Encore Reports 23% Increase in Net Income For Third Quarter of 2003; Cash Flow From Operations Increases 91% in First Nine Months of 2003
SAN DIEGO--(BUSINESS WIRE)--Nov. 12, 2003--Encore Capital Group, Inc. (Nasdaq:ECPG), a leading accounts receivable management firm, today reported consolidated financial results for the third quarter and nine months ended September 30, 2003.
- Pretax Income for the third quarter of 2003 increased 96.0% or $2.5 million to $5.2 million over the $2.6 million earned in the third quarter of 2002.
- Net income for the third quarter of 2003 increased 23.1% over third quarter of 2002, from $2.5 million to $3.1 million, or $0.14 to $0.15 per diluted share. Fully diluted EPS were impacted by both a higher tax rate in 2003 and a higher number of fully diluted shares outstanding - primarily as a result of a higher share price.
- Gross collections for the third quarter of 2003 increased by 26.7% or $10.4 million to $49.1 million over $38.7 million in the third quarter of 2002.
- Total revenues for the third quarter of 2003 were $29.5 million, an increase of 21.0% or $5.1 million over $24.4 million in the same period of the prior year.
- For the nine months ended September 30, 2003, cash flow from operations was $26.0 million, an increase of 91.2% or $12.4 million over $13.6 million for the first nine months of 2002.
"We are very pleased with our third quarter performance, which represented our eighth consecutive quarter of year-over-year improvement in net income," said Carl C. Gregory, III, President and CEO of Encore Capital Group, Inc. "We achieved significant increases in key metrics such as gross collections, revenues, and net income. We continue to effectively manage our growth and have excellent operating leverage, as our third quarter collections increased 26.7% over the prior year, while our operating expenses increased only 18.0%. Employee productivity remained high during this period of growth. Over the past twelve months, we increased total employees by approximately 27%, while maintaining average collections per employee at a consistent rate."
Mr. Gregory added, "It is also important to note that we completed a follow-on public offering shortly after the quarter ended that raised approximately $30.1 million for the Company and significantly improved our capital structure. With a stronger, less complex balance sheet, we can more aggressively pursue attractive receivable portfolios and grow the Company as we find appropriate opportunities."
Third Quarter Financial Highlights
Gross collections were $49.1 million in third quarter of 2003, an increase of 26.7% or $10.4 million over $38.7 million in the same period of 2002. Revenue recognized as a percentage of collections was down slightly, from 63.0% in the third quarter of 2002 to 60.2% in the third quarter of 2003.
Total operating expenses were $19.5 million, an increase of 18.0% or $3.0 million over the $16.5 million in the third quarter of 2002.
The Company purchased approximately $640 million in face value debt during the third quarter of 2003, with a blended purchase price of 3.02% of face value.
Nine Month Financial Highlights
Total revenues for the nine months ended September 30, 2003 were $86.0 million, an increase of 37.2% or $23.4 million over $62.7 million in the same period of the previous year.
Net income was $14.6 million, or $0.73 per diluted share, for the nine months ended September 30, 2003, an increase of 323% or $11.2 million over net income of $3.4 million, or $0.22 per diluted share, in the same period of the previous year. The 2003 number includes the one-time benefit of the previously announced litigation settlement of $4.4 million, or $0.22 per diluted share.
In the first nine months of 2003, the Company purchased $2.4 billion of face value debt at a blended price of 2.68% of face value, compared with $2.2 billion at a blended price of 2.02% of face value for the same period in 2002.
Outlook
The Company cited the following key drivers of future growth in revenue, earnings, and cash flow:
- The Company's exclusive Secured Financing Facility, under which it purchases credit card receivables, expires at the end of 2004. The Company believes that any replacement or renegotiation of this financing relationship will lower the Company's effective cost of borrowing and have a positive effect on earnings and cash flow. As a reference point, the interest expense under this facility was an after-tax $0.14 and $0.38 per fully diluted share for the three and nine months ended September 30, 2003, respectively. The contingent interest portion of this expense was an after-tax $0.12 and $0.33 per fully diluted share for the three and nine months ended September 30, 2003, respectively.
