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)
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(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||||||
(Address of principal executive offices)(Zip Code)
(877 ) 445-4581
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(Former name or former address, if changed since last report.)
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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:
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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 May 5, 2021, 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 | ||||
Slide presentation of Encore Capital Group, Inc. dated May 5, 2021 | |||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | ||||
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 5, 2021 | /s/ Jonathan C. Clark | ||||||
Jonathan C. Clark | ||||||||
Executive Vice President, Chief Financial Officer and Treasurer | ||||||||
EXHIBIT INDEX
| Exhibit Number | Description | ||||
Slide presentation of Encore Capital Group, Inc. dated May 5, 2021 | |||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | ||||
Encore Capital Group, Inc. Q1 2021 EARNINGS CALL
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 ion thereof, or similar eaning of the Private Securities Litigation Reform Act of 1995 (the are not limited to, statements regarding our future operating results, earnings per share, growth, run rates and impacts of COVI he 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.
Q1 2021 HIGHLIGHTS 3 Encore delivered strong operational and financial performance in Q1 Portfolio purchases were $170M at a purchase price multiple of 2.4x Q1 share repurchases of $20M and authorization increased to $300M multi-year program
4 OUR BUSINESS AND OUR STRATEGY Our StrategyOur Business Purchase NPL portfolios at attractive cash returns Focus on the consumer and ensure the highest level of compliance Meet or exceed collection expectations Maintain efficient cost structure Minimize cost of funding Market Focus Competitive Advantage Balance Sheet Strength
5 MARKET FOCUS: Q1 FOR MCM CHARACTERIZED BY VERY STRONG COLLECTIONS RESULTING IN INCREASED OPERATING LEVERAGE Record collections of $436M grew 16% compared to Q1 2020 Call Center & Digital collections grew 25% compared to Q1 2020 Collections effectiveness and scalability enabled significant reduction in cost to collect Portfolio purchases of $92M in the U.S. were lower compared to Q1 2020 and purchase price multiple was 2.5x We are well-prepared to fully implement long-awaited CFPB industry rules, which are now expected to become effective in early 2022 MCM (U.S.) Business MCM Collections by Channel and CTC 39.6% 39.5% 34.5% 0 250 500 Q1 2019 Q1 2020 Q1 2021 Call Center & Digital Legal Collections Collection Agencies Cost to Collect $436M $375M $330M 56% 57% 62% 43% 42% 38%
6 MARKET FOCUS: Q1 FOR CABOT CHARACTERIZED BY IMPROVED COLLECTIONS Collections of $163M grew 13% compared to Q1 2020 and were 108% of Dec 31, 2020 ERC forecast1 normalize from COVID-related volatility Portfolio purchases of $78M in Europe were higher compared to Q1 2020, with prices generally returning to pre-COVID levels attractive returns Cabot (Europe) Business Cabot Collections and CTC 27.6% 29.9% 29.4% 0 Q1 2019 Q1 2020 Q1 2021 Collections Cost to Collect $163M $144M $161M 1) Includes collections only related to portfolios purchased prior to January 1, 2021.
