UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): May 8, 2007
ENCORE CAPITAL GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
| Delaware | 000-26489 | 48-1090909 | ||
| (State or Other Jurisdiction of Incorporation) |
(Commission File Number) | (IRS Employer Identification No.) |
| 8875 Aero Drive, Suite 200, San Diego, California | 92123 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(877) 445-4581
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02 Results of Operations and Financial Condition
On May 8, 2007, we issued a press release announcing our financial results for the first quarter ended March 31, 2007.
A copy of the press release is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference herein.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits.
| Exhibit Number |
Description | |
| 99.1 | Press release dated May 8, 2007 |
The information reported in this Current Report on Form 8-K, including the exhibit, shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities under that Section, nor be deemed to be incorporated by reference into the filings of the Company under the Securities Act of 1933.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| ENCORE CAPITAL GROUP, INC. | ||
| Date: May 8, 2007 | /s/ Paul Grinberg | |
| Paul Grinberg | ||
| Executive Vice President and Chief Financial Officer | ||
EXHIBIT INDEX
| Exhibit Number |
Description | |
| 99.1 | Press release dated May 8, 2007 |
Exhibit 99.1
For Immediate Release
Encore Capital Group Announces First Quarter 2007 Results
SAN DIEGO, May 8, 2007 /PRNewswire-FirstCall/ — Encore Capital Group, Inc. (Nasdaq: ECPG), a leading distressed consumer debt management company, today reported consolidated financial results for the first quarter ended March 31, 2007.
For the first quarter of 2007:
| • | Gross collections were $90.5 million, a 3% increase over the $87.6 million in the same period of the prior year. |
| • | Revenues from the debt purchasing business were $62.2 million, an 8% increase over the $57.6 million in the same period of the prior year. Revenues from the bankruptcy servicing business were $3.2 million compared to $2.9 million in the same period of the prior year. |
| • | Net income was $5.7 million, a 21% increase over the $4.7 million in the same period of the prior year. |
| • | Earnings per fully diluted share were $0.24, a 20% increase over the $0.20 in the same period of the prior year. |
| • | Adjusted EBITDA, defined as net income before interest, taxes, depreciation and amortization, stock-based compensation expense, and portfolio amortization, was $45.9 million, a 4% decrease from the $47.8 million in the same period of the prior year. |
Commenting on the quarter, J. Brandon Black, President and CEO of Encore Capital Group, Inc., said, “The beginning of 2007 has been very positive for Encore. Our first quarter collections performance was one of the strongest in the Company’s history and we saw increasing productivity from our key strategic collection initiatives in India and the legal channel. Additionally, after the quarter closed, we finalized a buyout of the remaining contingent interest on our legacy secured lending facility.
“During the first quarter, we invested $45.4 million to purchase $2.5 billion in face value of debt. Our purchases were more concentrated this quarter in credit card portfolios as this asset class exhibited the best value during the period. While purchasing activity was strong in the first quarter, we continue to see elevated pricing levels across all asset classes. We are not expecting this pricing trend to change in the near term and are focused on building our business through continuous innovation, not by merely using traditional operating strategies,” continued Mr. Black.
Financial Highlights
Revenue recognized on receivable portfolios, as a percentage of portfolio collections, was 69% in the first quarter of 2007, compared with 66% in the first quarter of 2006. The higher revenue recognition rate was attributable to improvements in internal rates of return associated with several of our quarterly pool groups and the timing of recent purchases.
Encore Capital Group, Inc.
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The Company generated $3.2 million in fee-based revenue during the first quarter of 2007, compared with $2.9 million in the first quarter of 2006, primarily through the Ascension Capital bankruptcy services business.
Total operating expenses for the first quarter of 2007 were $49.8 million, compared with $44.7 million in the first quarter of 2006. First quarter 2007 operating expenses included stock-based compensation expense of $0.8 million, operating expenses of $4.1 million related to Ascension Capital, which is a fee-based business, and the final costs related to the consideration of strategic alternatives of $0.1 million. Excluding these items, operating expenses were $44.7 million in the first quarter of 2007, compared with $38.3 million in the first quarter of 2006, while operating expense per dollar collected increased to 49% compared to 44%. This increase was primarily attributable to the increase in legal costs associated with our newer initiatives, which contributed to the decline in Adjusted EBITDA from the same period in the prior year.
Total interest expense was $6.2 million in the first quarter of 2007, compared to $8.0 million in the first quarter of 2006. The contingent interest component of interest expense was $3.2 million in the first quarter of 2007, compared with $4.7 million in the same period of the prior year.
Outlook
Commenting on the outlook for Encore Capital Group, Mr. Black said, “We are pleased with our performance in the first quarter. The progress we have made across many of our strategic initiatives is beginning to improve the profitability of the Company. We would caution, however, against using the first quarter earnings per share as a run rate for the rest of the year or assuming year-over-year increases in earnings per share for the remaining quarters of 2007. Specifically, in the second quarter of 2007, the buyout of the remaining contingent interest on our legacy secured lending facility will have a one-time negative impact of approximately $0.30 per share after taxes. However, the transaction is expected to be accretive over the long term from an earnings per share perspective and the Company will begin recognizing the earnings benefit of not having contingent interest in the third quarter of 2007.
