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) |
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)) |
Exhibit Number | Description |
99.1 | Press release dated November 7, 2018 |
ENCORE CAPITAL GROUP, INC. | |
Date: November 7, 2018 | /s/ Jonathan C. Clark |
Jonathan C. Clark | |
Executive Vice President, Chief Financial Officer and Treasurer |
Exhibit Number | Description |
99.1 |
• | Completion of the Cabot transaction creates largest global debt purchaser |
• | Encore sets new records for collections and estimated remaining collections |
• | GAAP EPS from continuing operations of $0.69 per share |
• | Non-GAAP Economic EPS from continuing operations of $1.19 per share |
• | Estimated remaining collections (ERC) increased 10% compared to the same period of the prior year, to a record $7.2 billion. |
• | Portfolio purchases were $249 million, including $123 million in the U.S. and $115 million in Europe, compared to $292 million deployed overall in the same period a year ago. |
• | Gross collections increased 13% to a record $499 million, compared to $443 million in the same period of the prior year. |
• | Total revenues, adjusted by net allowances, increased 10% to $337 million, compared to $307 million in the third quarter of 2017. |
• | Total operating expenses were $239 million, compared to $203 million in the same period of the prior year. Incremental operating expenses in the third quarter of 2018 included expenses related to the completion of the Cabot acquisition in the quarter, in addition to expenses associated with Wescot, acquired by Encore’s Cabot subsidiary during the fourth quarter of 2017. |
• | Adjusted operating expenses, which represent the expenses related to our portfolio purchasing and recovery business, increased 6% to $180 million, compared to $170 million in the same period of the prior year. |
• | Total interest expense increased to $65.1 million, compared to $52.8 million in the same period of the prior year, principally as a result of costs related to a Cabot refinancing, Encore’s purchase of the remaining interest in Cabot, higher average debt balances related to larger investments in receivables, and increases in the cost of short-term borrowing. |
• | GAAP net income attributable to Encore was $20.7 million, or $0.69 per fully diluted share, as compared to $28.2 million, or $1.05 per fully diluted share in the same period a year ago. |
• | Adjusted income attributable to Encore was $35.8 million, compared to $30.7 million in the third quarter of 2017. Adjusted income attributable to Encore per share (also referred to as Economic EPS) was $1.19, compared to $1.17 in the same period of the prior year. |
• | As of September 30, 2018, after taking into account borrowing base and applicable debt covenants, available capacity under Encore’s U.S. revolving credit facility, was $178 million and availability under Cabot’s revolving credit facility was £77 million (approximately $100 million). These figures do not include cash on the balance sheet. |
September 30, 2018 | December 31, 2017 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 204,649 | $ | 212,139 | |||
Investment in receivable portfolios, net | 3,109,116 | 2,890,613 | |||||
Deferred court costs, net | 94,017 | 79,963 | |||||
Property and equipment, net | 96,429 | 76,276 | |||||
Other assets | 244,602 | 302,728 | |||||
Goodwill | 898,591 | 928,993 | |||||
Total assets | $ | 4,647,404 | $ | 4,490,712 | |||
Liabilities and Equity | |||||||
Liabilities: | |||||||
Accounts payable and accrued liabilities | $ | 274,213 | $ | 284,774 | |||
Debt, net | 3,561,467 | 3,446,876 | |||||
Other liabilities | 33,279 | 35,151 | |||||
Total liabilities | 3,868,959 | 3,766,801 | |||||
Commitments and contingencies | |||||||
Redeemable noncontrolling interest | 1,231 | 151,978 | |||||
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, 30,852 shares and 25,801 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | 309 | 258 | |||||