COMPETITIVE ADVANTAGE: CONTINUED STRONG CASH GENERATION 7 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 FY 2018 FY 2019 FY 2020 LTM Q1 2021 Adjusted EBITDA Collections applied to principal balance 1) Cash Generation defined as Adjusted EBITDA + collections applied to principal balance. 2) See appendix for reconciliation of Adjusted EBITDA to GAAP net income. Adjusted EBITDA + Collections applied to principal balance ($M) Our cash generation is driven by our operational efficiency and portfolio resiliency up 12% vs LTM Q1 2020 LTM Q1 2021 Cash Generation1 2
8 COMPETITIVE ADVANTAGE: WE EXPECT TO DELIVER STRONG RETURNS THROUGH THE CREDIT CYCLE 1) See appendix for calculation of Pre-Tax ROIC (Return on Invested Capital) ROIC is an important measure of our overall performance Pre-Tax Return on Invested Capital1 10.1% 10.8% 12.5% 15.8% FY 2018 FY 2019 FY 2020 LTM Q1 2021
9 BALANCE SHEET STRENGTH: STRONG CASH GENERATION IN Q1 DROVE A FURTHER REDUCTION IN OUR LEVERAGE RATIO Leverage 1) Leverage Ratio defined as Net Debt / (Adjusted EBITDA + collections applied to principal balance). See appendix for reconciliation of Net Debt to GAAP Borrowings and Adjusted EBITDA to GAAP net income. 4.3x 3.4x 2.7x 2.5x 2.8x 2.7x 2.4x 2.1x 0 1 2 3 4 5 6 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Debt/Equity Leverage Ratio 1
10 Detailed Financial Discussion
Q1 2021 KEY FINANCIAL MEASURES 11 1) 180-month Estimated Remaining Collections 2) Attributable to Encore 3) See appendix for calculation of LTM Pre-Tax ROIC (Return on Invested Capital) 4) Leverage Ratio defined as Net Debt / (Adjusted EBITDA + collections applied to principal balance) Q1 2021 vs. Q1 2020 Collections $606M +15% Revenues $417M +44% Portfolio Purchases $170M -21% ERC1 $8.31B -2% GAAP Net Income2 $95M +$105M GAAP EPS $2.97 +$3.30 LTM Pre-Tax ROIC3 15.8% +640 bps Leverage Ratio4 2.1x -0.5x
12 COLLECTIONS OF $606M WERE UP 15% COMPARED TO Q1 LAST YEAR Collections by Geographic Location 0 100 200 300 400 500 600 2 0 1 9 2 0 2 0 2 0 1 9 2 0 2 0 2 0 1 9 2 0 2 0 2 0 2 0 2 0 2 1 Q2 Q3 Q4 Q1 United States Europe Other 537 606 515 499 499 527508 540 $M Year-to-date global collections1 through the first quarter of 2021 were at 117% of our 12/31/2020 ERC forecast 1) Includes collections only related to portfolios purchased prior to 12/31/2020. U.S. collections were at 121% and Europe collections were at 108% of our 12/31/2020 ERC forecast, respectively.
Q1 REVENUES OF $417M REFLECT OUR FOCUS ON THE U.S. AND EUROPE Revenues by Geographic Location 13 0 50 100 150 200 250 300 350 400 450 2 0 1 9 2 0 2 0 2 0 1 9 2 0 2 0 2 0 1 9 2 0 2 0 2 0 2 0 2 0 2 1 Q2 Q3 Q4 Q1 United States Europe Other $M 289 347 356 348 417426 404 383
14 ERC OF $8.3B WAS DOWN 2% COMPARED TO Q1 LAST YEAR Total Estimated Remaining Collections1 0 2,000 4,000 6,000 8,000 Q1 2019 Q1 2020 Q1 2021 United States Europe Other Geographies REO 7,336 8,459 8,309 $M 1) Q1 2019 ERC of $7,276M as reported did not include $60M of E
312 410 413 487 150 173 100 521 482 29 189 523 550 993 413 487 2021 2022 2023 2024 2025 2026 2027 2028 WE HAVE A DIVERSIFIED GLOBAL FUNDING STRUCTURE 15 Debt Maturity Profile at March 31, 2021 ($M) Note: At 03/31/2021, LTV Ratio (loan-to-value) = 38.8% (72.5% covenant), FCCR (Fixed Charge Coverage Ratio) = 8.4x (2.0x covenant). Each as calculated under our Senior Secured Note indentures. We repaid $161M of March 2021 convertible notes using existing liquidity Bonds, 51% Revolving Credit Facility, 16% Securitisation Facility, 15% Convertible Notes, 13% Private Placement Notes, 4% As of March 31, 2021, available senior facility was $530M, in addition to cash and cash equivalents of $162M1 1) Excludes cash held for clients of $23M.
OUR FINANCIAL PRIORITIES 16 Preserve financial flexibility Target leverage1 between 2.0x and 3.0x Maintain a strong BB debt rating Deliver strong ROIC through the credit cycle Balance Sheet Objectives Portfolio purchases at attractive returns Strategic M&A Share repurchases Capital Allocation Priorities 1) Leverage defined as Net Debt / (Adjusted EBITDA + collections applied to principal balance)
17 Appendix
KEY FINANCIAL MEASURES BY YEAR 18 2018 2019 2020 Collections $1.97B $2.03B $2.11B Revenues $1.36B $1.40B $1.50B Portfolio Purchases $1.13B $1.00B $0.66B ERC1 $7.22B $7.83B $8.53B GAAP Net Income2 $116M $168M $212M GAAP EPS $4.06 $5.33 $6.68 Pre-tax ROIC3 10.1% 10.8% 12.5% GAAP ROAE4 16.6% 18.2% 18.9% Leverage Ratio5 2.8x 2.7x 2.4x 1) 180-month Estimated Remaining Collections 2) Attributable to Encore 3) See appendix for calculation of Pre-Tax ROIC (Return on Invested Capital) 4) GAAP ROAE (Return on Average Equity) defined as 5) Leverage ratio defined as Net debt / (Adjusted EBITDA + collections applied to principal balance).
