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8-K



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): March 31, 2016
______________________
ENCORE CAPITAL GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
______________________
Delaware
(State or Other Jurisdiction of Incorporation)

000-26489
(Commission
File Number)

48-1090909
(IRS Employer
Identification No.)

3111 Camino Del Rio North, Suite 103, San Diego, California
(Address of Principal Executive Offices)

92108
(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):
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))






Item 2.01.    Completion of Acquisition or Disposition of Assets.

On March 31, 2016, Encore Capital Group, Inc. (the “Company”) completed its previously announced divestiture of its membership interests in Propel Acquisition LLC (“Propel”) pursuant to the Securities Purchase Agreement (the “Purchase Agreement”), dated February 19, 2016, among the Company and certain funds affiliated with Prophet Capital Asset Management LP (“Buyer”). Pursuant to the Purchase Agreement, the application of the purchase price formula resulted in cash consideration paid to the Company at closing of $144.4 million, subject to customary post-closing adjustments. After an expected tax benefit, net proceeds from the transaction are expected to be in excess of $150 million.
The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the complete text of the Purchase Agreement, a copy of which is filed as Exhibit 2.4 to the Company's Annual Report on Form 10-K filed with the SEC on February 24, 2016 and which is incorporated herein by reference.
Item 9.01.    Financial Statements and Exhibits.
(b) Pro Forma Financial Information

The unaudited pro forma condensed consolidated financial information required by Item 9.01(b) of Form 8-K is included as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference.

(d) Exhibits

Exhibit Number
Description
2.4
Securities Purchase Agreement, dated February 19, 2016, by and among Encore Capital Group, Inc. and certain funds affiliated with Prophet Capital Asset Management LP (incorporated by reference to Exhibit 2.4 to the Company’s Annual Report on Form 10-K filed on February 24, 2016)
99.1
Encore Capital Group, Inc. Unaudited Pro Forma Condensed Consolidated Financial Information
99.2
Unaudited Pro Forma Non-GAAP Measures






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.
Date: April 6, 2016

ENCORE CAPITAL GROUP, INC.

 
/s/ Jonathan Clark
 
Jonathan Clark
 
Executive Vice President, Chief Financial Officer and Treasurer







Exhibit
Exhibit 99.1


Unaudited Pro Forma Condensed Consolidated Financial Information
The following unaudited pro forma condensed consolidated financial statements are based on the historical consolidated financial statements of Encore Capital Group, Inc. (the “Company”) and are adjusted to give effect to the divestiture of Propel Acquisition LLC (“Propel”) on March 31, 2016. The unaudited pro forma condensed consolidated statement of financial condition as of December 31, 2015 gives effect to the divestiture of Propel as if it had occurred on December 31, 2015. The unaudited pro forma condensed consolidated statements of income for the years ended December 31, 2015, 2014 and 2013 give effect to the divestiture of Propel as if it had occurred on January 1, 2013. The pro forma condensed consolidated financial statements do not necessarily reflect what the consolidated company’s financial condition or results of operations would have been had the divestiture occurred on the dates indicated. They also may not be useful in predicting the Company’s future financial condition and results of operations. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors. Beginning in the first quarter of fiscal 2016, the historical financial results of the Propel tax lien business for periods prior to the divestiture will be reflected in the Company’s consolidated financial statements as discontinued operations.
The unaudited pro forma consolidated financial statements should be read in conjunction with the historical consolidated financial statements and notes thereto in the Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
ENCORE CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Financial Condition as of December 31, 2015
(In Thousands)

 
Historical Financial Statement
 
Pro Forma Adjustments
 
Pro Forma Financial Statement
Assets
 
 
 
 
 
Cash and cash equivalents
$
153,593

 
$
113,157

(a)
$
266,750

Investment in receivable portfolios, net
2,440,669

 
—

 
2,440,669

Receivables secured by property tax liens, net
306,380

 
(306,380
)
(b)
—

Property and equipment, net
73,504

 
(958
)
(b)
72,546

Deferred court costs, net
75,239

 
—

 
75,239

Other assets
245,620

 
(41,530
)
(b)
204,090

Goodwill
924,847

 
—

 
924,847

Total assets
$
4,219,852

 
$
(235,711
)
 
