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): November 2, 2017
______________________
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 November 2, 2017, 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 | Slide presentation of Encore Capital Group, Inc. dated November 2, 2017 |
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: November 2, 2017 | /s/ Jonathan C. Clark |
Jonathan C. Clark | |
Executive Vice President, Chief Financial Officer and Treasurer | |
EXHIBIT INDEX
Exhibit Number | Description |
99.1 | |
Encore Capital Group, Inc.
Q3 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 CONDITIONS REMAIN FAVORABLE FOR OUR
BUSINESS
Supply continues to improve
Banks are building their loan loss provisions
Net charge-off rates continue to increase
We expect meaningful supply growth for next year and beyond
Pricing remains favorable
Better returns are generating more ERC for each dollar deployed
We continue to build capacity throughout our operations
Commitments for 2018 already total more than $280 million
We are positioning ourselves through capacity expansion
for a period of strong deployments at attractive returns
5
In line with Encore’s hardship policies, we temporarily suspended
collections efforts in impacted areas
Two Puerto Rico-focused pool groups incurred a combined
allowance charge of approximately $10M
After the allowance, remaining book value of the Puerto-Rico
based accounts in these pools is approximately $12M
We do not anticipate hurricane-related allowance charges on our
other pool groups
In line with Encore’s hardship policies, we temporarily
suspended collections in storm-impacted areas
HURRICANES RESULTED IN COLLECTIONS DISRUPTION
6
CABOT’S STRONG DEPLOYMENTS IN Q3 STRENGTHENED ITS
POSITION AS THE LEADING DEBT BUYER IN THE U.K.
Cabot had a very strong purchasing quarter in Europe, deploying
$165 million at solid returns
Cabot’s liquidation improvement initiatives continue to drive better
sustained collections performance on many of its portfolios across
a number of vintages
Sustained collections overperformance prompted an
allowance reversal of approximately $28M
On October 20, Cabot announced its intention to launch a public
offering and apply for admission to the London Stock Exchange
7
ENCORE’S LEVERAGE RATIO IS SIGNIFICANTLY IMPACTED BY THE
CONSOLIDATION OF CABOT’S DEBT ON OUR BALANCE SHEET
Debt and Debt Ratios1
Upon consummation of a Cabot IPO, we intend to deconsolidate
Cabot from Encore’s financial statements
Encore
With Cabot
at 09/30/17
Without Cabot
at 09/30/17
Total Debt $2.904 B $1.302 B
Total Debt / (Adjusted EBITDA + Collections
applied to principal balance)2
2.71x 1.86x
Total Debt / Equity 5.08x 2.28x
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
8
Detailed Financial Discussion
9
ENCORE DELIVERED SOLID THIRD QUARTER RESULTS
$1.17
Economic EPS2 GAAP EPS1
$1.05
GAAP Net Income1
$28.2
million
Adjusted Income2
$30.7
million
Estimated Remaining Collections of $6.6 Billion
1) From continuing operations attributable to Encore
2) Please refer to Appendix for reconciliation of Economic EPS and Adjusted Income to GAAP
Collections
$443 million
10
WORLDWIDE DEPLOYMENTS IN Q3 WERE UP 42% COMPARED
TO THE SAME QUARTER A YEAR AGO
Q3 2017 Deployments
$M
United
States
$111
Europe
$177
Other
$4
Total $292
11
THIRD QUARTER COLLECTIONS REFLECT GROWTH IN ALL THREE
GEOGRAPHIES COMPARED TO A YEAR AGO
Collections by Geography
0
100
200
300
400
500
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q4 Q1 Q2 Q3
Collection Sites Legal Collections Collection Agencies
$M
0
100
200
300
400
500
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q4 Q1 Q2 Q3
United States Europe Other
417
441 446 443
397
448 434
407
$M
Collections by Channel
417
441 446 443
397
448 434
407
Q3 REVENUE REFLECTS EUROPEAN ALLOWANCE REVERSAL
PARTIALLY OFFSET BY WEATHER-RELATED IMPACTS IN THE U.S.
