UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): August 3, 2017
______________________
ENCORE CAPITAL GROUP, INC.
(Exact Name of Registrant as Specified in Charter)
(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)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Item 2.02. Results of Operations and Financial Condition.
On August 3, 2017, Encore Capital Group, Inc. posted a slide presentation on its website. A copy of the slide presentation is furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated by reference herein.
The information in Item 2.02 of this Current Report on Form 8-K, including the information contained in Exhibit 99.1, is being furnished to the Securities and Exchange Commission pursuant to Item 2.02, and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by a specific reference in such filing.
Item 9.01. Financial Statements and Exhibits.
Exhibit Number | Description |
99.1 | Slide presentation of Encore Capital Group, Inc. dated August 3, 2017 |
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: August 3, 2017 | /s/ Jonathan C. Clark |
Jonathan C. Clark | |
Executive Vice President, Chief Financial Officer and Treasurer | |
EXHIBIT INDEX
Exhibit Number | Description |
99.1 | Slide presentation of Encore Capital Group, Inc. dated August 3, 2017. |
Encore Capital Group, Inc.
Q2 2017 EARNINGS CALL
Exhibit 99.1
2
CAUTIONARY NOTE ABOUT FORWARD-
LOOKING STATEMENTS
The statements in this presentation that are not
historical facts, including, most importantly, those
statements preceded by, or that include, the words
“will,” “may,” “believe,” “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, statements regarding our future
operating results, earnings per share, and
growth. 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 its 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 in the
reports filed by the Company with the Securities
and Exchange Commission, including its most
recent reports on Form 10-K and Form 10-Q, as
they may be amended from time to time. The
Company disclaims any intent or obligation to
update these forward-looking statements.
3
ENCORE UPDATE
4
U.S. MARKET CONTINUES TO DEMONSTRATE FAVORABLE
DYNAMICS FOR OUR BUSINESS
Supply improved in the second quarter
Banks continue to build their loan loss provisions
Issuers report delinquency and net charge-off rates continue to
increase
We expect supply will continue to grow
Pricing remains favorable
Better returns are generating more ERC for each dollar deployed
Year-to-date commitments for 2017 total more than $425 million
CFPB recently published September 2017 as updated time frame for Notice
of Proposed Rulemaking for debt collection
We are well-positioned for a strong year of deployments
at substantially better returns
5
OUR RECENT PURCHASES OF SIGNIFICANTLY MORE ACCOUNTS AND
ASSOCIATED CAPACITY EXPANSION REFLECT OUR ADAPTABILITY
Deploying capital more efficiently leads to acquiring more accounts
and the need for more collections capacity
We are willing to absorb this near-term expense in order to drive
higher IRRs and more favorable longer term returns
Previously mentioned capacity expansion remains on track
We continue to demonstrate our ability to adapt to changes in
market conditions
We are well-positioned to continue to benefit from favorable market conditions
6
CABOT HAS ESTABLISHED ITSELF AS THE LEADING DEBT BUYER
IN THE UNITED KINGDOM
Cabot had a strong purchasing quarter in Europe, deploying over
$90 million at solid returns
Cabot’s liquidation initiatives are driving sustained collections
improvement on many of its portfolios across a number of vintages
In May, became first credit management service company to be
authorized by the Central Bank of Ireland
Preparation for a Cabot IPO remains on track
7
ENCORE’S LEVERAGE RATIO IS SIGNIFICANTLY IMPACTED BY THE
CONSOLIDATION OF CABOT’S DEBT ON OUR BALANCE SHEET
Debt and Debt Ratios1
Upon consummation of a Cabot IPO, we intend to deconsolidate
Cabot from Encore’s financial statements
Encore
With Cabot
at 06/30/17
Without Cabot
at 06/30/17
Total Debt $2.734 B $1.297 B
Total Debt / (Adjusted EBITDA + Collections
applied to principal balance)2
2.65x 1.87x
Total Debt / Equity 4.94x 2.34x
1) Preferred equity certificates treated as equity. This represents the pro forma impact of removing Cabot’s debt from Encore’s financial
statements and does not represent a complete illustration of the deconsolidation of Cabot from Encore’s financial statements.
