Encore Capital Group Announces Second Quarter 2016 Financial Results

August 4, 2016 at 4:07 PM EDT
  • GAAP EPS from continuing operations increases 18% to $1.14
  • Non-GAAP Economic EPS from continuing operations increases 7% to $1.29

SAN DIEGO, Aug. 04, 2016 (GLOBE NEWSWIRE) -- Encore Capital Group, Inc. (NASDAQ:ECPG), an international specialty finance company providing debt recovery solutions for consumers across a broad range of assets, today reported consolidated financial results for the second quarter ended June 30, 2016.

“In the U.S., market participants have continued to exhibit discipline when bidding on portfolios, effectively reducing prices and helping returns remain elevated when compared to a year ago,” said Kenneth A. Vecchione, President and Chief Executive Officer. “Our consumer-centric liquidation programs also help to reinforce the favorable trend in improving returns as first-year liquidations and consumer satisfaction are both on the rise.”

“On the regulatory front, we were pleased to see the Consumer Financial Protection Bureau take the next step in the establishment of industry rules when they published their proposed rule outline last week. Although we’ll continue to evaluate their proposals as they become more refined, we believe the new rules will provide important clarity around key issues in our industry, remove uncertainty that was over-hanging the company and our industry, help raise industry standards to our high level, and create a more level playing field for all industry participants, both large and small.”

Key Financial Metrics for the Second Quarter of 2016:

  • Investment in receivable portfolios was $233 million, compared to $419 million in the same period a year ago, which included Cabot’s acquisition of dlc’s $216 million portfolio in June 2015.
  • Gross collections declined 1% to $434 million, compared to $437 million in the same period of the prior year.
  • Total revenues increased 2% to $289 million, compared to $283 million in the second quarter of 2015.
  • Total operating expenses were $198 million, unchanged from the same period of the prior year. Adjusted operating expenses decreased 2% to $160 million, compared to $164 million in the same period of the prior year. Adjusted operating expenses per dollar collected for the portfolio purchasing and recovery business decreased to 36.9%, compared to 37.6% in the same period of the prior year.
  • Adjusted EBITDA increased 2% to $279 million, compared to $274 million in the same period a year ago.
  • Total interest expense increased to $50.6 million, as compared to $46.3 million in the same period of the prior year, reflecting the financing of recent acquisitions and portfolio purchases in Europe.
  • GAAP income from continuing operations attributable to Encore was $29.6 million, or $1.14 per fully diluted share, as compared to $26.0 million, or $0.97 per fully diluted share in the same period a year ago.
  • Adjusted income from continuing operations attributable to Encore increased 6% to $33.4 million, compared to $31.5 million in the second quarter of 2015.
  • Adjusted income from continuing operations attributable to Encore per share (also referred to as Economic EPS) grew 7% to $1.29, compared to $1.21 in the same period of the prior year. In the second quarter of 2016, Economic EPS was not adjusted for shares associated with Encore’s convertible notes. In calculating Economic EPS for the second quarter of 2015, 0.8 million shares associated with convertible notes that will not be issued but are reflected in the fully diluted share count were excluded for accounting purposes.
  • Estimated Remaining Collections (ERC) declined 3% to $5.5 billion, compared to $5.7 billion at June 30, 2015.
  • Available capacity under Encore’s revolving credit facility, subject to borrowing base and applicable debt covenants, was $194 million as of June 30, 2016, and total debt on a consolidated basis was $2.8 billion.

Conference Call and Webcast

Encore will host a conference call and slide presentation today, August 4, 2016, at 2:00 p.m. Pacific / 5:00 p.m. Eastern time, presenting and discussing the reported results.

Members of the public are invited to access the live webcast via the Internet by logging on at the Investor Relations page of Encore's website at www.encorecapital.com. To access the live, listen-only telephone conference portion, please dial (855) 541-0982 or (704) 288-0606.

