
- Whether the $358.0 million cost of committed portfolio purchases and other cash needs can be funded while maintaining liquidity.