KEY FINANCIAL MEASURES BY QUARTER 19 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Collections $527M $508M $540M $537M $606M Revenues $289M $426M $404M $383M $417M Portfolio Purchases $214M $148M $170M $128M $170M ERC1 $8.46B $8.38B $8.46B $8.53B $8.31B GAAP Net Income2 ($10M) $130M $55M $37M $95M GAAP EPS ($0.33) $4.13 $1.72 $1.17 $2.97 LTM Pre-tax ROIC3 9.4% 11.9% 12.7% 12.5% 15.8% LTM GAAP ROAE4 12.2% 20.8% 21.3% 18.9% 29.1% Leverage Ratio5 2.6x 2.4x 2.4x 2.4x 2.1x 1) 180-month Estimated Remaining Collections 2) Attributable to Encore 3) See appendix for calculation of LTM Pre-Tax ROIC (Return on Invested Capital) 4) LTM GAAP ROAE (Return on Average Equity) defined as 5) Leverage ratio defined as Net debt / (Adjusted EBITDA + collections applied to principal balance).
20 LEVERAGE RATIOS at 03/31/18 at 06/30/18 at 09/30/18 at 12/31/18 Debt / Equity 5.9x 5.7x 4.6x 4.3x Net Debt / (LTM Adjusted EBITDA + LTM Collections applied to principal balance)1 3.2x 3.0x 2.9x 2.8x 1) See appendix for reconciliation of Adjusted EBITDA to GAAP net income and for reconciliation of Net Debt to GAAP Borrowings. at 03/31/19 at 06/30/19 at 09/30/19 at 12/31/19 Debt / Equity 4.1x 3.9x 3.7x 3.4x Net Debt / (LTM Adjusted EBITDA + LTM Collections applied to principal balance)1 2.8x 2.7x 2.7x 2.7x at 03/31/20 at 06/30/20 at 09/30/20 at 12/31/20 Debt / Equity 3.8x 3.2x 2.9x 2.7x Net Debt / (LTM Adjusted EBITDA + LTM Collections applied to principal balance)1 2.6x 2.4x 2.4x 2.4x at 03/31/21 Debt / Equity 2.5x Net Debt / (LTM Adjusted EBITDA + LTM Collections applied to principal balance)1 2.1x
21 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 Principl information concerning Adjusted EBITDA because management utilizes this information in the evaluation of its operations and believes that this measure is a usef 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 Pre-Tax ROIC as management uses this measure to monitor and evaluate operating performance relative to our invested capital and because the Company believes it is a useful measure for investors to evaluate effective use of capital. 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 from Operations (used in Pre-Tax ROIC) 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, income from operations, and total operating expenses as indicators of rmance. 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.
(Unaudited, in $ thousands) Twelve Months Ended 12/31/2020 12/31/2019 12/31/2018 GAAP net income, as reported $ 212,524 $ 168,909 $ 109,736 Interest expense 209,356 217,771 237,355 Loss on extinguishment of debt 40,951 8,989 2,693 Interest income (2,397) (3,693) (3,345) Provision for income taxes 70,374 32,333 46,752 Depreciation and amortization 42,780 41,029 41,228 CFPB settlement fees1 15,009 --- --- Stock-based compensation expense 16,560 12,557 12,980 Acquisition, integration and restructuring related expenses2 4,962 7,049 7,523 Loss on sale of Baycorp3 --- 12,489 --- Goodwill impairment3 --- 10,718 --- Net gain on fair value adjustments to contingent considerations4 --- (2,300) (5,664) Loss on derivative in connection with Cabot Transaction5 --- --- 9,315 Expenses related to withdrawn Cabot IPO6 --- --- 2,984 Adjusted EBITDA $ 610,119 $ 505,851 $ 461,557 Collections applied to principal balance7 $ 740,350 $ 765,748 $ 759,014 RECONCILIATION OF ADJUSTED EBITDA TO GAAP NET INCOME 22 1) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitor 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 co 3) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million and a loss on sale of $12.5 million during the year ended December 31, 2019. We believe the goodwill impairment charge and the loss on sale are not indicative of ongoing operations, therefore adjusting for these expenses enhances comparability to 4) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. 5) 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 futur 6) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot. 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 ou 7) For periods prior to January 1, 2020, amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios. For periods subsequent to January 1, 2020 amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) changes in expected recoveries. For consistency with the Company debt covenant reporting, for periods subsequent to June 30, 2020, the collections applied to principal balance also includes proceeds applied to basis from sales of REO assets and related activities; prior period amounts have not been adjusted to reflect this change as such amounts were immaterial.