For those who cannot listen to the live broadcast, a telephonic replay will be available for seven days by dialing (800) 585-8367 or (404) 537-3406 and entering the conference number 53359649. A replay of the webcast will also be available shortly after the call on the Company's website.

Non-GAAP Financial Measures

This news release 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 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 this measure 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 information concerning adjusted EBITDA because management utilizes this information, which is materially similar in calculation to a financial measure contained in covenants used in the Company’s revolving credit facility, 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. Adjusted income attributable to Encore, adjusted income attributable to Encore per share/economic EPS, adjusted EBITDA, and adjusted operating expenses 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 news release a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.

About Encore Capital Group, Inc.

Encore Capital Group is an international specialty finance company that provides debt recovery solutions for consumers across a broad range of assets. Through its subsidiaries, Encore purchases portfolios of consumer receivables from major banks, credit unions and utility providers.

Encore partners with individuals as they repay their obligations, helping them on the road to financial recovery and ultimately improving their economic well-being. Encore is the first and only company of its kind to operate with a Consumer Bill of Rights that provides industry-leading commitments to consumers. Headquartered in San Diego, the company is a publicly traded NASDAQ Global Select company (ticker symbol: ECPG) and a component stock of the Russell 2000, the S&P Small Cap 600 and the Wilshire 4500. More information about Encore can be found at http://www.encorecapital.com. More information about the Company’s Cabot Credit Management subsidiary can be found at http://www.cabotcm.com. Information found on the Company’s website or Cabot’s website is not incorporated by reference.

Forward Looking Statements

The statements in this press release 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, performance, business plans or prospects. 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 the most recent reports on Forms 10-K and 10-Q, as they may be amended from time to time. The Company disclaims any intent or obligation to update these forward-looking statements.

FINANCIAL TABLES FOLLOW


ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
(Unaudited)

  June 30,
 2016		   December 31,
 2015
Assets      
Cash and cash equivalents $ 139,009     $ 123,993  
Investment in receivable portfolios, net 2,469,593     2,440,669  
Property and equipment, net 67,428     72,546  
Deferred court costs, net 69,150     75,239  
Other assets 184,721     148,762  
Goodwill 840,544     924,847  
Assets associated with discontinued operations —     388,763  
Total assets $ 3,770,445     $ 4,174,819  
Liabilities and equity      
Liabilities:      
Accounts payable and accrued liabilities $ 217,215     $ 290,608  
Debt 2,849,066     2,944,063  
Other liabilities 30,451     59,226  
Liabilities associated with discontinued operations —     232,434  
Total liabilities 3,096,732     3,526,331  
Commitments and contingencies      
Redeemable noncontrolling interest 40,736     38,624  
Redeemable equity component of convertible senior notes 4,588     6,126  
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, 25,527 shares and 25,288 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively 255     253  
Additional paid-in capital 112,959     110,533  
Accumulated earnings 598,771     543,489  
Accumulated other comprehensive loss (92,536 )   (57,822 )
Total Encore Capital Group, Inc. stockholders’ equity 619,449     596,453  
Noncontrolling interest 8,940     7,285  
Total equity 628,389     603,738  
Total liabilities, redeemable equity and equity $ 3,770,445     $ 4,174,819  


The following table includes assets that can only be used to settle the liabilities of the Company’s consolidated variable interest entities (“VIEs”) and the creditors of the VIEs have no recourse to the Company. These assets and liabilities are included in the consolidated statements of financial condition above.

