Encore Capital Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated results. Encore purchases and collects defaulted consumer receivables; Cabot is a major U.K./European operation.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $306.7 million | $179.4 million | $869.6 million | $757.9 million |
| Operating income (loss) | $103.9 million | $(21.2) million | $260.3 million | $154.1 million |
| Net income (loss) attributable to Encore | $28.2 million | $(1.5) million | $70.5 million | $53.8 million |
| Diluted EPS attributable to Encore | $1.05 | $(0.06) | $2.67 | $2.08 |
| Operating margin | 33.9% | (11.8)% | 29.9% | 20.3% |
Q3 portfolio revenue was $283.6 million, up 77.8%; nine-month portfolio revenue was $807.8 million, up 15.9%. Gross collections rose 8.9% to $443.0 million in Q3 and 3.2% to $1.33 billion for nine months. Adjusted EBITDA, a non-GAAP measure, was $124.2 million for Q3 and $304.5 million for nine months. Adjusted income per diluted share was $1.15 for Q3 and $2.97 for nine months.
For the first nine months, operating cash flow was $81.7 million, investing cash flow was $(207.8) million, and financing cash flow was $155.3 million. Cash and equivalents totaled $188.2 million at September 30, including $39.8 million held by U.S. entities and $148.4 million held abroad.
Total assets were $4.17 billion, including $2.73 billion in net receivable portfolios. Debt was $3.15 billion, versus $2.81 billion at year-end 2016. Encore reported $382.0 million of availability under its revolving facility and approximately $259.2 million under Cabot’s facility, subject to borrowing-base and covenant limits. The company said it was in compliance with its debt covenants.
Changes versus prior comparable periods
- Revenue and operating profitability increased sharply, in part because Q3 2016 included a $94.0 million European portfolio allowance charge. In 2017, Encore reversed $28.0 million of prior European allowances in Q3 and $35.8 million year to date, reflecting improved collections and liquidation initiatives.
- Encore recorded a $10.2 million allowance charge on two U.S. pool groups heavily concentrated in Puerto Rico, where collections were affected by hurricanes.
- Operating expenses increased 1.1% in Q3 and 0.9% year to date, slower than revenue growth. Nine-month interest expense rose to $152.5 million from $149.9 million.
- Portfolio purchases totaled $757.5 million for nine months versus $696.2 million; face value purchased was $7.1 billion versus $7.9 billion. Q3 purchases were $292.3 million, up 41.6% year over year.
- Cash from operations was slightly lower year over year, while investing outflows increased; the prior-year period included $106.0 million of net proceeds from Propel’s divestiture.
Outlook, commentary and risks
- No specific earnings guidance was provided. Management stated it generally does not make specific earnings projections and believes available cash, operating cash flows, capital-market access and credit-facility availability can fund operations and maturing debt for at least 12 months.
- On October 20, 2017, Cabot announced its intention to pursue an IPO. Encore intends to deconsolidate Cabot upon completion; the resulting accounting and any share sale could materially affect reported assets, liabilities, liquidity and capital resources.
- Management described improving U.S. portfolio pricing and expected increased supply, while U.K. portfolio prices remained above historical averages. It cited ongoing opportunities in Europe but noted elevated purchase prices and the need to sustain collection improvements and competitive margins.
- Key risks include uncertain collections and portfolio cash-flow estimates, consumer-collection regulation and litigation, foreign-exchange movements, interest-rate exposure, and possible effects of Brexit. A 100-basis-point change in portfolio valuation assumptions for cost to collect and discount rates would change estimated fair value by about $53.8 million for U.S. portfolios and $71.3 million for European portfolios; these are estimates, not sale values.
- Legal matters include routine consumer-collection litigation and regulatory inquiries. The filing reported no material new developments in matters described in the 2016 Form 10-K; certain CFPB/state-regulatory and TCPA-related reserves remained. Loss estimates for some matters were immaterial or not yet determinable.
- Unusual items included a $5.7 million gain on redemption of Cabot’s Marlin notes, a $2.8 million reversal of contingent consideration liability, and a $10.5 million contingent consideration liability recorded in connection with an acquisition. Redeemable noncontrolling interest increased to $160.7 million from $45.8 million, reflecting fair-value adjustments and related changes.
Important facts for investors to verify
- Whether Cabot’s proposed IPO closes, Encore’s resulting ownership and accounting treatment, and any proceeds from a secondary sale.
- Whether European allowance reversals and improved collections are sustained, and how hurricane-affected Puerto Rico portfolios perform.
- Portfolio purchase returns and collection forecasts, particularly given higher recent investment and significant reliance on estimated future cash flows.
- Debt maturities, refinancing and facility availability, covenant headroom, and the implications of the $3.15 billion debt balance.
- Potential effects of regulatory actions, pending legal matters, foreign exchange, and interest-rate changes on cash flows and earnings.