(Unaudited, in $ thousands) Three Months Ended RECONCILIATION OF ADJUSTED EBITDA TO GAAP NET INCOME 23 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 co 2) The Baycorp Transaction resulted in a goodwill impairment charge of $10.7 million and a loss on sale of $12.5 million during the three and nine months ended September 30, 2019. We believe the goodwill impairment charge and the loss on sale are not indicative of ongoing operations, therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and 3) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for these amounts because we believe they are not indicative of ongoing operations; therefore, adjusting for them enhances comparability to prior periods, anticipated future periods, and our co 4) Amount represents the gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. 5) For periods prior to January 1, 2020, amount represents (a) (1) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios. For periods subsequent to January 1, 2020 amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) changes in expected recoveries. For consistency with the Company debt covenant reporting, for periods subsequent to June 30, 2020, the collections applied to principal balance also includes proceeds applied to basis from sales of REO assets and related activities; prior period amounts have not been adjusted to reflect this change as such amounts were immaterial. 06/30/19 09/30/19 12/31/19 03/31/20 06/30/20 09/30/20 12/31/20 03/31/21 GAAP net income (loss), as reported $ 36,822 $ 39,413 $ 43,232 $ (10,579) $ 130,784 $ 55,107 $ 37,212 $ 94,765 Interest expense 54,924 54,365 53,515 54,662 50,327 52,974 51,393 46,526 Loss on extinguishment of debt 8,989 - - - - 14,988 25,963 - Interest income (1,238) (590) (843) (1,000) (559) (394) (444) (474) Provision for income taxes 11,753 3,021 13,886 4,558 35,570 19,747 10,499 26,968 Depreciation and amortization 9,741 10,000 11,293 10,285 10,542 10,609 11,344 11,512 Stock-based compensation expense 3,581 4,005 3,145 4,527 4,778 3,884 3,371 3,405 Acquisition, integration and restructuring related expenses1 1,318 3,819 704 187 4,776 (23) 22 - Loss on Baycorp Transaction2 - 12,489 - - - - - - Goodwill impairment2 - 10,718 - - - - - - Settlement fees and related administrative expenses3 - - - - - 15,009 - - Net gain on fair value adjustments to contingent consideration4 (2,199) (101) - - - - - - Adjusted EBITDA $ 123,691 $ 137,139 $ 124,932 $ 62,640 $ 236,218 $ 171,901 $ 139,360 $ 182,702 Collections applied to principal balance5 $ 200,323 $ 174,663 $ 189,434 $ 268,575 $ 106,921 $ 172,406 $ 192,448 $ 229,510
CALCULATION OF ROIC RECONCILIATION OF ADJUSTED INCOME FROM OPERATIONS (in $ thousands) LTM 12/31/2020 LTM 12/31/2019 LTM 12/31/2018 Numerator GAAP Income from operations $ 533,562 $ 446,345 $ 405,300 Adjustments:1 CFPB settlement fees2 15,009 --- --- Acquisition, integration and restructuring related expenses3 154 7,049 9,041 Amortization of certain acquired intangible assets4 7,010 7,017 8,337 Goodwill impairment5 --- 10,718 --- Net gain on fair value adjustments to contingent considerations6 --- (2,300) (5,664) Expenses related to withdrawn Cabot IPO7 --- --- 2,984 Adjusted income from operations $ 555,735 $ 468,829 $ 419,998 Denominator Average net debt $ 3,311,835 $ 3,429,624 $ 3,388,336 Average equity 1,122,741 922,547 695,811 Average redeemable noncontrolling interest --- --- 75,989 Total invested capital $ 4,434,576 $ 4,352,171 $ 4,160,136 LTM Pre-tax ROIC 12.5% 10.8% 10.1% 24 1) Adjustments below are to adjust GAAP income from operations and accordingly do not include any amounts related to other income and expense. 2) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting 3) 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 co 4) We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers. 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 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. 5) The sale of Baycorp resulted in a goodwill impairment charge during the year ended December 31, 2019. We believe the goodwill impairment charge is not indicative of ongoing operations, therefore 6) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. 7) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot. 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 ou