  June 30,
 2016		   December 31,
 2015
Assets      
Cash and cash equivalents $ 37,464     $ 50,483  
Investment in receivable portfolios, net 1,176,446     1,197,513  
Property and equipment, net 16,447     19,767  
Deferred court costs, net 33,018     33,296  
Other assets 45,711     31,679  
Goodwill 637,156     706,812  
Assets associated with discontinued operations —     92,985  
Liabilities      
Accounts payable and accrued liabilities $ 92,210     $ 142,375  
Debt 1,637,825     1,665,009  
Other liabilities 719     839  
Liabilities associated with discontinued operations                                                                                                                                                                                                                                       —     58,923  


ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
(Unaudited)

  Three Months Ended
 June 30,
  2016   2015
Revenues      
Revenue from receivable portfolios, net $ 267,452     $ 270,301  
Other revenues 21,990     12,361  
Total revenues 289,442     282,662  
Operating expenses      
Salaries and employee benefits 75,499     65,569  
Cost of legal collections 46,807     57,076  
Other operating expenses 24,946     21,735  
Collection agency commissions 9,274     8,466  
General and administrative expenses 32,934     37,638  
Depreciation and amortization 8,235     7,878  
Total operating expenses 197,695     198,362  
Income from operations 91,747     84,300  
Other (expense) income      
Interest expense (50,597 )   (46,250 )
Other income 3,134     395  
Total other expense (47,463 )   (45,855 )
Income before income taxes 44,284     38,445  
Provision for income taxes (13,451 )   (14,921 )
Income from continuing operations 30,833     23,524  
Income from discontinued operations, net of tax —     1,661  
Net income 30,833     25,185  
Net (income) loss attributable to noncontrolling interest (1,245 )   2,472  
Net income attributable to Encore Capital Group, Inc. stockholders $ 29,588     $ 27,657  
Amounts attributable to Encore Capital Group, Inc.:      
Income from continuing operations $ 29,588     $ 25,996  
Income from discontinued operations, net of tax —     1,661  
Net income $ 29,588     $ 27,657  
       
Earnings (loss) per share attributable to Encore Capital Group, Inc.:      
       
Basic earnings per share from:      
Continuing operations $ 1.15     $ 1.00  
Discontinued operations $ —     $ 0.07  
Net basic earnings per share $ 1.15     $ 1.07  
Diluted earnings per share from:      
Continuing operations $ 1.14     $ 0.97  
Discontinued operations $ —     $ 0.06  
Net diluted earnings per share $ 1.14     $ 1.03  
       
Weighted average shares outstanding:      
Basic 25,742     25,885  
Diluted 25,874     26,919  


ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)

  Six Months Ended
 June 30,
  2016   2015
Operating activities:      
Net income $ 57,440     $ 55,152  
Adjustments to reconcile net income to net cash provided by operating activities:      
Loss (income) from discontinued operations, net of income taxes 1,352     (3,541 )
Depreciation and amortization 18,096     16,015  
Non-cash interest expense, net 19,242     17,182  
Stock-based compensation expense 8,869     12,103  
Gain on derivative instruments, net (7,531 )   —  
Deferred income taxes (25,002 )   765  
Excess tax benefit from stock-based payment arrangements —     (1,479 )
Loss on sale of discontinued operations, net of tax 1,830     —  
Reversal of allowances on receivable portfolios, net (4,670 )   (7,219 )
Changes in operating assets and liabilities      
Deferred court costs and other assets (666 )   (13,437 )
Prepaid income tax and income taxes payable 5,260     (25,830 )
Accounts payable, accrued liabilities and other liabilities (27,236 )   (5,616 )
Net cash provided by operating activities from continuing operations 46,984     44,095  
Net cash provided by operating activities from discontinued operations 2,096     3,317  
Net cash provided by operating activities 49,080     47,412  
Investing activities:      
Cash paid for acquisitions, net of cash acquired (675 )   (237,873 )
Proceeds from divestiture of business, net of cash divested 106,041     —  
Purchases of receivable portfolios, net of put-backs (517,665 )   (356,302 )
Collections applied to investment in receivable portfolios, net 351,219     334,587  
Purchases of property and equipment (10,094 )   (10,642 )
Other, net 3,502     —  
Net cash used in investing activities from continuing operations (67,672 )   (270,230 )
Net cash provided by (used in) used in investing activities from discontinued operations 14,685     (61,652 )
Net cash used in investing activities (52,987 )   (331,882 )
Financing activities:      
Payment of loan costs (2,934 )   (6,574 )
Proceeds from credit facilities 288,750     741,665  
Repayment of credit facilities (307,946 )   (357,496 )
Repayment of senior secured notes (11,256 )   (7,500 )
Repayment of securitized notes (935 )   (22,694 )
Repurchase of common stock —     (33,185 )
Taxes paid related to net share settlement of equity awards (4,068 )   (5,260 )
Excess tax benefit from stock-based payment arrangements —     1,479  
Proceeds from other debt 34,946     —  
Other, net (7,779 )   (6,640 )
Net cash (used in) provided by financing activities (11,222 )   303,795  
Net (decrease) increase in cash and cash equivalents (15,129 )   19,325  
Effect of exchange rate changes on cash 545     (5,330 )
Cash and cash equivalents, beginning of period 153,593     124,163  
Cash and cash equivalents, end of period 139,009     138,158  
Cash and cash equivalents of discontinued operations, end of period —     34,917  
Cash and cash equivalents of continuing operations, end of period $ 139,009     $ 103,241  