Additional paid-in capital | 207,985 | 42,646 | |||||
Accumulated earnings | 673,153 | 616,314 | |||||
Accumulated other comprehensive loss | (103,394 | ) | (77,356 | ) | |||
Total Encore Capital Group, Inc. stockholders’ equity | 778,053 | 581,862 | |||||
Noncontrolling interest | (839 | ) | (9,929 | ) | |||
Total equity | 777,214 | 571,933 | |||||
Total liabilities, redeemable equity and equity | $ | 4,647,404 | $ | 4,490,712 |
September 30, 2018 | December 31, 2017 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 471 | $ | 88,902 | |||
Investment in receivable portfolios, net | 444,503 | 1,342,300 | |||||
Deferred court costs, net | — | 26,482 | |||||
Property and equipment, net | — | 23,138 | |||||
Other assets | 8,212 | 122,263 | |||||
Goodwill | — | 724,054 | |||||
Liabilities | |||||||
Accounts payable and accrued liabilities | $ | 3,514 | $ | 151,208 | |||
Debt, net | 390,690 | 2,014,202 | |||||
Other liabilities | — | 1,494 |
Three Months Ended September 30, | |||||||
2018 | 2017 | ||||||
Revenues | |||||||
Revenue from receivable portfolios | $ | 295,357 | $ | 264,024 | |||
Other revenues | 37,388 | 23,111 | |||||
Total revenues | 332,745 | 287,135 | |||||
Allowance reversals on receivable portfolios, net | 4,029 | 19,564 | |||||
Total revenues, adjusted by net allowances | 336,774 | 306,699 | |||||
Operating expenses | |||||||
Salaries and employee benefits | 95,634 | 77,232 | |||||
Cost of legal collections | 50,473 | 48,094 | |||||
Other operating expenses | 30,691 | 25,859 | |||||
Collection agency commissions | 10,682 | 10,622 | |||||
General and administrative expenses | 41,893 | 32,500 | |||||
Depreciation and amortization | 9,873 | 8,522 | |||||
Total operating expenses | 239,246 | 202,829 | |||||
Income from operations | 97,528 | 103,870 | |||||
Other (expense) income | |||||||
Interest expense | (65,094 | ) | (52,755 | ) | |||
Other (expense) income | (2,539 | ) | 8,873 | ||||
Total other expense | (67,633 | ) | (43,882 | ) | |||
Income from operations before income taxes | 29,895 | 59,988 | |||||
Provision for income taxes | (16,879 | ) | (17,844 | ) | |||
Net income | 13,016 | 42,144 | |||||
Net loss (income) attributable to noncontrolling interest | 7,709 | (13,950 | ) | ||||
Net income | $ | 20,725 | $ | 28,194 | |||
Earnings (loss) per share attributable to Encore Capital Group, Inc.: | |||||||
Basic | $ | 0.69 | $ | 1.08 | |||
Diluted | $ | 0.69 | $ | 1.05 | |||
Weighted average shares outstanding: | |||||||
Basic | 29,867 | 26,011 | |||||
Diluted | 30,121 | 26,736 |
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
Operating activities: | |||||||
Net income | $ | 63,703 | $ | 76,199 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Loss from discontinued operations, net of income taxes | — | 199 | |||||
Depreciation and amortization | 31,232 | 25,819 | |||||
Other non-cash expense, net | 30,453 | 24,768 | |||||
Stock-based compensation expense | 10,452 | 7,041 | |||||
Loss (gain) on derivative instruments, net | 10,648 | (2,714 | ) | ||||
Deferred income taxes | 18,733 | (5,396 | ) | ||||
Allowance reversals on receivable portfolios, net | (31,472 | ) | (30,525 | ) | |||
Other, net | (9,690 | ) | 330 | ||||
Changes in operating assets and liabilities | |||||||
Deferred court costs and other assets | (19,537 | ) | (20,094 | ) | |||
Prepaid income tax and income taxes payable | 21,419 | 15,565 | |||||
Accounts payable, accrued liabilities and other liabilities | (5,919 | ) | (9,501 | ) | |||
Net cash provided by operating activities | 120,022 | 81,691 | |||||
Investing activities: | |||||||
Cash paid for acquisitions, net of cash acquired | — | (5,623 | ) | ||||
Purchases of receivable portfolios, net of put-backs | (881,789 | ) | (739,478 | ) | |||
Collections applied to investment in receivable portfolios, net | 615,010 | 549,544 | |||||
Purchases of property and equipment | (37,436 | ) | (20,518 | ) | |||
