Exhibit 99.1
For Immediate Release
Encore Capital Reports First Quarter 2006 Financial Results
SAN DIEGO, May 9, 2006/PRNewswire — FirstCall/ — Encore Capital Group, Inc. (Nasdaq: ECPG), a leading accounts receivable management firm, today reported consolidated financial results for the first quarter ended March 31, 2006.
For the first quarter of 2006:
| • | Gross collections were $87.6 million, a 33% increase over the $65.9 million in the same period of the prior year |
| • | Total revenues were $60.5 million, a 20% increase over the $50.5 million in the same period of the prior year |
| • | Net income was $4.7 million, a 37% decrease from the $7.5 million in the same period of the prior year |
| • | Earnings per fully diluted share were $0.20, a 38% decrease from the $0.32 in the same period of the prior year |
| • | Adjusted EBITDA, defined as net income before interest, taxes, depreciation and amortization, stock-based compensation related to stock options, and portfolio amortization, were $47.8 million, a 32% increase from the $36.3 million in the same period of the prior year |
Commenting on the first quarter results, J. Brandon Black, President and CEO of Encore Capital Group, Inc., said, “We had strong collection growth this quarter, as we received excellent production from all collection channels and had good contributions from both credit card and alternative asset classes such as telecom, healthcare and auto deficiencies. We continue to drive innovation in our collection efforts and have begun incorporating new strategies within our legal and direct marketing channels. As these initiatives gain traction, we believe they will improve the liquidation of our portfolios, which could ultimately result in higher collection multiples and revenue recognition.
“From a cash flow perspective, we are very pleased with the performance of the Company. Our Adjusted EBITDA increased 32% over the first quarter of 2005, which indicates that our operating strategies are generating strong, profitable growth and creating value for our stockholders.
“Pricing remained elevated for new portfolios during the first quarter. However, we did find several attractive opportunities, including a number of alternative asset class portfolios, and invested $27 million to purchase $560 million in face value debt. During the quarter, we also purchased our second portfolio of healthcare receivables, and we recently initiated our first
Encore Capital Group, Inc.
Page2 of8
internal collection efforts on this asset class. Building out our internal collection capabilities will enable us to better capitalize on the growth opportunities in this business without having to depend on the available capacity of third-party agencies that specialize in healthcare debt collection,” said Mr. Black.
Financial Highlights
The decrease in diluted earnings per share from the first quarter of 2005 is primarily attributable to the following factors:
| • | A lower revenue recognition rate resulting from the continued shift in the Company’s collection mix from portfolios with higher collection multiples to portfolios with lower collection multiples. |
| • | Additional expenses resulting from investment in new portfolio liquidation strategies. |
| • | The adoption of SFAS 123(R), which requires the recognition of stock option expense. |
| • | The dilutive impact of the Ascension Capital bankruptcy services business, although the business generated positive cash flow from operations during the quarter. |
Revenue recognized on receivable portfolios, as a percentage of portfolio collections, was 66% in the first quarter of 2006, compared with 77% in the first quarter of 2005. The lower revenue recognition rate was primarily attributable to a higher percentage of collections from more recently purchased portfolios that have lower collection multiples assigned to them.
The Company generated $2.9 million in fee-based revenue during the first quarter of 2006, through the Ascension Capital bankruptcy services business acquired in August 2005.
Total operating expenses for the first quarter of 2006 were $44.7 million, compared with $30.3 million in the first quarter of 2005. Excluding stock option expense and Ascension Capital, which is a fee-based business, operating expenses were $38.3 million in the first quarter of 2006, compared with $30.3 million in the first quarter of 2005, while operating expense per dollar collected declined to 44% from 46%.
Total interest expense was $8.0 million in the first quarter of 2006, compared to $8.1 million in the first quarter of 2005. The contingent interest component of interest expense was $4.7 million in the first quarter of 2006, compared with $6.9 million in the same period of the prior year. The Company continues to see a reduction in contingent interest expense as collections decline from older portfolios purchased under its previous credit facility.
Amended Credit Facility
In early May 2006, Encore Capital Group amended its revolving credit facility. The amended facility includes the following provisions:
| • | A reduction in interest rate spreads, which will effectively reduce the Company’s interest rates by up to 75 basis points |
| • | Extending the facility termination date to May 2010 from June 2008 |
Encore Capital Group, Inc.
Page3 of8
| • | Increasing the expansion feature of the facility to $50 million from $25 million |
| • | The modification and elimination of certain covenants |
Outlook
Commenting on the outlook for Encore Capital Group, Mr. Black said, “While our earnings per share will continue to be challenged by lower revenue recognition on more recently purchased portfolios, we believe we will continue to generate strong annual growth in Adjusted EBITDA in 2006.
