Encore Capital Group, Inc. — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Encore purchases and collects defaulted consumer receivables internationally and finances delinquent property taxes through Propel. Its reportable segments are portfolio purchasing and recovery and tax lien business.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $285.7 million | $253.7 million | +12.6% |
| Operating income | $86.0 million | $68.3 million | +26.0% |
| Operating margin | 30.1% | 26.9% | +3.2 percentage points |
| Net income attributable to Encore shareholders | $29.4 million | $23.2 million | +26.9% |
| Diluted EPS | $1.08 | $0.82 | +31.7% |
| Operating cash flow | $19.4 million | $12.2 million | +$7.2 million |
Portfolio revenue was $264.1 million, up 11.2%; other revenue was $14.4 million and net interest income was $7.1 million. Net income margin attributable to Encore was 10.3%, versus 9.1% a year earlier. Interest expense rose 11.4% to $42.3 million. Comprehensive income attributable to Encore fell to $8.9 million from $25.1 million, mainly reflecting a $22.6 million foreign-currency translation loss.
Cash and cash equivalents were $136.2 million at March 31, 2015, versus $124.2 million at year-end 2014. Total debt was $2.691 billion, down from $2.774 billion; total assets were $3.648 billion. Investing cash flow was positive $4.5 million, compared with negative $353.0 million in Q1 2014, which included acquisition spending. Financing cash flow was negative $12.3 million, versus positive $406.1 million. Management reported compliance with debt covenants and believed liquidity was sufficient for at least 12 months. The company reported $205.6 million available under its Encore credit facility and approximately $184.4 million available under Cabot’s revolving facility, excluding accordion capacity.
Material changes versus the prior comparable period
- Collections increased 7.2% to $425.1 million; management attributed the increase primarily to portfolios acquired through increased M&A activity.
- Operating expenses rose 7.6% to $199.6 million, slower than revenue growth. Cost per dollar collected for portfolio purchasing and recovery increased to 38.8% from 37.7%, with higher U.S. and European costs.
- Portfolio purchases were $125.2 million, versus $467.6 million in Q1 2014. The prior period included $208.5 million of portfolios acquired with Marlin. Management said market pricing remained elevated amid constrained supply and strong demand; Q1 2015 purchases were at 12.0% of face value versus 10.9%.
- International revenue increased to $95.6 million from $69.0 million; domestic revenue was $190.0 million, compared with $184.7 million.
- Goodwill declined to $865.7 million from $897.9 million, largely due to foreign-currency translation. A $2.4 million Atlantic acquisition purchase-price adjustment also increased goodwill.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management said it generally does not make specific earnings projections.
- The CFPB was examining debt-buyer collection practices, and Encore was in discussions with CFPB staff over practices and controls. A negotiated outcome could involve penalties or restitution and pre-tax charges exceeding $35 million, as well as terms that could materially affect operations, collections or results. If litigation followed, the company said it could not estimate a loss range. No material legal reserves were recorded.
- Management expected U.S. portfolio prices to remain elevated for some time and anticipated modest growth in U.K. portfolio supply in 2015; it also expected European pricing to remain high. Elevated purchase costs could pressure investment returns.
- Propel Facility I, with $48.8 million outstanding, was due to expire in May 2015 and was being renegotiated. Propel Facility II was amended on April 3, 2015, after quarter-end.
- Foreign subsidiaries held $84.9 million of cash, most of which management considered indefinitely reinvested and potentially subject to material tax effects if repatriated. Foreign-currency translation reduced comprehensive income materially.
- Receivable portfolio valuation depends on forecasts and assumptions. Management estimated $5.080 billion of remaining gross collections, which is not assured; a 100-basis-point change in portfolio valuation cost-to-collect or discount-rate assumptions could change estimated fair value by approximately $38.2 million for U.S. portfolios and $44.0 million for European portfolios.
Key facts for investors to verify
- Developments, potential exposure and any eventual resolution of the CFPB discussions, including possible charges above $35 million.
- Renewal terms and borrowing costs for Propel Facility I, and ongoing availability under corporate and Cabot credit facilities.
- Whether collection growth and portfolio performance support management’s remaining-collections estimates as purchase prices remain elevated.
- Changes in legal-channel costs, overall cost per dollar collected, and foreign-currency effects.
- Cash accessibility and tax consequences associated with foreign-held cash, along with the company’s debt maturities and covenant position.