Encore Capital Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Encore is a specialty finance company that buys defaulted consumer receivables and collects on them, primarily in the United States and Europe; it also provides European debt-servicing services. It reports one operating segment.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $309.6 | $307.8 | $945.3 | $1,164.4 |
| Operating income | $75.5 | $80.5 | $233.7 | $464.5 |
| Operating margin | 24.4% | 26.2% | 24.7% | 39.9% |
| Net income | $19.3 | $31.5 | $64.3 | $267.7 |
| Diluted EPS | $0.79 | $1.22 | $2.62 | $10.06 |
| Interest expense | $50.6 | $39.3 | $147.4 | $111.0 |
| Adjusted EBITDA (non-GAAP) | $90.7 | $95.8 | $282.3 | $514.6 |
Q3 revenue increased 0.6%, while net income declined 39%. For the nine-month period, revenue fell 18.8% and net income fell 76%. The comparison was affected by $179.3 million of positive changes in recoveries in the first nine months of 2022, versus $30.1 million of negative changes in 2023. The filing also cites higher financing costs and lower collections relative to the prior-year period.
- Receivables and collections: Portfolio purchases were $781.3 million for the first nine months, up from $575.2 million; U.S. purchases rose to $606.1 million while European purchases declined to $175.2 million. Gross collections were $1.404 billion, down 4.8% year over year. Portfolio investment, net, was $3.321 billion at quarter-end.
- Cash flow: Nine-month operating cash flow was $116.2 million, versus $154.9 million. Investing used $270.7 million, primarily reflecting portfolio purchases net of collections applied to investment; financing provided $158.9 million. Cash and equivalents were $144.7 million at September 30.
- Debt and liquidity: Balance-sheet borrowings, net of discounts and issuance costs, were $3.114 billion, versus $2.899 billion at December 31, 2022. Available Global Senior Facility capacity, after covenants, was approximately $307.2 million. Its weighted-average interest rate was 7.84% in Q3 and 7.48% for the nine months. The company reported material compliance with financing covenants.
- Other balance-sheet data: Total assets were $4.760 billion and stockholders’ equity was $1.199 billion at September 30, 2023.
Material changes and management commentary
- Management attributed collection underperformance partly to timing shifts in recent U.S. vintages as consumers returned to more normalized payment behavior. Collections were $4.3 million below forecast in Q3 and $20.1 million below forecast for the nine-month period.
- Management revised certain lifetime collection forecasts downward, recording a $12.8 million negative change in expected future recoveries in Q3; the year-to-date net change was negative $9.9 million. In the first nine months of 2022, the comparable change was positive $127.9 million.
- Q3 interest expense rose 28.6%, mainly from higher interest rates, increased average debt, and foreign-currency translation. The filing reports a 35.7% Q3 effective tax rate, versus 25.7%, primarily reflecting valuation allowances in certain foreign jurisdictions.
- Management said U.S. portfolio supply had increased and pricing improved. European supply remained below pre-pandemic levels and pricing competitive, leading to more limited purchases. No specific earnings guidance was provided; the company generally does not make specific earnings projections.
Outlook, risks and unusual items
- Management stated it expects liquidity to be sufficient for operations 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 on portfolio purchases and collections.
- Subsequent to quarter-end, Encore issued €100 million of additional 2028 floating-rate notes and used the proceeds to repay Global Senior Facility drawings and transaction costs. It also borrowed $175 million under a new secured U.S. facility, amended the Cabot securitization facility to extend maturity to September 2028 and reduce its commitment, and agreed to increase the Global Senior Facility commitment by $23 million.
- The company disclosed ordinary-course debt-collection litigation and regulatory matters, but no material new proceedings or developments and no material legal reserves at September 30. It reported no material change in previously disclosed risk factors.
- Receivable portfolio valuation depends on management’s estimated future collections and other significant assumptions. Adverse collection performance, consumer behavior, macroeconomic conditions, regulation, or market factors could affect estimates and potentially result in future impairment charges. Foreign-currency movements and variable interest rates also affect results; derivatives are used to manage some exposure.
- The $3.7 million gain from partial dedesignation of an interest-rate hedge increased other income in Q3. The company recorded $2.7 million of expense related to an induced conversion in its 2023 exchangeable-note repurchase earlier in 2023.
Investor facts to verify
- Whether subsequent collections support the revised portfolio recovery forecasts, particularly for recent U.S. vintages.
- How higher interest rates and elevated debt affect interest expense, cash generation, and covenant headroom.
- Whether portfolio-purchase growth, especially in the U.S., translates into expected collections and returns; monitor European supply and pricing as well.
- The terms, collateral, maturity, and use of proceeds for the post-quarter-end financing transactions, and resulting total debt and available liquidity.
- Whether reported non-GAAP Adjusted EBITDA trends are consistent with GAAP earnings and operating cash flow.