Encore Capital Group Announces Third Quarter 2007 Results

October 25, 2007 at 4:02 PM EDT

SAN DIEGO, Oct. 25 /PRNewswire-FirstCall/ -- Encore Capital Group, Inc. (Nasdaq: ECPG), a leading distressed consumer debt management company, today reported consolidated financial results for the third quarter ended September 30, 2007.

    For the third quarter of 2007:

    -- Net income was $5.4 million or $0.23 per fully diluted share, compared
       to net income of $5.2 million or $0.22 per fully diluted share in the
       same period of the prior year.  Net income was reduced by the one-time
       impact of $2.1 million after-tax, or $0.09 per fully diluted share,
       related to the cost savings initiatives announced in September,
       including the reduction in workforce at certain sites and the exit of
       healthcare purchasing and collection activities.  Net income includes
       the positive impact of a reduction in the Company's effective tax rate
       by 15.2%, or $0.05 per fully diluted share, primarily due to certain
       beneficial changes to the Company's effective State tax rate.

    -- Adjusted EBITDA, defined as net income before interest, taxes,
       depreciation and amortization, stock-based compensation expense, and
       portfolio amortization, was $35.1 million, a 1% decrease compared to
       $35.6 million in the same period of the prior year. Excluding the
       $2.8 million in charges associated with the cost savings initiatives,
       Adjusted EBITDA increased 6% to $37.9 million.

    -- Gross collections were $85.6 million, a 13% increase over the
       $75.8 million in the same period of the prior year.

    -- Revenues from receivable portfolios were $59.4 million, a 4% increase
       over the $57.2 million in the same period of the prior year.  Revenue
       recognized on receivable portfolios, as a percentage of portfolio
       collections, was 70%, compared to 76% in the same period of the prior
       year.  The lower revenue recognition rate was attributable to a higher
       percentage of collections from more recently purchased portfolios that
       have lower collection multiples assigned to them, as well as a higher
       level of allowance charges for investment in receivable portfolios,
       which included the $1.4 million write-down of healthcare receivables
       associated with the cost savings initiatives.

    -- Revenues from bankruptcy servicing were $3.3 million, compared to
       $3.4 million in the same period of the prior year.

    -- Operating expense (excluding stock-based compensation expense,
       bankruptcy servicing operating expenses and costs related to the
       consideration of strategic alternatives) per dollar collected increased
       to 55.1% compared to 50.5% in the same period of the prior year.  This
       increase was attributable to both the increase in legal costs
       associated with collection initiatives as well as severance and other
       costs associated with the cost savings initiatives.  Total operating
       expenses were $52.0 million, a 16% increase over the $45.0 million in
       the same period of the prior year.  Excluding the $1.4 million in
       severance and other costs associated with the cost savings initiatives,
       total operating expenses were $50.6 million, a 12% increase compared to
       the $45.0 million in the prior year.  Operating expense (excluding
       stock-based compensation expense, bankruptcy servicing operating
       expenses, costs related to the consideration of strategic alternatives
       as well as severance and other costs associated with the cost savings
       initiatives) per dollar collected was 53.4%.

    -- Total interest expense was $3.6 million, compared to $6.7 million in
       the same period of the prior year.

    -- Investments in receivable portfolios were $47.9 million to purchase
       $1.3 billion in face value of debt, compared to $32.3 million to
       purchase $1.1 billion in face value of debt in the same period of the
       prior year.


    Non-GAAP Financial Measures

The Company has included information concerning Adjusted EBITDA because management utilizes this information, which is materially similar to a financial measure contained in covenants used in the Company's credit agreement, in the evaluation of its operations and believes that this measure is a useful indicator of the Company's ability to generate cash collections in excess of operating expenses through the liquidation of its receivable portfolios. The Company has included information concerning total operating expenses excluding stock-based compensation expense, bankruptcy servicing operating expenses and costs related to the consideration of strategic alternatives in order to facilitate a comparison of approximate cash costs to cash collections for the debt purchasing business in the periods presented. These non-GAAP financial measures should not be considered as alternatives to, or more meaningful than, net income and total operating expenses as indicators of Encore Capital Group's operating performance. Neither Adjusted EBITDA nor operating expenses excluding stock-based compensation expense, bankruptcy servicing operating expenses and costs related to the consideration of strategic alternatives has been prepared in accordance with generally accepted accounting principles (GAAP). These non-GAAP financial measures, as presented by Encore Capital Group, may not be comparable to similarly titled measures reported by other companies. The Company has included a reconciliation of Adjusted EBITDA to reported earnings under GAAP, and a reconciliation of operating expenses excluding stock-based compensation expense, bankruptcy servicing operating expenses and costs related to the consideration of strategic alternatives to the GAAP measure total operating expenses in the attached financial tables.

