Encore Capital Group, Inc. — Q1 2021 Form 10-Q
Business and period: International specialty finance company that purchases defaulted consumer receivables and provides debt servicing. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020 unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $416.8 million | $289.1 million; up 44.2% |
| Income (loss) from operations | $168.3 million | $47.2 million |
| Operating margin | 40.4% | 16.3% |
| Net income (loss) attributable to Encore shareholders | $94.6 million | $(10.5) million |
| Diluted EPS | $2.97 | $(0.33) |
| Net cash from operating activities | $69.1 million | $70.8 million |
| Cash and cash equivalents | $184.6 million at March 31, 2021 | $189.2 million at December 31, 2020 |
| Total borrowings | $3.152 billion | $3.282 billion at December 31, 2020 |
| Total assets / total equity | $4.770 billion / $1.279 billion | $4.865 billion / $1.220 billion at December 31, 2020 |
Net margin was 22.7%, compared with a 3.7% net loss margin in Q1 2020. Interest expense fell 14.9% to $46.5 million. The company reported $95.3 million of cash provided by investing activities, compared with $43.3 million used in Q1 2020; financing activities used $160.1 million, including repayment of $161.0 million of 2021 convertible notes. Cash at quarter-end included $23.0 million held for clients.
Cash collections from purchased receivables were $606.5 million, up 15.0%. Portfolio purchases were $170.2 million, down 20.5%; the portfolio investment balance was $3.226 billion at quarter-end. The company reported $182.7 million of adjusted EBITDA, a non-GAAP measure, versus $62.6 million.
Material changes versus the prior period
- Revenue and earnings improved sharply, primarily because the expected-recoveries line changed from a $98.7 million reduction in Q1 2020 to a $44.5 million increase in Q1 2021. This reflects a $91.4 million positive current-period collections variance, partly offset by a $46.9 million reduction in estimated future recoveries.
- Revenue from receivable portfolios declined 5.4% to $338.0 million, attributed to lower portfolio basis following higher collections and lower recent purchases. Servicing revenue rose 13.4% to $32.5 million.
- Collections increased while purchases decreased. U.S. purchases fell and European purchases rose; management attributed portfolio supply constraints in part to pandemic-related lower charge-off rates and reduced bank sales.
- Operating expenses rose 2.7% to $248.5 million, but were lower as a share of revenue. Overall cost per dollar collected improved to 33.4% from 37.1%.
- Debt declined, including repayment at maturity of the $161.0 million 2021 convertible notes. Lower average debt, refinancing and adoption of a new convertible-debt accounting standard contributed to lower interest expense.
Outlook, risks and unusual items
- Management does not provide specific earnings guidance and states it generally does not make specific future earnings projections. It believes liquidity is sufficient for at least the next 12 months, citing expected operating cash flows and collections, cash, capital-market access and credit-facility availability. Approximately $529.5 million was available under the $1.05 billion Global Senior Facility at March 31, 2021; the company reported material compliance with financing covenants.
- COVID-19 effects remain uncertain. Management said collections outperformed forecasts, partly due to consumer behavior and collection initiatives, but views much of the outperformance as a shift in timing rather than higher lifetime recoveries. Its updated forecast reduced estimated remaining collections, producing the $46.9 million provision for credit loss adjustment. Future collection estimates remain sensitive to economic conditions and pandemic developments.
- Portfolio supply remains a risk: management observed reduced U.S. and European supply, while expecting U.S. supply ultimately to increase. Legal collections and associated costs may also be affected by pandemic-related court and process disruption.
- The company had $224.0 million of estimated minimum forward-flow purchase commitments and expects actual purchases to be significantly greater. It reported no material legal reserves and no material developments in previously disclosed legal proceedings; litigation and regulatory matters could nevertheless entail damages, fines or changes in business practices.
- On January 1, 2021, the company adopted ASU 2020-06, recording a $17.9 million cumulative-effect reduction to equity. Convertible and exchangeable notes are now carried without the former debt/equity bifurcation, and interest expense is based on coupon rates; prior-year comparative accounting was not adjusted.
- After quarter-end, on May 5, 2021, the board increased the share repurchase authorization from $50 million to $300 million. The company also terminated its $50 million at-the-market equity offering program in May. Q1 repurchases totaled 517,860 shares for $20.4 million, or $39.37 per share.
- New U.S. CFPB debt-collection rules were scheduled to take effect November 30, 2021, with a proposed extension to January 29, 2022. Management’s preliminary assessment was that the rules would not have a material incremental operational effect.
Investor verification priorities
- Assess whether Q1 collections strength is sustainable or principally a timing shift, and how future recoveries and the $46.9 million estimate adjustment evolve.
- Track portfolio supply, purchase volumes and pricing in the U.S. and Europe, alongside returns from recent purchase vintages.
- Review liquidity and refinancing needs against debt maturities, variable-rate exposure, facility covenants and the company’s substantial borrowings.
- Monitor the effects of pandemic conditions, legal-collection capacity and regulatory changes on collections and costs.
- Verify actual repurchases under the enlarged authorization and the effect on capital available for portfolio purchases and debt reduction.