Encore Capital Group, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone quarterly report; selected fourth-quarter results are included below. Encore buys defaulted consumer receivables at a discount and collects through internal, legal, and agency channels. Its subsidiary Ascension provides bankruptcy servicing.
Financial results and position
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Total revenue | $467.4 million | $381.3 million | +22.6% |
| Operating income | $120.8 million | $97.0 million | +24.5% |
| Operating margin | 25.8% | 25.5% | +0.3 percentage points |
| Net income | $61.0 million | $49.1 million | +24.3% |
| Diluted EPS | $2.37 | $1.95 | +21.5% |
| Operating cash flow | $84.6 million | $75.5 million | +$9.1 million |
Portfolio revenue was $448.7 million, up 23.2%; servicing fees and related revenue were $18.7 million. Net portfolio allowance provisions fell to $10.8 million from $22.2 million. The effective tax rate was 38.6%, compared with 37.1%.
Gross collections increased 25.9% to $761.2 million. Receivable portfolio purchases were $386.9 million, up 6.9%, at an average 3.3% of face value. Legal collections rose 41.5% to $377.5 million, collection-site collections rose to $336.0 million, while agency collections declined to $47.7 million. The company’s stated cost per dollar collected was 42.2%, versus 43.7%; this measure excludes stock-based compensation and bankruptcy servicing operating expenses.
At year-end, cash was $8.0 million, investment in receivable portfolios was $716.5 million, total assets were $812.5 million, total debt was $389.0 million, and stockholders’ equity was $371.5 million. Debt comprised $305.0 million drawn on the revolver, $75.0 million in senior secured notes, and $9.0 million of capital lease obligations. Revolver availability was $91.2 million, subject to borrowing-base and covenant terms. The company reported compliance with financing covenants and said it expected sufficient liquidity for at least the next 12 months.
Cash flow from investing activities was negative $88.1 million, principally reflecting portfolio purchases net of collections applied to portfolio principal. Financing cash flow was positive $0.7 million; year-end cash decreased by $2.9 million. The company had $151.0 million of portfolio purchase commitments due within one year.
Fourth-quarter 2011: Revenue was $120.7 million, net income $17.1 million, diluted EPS $0.67, and gross collections $185.9 million. Fourth-quarter 2010 figures were $99.8 million, $14.2 million, $0.56, and $149.2 million, respectively.
Material changes versus prior year
- Revenue and collections grew with the larger portfolio base; portfolio investment increased to $716.5 million from $644.8 million.
- Operating expenses rose 21.9% to $346.6 million. Legal collection costs increased 29.7% to $157.1 million as legal-channel collections expanded; legal-channel costs fell to 41.6% of that channel’s collections from 45.4%.
- Lower agency use supported the shift toward internal collections. Operating-site cost per site collection fell to 7.5% from 9.1%, with management citing growth in India operations.
- Interest expense increased 9.1% to $21.1 million, mainly from higher stated interest on debt. Total debt was slightly higher than 2010.
- Portfolio pricing had risen through 2011 after declining in 2009 and early 2010. Management said it continued to apply internal return hurdles when bidding.
Outlook, commentary, and risks
The company did not provide specific earnings or purchase-volume guidance. Management described collections as generally strongest in the first quarter and slowest in the fourth, and noted that seasonal collections can affect revenue recognition and margins. It expected Costa Rica operations, opened in January 2012, to add Spanish-language capacity; management anticipated higher variable collection costs and lower productivity during ramp-up, with potential longer-term efficiency benefits.
- Management said collection indicators were generally consistent with or better than comparable periods in 2009 and 2010, while economic uncertainty, elevated bankruptcies and foreclosures, and constrained consumer credit remained concerns. Payment plans were increasingly common; delays and missed installments can reduce projected portfolio cash flows.
- Portfolio revenue and carrying values depend on forecasts of future collections. Shortfalls can lead to allowance charges; FY 2011 included a $10.8 million net provision, with shortfalls concentrated in certain older vintages.
- Purchases depend on portfolio availability, pricing, seller relationships, funding, and the company’s ability to forecast recoveries. Two sellers represented 43.7% of 2011 purchase cost; the largest represented 24.3%.
- The business faces extensive consumer-protection regulation and litigation exposure. The filing describes TCPA class actions alleging calls to cellular phones without prior express consent; related cases were transferred for consolidation. A previously approved national settlement in other cases remained subject to appeals by objectors. The filing does not provide a clear quantified exposure for these matters.
- Other material risks include reliance on third-party agencies and attorneys, court-cost recovery, legal-channel expense, interest-rate exposure, foreign exchange and India operating risks, and the possibility that goodwill or portfolio forecasts may be impaired. The company hedged $150 million of variable-rate debt; the remaining exposure was subject to rate changes.
The company reported effective disclosure controls and internal control over financial reporting; its auditor issued unqualified opinions on the financial statements and internal controls. It had not paid common-stock dividends.
Important facts for investors to verify
- Whether realized collections track management’s estimated remaining gross collections of $1.57 billion and the accretable-yield forecasts underlying portfolio revenue.
- Whether legal-channel growth remains profitable as court costs, litigation expense, and consumer-protection scrutiny evolve; review current status and reserves for the disclosed class actions and investigations.
- Whether portfolio purchases remain attractive as prices rise, and how concentrated future purchases are among major sellers.
- Revolver borrowing-base availability, covenant capacity, debt maturity and refinancing requirements, and the funding needed for purchase commitments.
- Progress and costs of the Costa Rica launch, and whether India staffing, retention, and currency hedges preserve the expected cost advantage.