“Earnings for the remainder of 2007 will be dependent on the level and timing of purchases and the continuation of the upfront costs associated with our new collection initiatives. While negatively impacting our short-term earnings, these investments are essential for maintaining our long-term competitive advantage in an environment of higher pricing for portfolio. We will also continue to experience the diminishing contribution from older, higher multiple portfolios. We reiterate our view that 2007 is the second year in a two-year investment. However, with each quarter, we are seeing more evidence that our new collection initiatives are working well, and should, in the long term, result in continued growth in collections and solid growth in revenues, earnings and cash flow,” continued Mr. Black.
Encore Capital Group, Inc.
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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 first quarter results. Members of the public are invited to listen to the live conference call via the Internet.
To hear the presentation, 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.
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, Ascension Capital 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, Ascension Capital 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, Ascension Capital 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 www.encorecapitalgroup.com.
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 future collections, revenues, profitability, cash flow, any non-GAAP financial measures referenced herein, income or loss (including our expectations regarding measures designed to increase portfolio liquidation and the resulting effect on revenue and profitability); and plans for future operations, products or services, as well as assumptions
Encore Capital Group, Inc.
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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. These risks, uncertainties and other factors are discussed from time to time in the reports filed by the Company with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. 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 control, 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, nor does the Company intend, to update or revise any forward-looking statements to reflect new information or 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.
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.
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ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
| March 31, 2007 (Unaudited) |
December 31, 2006 (A) | |||||
| Assets |
||||||
| Cash and cash equivalents |
$ | 6,873 | $ | 10,791 | ||
| Restricted cash |
4,139 | 4,660 | ||||
| Accounts receivable, net |
4,407 | 2,599 | ||||
| Investment in receivable portfolios, net |
316,522 | 300,348 | ||||
| Property and equipment, net |
5,200 | 5,249 | ||||
| Prepaid income tax |
4,381 | 3,727 | ||||
| Purchased servicing asset |
803 | 1,132 | ||||
| Forward flow asset |
24,027 | 27,566 | ||||
| Other assets |
23,210 | 21,903 | ||||
| Goodwill |
13,735 | 13,735 | ||||
| Identifiable intangible assets, net |
3,360 | 3,628 | ||||
| Total assets |
$ | 406,657 | $ | 395,338 | ||
| Liabilities and stockholders’ equity |
||||||
| Liabilities: |
||||||
| Accounts payable and accrued liabilities |
$ | 19,570 | $ | 23,744 | ||
| Accrued profit sharing arrangement |
5,784 | 6,869 | ||||
| Deferred tax liabilities, net |
13,245 | 10,667 | ||||
| Deferred revenue |
2,387 | 2,156 | ||||
| Purchased servicing obligation |
463 | 634 | ||||
| Debt |
207,071 | 200,132 | ||||
| Total liabilities |
248,520 | 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, |
||||||
| 22,797 shares and 22,781 shares issued and outstanding as of March 31, 2007 and December 31, 2006, respectively |
228 | 228 | ||||
| Additional paid-in capital |
67,854 | 66,532 | ||||
| Accumulated earnings |
89,590 | 83,933 | ||||
| Accumulated other comprehensive income |
465 | 443 | ||||
| Total stockholders’ equity |
158,137 | 151,136 | ||||
| Total liabilities and stockholders’ equity |
$ | 406,657 | $ | 395,338 | ||
(A) Derived from the audited consolidated financial statements as of December 31, 2006.
Encore Capital Group, Inc.
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ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
| Three Months Ended March 31, |
||||||||
| 2007 | 2006 | |||||||
| Revenues |
||||||||
| Revenue from receivable portfolios, net |
$ | 62,153 | $ | 57,574 | ||||
| Servicing fees and other related revenue |
3,222 | 2,906 | ||||||
| Total revenues |
65,375 | 60,480 | ||||||
| Operating expenses |
||||||||
| Salaries and employee benefits |
17,186 | 16,279 | ||||||
| Stock-based compensation expense |
801 | 1,381 | ||||||
| Cost of legal collections |
17,621 | 11,278 | ||||||
| Other operating expenses |
5,744 | 6,446 | ||||||
| Collection agency commissions |
3,294 | 4,613 | ||||||
| General and administrative expenses |
4,271 | 3,733 | ||||||
| Depreciation and amortization |
869 | 960 | ||||||
| Total operating expenses |
49,786 | 44,690 | ||||||
| Income before other income (expense) and income taxes |
15,589 | 15,790 | ||||||
| Other income (expense) |
||||||||
| Interest expense |
(6,155 | ) | (7,951 | ) | ||||
| Other income |
116 | 50 | ||||||
| Total other expense |
(6,039 | ) | (7,901 | ) | ||||
| Income before income taxes |
9,550 | 7,889 | ||||||
| Provision for income taxes |
(3,893 | ) | (3,211 | ) | ||||
| Net income |
$ | 5,657 | $ | 4,678 | ||||
| Basic - earnings per share computation: |
||||||||
| Net income available to common stockholders |
$ | 5,657 | $ | 4,678 | ||||
| Weighted average shares outstanding |
22,783 | 22,681 | ||||||
| Earnings per share – Basic |
$ | 0.25 | $ | 0.21 | ||||
| Diluted - earnings per share computation: |
||||||||
| Net income available to common stockholders |
$ | 5,657 | $ | 4,678 | ||||
| Weighted average shares outstanding |
22,783 | 22,681 | ||||||
| Incremental shares from assumed conversion of stock options |
531 | 1,132 | ||||||
| Diluted weighted average shares outstanding |
23,314 | 23,813 | ||||||
| Earnings per share – Diluted |
$ | 0.24 | $ | 0.20 | ||||
Encore Capital Group, Inc.