$
3,984,141

Liabilities and equity
 
 
 
 
 
Liabilities:
 
 
 
 
 
Accounts payable and accrued liabilities
$
294,243

 
$
(3,599
)
(c)
$
290,644

Debt
3,216,572

 
(230,854
)
(b)
2,985,718

Other liabilities
60,549

 
(1,323
)
(b)
59,226

Total liabilities
3,571,364

 
(235,776
)
 
3,335,588

Commitments and contingencies
 
 
 
 
 
Redeemable noncontrolling interest
38,624

 
—

 
38,624

Redeemable equity component of convertible senior notes
6,126

 
—

 
6,126

Equity:
 
 
 
 
 
Convertible preferred stock
—

 
—

 
—

Common stock
253

 
—

 
253

Additional paid-in capital
110,533

 
—

 
110,533

Accumulated earnings
543,489

 
65

(d)
543,554

Accumulated other comprehensive loss
(57,822
)
 
—

 
(57,822
)
Total Encore Capital Group, Inc. stockholders’ equity
596,453

 
65

 
596,518

Noncontrolling interest
7,285

 
—

 
7,285

Total equity
603,738

 
65

 
603,803

Total liabilities, redeemable equity and equity
$
4,219,852

 
$
(235,711
)
 
$
3,984,141

See accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements



ENCORE CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Income For The Year Ended December 31, 2015
(In Thousands, Except Per Share Amounts)

 
Historical Financial Statement
 
Pro Forma Adjustments (e)
 
Pro Forma Financial Statement
Revenues
 
 
 
 
 
Revenue from receivable portfolios, net
$
1,072,436

 
$
—

 
$
1,072,436

Other revenues
60,696

 
(3,165
)
 
57,531

Net interest income
28,440

 
(28,440
)
 
—

Total revenues
1,161,572

 
(31,605
)
 
1,129,967

Operating expenses
 
 
 
 
 
Salaries and employee benefits
270,334

 
(8,053
)
 
262,281

Cost of legal collections
229,847

 
—

 
229,847

Other operating expenses
98,182

 
(4,972
)
 
93,210

Collection agency commissions
37,858

 
—

 
37,858

General and administrative expenses
196,827

 
(5,470
)
 
191,357

Depreciation and amortization
33,945

 
(785
)
 
33,160

Goodwill impairment
49,277

 
(49,277
)
 
—

Total operating expenses
916,270

 
(68,557
)
 
847,713

Income from operations
245,302

 
36,952

 
282,254

Other (expense) income
 
 
 
 
 
Interest expense
(186,556
)
 
—

 
(186,556
)
Other income
2,235

 
—

 
2,235

Total other expense
(184,321
)
 
—

 
(184,321
)
Income before income taxes
60,981

 
36,952

 
97,933

Provision for income taxes
(13,597
)
 
(13,565
)
 
(27,162
)
Net income
47,384

 
23,387

 
70,771

Net income attributable to noncontrolling interest
(2,249
)
 
—

 
(2,249
)
Net income attributable to Encore Capital Group, Inc. stockholders
$
45,135

 
$
23,387

 
$
68,522

 
 
 
 
 
 
Earnings per share attributable to Encore Capital Group, Inc.:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.75

 
$
0.91

 
$
2.66

Diluted
$
1.69

 
$
0.88

 
$
2.57

 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
Basic
25,722

 
25,722

 
25,722

Diluted
26,647

 
26,647

 
26,647

See accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements




ENCORE CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Income For The Year Ended December 31, 2014
(In Thousands, Except Per Share Amounts)

 
Historical Financial Statement
 
Pro Forma Adjustments (e)
 
Pro Forma Financial Statement
Revenues
 
 
 
 
 
Revenue from receivable portfolios, net
$
992,832

 
$
—

 
$
992,832

Other revenues
51,988

 
(1,391
)
 