Revenue by Geography
12
-50
0
50
100
150
200
250
300
350
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q4 Q1 Q2 Q3
United States Europe Other
$M
289 291
307
291
272
289
179
271
13
ERC AT THE END OF Q3 REPRESENTS ENCORE’S HIGHEST LEVEL
TO DATE
Total Estimated Remaining Collections
0
1,000
2,000
3,000
4,000
5,000
6,000
September 2013 September 2014 September 2015 September 2016 September 2017
United States Europe Other
4,022
5,128
5,654
$M
5,733
6,568
ENCORE DELIVERED GAAP EPS OF $1.05 AND ECONOMIC EPS OF $1.17
IN THE THIRD QUARTER OF 2017
14
* Please refer to Appendix for reconciliation of Adjusted EPS / Economic EPS measurements to GAAP
$1.05
$0.03 ($0.04)
($0.02) $1.15 $1.17 $0.12 $0.01
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
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
Amortization of
certain acquired
intangible assets
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)*
0.5M
shares
deducted
in
Q3 2017
15
A NUMBER OF ITEMS IMPACTED OUR Q3 EARNINGS RESULTS
As a result of Hurricane Maria, two Puerto Rico-focused pool
groups incurred a combined allowance charge of approximately
$10M
Cabot’s sustained collections overperformance prompted an
allowance reversal of approximately $28M
Cabot recognized a gain of approximately $5.7M on the
redemption of Marlin bonds
SUMMARY
16
Q3 was a solid quarter of financial and operational performance
Supply of charged-off credit card receivables in U.S. continues to
grow
Favorable pricing and further liquidation improvements drove YTD
core purchase price multiple to 2.0x through Q3
Cabot’s solid performance continues
• Very strong purchasing quarter in the U.K.
• Liquidation improvement initiatives delivering sustained
improved collections performance
On October 20th Cabot announced intention to float
17
Q&A
18
Appendix
19
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.
20
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
September 30,
2017 2016
$
Per Diluted
Share –
Accounting
Per Diluted
Share –
Economic6
$
Per Diluted
Share –
Accounting
Per Diluted
Share –
Economic6
GAAP net income from continuing operations attributable to Encore,
as reported
$ 28,194 $ 1.05 $ 1.07 $ (1,524) $ (0.06) $ (0.06)
Adjustments:
Convertible notes non-cash interest and issuance cost amortization 3,135 0.12 0.12 2,983 0.12 0.12
Acquisition, integration and restructuring related expenses1 342 0.01 0.01 3,843 0.15 0.15
Settlement fees and related administrative expenses2 --- --- --- 2,613 0.10 0.10
Amortization of certain acquired intangible assets3 803 0.03 0.03 529 0.02 0.02
Income tax effect of the adjustments4 (1,321) (0.04) (0.04) (3,263) (0.13) (0.13)
Adjustments attributable to noncontrolling interest5 (461) (0.02) (0.02) (1,568) (0.06) (0.06)
Adjusted income from continuing operations attributable to Encore $ 30,692 $ 1.15 $ 1.17 $ 3,613 $ 0.14 $ 0.14
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 litigation and government settlement fees and related administrative expenses. For the three months ended September 30, 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.
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. 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) 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.
5) Certain of the above pre-tax adjustments include expenses recognized by our partially-owned subsidiaries. This adjustment represents the portion of the non-GAAP adjustments that are attributable to noncontrolling
interest.
6) Economic EPS for the three months ended September 30, 2017 excludes approximately 0.5 million shares issuable upon the conversion of the company’s senior notes that are included for accounting purposes but will
not be issued due to certain hedge and warrant transactions. There were no shares excluded in the calculation of Economic EPS for the three months ended September 30, 2016.
