Encore Capital Group, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. Encore buys and collects defaulted consumer receivables internationally and also operated a tax-lien business through Propel during the year.
Key financial results
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenue | $1.162 billion | $1.073 billion | +8.3% |
| Operating income | $245.3 million | $319.4 million | -23.2% |
| Net income attributable to Encore shareholders | $45.1 million | $103.7 million | -56.5% |
| Diluted EPS | $1.69 | $3.77 | Lower |
| Net cash from operating activities | $114.4 million | $111.5 million | +2.6% |
| Gross collections | $1.701 billion | $1.607 billion | +5.8% |
| Portfolio purchases, at cost | $1.024 billion | $1.251 billion | -18.2% |
Revenue from receivable portfolios was $1.072 billion, up 8.0%; other revenue was $60.7 million and tax-lien net interest income was $28.4 million. Operating margin fell to 21.1% from 29.8%, while net income attributable to Encore was 3.9% of revenue versus 9.7%. Interest expense rose 11.7% to $186.6 million, primarily reflecting higher borrowings for acquisitions and portfolio purchases.
Management’s non-GAAP adjusted income from continuing operations attributable to Encore was $133.8 million, or $5.02 per diluted share, compared with $119.4 million, or $4.34, in 2014. Adjusted EBITDA was $1.060 billion versus $998.7 million. These measures exclude specified items and are not substitutes for GAAP results.
Balance sheet, debt and liquidity
- At year-end, cash was $153.6 million, receivable portfolios net were $2.441 billion, total assets were $4.220 billion and total debt was $3.217 billion, up from $2.774 billion in 2014.
- Cash flow from investing was negative $472.7 million, primarily reflecting portfolio purchases and acquisitions; financing provided $401.8 million.
- Encore reported $107.1 million available under its senior secured facilities, excluding $195.0 million of remaining accordion capacity. Cabot reported approximately $242.3 million available on its revolving facility. Availability is subject to borrowing-base and covenant conditions.
- The company said it was in compliance with financing covenants and believed liquidity, expected operating cash flow and credit availability were sufficient for at least the next 12 months. Most foreign-held cash was considered indefinitely reinvested and could incur material tax effects if repatriated.
Material changes and unusual items
- FY 2015 results included an approximately $43 million after-tax CFPB consent-order charge. The order requires operational measures, a compliance plan, consumer redress and a civil penalty; related state attorney general investigations were also noted. Encore said it expected future earnings effects after the charge to be immaterial.
- A $49.3 million non-cash goodwill impairment was recorded for Propel after a February 19, 2016 agreement to sell the business. The impairment reduced FY 2015 earnings and had no cash-flow impact.
- Encore acquired U.K. debt purchaser dlc in June 2015 and a controlling stake in Australia/New Zealand debt-resolution firm Baycorp in October 2015. Acquisitions expanded geographic reach but also contributed to higher expenses and debt.
- Portfolio-purchase prices remained elevated, especially for fresh U.S. portfolios; management attributed this to constrained supply and strong demand. Purchases fell year over year, while gross collections increased.
- Fourth-quarter 2015 net loss attributable to Encore was $1.0 million, compared with positive quarterly earnings in each 2014 quarter. The filing identifies material 2015 regulatory and impairment charges; quarterly seasonality and timing also affect results.
Outlook, commentary and principal risks
The filing provides no specific earnings guidance. Management expects elevated portfolio pricing to persist for some time, while pursuing investment in core operations, international expansion and collection efficiency. It stated that liquidity should support operations for at least 12 months, but future cash needs depend in part on portfolio and business acquisitions. The Propel sale price was formula-based and not final at filing; the stated year-end application implied enterprise value of $344.3 million and cash consideration of $142.8 million after repayment of third-party debt, subject to closing conditions.
- Collection forecasts and portfolio valuations depend on proprietary models and assumptions; underperformance may reduce revenue or trigger allowance charges. Recent portfolios have high remaining collection estimates and have had limited time to season.
- Substantial indebtedness, variable-rate borrowing, refinancing needs and restrictive covenants could constrain portfolio purchases and financial flexibility. A 10% change in market rates was estimated to change annualized interest expense by about $5.2 million.
- Regulatory, litigation and consumer-protection exposure is significant. The filing cites the CFPB order, related state investigations, proposed U.S. debt-collection rulemaking, and evolving U.K. authorization and court-procedure requirements.
- Other risks include limited portfolio supply, elevated purchase prices and competition; consumer payment and bankruptcy trends; foreign-exchange movements; and operational, third-party servicing, data-security and cyber risks.
Most important facts for investors to verify
- Whether actual collections from recent U.S., European and other-market portfolio cohorts support management’s estimated remaining collections and expected returns.
- The complete financial and cash-flow effects of the CFPB consent order, related state matters and any subsequent regulatory developments.
- Final Propel sale consideration, closing and debt repayment, and the resulting use of proceeds and changes in reported segments.
- Debt maturities, borrowing-base availability, covenant headroom and exposure to higher interest rates as debt increased year over year.
- Integration and performance of dlc and Baycorp, and the effect of acquisitions on operating costs and reported growth. Management’s internal-control assessment excluded these two recently acquired businesses; the auditor likewise did not assess their controls.