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): February 21, 2018
______________________
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 February 21, 2018, 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 | |
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: February 21, 2018 | /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 February 21, 2018. |
Encore Capital Group, Inc.
Q4 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 ON PATH TOWARD LONG-TERM
GROWTH
After growing more than 15% in 2016, supply in the U.S. grew more than 20% in
2017 – on track for continued growth in 2018 and beyond
Federal Reserve reports revolving credit in the U.S. reached another all-time high
in December 2017
Banks are indicating charge-off rates should continue to increase
Pricing environment remains favorable
Fresh paper segment has become much larger than the market for older
seasoned paper, consistent with Encore’s capacity expansion
Liquidation improvement programs continue to drive better returns
Q4 was a strong purchasing quarter as Encore deployed $170M in the U.S.
Forward flow commitments for 2018 have already surpassed
our total deployments in the U.S. during 2017
5
OUR CABOT CREDIT MANAGEMENT SUBSIDIARY DELIVERED
SOLID FINANCIAL RESULTS IN 2017
Cabot deployed ~$88M of capital in new portfolio
purchases in Q4 and ~$420M in 2017
Cabot’s liquidation improvement initiatives continue
to drive better sustained collections performance
Sustained collections overperformance prompted an allowance reversal of
approximately $8M in Q4
Cabot completed its acquisition of Wescot in Q4 and is now both the largest
debt buyer and debt servicer in the United Kingdom
The Cabot IPO was withdrawn in November 2017 due to an unfavorable
IPO environment and poor conditions in the European equity markets
6
WE REMAIN COMMITTED TO IMPROVING THE CONSUMER EXPERIENCE AS
WELL AS STRINGENT COMPLIANCE & RISK MANAGEMENT PRINCIPLES
Issuers remain focused on managing their reputational risk through
consistency in consumer interaction standards
Encore garners consistent accolades for superior issuer audit performance,
which remains a competitive advantage
Encore’s initiatives aimed at improving the consumer experience - in addition
to our sophisticated approach toward compliance and risk management - are
driving higher industry-wide thresholds of issuer expectation
We seek a regulatory framework that places value on treating consumers
fairly and provides them with sensible solutions based on reliable, accurate
information
We expect federal and state regulators to continue to promote high standards
for our industry – and we believe Encore is ahead of the curve
7
Detailed Financial Discussion
8
ENCORE’S FOURTH QUARTER 2017 GAAP EPS WAS $0.48
$1.05
Economic EPS2 GAAP EPS1
$0.48
GAAP Net Income1
$12.7
million
Adjusted Income2
$27.7
million
Estimated Remaining Collections of $7.0 billion
1) From continuing operations attributable to Encore
2) Please refer to Appendix for reconciliation of Economic EPS and Adjusted Income to GAAP
Collections
$438 million
9
ENCORE’S FULL-YEAR 2017 GAAP EPS WAS $3.16
$4.04
Economic EPS2 GAAP EPS1
$3.16
GAAP Net Income1
$83.4
million
Adjusted Income2
$106.0
million
Estimated Remaining Collections of $7.0 billion
Collections
$1.8 billion
1) From continuing operations attributable to Encore
2) Please refer to Appendix for reconciliation of Economic EPS and Adjusted Income to GAAP
United
States
$536
Europe
$464
Other
$58
10
2017 DEPLOYMENTS REFLECT A BALANCED YEAR OF U.S. AND
INTERNATIONAL PORTFOLIO PURCHASING
Q4-2017 Deployments 2017 Deployments
$M
Total $1,058 Total $301
United States
$170
Europe
$110
Other
$22
11
FOURTH QUARTER COLLECTIONS REFLECT GROWTH IN THE U.S.
