Encore Capital Group, Inc. — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; filed February 24, 2021. Encore is a specialty finance company that purchases defaulted consumer debt and provides debt-servicing services, primarily through U.S. operations (MCM) and European operations (Cabot). Latin America and Asia-Pacific operations were not significant to consolidated results.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $1.501 billion | $1.406 billion |
| Income from operations | $533.6 million | $446.3 million |
| Operating margin | 35.6% | 31.9% |
| Net income attributable to Encore | $211.8 million; diluted EPS $6.68 | $167.9 million; diluted EPS $5.33 |
| Operating cash flow | $312.9 million | $244.7 million |
| Cash and cash equivalents | $189.2 million | $192.3 million |
| Borrowings, net of debt discount and issuance costs | $3.282 billion | $3.513 billion |
Total revenue rose 6.8%; management’s adjusted EBITDA, a non-GAAP measure, increased to $610.1 million from $505.9 million. Adjusted diluted EPS was $7.75 versus $5.95. The filing reports a 24.9% effective tax rate, up from 16.1%. Revenue comparisons require care: Encore adopted CECL in 2020 and did not restate prior-year figures.
Collections from purchased receivables increased 4.2% to $2.112 billion. U.S. collections rose to $1.529 billion, while European collections declined to $554 million. Portfolio purchases fell to $659.9 million from $999.9 million, mainly because supply declined and Encore took a more cautious approach amid pandemic uncertainty. The year-end net investment in receivable portfolios was $3.292 billion.
Changes, liquidity and financing
- Operating cash flow improved by $68.1 million. Investing activities provided $82.8 million, compared with $202.3 million used in 2019, reflecting lower portfolio purchases and collections applied to principal. Financing activities used $403.2 million, largely amid refinancing and debt repayments.
- Gross principal borrowings were $3.373 billion at year-end; balance-sheet borrowings were $3.282 billion net of discounts and issuance costs. The company reported $569 million of available capacity under its $1.05 billion Global Senior Facility and stated it expected sufficient liquidity for at least 12 months.
- In September 2020, Encore implemented a global funding structure. It issued new secured notes, refinanced facilities, and repaid or redeemed certain existing debt. The company said the transactions reduced funding costs and increased financial flexibility; refinancing-related charges contributed to a $41.0 million loss on extinguishment of debt.
- Cash included $20.3 million held for third-party clients. Most cash held by foreign entities was considered indefinitely reinvested and could have tax consequences if repatriated.
- Encore adopted CECL on January 1, 2020. The transition increased portfolio investment by $44.2 million, eliminated $100.2 million of deferred court costs, and reduced opening retained earnings by $44.2 million. It also began expensing court costs as incurred.
Outlook, risks and unusual items
- COVID-19: Pandemic-related court closures disrupted legal collections; portfolio supply fell in the U.S. and Europe. Management said near-term operating disruption had been addressed through remote work and social distancing, but consumer distress and the outlook for collections remained uncertain. Management expects some reduced European collections from 2020 to be recovered in future years; this is not a quantified earnings forecast.
- CECL estimates: Collections outperformed the reduced near-term forecast by approximately $228.1 million in 2020, while updated lifetime forecasts lowered estimated remaining collections and produced a $220.8 million provision for credit-loss adjustment. These estimates depend on economic forecasts and collection performance.
- CFPB matter: A stipulated judgment resolved the CFPB’s 2020 lawsuit alleging violations of a 2015 consent order. Encore agreed to a $15.0 million civil penalty and approximately $9,000 in redress to 14 consumers, in addition to about $70,000 previously provided. The company neither admitted nor denied the allegations. Related state Attorney General investigations remained ongoing.
- Other material risks: High indebtedness and covenant compliance; fluctuating portfolio supply, purchase prices and collection estimates; regulatory and litigation exposure; consumer economic conditions and court access; foreign-exchange and interest-rate movements; cybersecurity and data privacy; and Brexit-related uncertainty. The filing reports material compliance with financing covenants at year-end.
- No specific earnings guidance: Encore states it generally does not provide specific earnings projections. The filing describes portfolio supply as expected to remain lower in the near term, with possible eventual improvement, but gives no quantified outlook.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. The audit highlighted portfolio valuation and Cabot goodwill impairment estimates as critical audit matters; no 2020 goodwill impairment was recorded.
Most important facts for investors to verify
- How 2020 CECL adoption and the $220.8 million reduction in estimated future recoveries affect future portfolio revenue and collection expectations.
- Whether portfolio supply, pricing and purchases recover, and whether recent U.S. collection gains can offset continued weakness in Europe.
- Debt maturities, refinancing terms, facility availability and headroom under financial covenants; distinguish $3.282 billion net borrowings from $3.373 billion gross principal.
- Developments in the CFPB settlement’s implementation and remaining state investigations, including any further penalties or operating restrictions.
- Reconcile GAAP results with adjusted EBITDA and adjusted EPS, which exclude selected charges; assess the effect of refinancing costs and the nonrecurring settlement separately.