Encore Capital Group(ECPG) - 2023 Q4 - Annual Report

PART I Business Encore Capital Group is an international specialty finance company focused on debt recovery with primary operations in the U.S and Europe Our Business and Operations The company's core business is purchasing and managing defaulted consumer receivables, primarily through its MCM subsidiary in the U.S and Cabot in Europe - The company's main activity is purchasing and managing defaulted consumer receivables from credit originators like banks and retailers[11] - Primary operations are conducted through two main subsidiaries: Midland Credit Management (MCM) in the United States and Cabot Credit Management (Cabot) in Europe and the UK[12] - The long-term growth strategy is focused on the core U.S. and UK markets, as well as strengthening its presence in the rest of Europe[14] Competitive Advantages and Strategy The company's competitive edge lies in its analytical strength, consumer-centric approach, regulatory expertise, and operational scale - Leverages a large database and proprietary behavioral and valuation models to guide portfolio purchases and collection activities[18][20] - Emphasizes a "Consumer Bill of Rights" to ensure ethical treatment, which builds trust and improves liquidation[22] - Maintains robust compliance frameworks tailored to the different regulatory environments in the U.S. (rules-based) and the UK (principles-based), which is a key differentiator for credit providers[25][26][27] - Strategic priorities include focusing on core U.S. and UK markets, investing in analytics and technology, and strengthening the balance sheet, with capital allocation focused on portfolio purchases, M&A, and share repurchases[31][32][35] Debt Purchasing and Collections Approach The company secures debt portfolios through "forward flow" contracts and employs tailored collection strategies for the U.S and European markets - The company utilizes "forward flow" contracts, which are commitments to purchase receivables over a period (typically 3-12 months) with defined terms, to ensure a consistent volume for operational planning[37][38] - In the U.S, collection channels include Direct Mail/Email, Call Centers (domestic and international), Digital Collections (website, email, text), and Legal Action for consumers who are able but unwilling to pay[42] - In Europe, Cabot distinguishes between 'paying portfolios' (consumers already making payments) and 'non-paying portfolios', tailoring collection strategies accordingly[46] - The company's stated policy is not to resell accounts to third parties in the ordinary course of business[48] Compliance, Competition, and Regulation The company operates in a highly competitive and regulated industry, viewing its scale and compliance expertise as a key advantage - The consumer credit recovery industry is highly competitive; the company believes that the high cost of regulatory compliance favors larger participants like itself[54][56] - U.S. operations are subject to numerous federal laws, including the FDCPA, FCRA, and TCPA, with oversight and enforcement by the CFPB and FTC[59][60][61] - In November 2021, the CFPB's Regulation F became effective, clarifying rules for debt collectors regarding communication technologies, contact limits, and disclosures[67] - European operations, particularly in the UK, are regulated by the Financial Conduct Authority (FCA), which implemented its new, stricter Consumer Duty in July 2023, requiring firms to deliver good outcomes for customers[77][78] - The company must comply with data protection laws, including GDPR in Europe and the California Privacy Rights Act (CPRA) in the U.S[69][84] Human Capital Management The company employed approximately 7,400 people as of year-end 2023, focusing on a diverse, inclusive, and ethical work environment Employee Distribution as of Dec 31, 2023 | Category | Percentage/Value | | :--- | :--- | | Total Employees | ~7,400 | | U.S. Employees | ~19% | | International Employees | ~81% | | Women in Workforce | ~49% | - The company emphasizes a commitment to values and ethics, guided by its Standards of Business Conduct and a Global Human Rights Policy[91][92] - Focuses on diversity and inclusion through training, tracking gender diversity, and cultural appreciation initiatives[93] Risk Factors The company faces significant risks from economic conditions, regulatory changes, competition, and its substantial debt burden Risks Related to Business and Industry Key business risks include economic downturns affecting consumer payments, portfolio pricing pressures, competition, and cybersecurity threats - Adverse economic conditions, including inflation and unemployment, can reduce the company's ability to collect on its receivable portfolios[99] - Profitability depends on the continued availability of receivable portfolios at favorable prices, which is affected by competition, supply volume, and relationships with credit originators[100][101] - A significant portion of revenue is generated from legal judgments against consumers, and any changes in court processes or willingness to grant judgments could adversely affect results[113] - Cybersecurity events, breaches, or system failures could disrupt operations, compromise sensitive data, and result in legal liability and reputational damage[127][132] - International operations expose the company to risks such as currency fluctuations, political and economic instability, and compliance with foreign laws like the UK Bribery Act and FCPA[133][137] Risks Related to Government Regulation and Litigation The company is exposed to extensive government regulation and litigation