2) Ratio calculation method is materially consistent with covenants in Encore’s restated credit agreement and senior secured notes
8
Detailed Financial Discussion
9
ENCORE HAD A SOLID SECOND QUARTER
$0.88
Economic EPS2 GAAP EPS1
$0.77
GAAP Net Income1
$20.3
million
Adjusted Income2
$22.9
million
Estimated Remaining Collections of $6.3 billion
1) From continuing operations attributable to Encore
2) Please refer to Appendix for reconciliation of Economic EPS and Adjusted Income to GAAP
Collections
$446 million
10
WORLDWIDE DEPLOYMENTS IN Q2 WERE UP 6% COMPARED
TO THE SAME QUARTER A YEAR AGO
Q2 2017 Deployments
$M
United
States
$132
Europe
$92
Other
$22
Total $246
11
WORLDWIDE COLLECTIONS WERE UP 3% COMPARED TO Q2 2016
AND WERE UP 6% IN CONSTANT CURRENCY
Collections by Geography
0
100
200
300
400
500
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q3 Q4 Q1 Q2
Collection Sites Legal Collections Collection Agencies
$M
0
100
200
300
400
500
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q3 Q4 Q1 Q2
United States Europe Other
417
441 446 422
397
448 434
407
$M
Collections by Channel
417
441 446 422
397
448 434
407
Q2 REVENUE IN THE U.S. GREW 5% COMPARED TO Q2 2016
Revenue by Geography
12
-50
0
50
100
150
200
250
300
350
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q3 Q4 Q1 Q2
United States Europe Other
$M
289 291 279 291 272
289
179
271
13
ERC AT THE END OF Q2 REPRESENTS OUR HIGHEST LEVEL
TO DATE
Total Estimated Remaining Collections
0
1,000
2,000
3,000
4,000
5,000
6,000
June 2013 June 2014 June 2015 June 2016 June 2017
United States Europe Other
2,741
4,899
5,684
$M
5,537
6,256
ENCORE DELIVERED GAAP EPS OF $0.77 AND ECONOMIC EPS OF $0.88
IN THE SECOND QUARTER OF 2017
14
* Please refer to Appendix for reconciliation of Adjusted EPS / Economic EPS measurements to GAAP
$0.77
$0.02 ($0.10)
($0.04)
($0.03) $0.87 $0.88 $0.12
$0.13
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
Net income per
diluted share from
continuing
operations
attributable to
Encore
Convertible notes
non-cash interest
and issuance cost
amortization
Acquisition,
integration and
restructuring
related expenses
Amortization of
certain acquired
intangible assets
Gain on reversal
of contingent
consideration
Income tax effect
of the
adjustments
Adjustments
attributable to
noncontrolling
interest
Adjusted income
per diluted share
from continuing
operations
attributable to
Encore -
(Accounting)*
Adjusted income
per diluted share
from continuing
operations
attributable to
Encore -
(Economic)*
0.2M
shares
deducted
in
Q2 2017
SUMMARY
15
Q2 was a solid quarter of financial and operational performance
Supply continues to rise and prices remain favorable in the U.S.
Improved pricing and better liquidations drove YTD core
purchase price multiple to 2.0x through Q2
We’ve secured more than $425 million in commitments for 2017
Cabot’s progress continues
Strong purchasing quarter in the U.K.
Liquidation improvement initiatives delivering sustained
improved collections performance
Preparation for Cabot IPO remains on track
16
Q&A
17
Appendix
18
NON-GAAP FINANCIAL MEASURES
This presentation includes certain financial measures that exclude the impact of certain items and therefore have
not been calculated in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The Company
has included information concerning Adjusted EBITDA because management utilizes this information 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 Adjusted Operating Expenses in order to facilitate a comparison of
approximate cash costs to cash collections for the portfolio purchasing and recovery business in the periods
presented. The Company has included Adjusted Income Attributable to Encore and Adjusted Income Attributable to
Encore per Share (also referred to as Economic EPS when adjusted for certain shares associated with our
convertible notes that will not be issued but are reflected in the fully diluted share count for accounting purposes)
because management uses these measures to assess operating performance, in order to highlight trends in the
Company’s business that may not otherwise be apparent when relying on financial measures calculated in
accordance with GAAP. The Company has included impacts from foreign currency exchange rates to facilitate a
comparison of operating metrics that are unburdened by variations in foreign currency exchange rates over time.
