Encore Capital Group Announces Third Quarter 2021 Financial Results

Encore Capital Group Inc
17 min read
0
In this article:

  • Collections of $567 million

  • GAAP EPS of $2.66

  • Share repurchases of $41 million in Q3 2021 and $88 million YTD through three quarters

  • Launching $300 million tender offer for Encore common shares on November 4

SAN DIEGO, Nov. 03, 2021 (GLOBE NEWSWIRE) -- Encore Capital Group, Inc. (NASDAQ: ECPG), an international specialty finance company, today reported consolidated financial results for the third quarter ended September 30, 2021.

“The third quarter for Encore was another period of strong performance as we continued to execute our strategy and deliver on our financial objectives, which include a focus on our capital allocation priorities,” said Ashish Masih, President and Chief Executive Officer. “Our financial performance was driven primarily by our strong collections in the period, particularly within our MCM business.”

“On a global basis, our portfolio purchases were $168 million in the quarter, nearly matching the $170 million purchase total from the third quarter a year ago. Despite lower market supply due to fewer charge-offs, we continue to acquire portfolios at attractive returns, which is enabled by our disciplined purchasing as well as our superior analytics and collections effectiveness.”

“Our business continues to perform extremely well, delivering strong returns and cash flows. As a result, our balance sheet has continued to strengthen as we have further reduced our leverage ratio1 to 1.8x, which is now below our target range of 2 to 3x. After purchasing $88 million of Encore shares through three quarters of 2021, including $41 million in the third quarter, we are now accelerating the return of capital by initiating a tender offer. Tomorrow morning we plan to launch a $300 million tender offer for our common shares. After the completion of the tender, assuming we purchase the entire $300 million amount, we expect to maintain a strong financial position, with approximately $700 million in available liquidity, leverage still at the low end of our target range and full access to capital markets. This strong position provides us ample liquidity to fully capitalize on future portfolio purchasing opportunities,” said Masih.

1 Leverage ratio defined below.

Financial Highlights for the Third Quarter of 2021:

Three Months Ended September 30,

(in thousands, except percentages and earnings per share)

2021

2020

Change

Collections

$

566,690

$

539,748

5

%

Revenues

$

412,624

$

403,676

2

%

Portfolio purchases(1)

$

168,188

$

170,131

(1

)%

Estimated Remaining Collections (ERC)

$

7,879,353

$

8,459,739

(7

)%

Operating expenses

$

245,977

$

261,221

(6

)%

GAAP net income attributable to Encore

$

83,566

$

54,650

53

%

GAAP earnings per share

$

2.66

$

1.72

55

%

LTM Pre-tax ROIC(2)

15.2

%

12.7

%

+250bps

Leverage Ratio(3)

1.8x

2.4x

-0.6x


______________________

(1)

Includes U.S. purchases of $102.3 million and $141.1 million, and Europe purchases of $65.8 million and $29.1 million in Q3 2021 and Q3 2020, respectively.

(2)

This is a non-GAAP metric. See Supplemental Financial Information for a definition and calculation of LTM Pre-Tax ROIC (Return on Invested Capital).

(3)

This is a non-GAAP metric that we define as the ratio of Net Debt at period end to (Adjusted EBITDA plus collections applied to principal balance for the preceding twelve months). See Supplemental Financial Information for a definition of Net Debt and Adjusted EBITDA and a reconciliation of Net Debt to total debt and Adjusted EBITDA to net income.

Financial Highlights Year-to-Date through the Third Quarter of 2021:

Nine Months Ended September 30,

(in thousands, except percentages and earnings per share)

2021

2020

Change

Collections

$

1,785,578

$

1,575,242

13

%

Revenues

$

1,257,196

$

1,118,790

12

%

Portfolio purchases(1)

$

481,094

$

532,183

(10

)%

Operating expenses

$

747,948

$

709,441

5

%

GAAP net income attributable to Encore

$

274,699

$

174,528

57

%

GAAP earnings per share

$

8.71

$

5.51

58

%


______________________

(1)

Includes U.S. purchases of $284.2 million and $451.1 million, and Europe purchases of $196.9 million and $81.0 million in nine months ended September 30, 2021 and 2020, respectively.