risk, with non-compliance potentially leading to significant fines and penalties - The business is subject to extensive and changing laws and regulations (e.g., CFPB's Regulation F), which could limit activities or increase compliance costs[139] - Failure to comply with government regulations in the U.S. or abroad could result in suspension of operations, significant fines, and other penalties; the company notes a 2020 stipulated judgment with the CFPB that included a $15.0 million civil penalty[144][145] - The company operates in an extremely litigious climate and is subject to ongoing risks of individual and class action lawsuits under various consumer protection laws, which could result in substantial damages[150] Risks Related to Indebtedness and Common Stock The company's substantial debt of approximately $3.3 billion poses risks to its financial health, operational flexibility, and earnings - As of December 31, 2023, total long-term indebtedness was approximately $3.3 billion, which could increase vulnerability to economic downturns and reduce cash flow available for other corporate purposes[152] - Failure to satisfy debt covenants, such as the LTV Ratio, SSRCF Ratio, or Fixed Charge Coverage Ratio in the Global Senior Facility, could result in acceleration of outstanding debt[157] - Portions of the company's debt bear variable interest rates, and increases in these rates could adversely affect operating results[158] General Risks General risks include dependence on key management, potential for goodwill impairment, and the need to maintain effective internal controls - The loss of services of key members of the management team could disrupt operations and impair the ability to manage and expand the business[170] - The company has a significant amount of goodwill and is at risk of future impairment charges; a goodwill impairment charge of $238.2 million was recorded for the Cabot reporting unit in the fourth quarter of 2023[173] - Failure to maintain effective internal control over financial reporting, as required by the Sarbanes-Oxley Act, could adversely impact the accuracy and timing of financial reports[176] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[178] Cybersecurity The company manages cybersecurity risk through a program based on the NIST framework, with oversight from the Board's Risk Committee - The company's cybersecurity risk management program is designed and assessed based on the National Institute of Standards and Technology Cybersecurity Framework (NIST CSF)[180] - The Risk Committee of the Board of Directors has oversight of cybersecurity risks and receives regular updates from management[182][183] - The company has experienced cybersecurity incidents but states they have not had a material impact on operations, business strategy, or financial condition[181] Properties The company leases all its office and operational facilities globally and considers them adequate for its current needs - The company leases office space for its corporate headquarters in San Diego, California, as well as for its call centers and support services globally[189] Legal Proceedings The company is involved in ordinary course legal and regulatory actions but does not expect them to have a material adverse effect - The company is involved in various legal and regulatory actions in the ordinary course of business but does not expect them to have a material adverse effect[191] - For additional information, the report refers to "Note 13: Commitments and Contingencies" in the consolidated financial statements[192] Mine Safety Disclosures This item is not applicable to the company - Not applicable[194] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on NASDAQ, no dividends have been paid, and no shares were repurchased in 2023 - The company's common stock is traded on the NASDAQ Global Select Market under the symbol 'ECPG'[197] - The company has never declared or paid dividends on its common stock and is restricted by debt covenants from doing so[201] - No share repurchases were made during the year ended December 31, 2023; in 2022, 1,497,184 shares were repurchased for approximately $86.9 million[202] [Reserved] This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations Revenues fell and a significant goodwill impairment led to a net loss in 2023, though portfolio purchases increased substantially Overview and Macroeconomic Update In 2023, the company saw improved portfolio pricing in the U.S. due to higher supply, while European markets remained more competitive - In 2023, increased market supply led to improved portfolio pricing in the U.S[216] - In the U.K. and Europe, the portfolio pricing environment in 2023 did not yet fully reflect the increased funding costs from higher interest rates, although pricing began to improve in Q4[216][227] Portfolio Purchasing and Collections Analysis Portfolio purchases rose 34% to $1.07 billion in 2023, driven by the U.S. market, while gross collections remained relatively stable at $1.86 billion Portfolio Purchases by Geographic Location (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | MCM (United States) | $ 814,557 | $ 556,000 | $ 408,741 | | Cabot (Europe) | 259,255 | 244,507 | 255,788 | | Total purchases | $ 1,073,812 | $ 800,507 | $ 664,529 | Gross Collections from Purchased Receivables (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | MCM (United States) | $ 1,314,582 | $ 1,354,932 | $ 1,641,698 | | Cabot (Europe) | 544,031 | 553,271 | 644,979 | | Total collections | $ 1,862,567 | $ 1,911,537 | $ 2,307,359 | - In addition to receivable portfolios, the company invested $26.9 million in Real Estate-Owned (REO) assets in 2023, compared to $39.3 million in 2022[230] Results of Operations A goodwill impairment charge drove a net loss of $206.5 million in 2023, a sharp reversal from a $194.6 million net income in 2022 Consolidated Results of Operations (in thousands) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Revenues | $ 1,222,680 | $ 1,398,347 | | Total Operating Expenses | $ 1,206,145 | $ 936,173 | | Income from Operations | $ 16,535 | $ 462,174 | | Net (Loss) Income | $ (206,492) | $ 194,564 | | Diluted (Loss) Income per Share | $ (8.72) | $ 7.46 | - The decrease in total revenues was primarily driven by a negative 'Changes in recoveries' of ($82.5 million) in 2023, compared to a positive $93.1 million in 2022, due to under-performing U.S. vintages[241][243][244] - Operating expenses were significantly impacted by a non-cash goodwill impairment charge of $238.2 million and an intangible asset impairment of $18.7 million, both related to the Cabot reporting unit[252][259][260] - Interest expense increased by 31.7% to $201.9 million, driven by rising interest rates and a higher average debt balance[261][263] Liquidity and Capital Resources The company funded increased portfolio purchases through operating cash flow and net borrowings, maintaining sufficient liquidity for the next year Summary of Cash Flow Activities (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $ 152,991 | $ 210,681 | $ 303,053 | | Net cash (used in) provided by investing activities | (401,941) | (130,235) | 339,896 | | Net cash provided by (used in) financing activities | 268,300 | (107,445) | (655,692) | - As of December 31, 2023, available capacity under the Global Senior Facility was $363.8 million[304] Future Contractual Cash Obligations as of Dec 31, 2023 (in thousands) | Contractual Obligations | Total | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Principal payments on debt | $ 3,355,729 | $ 39,426 | $ 1,054,381 | $ 2,030,651 | $ 231,271 | | Estimated interest payments | 736,153 | 198,539 | 372,479 | 160,535 | 4,600 | | Purchase commitments | 384,576 | 346,426 | 38,150 | — | — | | Total | $ 4,574,846 | $ 604,345 | $ 1,499,060 | $ 2,216,153 | $ 255,288 | Critical Accounting Estimates Key estimates include valuing receivable portfolios, assessing goodwill for impairment, and determining the realizability of deferred tax assets - Estimating future recoveries for receivable portfolios is a critical estimate, involving forecasts over one to two years before reverting to historical averages, and is influenced by operational performance and macroeconomic factors[313][314] - Goodwill is tested for impairment annually; the 2023 test resulted in a $238.2 million impairment charge for the Cabot reporting unit, whose fair value was equal to its carrying value after the charge, indicating continued risk of future impairment[321] - The company maintains valuation allowances against deferred tax assets in certain foreign jurisdictions, totaling $55.0 million as of December 31, 2023, based on the assessment that it is more likely than not they will not be realized[324] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to foreign currency and interest rate risks, which it manages using various derivative instruments - The company uses derivative instruments, including cross-currency swaps and interest rate swaps/caps, to manage foreign currency and interest rate risks[329][332] - A hypothetical 50 basis point increase or decrease in interest rates as of December 31, 2023, on unhedged variable rate debt would result in a $3.7 million positive or negative impact on income before taxes[333] Financial Statements and Supplementary Data This section references the consolidated financial statements and independent auditor's report included in the Form 10-K - Refers to the consolidated financial statements and the report of the independent registered public accounting firm, BDO USA, P.C., located on pages F-1 through F-36[338] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[339] Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls and internal controls over financial reporting were effective - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[341] - Management assessed internal control over financial reporting as effective, and the independent registered public accounting firm, BDO USA, P.C., issued an unqualified opinion on its effectiveness[343][346] - No material changes to internal control over financial reporting occurred during the fourth quarter of 2023[352] Other Information An executive adopted a Rule 10b5-1 trading plan in November 2023 - Ryan Bell, President of MCM, adopted a Rule 10b5-1 trading plan to sell up to 7,500 shares of common stock[354] Disclosure Regarding Foreign Jurisdictions that Prevent Inspection The company reports that this item is not applicable - None[356] PART III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Stockholders[359] Executive Compensation Information for this item is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Stockholders[361] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Stockholders[362] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Stockholders[364] Principal Accountant Fees and Services Information for this item is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Proxy Statement for the 2024 Annual Meeting of Stockholders[366] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed with the Form 10-K - This section contains the index to the consolidated financial statements and a list of all exhibits filed with the Form 10-K[369][370] Form 10-K Summary The company reports that there is no Form 10-K summary - None[377]