50,597

Net interest income
27,969

 
(27,969
)
 
—

Total revenues
1,072,789

 
(29,360
)
 
1,043,429

Operating expenses
 
 
 
 
 
Salaries and employee benefits
246,247

 
(7,305
)
 
238,942

Cost of legal collections
205,661

 
—

 
205,661

Other operating expenses
93,859

 
(3,925
)
 
89,934

Collection agency commissions
33,343

 
—

 
33,343

General and administrative expenses
146,286

 
(6,309
)
 
139,977

Depreciation and amortization
27,949

 
(848
)
 
27,101

Total operating expenses
753,345

 
(18,387
)
 
734,958

Income from operations
319,444

 
(10,973
)
 
308,471

Other (expense) income
 
 
 
 
 
Interest expense
(166,942
)
 
—

 
(166,942
)
Other income
113

 
—

 
113

Total other expense
(166,829
)
 
—

 
(166,829
)
Income before income taxes
152,615

 
(10,973
)
 
141,642

Provision for income taxes
(52,725
)
 
4,156

 
(48,569
)
Income from continuing operations
99,890

 
(6,817
)
 
93,073

Loss from discontinued operations, net of tax
(1,612
)
 
—

 
(1,612
)
Net income
98,278

 
(6,817
)
 
91,461

Net loss attributable to noncontrolling interest
5,448

 
—

 
5,448

Net income attributable to Encore Capital Group, Inc. stockholders
$
103,726

 
$
(6,817
)
 
$
96,909

Amounts attributable to Encore Capital Group, Inc.:
 
 
 
 
 
Income from continuing operations
$
105,338

 
$
(6,817
)
 
$
98,521

Loss from discontinued operations, net of tax
(1,612
)
 
—

 
(1,612
)
Net income
$
103,726

 
$
(6,817
)
 
$
96,909

 
 
 
 
 
 
Earnings per share attributable to Encore Capital Group, Inc.:
 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share from:
 
 
 
 
 
Continuing operations
$
4.07

 
$
(0.26
)
 
$
3.81

Discontinued operations
$
(0.06
)
 
$
—

 
$
(0.06
)
Basic
$
4.01

 
$
(0.26
)
 
$
3.75

Diluted earnings (loss) per share from:
 
 
 
 
 
Continuing operations
$
3.83

 
$
(0.25
)
 
$
3.58

Discontinued operations
$
(0.06
)
 
$
—

 
$
(0.06
)
Diluted
$
3.77

 
$
(0.25
)
 
$
3.52

 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
Basic
25,853

 
25,853

 
25,853

Diluted
27,495

 
27,495

 
27,495

See accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements



ENCORE CAPITAL GROUP, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Income For The Year Ended December 31, 2013
(In Thousands, Except Per Share Amounts)

 
Historical Financial Statement
 
Pro Forma Adjustments (e)
 
Pro Forma Financial Statement
Revenues
 
 
 
 
 
Revenue from receivable portfolios, net
$
744,870

 
$
—

 
$
744,870

Other revenues
12,588

 
(1,181
)
 
11,407

Net interest income
15,906

 
(15,906
)
 
—

Total revenues
773,364

 
(17,087
)
 
756,277

Operating expenses
 
 
 
 
 
Salaries and employee benefits
165,040

 
(5,721
)
 
159,319

Cost of legal collections
186,959

 
—

 
186,959

Other operating expenses
66,649

 
(3,420
)
 
63,229

Collection agency commissions
33,097

 
—

 
33,097

General and administrative expenses
109,713

 
(2,900
)
 
106,813

Depreciation and amortization
13,547

 
(490
)
 
13,057

Total operating expenses
575,005

 
(12,531
)
 
562,474

Income from operations
198,359

 
(4,556
)
 
193,803

Other (expense) income
 
 
 
 
 
Interest expense
(73,269
)
 
—

 
(73,269
)
Other expense
(4,222
)
 
(3
)
 
(4,225
)
Total other expense
(77,491
)
 
(3
)
 
(77,494
)
Income before income taxes
120,868

 
(4,559
)
 
