Encore Capital Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement amounts are unaudited. Encore purchases and services defaulted consumer receivables, primarily in the United States and Europe.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $347.4m | $332.7m | $1,037.9m | $981.8m |
| Revenue, adjusted for net portfolio allowances | $355.9m | $336.8m | $1,049.9m | $1,013.3m |
| Operating income | $108.3m | $97.5m | $333.1m | $289.4m |
| Net income attributable to Encore stockholders | $38.9m | $20.7m | $124.8m | $68.9m |
| Diluted EPS | $1.23 | $0.69 | $3.97 | $2.49 |
| Operating margin on adjusted revenue | 30.4% | 29.0% | 31.7% | 28.6% |
Revenue adjusted for net portfolio allowances increased 5.7% in Q3 and 3.6% year to date. Portfolio revenue grew 7.1% and 8.2%, respectively; other revenue declined, partly reflecting foreign exchange and the prior sale of Refinancia. Net income benefited from lower tax expense, including the Baycorp-related tax benefit.
Cash flow, balance sheet and debt
- For the first nine months, operating cash flow was $196.9m, investing cash flow was negative $198.0m, and financing cash flow was positive $31.3m. Portfolio purchases were $764.9m; collections applied to portfolio principal were $588.3m.
- At September 30, cash and cash equivalents were $186.7m, total assets $4.71bn, total borrowings $3.43bn, and total equity $924.0m. Cash included $22.4m collected for third-party clients; $161.8m was held outside the United States.
- Available borrowing capacity was $224.6m under Encore’s revolving facility and approximately $167.8m under Cabot’s facility. Management said liquidity was sufficient for at least the next 12 months; the company reported compliance with financing covenants.
- Debt includes floating-rate facilities and notes with maturities beginning in 2020; $89.4m of 2020 convertible notes remained outstanding. The company used a September issuance of $100m of 2025 convertible notes partly to repurchase approximately $83.1m principal of the 2020 notes.
Material changes and unusual items
- Encore completed the sale of Baycorp, its Australia and New Zealand business, on August 15. The sale resulted in a $12.5m loss and a $10.7m goodwill impairment; a $17.5m tax benefit was recognized in connection with the transaction.
- Portfolio purchases totaled $764.9m in the first nine months, down from $885.0m a year earlier, while purchased face value rose to $9.4bn from $6.2bn. Management attributed the lower purchase-price-to-face-value ratio partly to deeply discounted European assets and said European deployment was reduced as part of a plan to lower European debt leverage.
- Gross collections rose 3.0% year to date to $1.53bn, mainly due to U.S. collections; European collections were affected by currency translation and lower recent portfolio deployment. The U.S. dollar strengthened against the British pound, weighing on reported international revenue.
- Q3 other expense included the Baycorp sale loss. Goodwill impairment and sale-related charges are unusual items; reported results also reflect tax benefits and a tax accounting method change approved by the IRS.
Outlook, risks and contingencies
- The filing provides no specific company earnings guidance; management says it generally does not make specific earnings projections. It expects to continue investing in its core U.S. and European portfolio purchasing and recovery businesses and notes that future cash needs depend on portfolio and business acquisitions.
- Management cited favorable U.S. portfolio supply and pricing conditions, while noting that European pricing had been elevated and that portfolio purchasing, collections, costs and returns vary by geography, asset mix, and timing.
- Risks include portfolio cash-flow estimation and collection performance, foreign currency and interest-rate exposure, high debt, and changes in collection laws and regulation. The CFPB had proposed debt-collection rules covering disclosures, validation, newer communication methods and call limits; final rules were anticipated in 2020, with timing and impact uncertain.
- The company is implementing the expected-credit-loss accounting standard (ASC 326), effective for it in 2020, and expects a significant change to receivables accounting. It also faces ordinary-course litigation and regulatory matters; it reported no material legal reserves and no material developments in previously disclosed proceedings.
Important facts for investors to verify
- Whether stronger portfolio revenue and collections persist, especially across newer purchase vintages, and whether forecast collections support portfolio carrying values.
- How much reported earnings growth reflects ongoing operations versus Baycorp-related tax benefits, sale and impairment charges, and other adjustments.
- Debt maturities, refinancing needs, variable-rate exposure, covenant headroom and available borrowing capacity as portfolio investment continues.
- The pace and economics of U.S. and European portfolio deployment, including the effect of reduced European purchases and foreign exchange movements.
- The eventual impact of CFPB rulemaking, other regulatory or litigation outcomes, and adoption of the new expected-credit-loss accounting standard.