Adjusted EBITDA, Adjusted Operating Expenses, Adjusted Income Attributable to Encore, Adjusted Income
Attributable to Encore per Share/Economic EPS, and impacts from foreign currency exchange rates have not been
prepared in accordance with GAAP. These non-GAAP financial measures should not be considered as alternatives
to, or more meaningful than, net income, net income per share, and total operating expenses as indicators of the
Company’s operating performance. Further, these non-GAAP financial measures, as presented by the Company,
may not be comparable to similarly titled measures reported by other companies. The Company has attached to
this presentation a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP
financial measures.
19
RECONCILIATION OF ADJUSTED INCOME AND
ECONOMIC / ADJUSTED EPS
Reconciliation of Adjusted Income and Economic / Adjusted EPS to GAAP EPS
(Unaudited, In Thousands, except per share amounts), Three Months Ended
June 30,
2017 2016
$
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
$ 20,255 $ 0.77 $ 0.77 $ 29,588 $ 1.14 $ 1.14
Adjustments:
Convertible notes non-cash interest and issuance cost amortization 3,078 0.12 0.12 2,921 0.11 0.11
Acquisition, integration and restructuring related expenses1 3,520 0.13 0.14 3,271 0.13 0.13
Gain on reversal of contingent consideration2 (2,773) (0.10) (0.10) --- --- ---
Settlement fees and related administrative expenses3 --- --- --- 698 0.03 0.03
Amortization of certain acquired intangible assets4 588 0.02 0.02 575 0.02 0.02
Income tax effect of the adjustments5 (943) (0.04) (0.04) (2,338) (0.09) (0.09)
Adjustments attributable to noncontrolling interest6 (812) (0.03) (0.03) (1,273) (0.05) (0.05)
Adjusted income from continuing operations attributable to Encore $ 22,913 $ 0.87 $ 0.88 $ 33,442 $ 1.29 $ 1.29
1) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these
expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
2) Amount represents a gain recognized as a result of reversing a liability for contingent consideration that was established when we acquired a debt solution service provider in Europe. We have adjusted for this amount
because we do not believe this is indicative of ongoing operations.
3) Amount represents litigation and government settlement fees and related administrative expenses. For the three months ended June 30, 2016, amount consists of settlement and administrative fees related to certain
TCPA settlements. We believe these fees and expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our
competitors’ results.
4) As we continue to acquire debt solution service providers around the world, the acquired intangible assets, such as trade names and customer relationships, have grown substantially. These intangible assets are
valued at the time of the acquisition and amortized over their estimated lives. We believe that amortization of acquisition-related intangible assets, especially the amortization of an acquired company’s trade names and
customer relationships, is the result of pre-acquisition activities. In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by operations during any reporting period. As a
result, the amortization of certain acquired intangible assets is excluded from our adjusted income from continuing operations attributable to Encore and adjusted income from continuing operations per share.
5) Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred.
6) Certain of the above pre-tax adjustments include expenses recognized by our partially-owned subsidiaries. This adjustment represents the portion of the non-GAAP adjustments that are attributable to noncontrolling
interest.
Reconciliation of Adjusted EBITDA to GAAP Net Income
(Unaudited, In $ Thousands) Three Months Ended
9/30/16 12/31/16 3/31/17 6/30/17
GAAP net income, as reported $ (51,946) $ 11,323 $ 14,979 $ 19,076
Adjustments:
(Income) loss from discontinued operations, net of tax --- (829) 199 ---
Interest expense 48,632 48,447 49,198 50,516
Interest income1 (694) (725) (779) (919)
Provision for income taxes (13,768) 28,374 12,067 13,531
Depreciation and amortization 8,032 8,740 8,625 8,672
Stock-based compensation expense 633 3,125 750 2,760
Acquisition, integration and restructuring related expenses2 3,843 7,457 855 3,520
Gain on reversal of contingent consideration3 --- (8,111) --- (2,773)
Settlement fees and related administrative expenses4 2,613 --- --- ---
Adjusted EBITDA $ (2,655) $ 97,801 $ 85,894 $ 94,383
Collections applied to principal balance5 247,427 147,203 188,893 173,946
RECONCILIATION OF ADJUSTED EBITDA
20
1) In the fourth quarter of 2016, we made a change to our presentation of adjusted EBITDA to adjust for interest income. In previous years we did not include interest income as an adjustment because it was
immaterial. We have updated prior periods for comparability.
2) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these
expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
3) Amounts in the second quarter of 2017 and in the fourth quarter of 2016 represent gains recognized as a result of reversing liabilities for contingent consideration that were established when we acquired two debt
solution service providers in Europe. We have adjusted for these amounts because we do not believe they are indicative of ongoing operations.
