Encore Capital Group Announces Third Quarter 2018 Financial Results
- 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
- Non-GAAP Economic EPS from continuing operations of
“Encore had a strong quarter as we recorded our third consecutive quarter of record global cash collections and reached an all-time high for estimated remaining collections,” said
“The acquisition of Cabot strengthens our global business and establishes us as a clear leader in both
Key Financial Metrics for the Third Quarter of 2018:
- Estimated remaining collections (ERC) increased 10% compared to the same period of the prior year, to a record
- Portfolio purchases were
$249 million, including $123 millionin the U.S. and $115 millionin Europe, compared to $292 milliondeployed overall in the same period a year ago.
- Gross collections increased 13% to a record
$499 million, compared to $443 millionin the same period of the prior year.
- Total revenues, adjusted by net allowances, increased 10% to
$337 million, compared to $307 millionin the third quarter of 2017.
- Total operating expenses were
$239 million, compared to $203 millionin 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 millionin the same period of the prior year.
- Total interest expense increased to
$65.1 million, compared to $52.8 millionin 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 $0.69per fully diluted share, as compared to $28.2 million, or $1.05per fully diluted share in the same period a year ago.
- Adjusted income attributable to Encore was
$35.8 million, compared to $30.7 millionin the third quarter of 2017. Adjusted income attributable to Encore per share (also referred to as Economic EPS) was $1.19, compared to $1.17in 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 millionand availability under Cabot’s revolving credit facility was £77 million (approximately $100 million). These figures do not include cash on the balance sheet.
Conference Call and Webcast
Encore will host a conference call and slide presentation today, November 7, 2018, at
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 9439619. 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 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, 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.
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
Vice President, Investor Relations
FINANCIAL TABLES FOLLOW
Condensed Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
|Cash and cash equivalents||$||204,649||$||212,139|
|Investment in receivable portfolios, net||3,109,116||2,890,613|
|Deferred court costs, net||94,017||79,963|
|Property and equipment, net||96,429||76,276|
|Liabilities and Equity|
|Accounts payable and accrued liabilities||$||274,213||$||284,774|
|Commitments and contingencies|
|Redeemable noncontrolling interest||1,231||151,978|
|Convertible preferred stock, $.01 par value, 5,000 shares authorized, no shares issued and outstanding||—||—|
|Common stock, $.01 par value, 50,000 shares authorized, 30,852 shares and 25,801 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively||309||258|
|Additional paid-in capital||207,985||42,646|
|Accumulated other comprehensive loss||(103,394||)||(77,356||)|
|Total Encore Capital Group, Inc. stockholders’ equity||778,053||581,862|
|Total liabilities, redeemable equity and equity||$||4,647,404||$||4,490,712|
The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the consolidated statements of financial condition above. Most assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs. The liabilities exclude amounts where creditors or beneficial interest holders have recourse to the general credit of the Company.
|Cash and cash equivalents||$||471||$||88,902|
|Investment in receivable portfolios, net||444,503||1,342,300|
|Deferred court costs, net||—||26,482|
|Property and equipment, net||—||23,138|
|Accounts payable and accrued liabilities||$||3,514||$||151,208|
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
|Three Months Ended
|Revenue from receivable portfolios||$||295,357||$||264,024|
|Allowance reversals on receivable portfolios, net||4,029||19,564|
|Total revenues, adjusted by net allowances||336,774||306,699|
|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|
|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 loss (income) attributable to noncontrolling interest||7,709||(13,950||)|
|Earnings (loss) per share attributable to Encore Capital Group, Inc.:|
|Weighted average shares outstanding:|
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
|Nine Months Ended
|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||)|
|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|
|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|
|Net cash used in investing activities||(326,071||)||(207,780||)|
|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||)||—|
|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||$||188,246|
Supplemental Financial Information
Reconciliation of Adjusted Income Attributable to Encore to GAAP Net Income Attributable to Encore and Adjusted Operating Expenses Related to Portfolio Purchasing and Recovery Business to GAAP Total Operating Expenses
(In Thousands, Except Per Share amounts) (Unaudited)
|Three Months Ended September 30,|
Accounting and Economic
|GAAP net income from continuing operations attributable to Encore, as reported||$||20,725||$||0.69||$||28,194||$||1.05||$||1.07|
|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|
- 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.
- 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.
- 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.
- 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.
- 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
|GAAP total operating expenses, as reported||$||239,246||$||202,829|
|Operating expenses related to non-portfolio purchasing and recovery business(1)||(45,980||)||(28,934||)|
|Acquisition, integration and restructuring related expenses(2)||(8,475||)||(342||)|
|Stock-based compensation expense||(5,007||)||(3,531||)|
|Adjusted operating expenses related to portfolio purchasing and recovery business||$||179,784||$||170,022|
- 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.
- 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.
Source: Encore Capital Group Inc