Conference Call and Webcast

Encore will host a conference call and slide presentation today, November 3, 2021, at 2:00 p.m. Pacific / 5:00 p.m. Eastern time, to present and discuss third quarter results.

Members of the public are invited to access the live webcast via the Internet by logging in on 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 ID number 5995723. 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 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 Pre-Tax ROIC as management uses this measure to monitor and evaluate operating performance relative to our invested capital and because the Company believes it is a useful measure for investors to evaluate effective use of capital. The Company has included Net Debt and Leverage Ratio as management uses these measures to monitor and evaluate its ability to incur and service debt. Adjusted EBITDA, adjusted operating expenses, Adjusted Income from Operations (used in Pre-Tax ROIC), Net Debt and Leverage Ratio 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 or liquidity. 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 and other related services for consumers across a broad range of financial assets. Through its subsidiaries around the globe, Encore purchases portfolios of consumer receivables from major banks, credit unions, and utility providers.

Encore partners with individuals as they repay their debt 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, Encore 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 the company 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 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, each as it may be amended from time to time. The Company disclaims any intent or obligation to update these forward-looking statements.

Contact:

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

SOURCE: Encore Capital Group, Inc.


FINANCIAL TABLES FOLLOW


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

September 30,
2021

December 31,
2020

Assets

Cash and cash equivalents

$

158,243

$

189,184

Investment in receivable portfolios, net

3,083,271

3,291,918

Property and equipment, net

121,097

127,297

Other assets

291,840

349,162

Goodwill

895,515

906,962

Total assets

$

4,549,966

$

4,864,523

Liabilities and Equity

Liabilities:

Accounts payable and accrued liabilities

$

214,486

$

215,920

Borrowings

2,796,224

3,281,634

Other liabilities

140,436

146,893

Total liabilities

3,151,146

3,644,447

Commitments and Contingencies

Equity:

Convertible preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding

—

—

Common stock, $0.01 par value, 75,000 shares authorized, 29,598 and 31,345 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

296

313

Additional paid-in capital

105,326

230,440

Accumulated earnings

1,352,825

1,055,668

Accumulated other comprehensive loss

(59,627

)

(68,813

)

Total Encore Capital Group, Inc. stockholders’ equity

1,398,820

1,217,608

Noncontrolling interest

—

2,468

Total equity

1,398,820

1,220,076

Total liabilities and equity

$

4,549,966

$

4,864,523

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.

September 30,
2021

December 31,
2020

Assets

Cash and cash equivalents

$

718

$

2,223

Investment in receivable portfolios, net

500,304

553,621

Other assets

4,285

5,127

Liabilities

Borrowings

471,570

478,131

Other liabilities

10

37

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

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020

2021

2020

Revenues

Revenue from receivable portfolios

$

316,225

$

342,489

$

982,393

$

1,035,141

Changes in recoveries

65,913

30,451

176,628

(2,203

)

Total debt purchasing revenue

382,138

372,940

1,159,021

1,032,938

Servicing revenue

29,321

29,787

93,901

82,417

Other revenues

1,165

949

4,274

3,435

Total revenues

412,624

403,676

1,257,196

1,118,790

Operating expenses

Salaries and employee benefits

94,662

95,979

288,892

279,944

Cost of legal collections

64,170

60,383

198,212

164,018

General and administrative expenses

35,819

53,459

102,790

113,954

Other operating expenses

25,226

28,088

81,895

83,527

Collection agency commissions

11,964

12,703

38,465

36,562

Depreciation and amortization

14,136

10,609

37,694

31,436

Total operating expenses

245,977

261,221

747,948

709,441

Income from operations

166,647

142,455

509,248

409,349

Other expense

Interest expense

(40,874

)

(52,974

)

(131,559

)

(157,963

)

Loss on extinguishment of debt

—

(14,988

)

(9,300

)

(14,988

)

Other (expense) income

(17,504

)

361

(16,993

)

(1,211

)

Total other expense

(58,378

)

(67,601

)

(157,852

)

(174,162

)