- The Company is currently validating the accuracy of a new model related to the expected collections on its receivables portfolios, and believes the validation will be completed in the fourth quarter of 2003. Once the validation is complete, the Company will implement the revised collection forecasts.
- As a result of our business success and the completion of our public offering, the Company now has approximately $37.5 million in cash. This cash is immediately available to invest in non-credit card paper purchases or other opportunities. As such, the Company expects that non-credit card paper will make up an increasing percentage of its purchases in the near future. The Company believes these purchases will yield a higher profit margin since they will not be financed under the current financing arrangement for its credit card receivables discussed above.
Commenting on the outlook for the Company, Mr. Gregory said, "We expect to deliver strong year-over-year growth going forward. We continue to see good opportunities to purchase additional portfolios that meet our investment criteria. We are also focused on prudently managing our growth. We are adding approximately 15 new collectors per month, while maintaining an employee retention rate above 80.0% for those employees who have graduated from our training program," said Mr. Gregory.
Conference Call and Webcast
The Company will hold a conference call today at 2:00 PM Pacific time / 5:00 P.M. Eastern time to discuss the third quarter results. Members of the public are invited to listen to the live conference call via the Internet. To hear the call, log on at the Investor Relations page of the Company's web site at www.encorecapitalgroup.com. For those who cannot listen to the live broadcast, a replay of the conference call will be available shortly after the call at the same location.
About Encore Capital Group, Inc.
Encore Capital Group, Inc. is an accounts receivable management firm that specializes in purchasing charged-off and defaulted consumer debt.
Forward Looking Statements
The statements in this press release that are not historical facts, including, most importantly, those statements preceded by, or that include, the words "may," "believes," "projects," "expects," "anticipates" or the negation thereof, or similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). These statements may include, but are not limited to, projections of revenues, income or loss; estimates of capital expenditures; plans for future operations, products or services; and financing needs or plans, as well as assumptions relating to those matters. For all "forward-looking statements," the Company claims the protection of the safe harbor for forward-looking statements contained in the Reform Act. Such forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the Company and our subsidiaries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could affect the Company's results and cause them to materially differ from those contained in the forward-looking statements include: the Company's ability to maintain existing, and secure additional, financing; the Company's ability to maintain sufficient liquidity to operate our business; the Company's continued servicing of the receivables in our secured financing facility; the Company's ability to recover sufficient amounts on or with respect to receivables to fund operations (including from sellers of non-conforming receivable portfolios); the Company's ability to hire and retain qualified personnel to recover on its receivables efficiently; changes in, or failure to comply with, government regulations; the costs, uncertainties and other effects of legal and administrative proceedings; and Risk factors and cautionary statements made in the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2002.
Forward-looking statements speak only as of the date the statement was made. They are inherently subject to risks and uncertainties, some of which the Company cannot predict or quantify. Future events and actual results could differ materially from the forward-looking statements. The Company will not undertake and specifically declines any obligation to publicly release the result of any revisions to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events, whether as the result of new information, future events or for any other reason. In addition, it is the Company's policy generally not to make any specific projections as to future earnings, and the Company does not endorse any projections regarding future performance that may be made by third parties.
