Encore Capital Group, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Financial statements are unaudited. Dollar amounts below are in millions unless otherwise stated.
Business context and reporting period
Encore purchases and collects defaulted consumer receivables. It added Texas property-tax lien financing through its May 8, 2012 acquisition of the Propel entities, and reports portfolio purchasing and recovery and tax lien transfer as operating segments. Propel’s results are included only from the acquisition date. Encore sold substantially all of its Ascension bankruptcy-servicing business on May 16, 2012; its results are reported as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $144.8 | $115.8 | $412.3 | $332.3 |
| Operating income | $41.2 | $30.7 | $114.4 | $87.3 |
| Operating margin | 28.4% | 26.5% | 27.8% | 26.3% |
| Continuing-operations income | $21.3 | $15.3 | $58.4 | $43.4 |
| Net income | $21.3 | $15.4 | $49.3 | $43.8 |
| Diluted EPS | $0.82 | $0.60 | $1.90 | $1.71 |
- Portfolio revenue increased 21.4% in Q3 and 22.1% for the first nine months. Propel contributed net interest income of $4.1 million in Q3 and $6.4 million since acquisition.
- Operating expenses rose 21.6% in both comparison periods. Interest expense was $7.0 million in Q3 and $19.0 million for nine months, up from $5.2 million and $16.1 million, respectively.
- Net cash from operations was $66.2 million for nine months, versus $58.2 million a year earlier. Investing used $282.0 million, principally for $408.8 million of portfolio purchases and the $186.7 million cash acquisition payment, partly offset by collections. Financing provided $227.1 million.
- Cash was $19.3 million at September 30, compared with $8.0 million at year-end 2011. Total debt was $615.1 million, versus $389.0 million at year-end; stockholders’ equity was $431.2 million.
- Debt included $410.0 million outstanding on the $555.5 million revolving commitment (with an additional $100 million accordion) and $122.4 million outstanding on Propel’s $160 million facility. Encore reported compliance with financing covenants.
- Receivable portfolios had a net carrying value of $811.6 million. Management estimated $1.89 billion of remaining gross collections across portfolios; this is an estimate, not a guaranteed realization.
Material changes versus prior periods
- Nine-month portfolio purchases increased 63.5% to $408.8 million; gross collections increased 24.8% to $717.6 million. Q3 purchases, however, fell 28.0% year over year to $47.3 million.
- Portfolio purchase cost averaged 4.1% of face value for nine months, compared with 3.2% in 2011. Management attributed rising prices, especially for fresh portfolios, to tighter supply and steady demand.
- Cost per dollar collected improved to 40.5% in Q3 from 43.8%, and to 40.1% for nine months from 41.5%. Management cited lower legal-channel costs and improved internal collection-site efficiency; indirect costs increased.
- Nine-month net income includes a $9.1 million loss from discontinued operations, compared with $0.5 million of income in 2011. Continuing-operations income increased, while the comparison of total net income was affected by the Ascension sale and related charges.
- Assets grew to $1.11 billion from $812.5 million at year-end, reflecting the Propel acquisition and portfolio investment. Goodwill increased to $55.4 million, including $49.4 million recorded for Propel.
Outlook, management commentary, risks and unusual items
- Management said collection metrics were generally consistent with or better than 2010–2011, and that payment-plan completion rates had improved. It also cautioned that broken payment plans can reduce recoveries relative to forecasts.
- Management said elevated portfolio prices could constrain favorable purchases in 2013; if pricing persists, it may shift purchases toward older portfolios or alternative asset classes. It stated the current supply environment was not expected to materially affect 2012 purchases.
- Encore does not provide specific earnings projections in the filing. It stated it expected positive operating cash flows and sufficient liquidity for at least 12 months.
- Ascension’s sale produced no proceeds. Encore recognized a $4.0 million first-year operating-loss funding contingency, capped at that amount, and may receive an earn-out if the business becomes profitable. Encore also recorded a $9.9 million impairment of Ascension goodwill and wrote off approximately $0.4 million of related intangible assets.
- Consumer debt collection entails litigation and regulatory exposure, including claims under the FDCPA and TCPA. The filing reported no material litigation reserves and no material development in previously disclosed cases. The CFPB’s larger-participant rule, effective January 2013, covers Encore and authorizes CFPB supervision; management said the full regulatory impact remained uncertain.
- Property-tax agreements are secured by Texas tax liens. Management reported no historical losses and no allowance, although $21.7 million of receivables were more than 90 days past due at September 30. Portfolio cash-flow estimates, payment-plan performance, and collection seasonality may affect revenue and earnings.
Most important facts for investors to verify
- Whether portfolio collection forecasts and estimated remaining collections are being realized, and whether elevated purchase prices preserve expected returns.
- How Propel performs after acquisition, including delinquency and loss experience on property-tax agreements and its ability to service debt.
- Debt capacity, borrowing-base availability, interest costs, and compliance with revolving and Propel facility covenants.
- The outcome and financial impact of CFPB supervision, consumer-protection regulation, and pending collection-related litigation.
- The final financial effects of the Ascension sale, including potential operating-loss funding and any earn-out.