Income before income taxes

108,269

74,854

351,396

235,187

Provision for income taxes

(24,703

)

(19,747

)

(76,278

)

(59,875

)

Net income

83,566

55,107

275,118

175,312

Net income attributable to noncontrolling interest

—

(457

)

(419

)

(784

)

Net income attributable to Encore Capital Group, Inc. stockholders

$

83,566

$

54,650

$

274,699

$

174,528

Earnings per share attributable to Encore Capital Group, Inc.:

Basic

$

2.76

$

1.74

$

8.90

$

5.56

Diluted

$

2.66

$

1.72

$

8.71

$

5.51

Weighted average shares outstanding:

Basic

30,225

31,484

30,863

31,402

Diluted

31,362

31,826

31,531

31,672

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

Nine Months Ended September 30,

2021

2020

Operating activities:

Net income

$

275,118

$

175,312

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

37,694

31,436

Expense related to financing

9,300

19,791

Other non-cash interest expense, net

13,677

22,725

Stock-based compensation expense

12,903

13,189

Deferred income taxes

(8,504

)

(15,070

)

Changes in recoveries

(176,628

)

2,203

Other, net

18,003

24,469

Changes in operating assets and liabilities

Other assets

13,320

14,267

Prepaid income tax and income taxes payable

40,590

(11,226

)

Accounts payable, accrued liabilities and other liabilities

(23,483

)

(27,114

)

Net cash provided by operating activities

211,990

249,982

Investing activities:

Purchases of receivable portfolios, net of put-backs

(473,013

)

(517,959

)

Collections applied to investment in receivable portfolios, net

803,185

540,101

Purchases of property and equipment

(24,163

)

(22,658

)

Other, net

6,799

8,091

Net cash provided by investing activities

312,808

7,575

Financing activities:

Payment of loan and debt refinancing costs

(11,667

)

(48,676

)

Proceeds from credit facilities

418,941

1,695,914

Repayment of credit facilities

(713,958

)

(2,051,764

)

Proceeds from senior secured notes

353,747

410,820

Repayment of senior secured notes

(349,355

)

(152,430

)

Repayment of convertible senior notes

(161,000

)

(89,355

)

Repurchase of common stock

(88,119

)

—

Other, net

(13,262

)

(32,400

)

Net cash used in financing activities

(564,673

)

(267,891

)

Net decrease in cash and cash equivalents

(39,875

)

(10,334

)

Effect of exchange rate changes on cash and cash equivalents

8,934

(12,018

)

Cash and cash equivalents, beginning of period

189,184

192,335

Cash and cash equivalents, end of period

$

158,243

$

169,983

Supplemental disclosure of cash information:

Cash paid for interest

$

100,335

$

148,059

Cash paid for taxes, net of refunds

42,815

87,154

ENCORE CAPITAL GROUP, INC.
Supplemental Financial Information

Reconciliation of Adjusted EBITDA to GAAP Net 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
September 30,

Nine Months Ended
September 30,

Twelve Months Ended
September 30,

2021

2020

2021

2020

2021

2020

GAAP net income, as reported

$

83,566

$

55,107

$

275,118

$

175,312

$

312,329

$

218,544

Adjustments:

Interest expense

40,874

52,974

131,559

157,963

182,952

211,478

Interest income

(270

)

(394

)

(1,170

)

(1,953

)

(1,614

)

(2,796

)

Provision for income taxes

24,703

19,747

76,278

59,875

86,778

73,761

Depreciation and amortization

14,136

10,609

37,694

31,436

49,038

42,729

CFPB settlement fees(1)

—

15,009

—

15,009

—

15,009

Stock-based compensation expense

3,847

3,884

12,903

13,189

16,274

16,334

Acquisition, integration and restructuring related expenses(2)

17,950

(23

)

17,950

4,940

17,972

5,644

Loss on extinguishment of debt

—

14,988

9,300

14,988

35,263

14,988

Adjusted EBITDA

$

184,806

$

171,901

$

559,632

$

470,759

$

698,992

$

595,691

Collections applied to principal balance(3)