AND IN EUROPE COMPARED TO A YEAR AGO
Collections by Geography
0
100
200
300
400
500
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q1 Q2 Q3 Q4
Collection Sites Legal Collections Collection Agencies
$M
0
100
200
300
400
500
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q1 Q2 Q3 Q4
United States Europe Other
397
441 446 443 438 448 434
407
$M
Collections by Channel
438 441 446 443
397
448 434
407
12
ENCORE’S ANNUAL GLOBAL COLLECTIONS REACHED AN ALL-TIME
HIGH IN 2017
Collections by Geography
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2013 2014 2015 2016 2017
United States Europe Other
1,768
1,280
1,607
$M
1,701 1,686
Q4 REVENUE REFLECTS OUR GROWTH IN EUROPE
Revenue by Geography
13
-50
0
50
100
150
200
250
300
350
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q1 Q2 Q3 Q4
United States Europe Other
$M
289 291
307 317
272
289
179
271
2017 WORLDWIDE REVENUE REFLECTS THE IMPACTS OF PAST PORTFOLIO
ALLOWANCES AND REVERSALS AS WELL AS OUR GROWTH IN EUROPE
Revenue by Geography
14
$M
0
200
400
600
800
1,000
1,200
2013 2014 2015 2016 2017
United States Europe Other
$M 1,187
756
1,043
1,130
1,029
15
ESTIMATED REMAINING COLLECTIONS GREW $1.1 BILLION IN 2017 TO
SET A NEW ENCORE ALL-TIME HIGH
Total Estimated Remaining Collections
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2013 2014 2015 2016 2017
United States Europe Other
6,955
3,990
5,203
$M
5,711 5,840
ENCORE DELIVERED GAAP EPS OF $0.48 AND ECONOMIC EPS OF $1.05 IN THE
FOURTH QUARTER OF 2017
Three Months Ended December 31, 2017
16
• Please refer to Appendix for reconciliation of Adjusted EPS / Economic EPS measurements to GAAP.
• In total, $1.05 Economic EPS includes $0.40 of adjustments to Cabot’s EPS contribution after tax and noncontrolling interest, consisting primarily of a portion of expenses related to the
withdrawn Cabot IPO as well as restructuring charges related to Cabot’s acquisition of Wescot.
$0.48
$0.58
$0.06 $0.05 ($0.16)
($0.53)
$1.05 $1.05
$0.12
$0.45
$0.00
$0.25
$0.50
$0.75
$1.00
$1.25
$1.50
$1.75
$2.00
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
Expenses
related to
withdrawn
Cabot IPO
Amortization of
certain acquired
intangible
assets
Impact from tax
reform
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)*
No
shares
deducted
in
Q4 2017
ENCORE DELIVERED GAAP EPS OF $3.16 AND ECONOMIC EPS OF $4.04 IN 2017
Year Ended December 31, 2017
17
* Please refer to Appendix for reconciliation of Adjusted EPS / Economic EPS measurements to GAAP
$3.16
$0.58 $0.13
$0.05 ($0.11) ($0.30)
($0.60)
$4.01 $4.04
$0.47
$0.63
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
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
Expenses
related to
withdrawn
Cabot IPO
Amortization
of certain
acquired
intangible
assets
Impact from
tax reform
Net gain on
fair value
adjustments to
contingent
considerations
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
2017
18
ENCORE’S LEVERAGE RATIO IS SIGNIFICANTLY IMPACTED BY THE
CONSOLIDATION OF CABOT’S DEBT ON OUR BALANCE SHEET
Debt and Debt Ratios1
Although we fully consolidate Cabot’s debt on our balance sheet,
Cabot’s debt is non-recourse to Encore
Encore
With Cabot
at 12/31/17
Without Cabot
at 12/31/17
Total Debt $3.194 B $1.433 B
Total Debt / (Adjusted EBITDA + Collections
applied to principal balance)2
2.96x 2.08x
Total Debt / Equity 5.49x 2.46x
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
19
SUMMARY AND 2018 EXPECTATIONS
The U.S. market remains strong
Forward flow commitments for 2018 have already surpassed our
total deployments in the U.S. during 2017
Cabot had a record year for capital deployment for 2017
We plan to invest, including the savings from changes in our tax
rates, in expanding our operational capacity in call centers and
internal legal collections
We expect our annual earnings growth rate in 2018 to be
comparable to what it was in 2017
We are well-positioned to benefit from favorable market conditions
in 2018 and beyond
20
Q&A
21
Appendix
22
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.
23
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
December 31,
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 $ 12,681 $ 0.48 $ 0.48 $ 21,983 $ 0.85 $ 0.85
Adjustments:
Convertible notes non-cash interest and issuance cost amortization 3,126 0.12 0.12 3,017 0.12 0.12
Acquisition, integration and restructuring related expenses1 11,911 0.45 0.45 7,457 0.29 0.29
Net gain on fair value adjustments to contingent considerations2 (49) --- --- (8,111) (0.31) (0.31)
Amortization of certain acquired intangible assets3 1,610 0.06 0.06 415 0.02 0.02
Expenses related to withdrawn Cabot IPO4 15,339 0.58 0.58 --- --- ---
Income tax effect of the adjustments5 (4,183) (0.16) (0.16) (3,693) (0.15) (0.15)
Adjustments attributable to noncontrolling interest6 (13,965) (0.53) (0.53) (2,402) (0.10) (0.10)
Impact from tax reform7 1,182 0.05 0.05 --- --- ---
Adjusted income from continuing operations attributable to Encore $ 27,652 $ 1.05 $ 1.058 $ 18,666 $ 0.72 $ 0.72
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 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.