116,309

Provision for income taxes
(45,388
)
 
1,735

 
(43,653
)
Income from continuing operations
75,480

 
(2,824
)
 
72,656

Loss from discontinued operations, net of tax
(1,740
)
 
—

 
(1,740
)
Net income
73,740

 
(2,824
)
 
70,916

Net loss attributable to noncontrolling interest
1,559

 
—

 
1,559

Net income attributable to Encore Capital Group, Inc. stockholders
$
75,299

 
$
(2,824
)
 
$
72,475

Amounts attributable to Encore Capital Group, Inc.:
 
 
 
 
 
Income from continuing operations
$
77,039

 
$
(2,824
)
 
$
74,215

Loss from discontinued operations, net of tax
(1,740
)
 
—

 
(1,740
)
Net income
$
75,299

 
$
(2,824
)
 
$
72,475

 
 
 
 
 
 
Earnings per share attributable to Encore Capital Group, Inc.:
 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share from:
 
 
 
 
 
Continuing operations
$
3.12

 
$
(0.11
)
 
$
3.01

Discontinued operations
$
(0.07
)
 
$
—

 
$
(0.07
)
Basic
$
3.05

 
$
(0.11
)
 
$
2.94

Diluted earnings (loss) per share from:
 
 
 
 
 
Continuing operations
$
2.94

 
$
(0.11
)
 
$
2.83

Discontinued operations
$
(0.07
)
 
$
—

 
$
(0.06
)
Diluted
$
2.87

 
$
(0.11
)
 
$
2.77

 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
Basic
24,659

 
24,659

 
24,659

Diluted
26,204

 
26,204

 
26,204

See accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements



Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements


The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed consolidated financial information:
 
Adjustments to the pro forma condensed consolidated statement of financial condition

(a) Represents net cash received on sale less cash held at Propel which will transfer to buyer. The Company expects to use the proceeds to pay down the revolving credit facility and for general corporate purposes.

(b) Reflects the elimination of Propel’s historical assets and liabilities.

(c) Reflects the elimination of Propel’s historical accounts payable and accrued liabilities and adjustment for income taxes payable related to gain on sale.

(d) Represents the estimated gain on sale of Propel, less estimated income taxes payable. The actual gain to be recognized will be adjusted by the actual closing adjustments and actual transaction fees incurred. This estimated gain has not been reflected in the pro forma consolidated statement of income as it is considered to be nonrecurring in nature. No adjustment has been made to the sale proceeds to give effect to any potential post-closing adjustments under the terms of the purchase agreement.

Adjustments to the pro forma condensed consolidated statements of income

(e) Represents the elimination of Propel’s historical operating results for the periods presented. The anticipated nonrecurring after-tax gain on the sale is not reflected in the pro forma condensed consolidated statements of income.





Exhibit
Exhibit 99.2

Unaudited Pro Forma Non-GAAP Measures
In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.
Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.
Pro Forma Adjusted Income from Continuing Operations Per Share. The following table provides a reconciliation between income from pro forma continuing operations and pro forma diluted income from continuing operations per share attributable to Encore calculated in accordance with GAAP to pro forma adjusted income from continuing operations and pro forma adjusted income from continuing operations per share attributable to Encore, respectively including the effects of the divestiture of Propel. Adjusted income from continuing operations attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible notes, one-time charges, acquisition, integration and restructuring related expenses, and non-cash goodwill impairment charges, all net of tax. GAAP diluted earnings per share for the years ended December 31, 2015, 2014, and 2013, includes the effect of approximately 0.7 million, 1.1 million, and 0.6 million, respectively, common shares that are issuable upon conversion of certain convertible senior notes because the average stock price during the respective periods exceeded the conversion price of these notes. However, as described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, Note 9, “Debt—Encore Convertible Notes,” in the notes to our consolidated financial statements, we have certain hedging transactions in place that have the effect of increasing the effective conversion price of these notes. Accordingly, while these common shares are included in our diluted earnings per share, the hedge transactions will offset the impact of this dilution and no shares will be issued unless our stock price exceeds the effective conversion price, thereby creating a discrepancy between the accounting effect of those notes under GAAP and their economic impact. We have presented the following metrics both including and excluding the dilutive effect of these convertible senior notes to better illustrate the economic impact of those notes and the related hedging transactions to shareholders, with the GAAP item under the “Per Diluted Share-Accounting” and “Per Diluted Share-Economic” (non-GAAP) columns, respectively (in thousands, except per share data):
 