$

188,181

$

172,406

$

641,765

$

547,902

$

834,213

$

737,336


________________________

(1)

Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(2)

Amount represents acquisition, integration and restructuring related expenses, including the loss recognized on the sale of our investment in Colombia and Peru of $17.4 million during the three and nine months ended September 30, 2021 and the loss on sale of our investment in Brazil of $4.8 million during the nine months ended September 30, 2020. 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)

For periods prior to January 1, 2020, amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios. For periods subsequent to January 1, 2020, amount represents (a) gross collections from receivable portfolios less (b) debt purchasing revenue. For consistency with the Company debt covenant reporting, for periods subsequent to June 30, 2020, the collections applied to principal balance also includes proceeds applied to basis from sales of REO assets and related activities; prior period amounts have not been adjusted to reflect this change as such amounts were immaterial. A reconciliation of “collections applied to investment in receivable portfolios, net” to “collections applied to principal balance” is available in the Form 10-Q for the period ending September 30, 2021.

Three Months Ended
September 30,

Nine Months Ended
September 30,

2021

2020

2021

2020

GAAP total operating expenses, as reported

$

245,977

$

261,221

$

747,948

$

709,441

Adjustments:

Operating expenses related to non-portfolio purchasing and recovery business(1)

(47,088

)

(54,001

)

(133,008

)

(137,876

)

CFPB settlement fees(2)

—

(15,009

)

—

(15,009

)

Stock-based compensation expense

(3,847

)

(3,884

)

(12,903

)

(13,189

)

Acquisition, integration and restructuring related operating expenses(3)

—

23

—

(132

)

Adjusted operating expenses related to portfolio purchasing and recovery business

$

195,042

$

188,350

$

602,037

$

543,235


________________________

(1)

Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily engage in fee-based business, as well as corporate overhead not related to our portfolio purchasing and recovery business.

(2)

Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(3)

Amount represents acquisition, integration and restructuring related operating expenses. We adjust for this amount because we believe these operating expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

Pre-Tax Return on Invested Capital (“ROIC”)

ROIC is calculated as last twelve months adjusted income from operations, divided by our average invested capital. Adjusted income from operations excludes acquisition, integration and restructuring related expenses, amortization of certain acquired intangible assets and other charges or gains that are not indicative of ongoing operations. Average invested capital is defined as the aggregate of average Net Debt (defined below) and average GAAP equity and is calculated as the sum of current and prior period ending amounts divided by two.

Last Twelve Months Ended September 30,

(in thousands, except percentages)

2021

2020

Numerator

Income from operations

$

633,462

$

522,559

Adjustments:(1)

CFPB settlement fees

—

15,009

Acquisition, integration and restructuring related expenses

2,670

836

Amortization of certain acquired intangible assets(2)

7,409

6,866

Adjusted income from operations

$

643,541

$

545,270

Denominator

Average Net Debt

$

2,967,800

$

3,274,692

Average equity

1,263,038

1,025,627

Total average invested capital

$

4,230,838

$

4,300,319

Pre-tax ROIC

15.2 %

12.7 %


________________________

(1)

We believe these amounts are not indicative of ongoing operations; therefore, adjusting for them enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(2)

We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers. These intangible assets are valued at the time of the acquisition and amortized over their estimated lives. We believe that amortization of acquisition-related intangible assets, 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.

Net Debt

Net Debt is GAAP borrowings adjusted for debt issuance costs and debt discounts, cash and cash equivalents and client cash. Net Debt is a measure commonly used by lenders to our industry to represent the net borrowings of market participants, and is also used regularly by lenders and others as the numerator in industry leverage calculations.

(in thousands)

September 30,
2021

September 30,
2020

September 30,
2019

GAAP Borrowings

$

2,796,224

$

3,252,101

$

3,429,342

Debt issuance costs and debt discounts

60,268

106,511

75,314

Cash & cash equivalents

(158,243

)

(169,983

)

(186,677

)

Client cash(1)

28,343

20,379

22,397

Net Debt

$

2,726,592

$

3,209,008

$

3,340,376


________________________

(1)

Client cash is cash that was collected on behalf of, and remains payable to, third party clients.


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