“We continue to be proactive in evolving our operating strategy to effectively compete in the changing consumer debt recovery market. We have taken a number of steps to improve our ability to pursue additional asset classes that have strong growth potential, while also employing new collection strategies to improve the liquidation of our portfolios. We are confident that the steps we are taking will position the Company to generate sustainable growth in cash flow and earnings in the years ahead,” said Mr. Black.
Conference Call and Webcast
The Company will hold a conference call today at 2:00 PM Pacific time / 5:00 P.M. Eastern time to discuss first quarter results. Members of the public are invited to listen to the live conference call via the Internet.
To hear the presentation and to access a slide presentation containing financial information that will be discussed in the conference call, log on at the Investor Relations page of the Company’s web site atwww.encorecapitalgroup.com.For those who cannot listen to the live broadcast, a replay of the conference call will be available shortly after the call at the same location.
Non-GAAP Financial Measures
The Company has included information concerning Adjusted EBITDA because management utilizes this information, which is materially similar to a financial measure contained in covenants used in the Company’s credit agreement, 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 total operating expenses excluding stock option expense and Ascension Capital operating expenses because the elimination of these expense items included in the GAAP financial measure results in enhanced comparability of certain key financial results between the periods presented. These non-GAAP financial measures should not be considered as alternatives to, or more meaningful than, net income and total operating expenses as indicators of Encore Capital Group’s operating performance. For example, Adjusted EBITDA does not take into account the increased costs of portfolios that have a negative impact on earnings through collections applied to principal on receivable portfolios. Neither Adjusted EBITDA nor operating expenses excluding stock option expense and Ascension Capital operating expenses has been prepared in accordance with generally accepted accounting principles (GAAP). These non-GAAP financial measures, as presented by Encore Capital Group, may not be comparable to similarly
Encore Capital Group, Inc.
Page4 of8
titled measures reported by other companies. The Company has included a reconciliation of Adjusted EBITDA to reported earnings under GAAP, and a reconciliation of operating expenses excluding stock option expense and Ascension Capital operating expenses to the GAAP measure total operating expenses in the attached financial tables.
About Encore Capital Group, Inc.
Encore Capital Group, Inc. is a systems-driven purchaser and manager of charged-off consumer receivables portfolios. More information on the company can be found at www.encorecapitalgroup.com.
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 “may,” “believes,” “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, projections of future collections, revenues, profitability, cash flow, any non-GAAP financial measures referenced herein, income or loss (including our expectations regarding measures designed to increase portfolio liquidation and the resulting effect on revenue and profitability), the size of the market for delinquent consumer healthcare debt, and the exploitation of new opportunities in that market; and plans for future acquisitions, operations, products or services, as well as assumptions relating to those matters. 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 our subsidiaries to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could affect the Company’s results and cause them to materially differ from those contained in the forward-looking statements include: the Company’s ability to purchase receivables portfolios on acceptable terms and in sufficient quantities; the Company’s ability to acquire and collect on portfolios consisting of new types of receivables; the Company’s ability to recover sufficient amounts on or with respect to receivables to fund operations; the Company’s ability to successfully execute acquisitions; the Company’s continued servicing of receivables in its third party financing transactions; the Company’s ability to hire and retain qualified personnel to recover on its receivables efficiently; changes in, or failure to comply with, government regulations; the costs, uncertainties and other effects of legal and administrative proceedings; and risk factors and cautionary statements made in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2005. Forward-looking statements speak only as of the date the statement was made. They are inherently subject to risks and uncertainties, some of which the Company cannot control, predict or quantify. Future events and actual results could differ materially from the forward-looking statements. The Company will not undertake and specifically declines any obligation, nor does the Company intend, to update or revise any forward-looking statements to reflect new information or future events or for any other reason. In addition, it is the Company’s policy generally not to make any specific projections as to future earnings, and the Company does not endorse any projections regarding future performance that may be made by third parties.
Contact:
Encore Capital Group, Inc.
Paul Grinberg (858) 309-6904 (Stockholders/Analysts)
paul.grinberg@encorecapitalgroup.com
or
Ren Zamora (858) 560-3598 (Investor Relations)
ren.zamora@encorecapitalgroup.com
FINANCIAL TABLES FOLLOW
Encore Capital Group, Inc.