Year Ended December 31, 2015
 
Historical
 
Adjustments
 
Pro Forma
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
GAAP net income from continuing operations attributable to Encore, as reported
$
45,135

 
$
1.69

 
$
1.74

 
$
23,387

 
$
0.88

 
$
0.90

 
$
68,522

 
$
2.57

 
$
2.64

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible notes non-cash interest and issuance cost amortization, net of tax
6,896

 
0.26

 
0.26

 
—

 
—

 
—

 
6,896

 
0.26

 
0.26

Acquisition, integration and restructuring related expenses, net of tax
8,063

 
0.30

 
0.31

 
(16
)
 
0.00

 
0.00

 
8,047

 
0.30

 
0.31

CFPB / regulatory one-time charges, net of tax
42,554

 
1.60

 
1.64

 
—

 
—

 
—

 
42,554

 
1.60

 
1.64

Goodwill impairment, net of tax
31,187

 
1.17

 
1.20

 
(31,187
)
 
(1.17
)
 
(1.20
)
 
—

 
—

 
—

Adjusted income from continuing operations attributable to Encore
$
133,835

 
$
5.02

 
$
5.15

 
$
(7,816
)
 
$
(0.29
)
 
$
(0.30
)
 
$
126,019

 
$
4.73

 
$
4.85




 
Year Ended December 31, 2014
 
Historical
 
Adjustments
 
Pro Forma
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
GAAP net income from continuing operations attributable to Encore, as reported
$
105,338

 
$
3.83

 
$
3.99

 
$
(6,817
)
 
$
(0.25
)
 
$
(0.26
)
 
$
98,521

 
$
3.58

 
$
3.73

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible notes non-cash interest and issuance cost amortization, net of tax
6,413

 
0.23

 
0.24

 
—

 
—

 
—

 
6,413

 
0.23

 
0.24

Acquisition, integration and restructuring related expenses, net of tax
9,898

 
0.36

 
0.37

 
(316
)
 
(0.01
)
 
(0.01
)
 
9,582

 
0.35

 
0.36

Net effect of non-recurring tax adjustments
(2,291
)
 
(0.08
)
 
(0.08
)
 
—

 
—

 
—

 
(2,291
)
 
(0.08
)
 
(0.08
)
Adjusted income from continuing operations attributable to Encore
$
119,358

 
$
4.34

 
$
4.52

 
$
(7,133
)
 
$
(0.26
)
 
$
(0.27
)
 
$
112,225

 
$
4.08

 
$
4.25

 
Year Ended December 31, 2013
 
Historical
 
Adjustments
 
Pro Forma
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
 
$
 
Per Diluted
Share—
Accounting
 
Per  Diluted
Share—
Economic
GAAP net income from continuing operations attributable to Encore, as reported
$
77,039

 
$
2.94

 
$
3.01

 
$
(2,824
)
 
$
(0.11
)
 
$
(0.11
)
 
$
74,215

 
$
2.83

 
$
2.90

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible notes non-cash interest and issuance cost amortization, net of tax
3,274

 
0.12

 
0.13

 
—

 
—

 
—

 
3,274

 
0.12

 
0.13

Acquisition, integration and restructuring related expenses, net of tax
18,483

 
0.71

 
0.72

 
(182
)
 
(0.01
)
 
(0.01
)
 
18,301

 
0.70

 
0.71

Adjusted income from continuing operations attributable to Encore
$
98,796

 
$
3.77

 
$
3.86

 
$
(3,006
)
 
$
(0.12
)
 
$
(0.12
)
 
$
95,790

 
$
3.65

 
$
3.74