About Encore Capital Group, Inc.

Encore Capital Group, Inc. is a systems-driven purchaser and manager of charged-off consumer receivables portfolios. More information on the company can be found at http://www.encorecapitalgroup.com.

    Contact:
    Encore Capital Group, Inc.
    Paul Grinberg (858) 309-6904
    paul.grinberg@encorecapitalgroup.com
    or
    Ren Zamora (858) 560-3598
    ren.zamora@encorecapitalgroup.com


                           FINANCIAL TABLES FOLLOW


                          ENCORE CAPITAL GROUP, INC.
           Condensed Consolidated Statements of Financial Condition
                   (In Thousands, Except Par Value Amounts)

                                                  September 30,
                                                       2007       December 31,
                                                   (Unaudited)      2006 (A)

    Assets
    Cash and cash equivalents                         $4,478        $10,791
    Restricted cash                                    3,137          4,660
    Accounts receivable, net                           4,915          2,599
    Investment in receivable portfolios, net         348,818        300,348
    Property and equipment, net                        4,650          5,249
    Prepaid income tax                                 5,031          3,727
    Purchased servicing asset                            314          1,132
    Forward flow asset                                18,399         27,566
    Other assets                                      26,200         21,903
    Goodwill                                          13,735         13,735
    Identifiable intangible assets, net                2,825          3,628
          Total assets                              $432,502       $395,338

    Liabilities and stockholders' equity
    Liabilities:
      Accounts payable and accrued liabilities       $18,823        $23,744
      Accrued profit sharing arrangement                   -          6,869
      Deferred tax liabilities, net                   10,862         10,667
      Deferred revenue                                 3,034          2,156
      Purchased servicing obligation                     187            634
      Debt                                           232,948        200,132
      Other liabilities                                  606              -
          Total liabilities                          266,460        244,202

    Commitments and contingencies

    Stockholders' equity:
      Convertible preferred stock, $.01 par
       value, 5,000 shares authorized, no shares
       issued and outstanding                              -              -
      Common stock, $.01 par value, 50,000 shares
       authorized, 22,988 shares and 22,781 shares
       issued and outstanding as of September 30,
       2007 and December 31, 2006, respectively          230            228
      Additional paid-in capital                      71,698         66,532
      Accumulated earnings                            94,127         83,933
      Accumulated other comprehensive (loss) income      (13)           443
        Total stockholders' equity                   166,042        151,136
          Total liabilities and stockholders'
           equity                                   $432,502       $395,338

    (A) Derived from the audited consolidated financial statements as of
        December 31, 2006.



                          ENCORE CAPITAL GROUP, INC.
               Condensed Consolidated Statements of Operations
                   (In Thousands, Except Per Share Amounts)
                                 (Unaudited)

                                Three Months ended        Nine Months Ended
                                    September 30,            September 30,
                                 2007         2006         2007        2006
    Revenues
    Revenue from receivable
     portfolios, net           $59,415      $57,247     $185,589     $174,425
    Servicing fees and
     other related revenue       3,276        3,350        9,705       12,585
        Total revenues          62,691       60,597      195,294      187,010

    Operating expenses
      Salaries and employee
       benefits                 17,138       15,773       50,388       48,358
      Stock-based compensation
       expense                   1,281        1,490        3,286        4,335
      Cost of legal
       collections              20,868       12,545       59,649       36,767
      Other operating
       expenses                  4,987        5,308       16,970       17,409
      Collection agency
       commissions               2,478        4,533        8,639       14,178
      General and
       administrative expenses   4,462        4,388       12,965       11,421
      Depreciation and
       amortization                833          964        2,541        2,892
        Total operating
         expenses               52,047       45,001      154,438      135,360

    Income before other
     (expense) income
     and income taxes           10,644       15,596       40,856       51,650

    Other (expense) income
      Interest expense          (3,648)      (2,920)      (9,904)      (9,286)
      Contingent interest
       expense                       -       (3,824)      (4,123)     (12,746)
      Pay-off of future
       contingent interest           -            -      (11,733)           -
      Other income                  79           45          153          379
          Total other expense   (3,569)      (6,699)     (25,607)     (21,653)

    Income before income taxes   7,075        8,897       15,249       29,997
    Provision for income taxes  (1,717)      (3,689)      (5,055)     (12,616)
            Net income          $5,358       $5,208      $10,194      $17,381