3) 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, particularly in recent quarters. 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.
4) In October 2017, Cabot announced its intention to proceed with an initial public offering and to apply for admission of its ordinary shares to the premium listing segment of the Official List of the Financial Conduct Authority and to
trade on the main market for listed securities of the London Stock Exchange. In November 2017, Encore announced that Cabot has decided to not go forward with its previously announced initial public offering as a result of poor
performance of other IPOs on the London Stock Exchange and unfavorable equity market conditions in the U.K. 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.
5) Amount represents the total income tax effect of the adjustments, which is 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.
7) As a result of the Tax Reform Act, we incurred a net additional tax expense of approximately $1.2 million. We believe the Tax Reform Act related expenses are not indicative of our ongoing operations, therefore adjusting for these
expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. Refer to Note 12 “Income Taxes” in the notes to our consolidated financial statements for further details.
8) This EPS total includes $0.40 of adjustments to Cabot’s EPS contribution after tax and noncontrolling interest, consisting primarily of a portion of expenses related to the withdrawn Cabot IPO as well as restructuring charges related
to Cabot’s acquisition of Wescot.
24
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), Twelve Months Ended
December 31,
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 $ 83,427 $ 3.16 $ 3.18 $ 78,923 $ 3.05 $ 3.05
Adjustments:
Convertible notes non-cash interest and issuance cost amortization 12,353 0.47 0.47 11,830 0.46 0.46
Acquisition, integration and restructuring related expenses1 16,628 0.63 0.63 17,630 0.68 0.68
Net gain on fair value adjustments to contingent considerations2 (2,822) (0.11) (0.11) (8,111) (0.31) (0.31)
Settlement fees and related administrative expenses3 --- --- --- 6,299 0.24 0.24
Amortization of certain acquired intangible assets4 3,561 0.13 0.14 2,593 0.10 0.10
Expenses related to withdrawn Cabot IPO5 15,339 0.58 0.58 --- --- ---
Income tax effect of the adjustments6 (7,936) (0.30) (0.30) (12,577) (0.49) (0.49)
Adjustments attributable to noncontrolling interest7 (15,720) (0.60) (0.60) (6,461) (0.25) (0.25)
Impact from tax reform8 1,182 0.05 0.05 --- --- ---
Adjusted income from continuing operations attributable to Encore $ 106,012 $ 4.01 $ 4.04 $ 90,126 $ 3.48 $ 3.48
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 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.
3) Amount represents litigation and government settlement fees and related administrative expenses. For the year ended December 31, 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, particularly in recent quarters. 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) In October 2017, Cabot announced its intention to proceed with an initial public offering and to apply for admission of its ordinary shares to the premium listing segment of the Official List of the Financial Conduct Authority and to trade on the
main market for listed securities of the London Stock Exchange. In November 2017, Encore announced that Cabot has decided to not go forward with its previously announced initial public offering as a result of poor performance of other
IPOs on the London Stock Exchange and unfavorable equity market conditions in the U.K. 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.
6) Amount represents the total income tax effect of the adjustments, which is calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred.
7) 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.
8) As a result of the Tax Reform Act, we incurred a net additional tax expense of approximately $1.2 million. We believe the Tax Reform Act related expenses are not indicative of our ongoing operations, therefore adjusting for these expenses
enhances comparability to prior periods, anticipated future periods, and our competitors’ results. Refer to Note 12 “Income Taxes” in the notes to our consolidated financial statements for further details.
Reconciliation of Adjusted EBITDA to GAAP Net Income
(Unaudited, In $ Thousands) Twelve Months Ended
12/31/17 12/31/16 12/31/15
GAAP net income, as reported $ 78,978 $ 16,817 $ 47,384
Adjustments:
Loss (income) from discontinued operations, net of tax 199 2,353 23,387
Interest expense 204,161 198,367 186,556
Interest income1 (3,635) (2,538) (1,664)
Provision for income taxes 52,049 38,205 27,162
Depreciation and amortization 39,977 34,868 33,160
Stock-based compensation expense 10,399 12,627 22,008
Acquisition, integration and restructuring related expenses2 11,962 16,712 15,528
Net gain on fair value adjustments to contingent considerations3 (2,822) (8,111) ---
Settlement fees and related administrative expenses4 --- 6,299 63,019
Expenses related to withdrawn Cabot IPO5 15,339 --- ---
Adjusted EBITDA $ 406,607 $ 315,599 $ 416,540
Collections applied to principal balance6 673,035 738,989 628,289
RECONCILIATION OF ADJUSTED EBITDA
25
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) 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) Amount represents litigation and government settlement fees and related administrative expenses. For the year ended December 31, 2016, amount consists of settlement and administrative fees related to certain
TCPA settlements. For the year ended December 31, 2015, amount relates to the consent order with the CFPB that we entered into in September 2015. 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) In October 2017, Cabot announced its intention to proceed with an initial public offering and to apply for admission of its ordinary shares to the premium listing segment of the Official List of the Financial Conduct
Authority and to trade on the main market for listed securities of the London Stock Exchange. In November 2017, Encore announced that Cabot has decided to not go forward with its previously announced initial
public offering as a result of poor performance of other IPOs on the London Stock Exchange and unfavorable equity market conditions in the U.K. 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.