(Payment) proceeds from derivative instruments, net | (28,656 | ) | 6,140 | ||||
Other, net | 6,800 | 2,155 | |||||
Net cash used in investing activities | (326,071 | ) | (207,780 | ) | |||
Financing activities: | |||||||
Payment of loan costs | (6,440 | ) | (19,910 | ) | |||
Proceeds from credit facilities | 766,471 | 928,141 | |||||
Repayment of credit facilities | (465,666 | ) | (972,453 | ) | |||
Proceeds from senior secured notes | — | 325,000 | |||||
Repayment of senior secured notes | (1,029 | ) | (203,212 | ) | |||
Proceeds from issuance of convertible senior notes | 172,500 | 150,000 | |||||
Repayment of convertible senior notes | — | (60,406 | ) | ||||
Proceeds from convertible hedge instruments | — | 5,580 | |||||
Proceeds from other debt | 9,090 | 8,318 | |||||
Repayment of other debt | (23,450 | ) | (4,309 | ) | |||
Payment for the purchase of PECs and noncontrolling interest | (234,101 | ) | — | ||||
Payment of direct and incremental costs relating to Cabot Transaction | (8,622 | ) | — | ||||
Other, net | (3,826 | ) | (1,440 | ) | |||
Net cash provided by financing activities | 204,927 | 155,309 | |||||
Net (decrease) increase in cash and cash equivalents | (1,122 | ) | 29,220 | ||||
Effect of exchange rate changes on cash and cash equivalents | (6,368 | ) | 9,261 | ||||
Cash and cash equivalents, beginning of period | 212,139 | 149,765 | |||||
Cash and cash equivalents, end of period | $ | 204,649 | $ | 188,246 |
Three Months Ended September 30, | |||||||||||||||||||
2018 | 2017 | ||||||||||||||||||
$ | Per Diluted Share— Accounting and Economic | $ | Per Diluted Share— Accounting | Per Diluted Share— Economic | |||||||||||||||
GAAP net income from continuing operations attributable to Encore, as reported | $ | 20,725 | $ | 0.69 | $ | 28,194 | $ | 1.05 | $ | 1.07 | |||||||||
Adjustments: | |||||||||||||||||||
Convertible notes and exchangeable notes non-cash interest and issuance cost amortization | 3,719 | 0.12 | 3,135 | 0.12 | 0.12 | ||||||||||||||
Acquisition, integration and restructuring related expenses(1) | 12,458 | 0.41 | 342 | 0.01 | 0.01 | ||||||||||||||
Amortization of certain acquired intangible assets(2) | 1,947 | 0.07 | 803 | 0.03 | 0.03 | ||||||||||||||
Loss on derivatives in connection with the Cabot Transaction(3) | 2,737 | 0.09 | — | — | — | ||||||||||||||
Income tax effect of above non-GAAP adjustments and certain discrete tax items(4) | (2,335 | ) | (0.08 | ) | (1,321 | ) | (0.04 | ) | (0.04 | ) | |||||||||
Adjustments attributable to noncontrolling interest(5) | (3,474 | ) | (0.11 | ) | (461 | ) | (0.02 | ) | (0.02 | ) | |||||||||
Adjusted income attributable to Encore | $ | 35,777 | $ | 1.19 | $ | 30,692 | $ | 1.15 | $ | 1.17 |
(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) | 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. |
(3) | Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction. We adjust for this amount because we believe the loss is not indicative of ongoing operations; therefore adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors’ results. |
(4) | 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. Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing operations. |
(5) | 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. |
Three Months Ended September 30, | |||||||
2018 | 2017 | ||||||
GAAP total operating expenses, as reported | $ | 239,246 | $ | 202,829 | |||
Adjustments: | |||||||
Operating expenses related to non-portfolio purchasing and recovery business(1) | (45,980 | ) | (28,934 | ) | |||
Acquisition, integration and restructuring related expenses(2) | (8,475 | ) | (342 | ) | |||
Stock-based compensation expense | (5,007 | ) | (3,531 | ) | |||
Adjusted operating expenses related to portfolio purchasing and recovery business | $ | 179,784 | $ | 170,022 |
(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 (excluding amounts already included in stock-based compensation expense). 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. |