    Basic - Earnings per
     share computation:
      Net income available to
       common stockholders      $5,358       $5,208      $10,194      $17,381
      Weighted average shares
       outstanding              22,922       22,778       22,837       22,745
        Earnings per share -
         Basic                   $0.23        $0.23        $0.45        $0.76

    Diluted -Earnings per
     share computation:
      Net income available to
       common stockholders      $5,358       $5,208      $10,194      $17,381
      Weighted average shares
       outstanding              22,922       22,778       22,837       22,745
      Incremental shares from
       assumed conversion of
       stock awards                551          605          583          644
      Diluted weighted average
       shares outstanding       23,473       23,383       23,420       23,389
        Earnings per share -
         Diluted                 $0.23        $0.22        $0.44        $0.74



                          ENCORE CAPITAL GROUP, INC.
               Condensed Consolidated Statements of Cash Flows
                          (Unaudited, In Thousands)

                                                         Nine Months Ended
                                                           September 30,
                                                        2007          2006
    Operating activities
    Gross collections                                $269,782       $242,583

    Less:
      Amounts collected on behalf of third parties       (368)          (546)
      Amounts applied to principal on receivable
       portfolios                                     (81,267)       (66,937)
    Servicing fees                                         89             51
    Operating expenses                               (146,071)      (121,420)
    Interest payments                                 (10,193)        (9,634)
    Contingent interest payments                      (22,724)       (17,975)
    Other income                                          153            379
    Decrease in restricted cash                         1,523            848
    Income taxes                                       (7,398)          (842)
    Excess tax benefits from stock-based payment
     arrangements                                        (683)          (754)
        Net cash provided by operating activities       2,843         25,753

    Investing activities
    Purchases of receivable portfolios, net of
     forward flow allocation                         (125,224)       (73,237)
    Collections applied to principal of receivable
     portfolios                                        81,267         66,937
    Proceeds from put-backs and recalls of
     receivable portfolios                              2,097          2,691
    Purchases of property and equipment                (1,139)        (1,447)
        Net cash used in by investing activities      (42,999)        (5,056)

    Financing activities
    Proceeds from notes payable and other borrowings   53,000         23,500
    Repayment of notes payable and other borrowings   (20,000)       (35,641)
    Proceeds from exercise of common stock options        344            146
    Excess tax benefits from stock-based payment
     arrangements                                         683            754
    Repayment of capital lease obligations               (184)          (179)
        Net cash provided by (used in) financing
         activities                                    33,843        (11,420)

    Net (decrease) increase in cash                    (6,313)         9,277
    Cash and cash equivalents, beginning of period     10,791          7,026
    Cash and cash equivalents, end of period           $4,478        $16,303



                          ENCORE CAPITAL GROUP, INC.
                      Supplemental Financial Information

Reconciliation of Adjusted EBITDA to GAAP Net Income and Operating Expenses,

Excluding Stock-based Compensation Expense, Bankruptcy Servicing Operating

Expenses and Costs Related to the Consideration of Strategic Alternatives to

                        GAAP Total Operating Expenses
                          (Unaudited, In Thousands)

                                                        Three Months Ended
                                                           September 30,
                                                        2007           2006
    GAAP net income, as reported                      $5,358         $5,208
    Interest expense                                   3,648          2,920
    Contingent interest expense                            -          3,824
    Provision for income taxes                         1,717          3,689
    Depreciation and amortization                        833            964
    Amount applied to principal on receivable
     portfolios                                       22,293         17,526
    Stock-based compensation expense                   1,281          1,490
    Adjusted EBITDA                                  $35,130        $35,621


    GAAP total operating expenses, as reported       $52,047        $45,001
    Stock-based compensation expense                  (1,281)        (1,490)
    Bankruptcy servicing operating expenses           (3,599)        (4,499)
    Costs related to the consideration of strategic
     alternatives                                          -           (749)
    Operating expenses, excluding stock-based
     compensation expense, bankruptcy servicing
     operating expenses and costs related to the
     consideration of strategic alternatives         $47,167        $38,263
SOURCE Encore Capital Group, Inc.
10/25/2007
CONTACT: Paul Grinberg, +1-858-309-6904,
paul.grinberg@encorecapitalgroup.com, or Ren Zamora, +1-858-560-3598,
ren.zamora@encorecapitalgroup.com, both of Encore Capital Group, Inc.
Web site: http://www.encorecapitalgroup.com
(ECPG)