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
September December
30, 31,
2003 2002
(unaudited) (audited)
----------- ---------
Assets
Cash $ 10,883 $ 752
Restricted cash 745 3,105
Investment in receivable portfolios, net 78,497 64,168
Investment in retained interest 2,349 8,256
Property and equipment, net 3,156 3,541
Deferred tax asset, net 208 6,813
Other assets 4,135 3,339
----------- ---------
Total assets $ 99,973 $ 89,974
=========== =========
Liabilities and stockholders' equity
Accounts payable and accrued liabilities $ 10,100 $ 10,688
Accrued profit sharing arrangement 11,360 11,180
Income tax payable 2,383 531
Notes payable and other borrowings, net of
discount of $634 and $742 as of September 30,
2003, and December 31, 2002, respectively 42,058 47,689
Capital lease obligations 524 344
----------- ---------
Total liabilities 66,425 70,432
----------- ---------
Commitments and contingencies
Stockholders' equity
Convertible preferred stock, $.01 par value,
5,000 shares authorized, 1,000 shares issued
and outstanding (Liquidation value of
$122,000 at September 30, 2003) 10 10
Common stock, $.01 par value, 50,000 shares
authorized, and 7,437 shares and 7,411
shares issued and outstanding at September
30, 2003 and December 31, 2002, respectively 74 74
Additional paid-in capital 31,558 31,479
Accumulated earnings (deficit) 1,815 (12,388)
Accumulated other comprehensive income 91 367
----------- ---------
Total stockholders' equity 33,548 19,542
----------- ---------
Total liabilities and stockholders' equity $ 99,973 $ 89,974
=========== =========
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
---------------- ------------------
2003 2002 2003 2002
------- ------- -------- --------
Revenues
Revenue from portfolio
receivables $29,148 $21,931 $ 84,405 $ 55,164
Revenue from retained
interest 59 1,331 272 4,549
Servicing fees and related
revenue 332 1,144 1,375 3,019
------- ------- -------- --------
Total revenues 29,539 24,406 86,052 62,732
------- ------- -------- --------
Operating expenses
Salaries and employee
benefits 9,872 8,820 29,001 26,022
Other operating expenses 3,393 2,198 8,404 5,522
Cost of legal collections 3,983 2,450 11,502 6,919
General and administrative
expenses 1,712 1,919 4,725 4,914
Provision for portfolio
losses - 492 - 492
Depreciation and amortization 507 623 1,521 1,815
------- ------- -------- --------
Total operating expenses 19,467 16,502 55,153 45,684
------- ------- -------- --------
Income before other income
(expense) and income taxes 10,072 7,904 30,899 17,048
Other income and expense
Interest expense (4,903) (5,272) (13,857) (13,285)
Other income 21 16 7,310 173
------- ------- -------- --------
Income before income taxes 5,190 2,648 24,352 3,936
Income tax provision (2,086) (127) (9,773) (490)
------- ------- -------- --------
Net Income 3,104 2,521 14,579 3,446
Other comprehensive income:
Increase (decrease) in
unrealized gain on
non-qualified deferred
compensation plan assets 42 44 (4) 65
Decrease in unrealized gain on
retained interest in
securitized receivables,
net of tax (58) (181) (272) (722)
------- ------- -------- --------
Comprehensive income $ 3,088 $ 2,384 $ 14,303 $ 2,789
======= ======= ======== ========
Earnings per share - Basic $ 0.40 $ 0.32 $ 1.91 $ 0.43
======= ======= ======== ========
Earnings per share - Diluted $ 0.15 $ 0.14 $ 0.73 $ 0.22
======= ======= ======== ========
Shares used for computation
Basic 7,435 7,411 7,422 7,311
======= ======= ======== ========
Diluted 20,197 17,841 19,999 15,911
======= ======= ======== ========
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
Nine Months Ended
September 30
--------------------
2003 2002
-------- --------
Operating activities
Gross Collections $142,828 $108,359
Proceeds from litigation settlement 11,100 -
Less:
Amounts collected on behalf of third parties (3,982) (8,636)
Amounts applied to principal of receivable
portfolios (48,715) (32,916)
Amounts applied to principal of securitization
98-1 (5,453) (7,096)
Litigation settlement proceeds applied
to principal of receivable portfolios (692) -
Legal and other costs related to
litigation settlement (3,198) -
Servicing fees 1,375 3,020
Operating Expenses
Salaries and employee benefits (28,777) (24,833)
Other operating expenses (8,429) (6,246)
Collection legal costs (11,502) (6,919)
