Encore Capital Group(ECPG) - 2024 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the first quarter Condensed Consolidated Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements, including statements of financial condition, income, and cash flows, with detailed notes Condensed Consolidated Statements of Financial Condition Total assets increased to $4.69 billion, driven by receivable portfolios, with liabilities and equity also rising Condensed Consolidated Statements of Financial Condition (in thousands) | | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total assets | $4,687,175 | $4,630,486 | | Cash and cash equivalents | $172,990 | $158,364 | | Investment in receivable portfolios, net | $3,531,387 | $3,468,432 | | Total liabilities | $3,733,316 | $3,693,948 | | Borrowings | $3,364,029 | $3,318,031 | | Total stockholders' equity | $953,859 | $936,538 | Condensed Consolidated Statements of Income Total revenues rose to $328.4 million, driving net income to $23.2 million or $0.95 EPS for Q1 2024 Condensed Consolidated Statements of Income (in thousands, except per share amounts) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Total revenues | $328,386 | $312,630 | | Total debt purchasing revenue | $303,443 | $286,173 | | Income from operations | $83,591 | $70,138 | | Interest expense | $(55,765) | $(46,835) | | Net income | $23,239 | $18,626 | | Diluted EPS | $0.95 | $0.75 | Condensed Consolidated Statements of Cash Flows Operating cash flow increased to $51.0 million, with financing activities providing $55.8 million from new notes Summary of Cash Flows (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $50,984 | $35,913 | | Net cash used in investing activities | $(90,882) | $(130,715) | | Net cash provided by financing activities | $55,790 | $110,374 | | Net increase in cash and cash equivalents | $15,892 | $15,572 | Note 5: Investment in Receivable Portfolios, Net Net investment in receivable portfolios increased to $3.53 billion, driven by new purchases despite negative changes in recoveries Changes in Investment in Receivable Portfolios, Net (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Balance, beginning of period | $3,468,432 | $3,088,261 | | Negative allowance for expected recoveries - current period purchases | $295,714 | $276,431 | | Collections applied to investment in receivable portfolios, net | $(195,035) | $(166,682) | | Changes in recoveries | $(12,409) | $(9,501) | | Balance, end of period | $3,531,387 | $3,214,792 | - For Q1 2024, 'Changes in recoveries' included a $0.9 million over-performance against forecast, but was offset by a $13.3 million negative revision in the present value of expected future recoveries[65][67] Note 7: Borrowings Total borrowings increased to $3.36 billion, with new senior secured notes issued to repay credit facilities Consolidated Borrowings (in thousands) | | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Global senior secured revolving credit facility | $367,739 | $816,880 | | Senior secured notes | $2,128,357 | $1,654,989 | | Convertible senior notes | $330,000 | $330,000 | | Total Borrowings (net) | $3,364,029 | $3,318,031 | - In March 2024, Encore issued $500.0 million in 9.250% Senior Secured Notes due 2029. Proceeds were used to repay $493.0 million under the Global Senior Facility[76] - As of March 31, 2024, available capacity under the Global Senior Facility was approximately $827.3 million[72] Note 11: Commitments and Contingencies No new material legal proceedings were reported, with $598.9 million in forward flow purchase commitments - As of March 31, 2024, the company had forward flow purchase agreements with an estimated minimum aggregate purchase price of approximately $598.9 million[107] - No material reserves for legal matters were recorded as of March 31, 2024, as no losses were deemed both probable and reasonably estimable[105] Note 12: Segment and Geographic Information The company operates as a single segment, with Q1 2024 total revenues of $328.4 million from the U.S. and Europe Total Revenues by Geographic Area (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | United States | $219,136 | $200,218 | | Europe | $108,531 | $112,223 | | Other geographies | $719 | $189 | | Total | $328,386 | $312,630 | - The company determined its operating segments meet aggregation criteria, resulting in one reportable segment: portfolio purchasing and recovery[108] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 5.0% revenue increase, higher U.S. capital deployment, and significant debt refinancing activities Purchases and Collections Portfolio purchases increased to $295.7 million, driven by U.S. deployment, with total gross collections up 10.5% Purchases of Receivable Portfolios by Geographic Location (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | MCM (United States) | $236,509 | $213,452 | | Cabot (Europe) | $59,205 | $62,979 | | Total | $295,714 | $276,431 | Total Collections by Channel and Geographic Area (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | MCM (United States) | $369,478 | $328,670 | | Call center and digital | $235,091 | $191,105 | | Legal collections | $128,903 | $137,511 | | Cabot (Europe) | $140,697 | $132,788 | | Total Collections | $510,887 | $462,356 | - In the U.S., increased lending and rising delinquency rates have led to an increase in supply of predominantly fresh portfolios at favorable pricing levels[133] Results of Operations Total revenues increased 5.0% to $328.4 million, but higher interest expense impacted net income of $23.2 million Revenue Components (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Revenue from receivable portfolios | $315,852 | $295,674 | | Changes in recoveries | $(12,409) | $(9,501) | | Debt purchasing revenue | $303,443 | $286,173 | | Servicing revenue | $20,379 | $22,585 | | Total revenues | $328,386 | $312,630 | Operating Expenses (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Salaries and employee benefits | $104,184 | $103,850 | | Cost of legal collections | $58,721 | $54,101 | | General and administrative expenses | $36,241 | $37,965 | | Total operating expenses | $244,795 | $242,492 | - Interest expense increased by $8.9 million (19.1%) YoY, driven by a higher average debt balance ($6.3 million effect) and rising interest rates ($2.1 million effect)[169][172] Adjusted EBITDA Reconciliation (in thousands) | | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | GAAP net income, as reported | $23,239 | $18,626 | | Interest expense | $55,765 | $46,835 | | Provision for income taxes | $7,253 | $6,409 | | Depreciation and amortization | $7,848 | $10,870 | | Stock-based compensation expense | $3,357 | $4,052 | | Other adjustments | $2,124 | $5,526 | | Adjusted EBITDA | $98,218 | $91,374 | Supplemental Performance Data The total portfolio has a cumulative collections to purchase price multiple of 1.9x, with $8.2 billion in ERC Purchase Price Multiple by Geography (as of March 31, 2024) | Geography | Purchase Price (in thousands) | Total Estimated Gross Collections (in thousands) | Purchase Price Multiple | | :--- | :--- | :--- | :--- | | United States | $9,184,179 | $23,874,527 | 2.6x | | Europe | $4,022,533 | $9,401,655 | 2.3x | | Total | $13,546,995 | $33,866,233 | 2.5x | Estimated Remaining Gross Collections (ERC) (in thousands) | | 84-Month ERC | 120-Month ERC | 180-Month ERC | | :--- | :--- | :--- | :--- | | Portfolio ERC | $6,829,240 | $7,578,068 | $8,195,339 | | REO ERC | $111,330 | $111,955 | $111,955 | | Total ERC | $6,940,570 | $7,690,023 | $8,307,294 | Liquidity and Capital Resources The company maintains strong liquidity with $173.0 million cash and $827.3 million available credit, and refinanced debt - Primary sources of capital are cash collections, bank borrowings, and debt/equity offerings. Primary cash requirements include portfolio purchases, operating expenses, and debt service[202] - In March 2024, the company issued $500.0 million in 9.250% Senior Secured Notes due 2029[203] - As of March 31, 2024, $91.9 million remained under the share repurchase program. No repurchases were made in Q1 2024[204] Quantitative and Qualitative Disclosures About Market Risk No material changes to foreign currency exchange rate or interest rate risk were reported since year-end 2023 - There had not been a material change in any of the foreign currency risk information or interest rate risk information disclosed in the 2023 Annual Report on Form 10-K[212][213] Controls and Procedures Disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective at the reasonable assurance level as of the end of the reporting period[217] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[218] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, other disclosures, and exhibits Legal Proceedings Information on legal proceedings is referenced in Note 11, indicating no new material developments this quarter - Information regarding legal proceedings is located in Note 11 of the financial statements[221] Risk Factors No material changes to the risk factors previously disclosed in the 2023 Annual Report on Form 10-K - There is no material change in the information reported under 'Part I-Item 1A-Risk Factors' in the Annual Report on Form 10-K for the fiscal year ended December 31, 2023[223] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were reported during the period - None[225] Other Information A Rule 10b5-1 trading plan was adopted by a Senior Vice President to sell up to 2,025 shares - On March 18, 2024, Andrew Asch, Senior Vice President and General Counsel, adopted a Rule 10b5-1(c) trading plan to sell up to 2,025 shares of company common stock[227] Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications and debt indentures - Exhibits filed include officer certifications (31.1, 31.2, 32.1) and the indenture for the 2029 Notes (4.1)[230]