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ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
| Three Months Ended March 31, |
||||||||
| 2007 | 2006 | |||||||
| Operating activities |
||||||||
| Gross collections |
$ | 90,541 | $ | 87,616 | ||||
| Less: |
||||||||
| Amounts collected on behalf of third parties |
(129 | ) | (168 | ) | ||||
| Amounts applied to principal on receivable portfolios |
(28,476 | ) | (29,579 | ) | ||||
| Servicing fees |
31 | 51 | ||||||
| Operating expenses |
(50,896 | ) | (41,580 | ) | ||||
| Interest payments |
(3,391 | ) | (2,187 | ) | ||||
| Contingent interest payments |
(4,319 | ) | (7,455 | ) | ||||
| Other income |
116 | 50 | ||||||
| Decrease (increase) in restricted cash |
521 | (1,090 | ) | |||||
| Income taxes |
(1,899 | ) | (249 | ) | ||||
| Excess tax benefits from stock-based payment arrangements |
(52 | ) | (730 | ) | ||||
| Net cash provided by operating activities |
2,047 | 4,679 | ||||||
| Investing activities |
||||||||
| Purchases of receivable portfolios |
(41,847 | ) | (24,688 | ) | ||||
| Collections applied to principal of receivable portfolios |
28,476 | 29,579 | ||||||
| Proceeds from put-backs of receivable portfolios |
953 | 1,148 | ||||||
| Purchases of property and equipment |
(552 | ) | (265 | ) | ||||
| Net cash (used in) provided by investing activities |
(12,970 | ) | 5,774 | |||||
| Financing activities |
||||||||
| Proceeds from notes payable and other borrowings |
7,000 | 3,000 | ||||||
| Repayment of notes payable and other borrowings |
— | (14,555 | ) | |||||
| Proceeds from exercise of common stock options |
14 | 144 | ||||||
| Excess tax benefits from stock-based payment arrangements |
52 | 730 | ||||||
| Repayment of capital lease obligations |
(61 | ) | (59 | ) | ||||
| Net cash provided by (used in) financing activities |
7,005 | (10,740 | ) | |||||
| Net decrease in cash |
(3,918 | ) | (287 | ) | ||||
| Cash and cash equivalents, beginning of period |
10,791 | 7,026 | ||||||
| Cash and cash equivalents, end of period |
$ | 6,873 | $ | 6,739 | ||||
Encore Capital Group, Inc.
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ENCORE CAPITAL GROUP, INC.
Supplemental Financial Information
Reconciliation of Adjusted EBITDA to GAAP Net Income and Operating Expenses, Excluding Stock Option Expense, Ascension Capital Operating Expenses and Costs Related to the Consideration of Strategic Alternatives to
GAAP Total Operating Expenses
(Unaudited, In Thousands)
| Three Months Ended March 31, |
||||||||
| 2007 | 2006 | |||||||
| GAAP net income, as reported |
$ | 5,657 | $ | 4,678 | ||||
| Interest expense |
6,155 | 7,951 | ||||||
| Provision for income taxes |
3,893 | 3,211 | ||||||
| Depreciation and amortization |
869 | 960 | ||||||
| Amount applied to principal on receivable portfolios |
28,476 | 29,579 | ||||||
| Stock-based compensation expense |
801 | 1,381 | ||||||
| Adjusted EBITDA |
$ | 45,851 | $ | 47,760 | ||||
| GAAP total operating expenses, as reported |
$ | 49,786 | $ | 44,690 | ||||
| Stock-based compensation expense |
(801 | ) | (1,381 | ) | ||||
| Ascension Capital operating expenses |
(4,120 | ) | (4,978 | ) | ||||
| Costs related to the consideration of strategic alternatives |
(116 | ) | — | |||||
| Operating expenses, excluding stock-based compensation expense, Ascension Capital operating expenses and costs related to the consideration of strategic alternatives |
$ | 44,749 | $ | 38,331 | ||||
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