4) Amount represents litigation and government settlement fees and related administrative expenses. Amount consists of settlement and administrative fees related to certain TCPA settlements. We believe these fees
and expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
5) Collections applied to principal balance represents (a) gross collections from receivable portfolios less (b) revenue from receivable portfolios, net.
Reconciliation of Adjusted Operating Expenses to GAAP Operating Expenses
(Unaudited, In $ Thousands) Three Months Ended
RECONCILIATION OF ADJUSTED OPERATING EXPENSES
9/30/15 12/31/15 3/31/16 6/30/16 9/30/16 12/31/16 3/31/17 6/30/17
GAAP total operating expenses, as reported $ 248,185 $ 206,271 $ 205,513 $ 197,695 $ 200,597 $ 183,939 $ 196,100 $ 210,323
Adjustments:
Stock-based compensation expense (5,156) (4,749) (3,718) (5,151) (633) (3,125) (750) (2,760)
Operating expenses related to non-portfolio
purchasing and recovery business1
(20,835) (26,144) (26,885) (28,253) (26,446) (29,291) (27,946) (26,984)
Acquisition, integration and restructuring related
expenses2
(2,235) (2,635) (3,059) (3,271) (3,843) (7,457) (855) (3,520)
Gain on reversal of contingent consideration3 --- --- --- --- --- 8,111 --- 2,773
Settlement fees and related administrative expenses4 (54,697) --- (2,988) (698) (2,613) --- --- ---
Adjusted operating expenses related to portfolio
purchasing and recovery business
$ 165,262 $ 172,743 $ 168,863 $ 160,322 $ 167,062 $ 152,177 $ 166,549 $ 179,832
21
1) Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily engage in fee-based business, as well as corporate overhead
not related to our portfolio purchasing and recovery business.
2) Amount represents acquisition, integration and restructuring related operating expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting
for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
3) Amounts in the second quarter of 2017 and in the fourth quarter of 2016 represent gains recognized as a result of reversing liabilities for contingent consideration that were established when we acquired two debt
solution service providers in Europe. We have adjusted for these amounts because we do not believe they are indicative of ongoing operations.
4) Amount represents litigation and government settlement fees and related administrative expenses. Amount in third quarter of 2015 represents the consent order with the CFPB that we entered into in September
2015. Amounts in the first, second and third quarters of 2016 represent settlement and administrative fees related to certain TCPA settlements. We believe these fees and expenses are not indicative of ongoing
operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
(Unaudited, In Millions, except per share amounts)
IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY
EXCHANGE RATES
Three Months Ended
6/30/17
As Reported
Constant
Currency
Revenue $ 291 $ 302
Operating expenses $ 210 $ 216
Net income* $ 20 $ 21
Adjusted net income* $ 23 $ 24
GAAP EPS* $ 0.77 $ 0.80
Economic EPS* $ 0.88 $ 0.91
Collections $ 446 $ 461
ERC $ 6,256 $ 6,336
22
* From continuing operations attributable to Encore.
Note: Constant Currency figures are calculated by employing Q2 2016 foreign currency exchange rates to recalculate Q2 2017 results. All constant currency values are calculated based on
the average exchange rates during the respective periods, except for ERC, which is calculated using the changes in the period-ending exchange rates. Management refers to operating results
on a constant currency basis so that the operating results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons
of the company's operating performance. Constant currency financial results are calculated by translating current period financial results in local currency using the prior period’s respective
currency conversion rate. Certain foreign subsidiaries’ local currency financial results in our calculation include the translation effect from their foreign operating results.
COST-TO-COLLECT REFLECTS HIGHER LEGAL SPENDING IN
THE U.S. PARTIALLY OFFSET BY LOWER COSTS IN EUROPE
23
Overall Cost-to-Collect1
39.2%
41.1% 41.5%
38.4% 37.7% 37.8% 36.9%
40.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2
0
1
5
2
0
1
6
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q3 Q4 Q1 Q2
1. Cost-to-Collect = Adjusted operating expenses / collections. See appendix for reconciliation of Adjusted operating expenses to GAAP.
2. Cost-to-collect in Q3 2016 includes the impact of $11 million adjustment to deferred court cost receivable in Europe.
Location
Q2 2017
CTC
Q2 2016
CTC
United States 44.5% 39.0%
Europe 29.7% 31.1%
Other 48.1% 42.9%
Encore total 40.3% 36.9%
2