LTM Q1 2020 LTM Q2 2020 LTM Q3 2020 LTM Q4 2020 LTM Q1 2021 Numerator GAAP Income from operations $ 382,489 $ 488,449 $ 522,559 $ 533,562 $ 654,675 Adjustments:1 CFPB settlement fees2 --- --- 15,009 15,009 15,009 Acquisition, integration and restructuring related expenses3 6,028 4,678 836 154 (33) Amortization of certain acquired intangible assets4 6,783 6,737 6,866 7,010 7,232 Goodwill impairment5 10,718 10,718 --- --- --- Net gain on fair value adjustments to contingent considerations6 (2,300) (101) --- --- --- Adjusted income from operations $ 403,718 $ 510,481 $ 545,270 $ 555,735 $ 676,883 Denominator Average net debt $ 3,417,019 $ 3,301,314 $3,274,693 $ 3,311,835 $ 3,181,033 Average equity 890,184 972,672 1,025,626 1,122,741 1,092,298 Total invested capital $ 4,307,203 $ 4,273,986 $ 4,300,319 $ 4,434,576 $ 4,273,331 LTM Pre-tax ROIC 9.4% 11.9% 12.7% 12.5% 15.8% CALCULATION OF ROIC RECONCILIATION OF ADJUSTED INCOME FROM OPERATIONS 25 1) Adjustments below are to adjust GAAP income from operations and accordingly do not include any amounts related to other income and expense. 2) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting 3) 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 co 4) We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers. 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 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. 5) The sale of Baycorp resulted in a goodwill impairment charge during the year ended December 31, 2019. We believe the goodwill impairment charge is not indicative of ongoing operations, therefore 6) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. (in $ thousands)
Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Numerator GAAP Income from operations $ 113,732 $ 108,345 $ 113,210 $47,202 $ 219,692 $ 142,455 $ 124,213 $ 168,314 Adjustments:1 CFPB settlement fees2 --- --- --- --- --- 15,009 --- --- Acquisition, integration and restructuring related expenses3 1,318 3,819 704 187 (32) (23) 22 --- Amortization of certain acquired intangible assets4 1,837 1,644 1,659 1,643 1,791 1,773 1,803 1,865 Goodwill impairment5 --- 10,718 --- --- --- --- --- --- Net gain on fair value adjustments to contingent considerations6 (2,199) (101) --- --- --- --- --- --- Adjusted income from operations $ 114,688 $ 124,425 $ 115,573 $ 49,032 $ 221,451 $ 159,214 $ 126,038 $ 170,179 LTM Adjusted income from operations $ 449,881 $ 464,837 $ 468,829 $ 403,718 $ 510,481 $545,270 $ 555,735 $ 676,883 CALCULATION OF ROIC RECONCILIATION OF ADJUSTED INCOME FROM OPERATIONS 26 1) We believe these amounts are not indicative of ongoing operations; therefore, adjusting for them enhances comparability to pr 2) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting 3) 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 co 4) We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers. 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 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. 5) The sale of Baycorp resulted in a goodwill impairment charge during the year ended December 31, 2019. We believe the goodwill impairment charge is not indicative of ongoing operations, therefore 6) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. (in $ thousands) Three Months Ending
