Encore Capital Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; amounts below are in U.S. dollars unless noted. Encore purchases and services defaulted consumer receivables, primarily through MCM in the U.S. and Cabot in Europe. The interim financial statements are unaudited.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $307.8m | $412.6m | $1,164.4m | $1,257.2m |
| Operating income | $80.5m | $166.6m | $464.5m | $509.2m |
| Operating margin | 26.2% | 40.4% | 39.9% | 40.5% |
| Net income attributable to Encore stockholders | $31.5m | $83.6m | $267.7m | $274.7m |
| Basic / diluted EPS | $1.31 / $1.22 | $2.76 / $2.66 | $11.00 / $10.06 | $8.90 / $8.71 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $154.9m | $212.0m |
| Cash and equivalents, period end | September 30, 2022: $147.0m | December 31, 2021: $189.6m | ||
| Borrowings, net of discounts and issuance costs | September 30, 2022: $2,690.2m | December 31, 2021: $2,997.3m |
Q3 revenue fell 25.4% year over year, while net income declined 62.3%. Debt-purchasing revenue was $284.1m, including a $13.1m negative change in recoveries, compared with $382.1m in Q3 2021, which included a $65.9m positive change. Nine-month net income was slightly lower despite revenue declining 7.4%; lower interest expense and the absence of the prior-year debt-extinguishment loss and Colombia/Peru sale loss supported the comparison. Nine-month cash flow from investing was a $40.7m outflow, versus a $312.8m inflow in 2021, as collections applied to portfolio investment declined to $567.8m from $803.2m while purchases increased.
At September 30, 2022, total assets were $4.33bn and stockholders’ equity was $1.19bn. The company reported $535.3m of available capacity under its Global Senior Facility after covenants. Management said liquidity was sufficient for at least the next 12 months, based on expected operating cash flows, collections, cash, capital-market access and credit availability. Cash included $17.9m collected for clients; most cash held by foreign entities was considered indefinitely reinvested.
Material changes and operating trends
- Q3 gross collections from purchased receivables declined 19.1% to $458.3m; nine-month collections fell 17.4% to $1.48bn. Management attributed the comparison partly to unusually high pandemic-era collections in the prior year, lower recent-period purchases and normalization of consumer behavior.
- Q3 collections underperformed forecast by about $4.9m; management recorded an $8.2m negative change in expected future recoveries after revising assumptions for certain pools. Nine-month changes in recoveries remained positive at $179.3m, including $127.9m of net positive changes in expected future recoveries.
- Portfolio purchases rose 38.3% year over year in Q3 to $232.7m and increased 19.6% for the first nine months to $575.2m. U.S. purchases grew, while European purchases remained below pre-pandemic levels and were affected by foreign exchange.
- Revenue and operating expenses were both affected by the stronger U.S. dollar, particularly against the British pound. Management cited reduced servicing demand and U.K. staffing constraints as additional factors affecting collections or servicing revenue.
- Shares repurchased: 457,244 in Q3 for about $25.9m; 1.28m in the first nine months for about $76.6m. Approximately $102.2m remained under the $300m authorization at quarter end.
Debt, liquidity, outlook and risks
- On March 29, 2022, Encore amended and restated its Global Senior Facility, increasing commitments by $90m to $1.14bn, extending maturity to September 2026 and transitioning U.S.-dollar borrowings from LIBOR to Term SOFR. The facility’s weighted-average rate was 4.71% in Q3 2022, versus 3.01% a year earlier.
- The company repaid $150m principal of its 2022 Convertible Notes at maturity in March, settling the conversion entirely in cash for $221.2m, including a $71.2m conversion spread recorded in equity. Remaining convertible and exchangeable notes totaled $272.5m principal at quarter end, including $172.5m of 2023 Exchangeable Notes.
- Management provided no specific earnings forecast and stated it generally does not issue specific earnings projections. It expects U.S. portfolio supply to increase as lending and delinquencies rise; European portfolio supply and sales remain below pre-pandemic levels, with competitive pricing.
- Interest-rate and currency exposure remain material. The company had $783m notional of interest-rate caps and €350m notional of cross-currency swaps. A hypothetical 50-basis-point rate increase on unhedged variable-rate debt was estimated to reduce pretax income by about $3.2m.
- Management cited regulatory, litigation, collection-performance, consumer-behavior, macroeconomic, foreign-exchange and interest-rate risks. The filing describes ongoing routine litigation and regulatory matters, but reports no material legal reserves and no material developments in previously disclosed proceedings. Forward-flow purchase agreements had estimated minimum aggregate purchase commitments of $551.8m; expected actual purchases were stated to be significantly higher.
- Disclosure controls were deemed ineffective at September 30 because of a previously reported material weakness in internal control over financial reporting. Remediation was underway, with completion expected no later than December 31, 2022; it would not be considered complete until controls had operated effectively for a sufficient period and been tested.
Important facts for investors to verify
- Whether collections and recovery forecasts stabilize after Q3’s underperformance and the negative revision to expected future recoveries.
- Whether higher portfolio purchasing translates into forecast collections and returns, particularly given the stated competitive pricing and lower-than-pre-pandemic European supply.
- Debt service costs and covenant headroom as variable rates rise; verify facility availability and maturity/refinancing plans for near-term notes.
- Progress and testing results for remediation of the material weakness in internal controls.
- Potential effects of foreign-exchange movements, regulatory changes (including the U.K. FCA Consumer Duty), and collection-related litigation on results and liquidity.
- How much of reported cash is available for corporate use, given client funds and foreign cash that may incur tax effects if repatriated.