Reconciliation of Adjusted EBITDA to GAAP Net Income
(Unaudited, In $ Thousands) Three Months Ended
9/30/16 12/31/16 3/31/17 6/30/17 9/30/17
GAAP net (loss) income, as reported $ (51,946) $ 11,323 $ 14,979 $ 19,076 $ 42,144
Adjustments:
(Income) loss from discontinued operations, net of tax --- (829) 199 --- ---
Interest expense 48,632 48,447 49,198 50,516 52,755
Interest income1 (694) (725) (779) (919) (943)
(Benefit) provision for income taxes (13,768) 28,374 12,067 13,531 17,844
Depreciation and amortization 8,032 8,740 8,625 8,672 8,522
Stock-based compensation expense 633 3,125 750 2,760 3,531
Acquisition, integration and restructuring related expenses2 3,843 7,457 855 3,520 342
Gain on reversal of contingent consideration3 --- (8,111) --- (2,773) ---
Settlement fees and related administrative expenses4 2,613 --- --- --- ---
Adjusted EBITDA $ (2,655) $ 97,801 $ 85,894 $ 94,383 $ 124,195
Collections applied to principal balance5 $ 247,427 $ 147,203 $ 188,893 $ 173,946 $ 159,408
RECONCILIATION OF ADJUSTED EBITDA
21
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) Amounts in the second quarter of 2017 and in the fourth quarter of 2016 represent gains recognized as a result of reversing liabilities for contingent consideration that were established when we acquired two debt
solution service providers in Europe. We have adjusted for these amounts because we do not believe they are indicative of ongoing operations.
4) Amount represents litigation and government settlement fees and related administrative expenses. 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) Collections applied to principal balance 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
12/31/15 3/31/16 6/30/16 9/30/16 12/31/16 3/31/17 6/30/17 9/30/17
GAAP total operating expenses, as reported $ 206,271 $ 205,513 $ 197,695 $ 200,597 $ 183,939 $ 196,100 $ 210,323 $ 202,829
Adjustments:
Stock-based compensation expense (4,749) (3,718) (5,151) (633) (3,125) (750) (2,760) (3,531)
Operating expenses related to non-portfolio
purchasing and recovery business1
(26,144) (26,885) (28,253) (26,446) (29,291) (27,946) (26,984) (28,934)
Acquisition, integration and restructuring related
expenses2
(2,635) (3,059) (3,271) (3,843) (7,457) (855) (3,520) (342)
Gain on reversal of contingent consideration3 --- --- --- --- 8,111 --- 2,773 ---
Settlement fees and related administrative expenses4 --- (2,988) (698) (2,613) --- --- --- ---
Adjusted operating expenses related to portfolio
purchasing and recovery business
$ 172,743 $ 168,863 $ 160,322 $ 167,062 $ 152,177 $ 166,549 $ 179,832 $ 170,022
22
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) Amounts in the second quarter of 2017 and in the fourth quarter of 2016 represent gains recognized as a result of reversing liabilities for contingent consideration that were established when we acquired two debt
solution service providers in Europe. We have adjusted for these amounts because we do not believe they are indicative of ongoing operations.
4) Amount represents litigation and government settlement fees and related administrative expenses. Amounts in the first, second and third quarters of 2016 represent 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.
(Unaudited, In Millions, except per share amounts)
IMPACT OF FLUCTUATIONS IN FOREIGN CURRENCY
EXCHANGE RATES
Three Months Ended
9/30/17
As Reported
Constant
Currency
Revenue $ 307 $ 306
Operating expenses $ 203 $ 202
Net income* $ 28 $ 28
Adjusted net income* $ 31 $ 31
GAAP EPS* $ 1.05 $ 1.06
Economic EPS* $ 1.17 $ 1.17
Collections $ 443 $ 442
ERC $ 6,568 $ 6,453
23
* From continuing operations attributable to Encore.
Note: Constant Currency figures are calculated by employing Q3 2016 foreign currency exchange rates to recalculate Q3 2017 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.
COST-TO-COLLECT REFLECTS LOWER COSTS IN EUROPE
PARTIALLY OFFSET BY CAPACITY EXPANSION COSTS IN THE U.S.
24
Overall Cost-to-Collect1
41.5%
38.4% 37.7% 37.8% 36.9%
40.3% 41.1%
[VALUE]
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2
0
1
5
2
0
1
6
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
Q4 Q1 Q2 Q3
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
Q3 2017
CTC
Q3 2016
CTC
United States 42.9% 41.0%
Europe 28.4% 40.3%
Other 45.9% 44.1%
Encore total 38.4% 41.1%
2