6) Amount 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
3/31/16 6/30/16 9/30/16 12/31/16 3/31/17 6/30/17 9/30/17 12/31/17
GAAP total operating expenses, as reported $ 205,513 $ 197,695 $ 200,597 $ 183,939 $ 196,100 $ 210,323 $ 202,829 $ 253,246
Adjustments:
Stock-based compensation expense (3,718) (5,151) (633) (3,125) (750) (2,760) (3,531) (3,358)
Operating expenses related to non-portfolio
purchasing and recovery business1
(26,885) (28,253) (26,446) (29,291) (27,946) (26,984) (28,934) (41,164)
Acquisition, integration and restructuring related
expenses2
(3,059) (3,271) (3,843) (7,457) (855) (3,520) (342) (11,911)
Gain on reversal of contingent consideration3 --- --- --- 8,111 --- 2,773 --- 49
Settlement fees and related administrative expenses4 (2,988) (698) (2,613) --- --- --- --- ---
Expenses related to withdrawn Cabot IPO5
--- --- --- --- --- --- --- (15,339)
Adjusted operating expenses related to portfolio
purchasing and recovery business
$ 168,863 $ 160,322 $ 167,062 $ 152,177 $ 166,549 $ 179,832 $ 170,022 $ 181,523
26
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) 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) 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) In October 2017, Cabot announced its intention to proceed with an initial public offering and to apply for admission of its ordinary shares to the premium listing segment of the Official List of the Financial Conduct
Authority and to trade on the main market for listed securities of the London Stock Exchange. In November 2017, Encore announced that Cabot has decided to not go forward with its previously announced initial
public offering as a result of poor performance of other IPOs on the London Stock Exchange and unfavorable equity market conditions in the U.K. 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.
(Unaudited, In Millions, except per share amounts)
IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY
EXCHANGE RATES
Three Months Ended
12/31/17
As Reported
Constant
Currency
Revenue $ 317 $ 309
Operating expenses $ 253 $ 246
Net income* $ 13 $ 13
Adjusted net income* $ 28 $ 27
GAAP EPS* $ 0.48 $ 0.48
Economic EPS* $ 1.05 $ 1.02
Collections $ 438 $ 427
ERC $ 6,955 $ 6,618
27
Year Ended
12/31/17
As Reported
Constant
Currency
Revenue $ 1,187 $ 1,199
Operating expenses $ 862 $ 867
Net income* $ 83 $ 85
Adjusted net income* $ 106 $ 107
GAAP EPS* $ 3.16 $ 3.20
Economic EPS* $ 4.04 $ 4.06
Collections $ 1,768 $ 1,789
ERC $ 6,955 $ 6,618
* from continuing operations attributable to Encore.
Note: Constant Currency figures are calculated by employing Q4 2016 foreign currency exchange rates to recalculate Q4 2017 results and FY2016 foreign currency exchange rates to
recalculate FY2017 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.
2017 COST-TO-COLLECT REFLECTS THE RETURN OF LEGAL
PLACEMENTS AFTER PRIOR DELAYS AND MANY MORE ACCOUNTS
28
Overall Cost-to-Collect1
37.7% 37.8% 36.9%
40.3% 41.1%
38.4% 38.4%
41.5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q1 Q2 Q3 Q4
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
Q4 2017
CTC
Q4 2016
CTC
United States 49.5% 43.0%
Europe 26.3% 25.9%
Other 49.6% 48.7%
Encore total 41.5% 38.4%
Location
FY 2017
CTC
FY 2016
CTC
United States 44.2% 40.5%
Europe 28.2% 32.8%
Other 48.6% 44.1%
Encore total 39.5% 38.5%
2