ENCORE CAPITAL GROUP, INC.
Supplemental Financial Information
Reconciliation of Adjusted Income Attributable to Encore to GAAP Net (Loss) Income Attributable to Encore, Adjusted EBITDA to GAAP Net (Loss) Income, and Adjusted Operating Expenses Related to Portfolio Purchasing and Recovery Business to GAAP Total Operating Expenses
(In Thousands, Except Per Share amounts) (Unaudited)

  Three Months Ended June 30,
  2016   2015
  $   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 $ 29,588     $ 1.14     $ 1.14     $ 25,996     $ 0.97     $ 1.00  
Adjustments:                      
Convertible notes non-cash interest and issuance cost amortization 2,921     0.11     0.11     2,809     0.10     0.11  
Acquisition, integration and restructuring related expenses 3,271     0.13     0.13     9,297     0.35     0.35  
Settlement fees and related administrative expenses 698     0.03     0.03     —     —     —  
Amortization of certain acquired intangible assets 575     0.02     0.02     —     —     —  
Income tax effect of the adjustments (2,338 )   (0.09 )   (0.09 )   (2,570 )   (0.10 )   (0.10 )
Adjustments attributable to noncontrolling interest (1) (1,273 )   (0.05 )   (0.05 )   (4,023 )   (0.15 )   (0.15 )
Adjusted income from continuing operations attributable to Encore $ 33,442     $ 1.29     $ 1.29     $ 31,509     $ 1.17     $ 1.21  

________________________

(1) 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
 June 30,
2016   2015
GAAP net income, as reported $ 30,833     $ 25,185  
Adjustments:      
Income from discontinued operations, net of tax —     (1,661 )
Interest expense 50,597     46,250  
Provision for income taxes 13,451     14,921  
Depreciation and amortization 8,235     7,878  
Amount applied to principal on receivable portfolios 166,648     167,024  
Stock-based compensation expense 5,151     6,198  
Acquisition, integration and restructuring related expenses                                                                                                           3,271     7,892  
Settlement fees and related administrative expenses 698     —  
Adjusted EBITDA $ 278,884     $ 273,687  


  Three Months Ended
 June 30,
2016   2015
GAAP total operating expenses, as reported $ 197,695     $ 198,362  
Adjustments:      
Stock-based compensation expense (5,151 )   (6,198 )
Operating expenses related to non-portfolio purchasing and recovery business (28,253 )   (19,946 )
Acquisition, integration and restructuring related expenses  (3,271 )   (7,892 )
Settlement fees and related administrative expenses (698 )   —  
Adjusted operating expenses related to portfolio purchasing and recovery business                                                                           $ 160,322     $ 164,326  

 

Bruce Thomas
Vice President, Investor Relations
Encore Capital Group, Inc.
(858) 309-6442
bruce.thomas@encorecapital.com

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