03/31/21 GAAP Borrowings, as reported $ 3,152 Debt issuance costs and debt discounts 68 Cash & cash equivalents (185) Client cash1 23 Net Debt $ 3,058 RECONCILIATION OF NET DEBT 271) Client cash is cash that was collected on behalf of, and remains payable to, third party clients. 03/31/19 06/30/19 09/30/19 12/31/19 GAAP Borrowings, as reported $ 3,593 $ 3,530 $ 3,429 $ 3,513 Debt issuance costs and debt discounts 79 73 75 73 Cash & cash equivalents (167) (169) (187) (192) Client cash1 25 24 22 25 Net Debt $ 3,530 $ 3,459 $ 3,340 $ 3,419 03/31/18 06/30/18 09/30/18 12/31/18 GAAP Borrowings, as reported $ 3,607 $ 3,530 $ 3,561 $ 3,491 Debt issuance costs and debt discounts 77 70 89 85 Cash & cash equivalents (217) (182) (205) (157) Client cash1 26 23 26 22 Net Debt $ 3,493 $ 3,442 $ 3,472 $ 3,440 (Unaudited, in $ millions) Three Months Ended 03/31/20 06/30/20 09/30/20 12/31/20 GAAP Borrowings, as reported $ 3,404 $ 3,354 $3,252 $ 3,282 Debt issuance costs and debt discounts 69 63 107 92 Cash & cash equivalents (188) (294) (170) (189) Client cash1 19 21 20 20 Net Debt $ 3,304 $ 3,144 $ 3,209 $ 3,205
RECONCILIATION OF ADJUSTED OPERATING EXPENSES RELATED TO PORTFOLIO PURCHASING AND RECOVERY BUSINESS 06/30/19 09/30/19 12/31/19 03/31/20 06/30/20 09/30/20 12/31/20 03/31/21 GAAP total operating expenses, as reported $ 233,142 $ 247,591 $ 234,584 $ 241,879 $ 206,341 $ 261,221 $ 258,397 $ 248,523 Operating expenses related to non-portfolio purchasing and recovery business1 (42,232) (42,503) (42,373) (41,489) (42,386) (54,001) (45,054) (42,653) CFPB settlement fees2 --- --- --- --- --- (15,009) --- --- Stock-based compensation expense (3,581) (4,005) (3,145) (4,527) (4,778) (3,884) (3,371) (3,405) Gain on fair value adjustments to contingent considerations3 2,199 101 --- --- --- --- --- --- Goodwill impairment4 --- (10,718) --- --- --- --- --- --- Acquisition, integration and restructuring related expenses5 (1,318) (3,819) (704) (187) 32 23 (22) --- Adjusted operating expenses related to portfolio purchasing and recovery business $ 188,210 $ 186,647 $ 188,362 $ 195,676 $ 159,209 $ 188,350 $ 209,950 $ 202,465 28 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 a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior peri 3) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. 4) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million that is included in operating expenses during the year ended December 31, 2019. We believe the goodwill impairment charge is not indicative of ongoing operations, therefore, adjusting for the expense enhances comparability to prior periods, anticipated future results. 5) 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 ou (Unaudited, in $ thousands) Three Months Ended
BEGINNING IN Q1 2020, COST-TO-COLLECT INCLUDES 100% OF COURT COSTS, BRINGING ENCORE INTO ALIGNMENT WITH THE INDUSTRY 29 Overall Cost-to-Collect1 36.6% 31.3% 37.4% 34.9% 37.8% 39.1% 37.1% 33.4% 2 0 1 9 2 0 2 0 2 0 1 9 2 0 2 0 2 0 1 9 2 0 2 0 2 0 2 0 2 0 2 1 Q2 Q3 Q4 Q1 1) Cost-to-Collect = Adjusted operating expenses / collections. See appendix for reconciliation of Adjusted operating expenses to GAAP. Location Q1 2020 CTC Q1 2021 CTC United States 39.5% 34.5% Europe 29.9% 29.4% Other 52.6% 52.1% Encore total 37.1% 33.4%
IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES Three Months Ended 03/31/21 As Reported Constant Currency Revenues $417 $408 Operating expenses $249 $243 GAAP Net income1 $95 $92 GAAP EPS1 $2.97 $2.90 Collections $606 $595 ERC2 $8,309 $7,898 Debt2 $3,152 $2,963 30 Note: Constant Currency figures are calculated by employing Q1 2020 foreign currency exchange rates to recalculate Q1 2021 results. All constant currency values are calculated based on the average exchange rates during the respective periods, except for ERC and debt, which are 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 y conversion rate. Certain foreign subsid our calculation include the translation effect from their foreign operating results. 1. Attributable to Encore. 2. At March 31, 2021. (Unaudited, in $ millions, except per share amounts)