General and administrative (4,491) (5,154)
Interest payments (4,581) (3,255)
Contingent interest payments (10,806) (1,915)
Other income 100 173
Decrease (increase) in restricted cash 2,360 (952)
Income taxes (1,077) -
-------- --------
Net cash provided by operating activities 26,060 13,630
-------- --------
Investing activities
Purchases of receivable portfolios (64,423) (44,625)
Collections applied to principal of receivable
portfolios 48,715 32,916
Litigation settlement proceeds applied to
principal of receivable portfolios 692 -
Collections applied to principal of
securitization 98-1 5,453 7,096
Proceeds from put-backs of receivable portfolios 687 766
Purchases of property and equipment (594) (604)
-------- --------
Net cash used in investing activities (9,470) (4,451)
-------- --------
Financing activities
Proceeds from notes payable and other borrowings 56,489 39,310
Repayment of notes payable and other borrowings (62,227) (52,122)
Capitalized loan costs relating to financing
arrangement - (154)
Proceeds from exercise of common stock options 17 -
Proceeds from exercise of common stock warrants - 2
Proceeds from sale of preferred stock - 4,588
Payment of preferred dividend (375) (250)
Repayment of capital lease obligations (363) (736)
-------- --------
Net cash used in financing activities (6,459) (9,362)
-------- --------
Net increase (decrease) in cash 10,131 (183)
Cash, beginning of period 752 1,412
-------- --------
Cash, end of period $ 10,883 $ 1,229
======== ========
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows (cont.)
Reconciliation of Net Income to Net Cash Provided by Operating
Activities
(Unaudited, In Thousands)
Nine Months
Ended
September 30
----------------
2003 2002
------- -------
Net income $14,579 $ 3,446
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,521 1,815
Amortization of loan costs and debt discount 206 654
Deferred income tax expense 6,851 490
Increase in provision for portfolio losses - 492
Increase in income on retained interest - 419
Changes in operating assets and liabilities
Decrease (increase) in restricted cash 2,360 (952)
Increase in other assets (895) (1,364)
Increase in accounts payable and
accrued liabilities 1,258 1,589
Increase in accrued profit sharing
arrangement 180 7,041
------- -------
Net cash provided by operating activities $26,060 $13,630
======= =======
Supplemental schedule of non-cash investing
activities:
Property and equipment acquired under
capital lease $ 542 $ -
======= =======
The following table sets forth our capitalization as of September 30, 2003 on an actual basis and on a pro-forma basis to reflect the effects of the follow-on public offering, the conversion of the Series A convertible preferred stock, the exercise of warrants and options, and the repayment of the senior note:
As of September
30, 2003
Pro-
Actual forma
------- -------
Cash $10,883 $34,100
======= =======
Notes payable and other borrowings, net of
$634 discount, actual; and $0 pro-forma 42,058 34,808
Capital lease obligations 524 524
------- -------
Total Debt 42,582 35,332
------- -------
Stockholders' equity
Series A convertible preferred stock,
$0.01 par value, 5,000,000 shares
authorized, 1,000,000 shares issued
and outstanding, actual; zero shares
issued and outstanding, pro-forma 10 -
Common stock, $0.01 par value,
50,000,000 shares authorized,
7,437,433 shares issued and
outstanding, actual; and 21,299,187
shares issued and outstanding
pro-forma (1) 74 213
Additional paid-in capital 31,558 62,083
Accumulated earnings (2) 1,815 945
Accumulated other comprehensive income 91 91
------- -------
Total stockholders' equity 33,548 63,332
------- -------
Total capitalization $76,130 $98,664
======= =======
(1) Total pro-forma shares outstanding and potential dilutive common
shares at September 30, 2003 were 23,424,128.
(2) Reflects, on a pro-forma basis, the write-off of $0.9 million in
debt discount and capitalized loan fees related to the payoff of our
Senior Notes, which will be recorded as a charge to earnings.
CONTACT: Encore Capital Group, Inc. (Shareholders/Analysts)
Carl C. Gregory, III, 858-309-6961
carl.gregory@encorecapitalgroup.com
or
Financial Relations Board (Press)
Tony Rossi, 310-407-6563 (Investor Relations)
trossi@financialrelationsboard.com
SOURCE: Encore Capital Group, Inc.