Page5 of8
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
March 31, 2006 (Unaudited) | December 31, 2005 (A) | |||||
Assets | ||||||
Cash and cash equivalents | $ | 6,739 | $ | 7,026 | ||
Restricted cash | 5,302 | 4,212 | ||||
Accounts receivable, net | 3,504 | 5,515 | ||||
Investment in receivable portfolios, net | 252,409 | 256,333 | ||||
Property and equipment, net | 4,811 | 5,113 | ||||
Prepaid income tax | 12,464 | 13,570 | ||||
Purchased servicing asset | 2,474 | 3,035 | ||||
Forward flow asset | 35,798 | 38,201 | ||||
Other assets | 16,262 | 16,065 | ||||
Goodwill | 14,148 | 14,148 | ||||
Identifiable intangible assets, net | 4,827 | 5,227 | ||||
Total assets | $ | 358,738 | $ | 368,445 | ||
Liabilities and stockholders’ equity | ||||||
Liabilities: | ||||||
Accounts payable and accrued liabilities | $ | 18,938 | $ | 23,101 | ||
Accrued profit sharing arrangement | 13,759 | 16,528 | ||||
Deferred tax liabilities, net | 7,963 | 7,241 | ||||
Deferred revenue | 4,344 | 3,326 | ||||
Purchased servicing obligation | 1,338 | 1,776 | ||||
Debt | 186,506 | 198,121 | ||||
Total liabilities | 232,848 | 250,093 | ||||
Commitments and contingencies | ||||||
Stockholders’ 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, 22,776 shares and 22,651 shares issued and outstanding as of March 31, 2006 and December 31, 2005, respectively | 228 | 227 | ||||
Additional paid-in capital | 60,729 | 57,989 | ||||
Accumulated earnings | 64,603 | 59,925 | ||||
Accumulated other comprehensive income | 330 | 211 | ||||
Total stockholders’ equity | 125,890 | 118,352 | ||||
Total liabilities and stockholders’ equity | $ | 358,738 | $ | 368,445 | ||
| (A) | Derived from the audited consolidated financial statements as of December 31, 2005. |
Encore Capital Group, Inc.
Page6 of8
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2006 | 2005 | |||||||
Revenues | ||||||||
Revenue from receivable portfolios, net | $ | 57,574 | $ | 50,420 | ||||
Servicing fees and other related revenue | 2,906 | 56 | ||||||
Total revenues | 60,480 | 50,476 | ||||||
Operating expenses | ||||||||
Salaries and employee benefits | 16,279 | 12,600 | ||||||
Stock-based compensation expense | 1,381 | — | ||||||
Cost of legal collections | 11,278 | 8,356 | ||||||
Other operating expenses | 6,446 | 4,642 | ||||||
Collection agency commissions | 4,613 | 2,024 | ||||||
General and administrative expenses | 3,733 | 2,158 | ||||||
Depreciation and amortization | 960 | 511 | ||||||
Total operating expenses | 44,690 | 30,291 | ||||||
Income before other income (expense) and income taxes | 15,790 | 20,185 | ||||||
Other income (expense) | ||||||||
Interest expense | (7,951 | ) | (8,087 | ) | ||||
Other income | 50 | 405 | ||||||
Total other expense | (7,901 | ) | (7,682 | ) | ||||
Income before income taxes | 7,889 | 12,503 | ||||||
Provision for income taxes | (3,211 | ) | (5,051 | ) | ||||
Net income | $ | 4,678 | $ | 7,452 | ||||
Basic - earnings per share computation: | ||||||||
Net income available to common stockholders | $ | 4,678 | $ | 7,452 | ||||
Weighted average shares outstanding | 22,681 | 22,227 | ||||||
Earnings per share – Basic | $ | 0.21 | $ | 0.34 | ||||
Diluted - earnings per share computation: | ||||||||
Net income available to common stockholders | $ | 4,678 | $ | 7,452 | ||||
Weighted average shares outstanding | 22,681 | 22,227 | ||||||
Incremental shares from assumed conversion of stock options | 1,132 | 1,353 | ||||||
Diluted weighted average shares outstanding | 23,813 | 23,580 | ||||||
Earnings per share – Diluted | $ | 0.20 | $ | 0.32 | ||||
Encore Capital Group, Inc.
Page7 of8
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
| Three Months Ended March 31, | ||||||||
| 2006 | 2005 | |||||||
Operating activities | ||||||||
Gross collections | $ | 87,616 | $ | 65,853 | ||||
Less: | ||||||||
Amounts collected on behalf of third parties | (168 | ) | (274 | ) | ||||
Amounts applied to principal on receivable portfolios | (29,579 | ) | (15,160 | ) | ||||
Servicing fees | 51 | 56 | ||||||
Operating expenses | (41,580 | ) | (32,997 | ) | ||||
Interest payments | (2,187 | ) | (1,151 | ) | ||||
Contingent interest payments | (7,455 | ) | (8,205 | ) | ||||
Other income | 50 | 405 | ||||||
Increase in restricted cash | (1,090 | ) | (1,248 | ) | ||||
Income taxes | (249 | ) | (1,490 | ) | ||||
Excess tax benefits from stock-based payment arrangements | (730 | ) | — | |||||
Net cash provided by operating activities | 4,679 | 5,789 | ||||||
Investing activities | ||||||||
Purchases of receivable portfolios | (24,688 | ) | (19,523 | ) | ||||
Collections applied to principal of receivable portfolios | 29,579 | 15,160 | ||||||
Proceeds from the sale of marketable securities | — | 24,000 | ||||||
Proceeds from put-backs of receivable portfolios | 1,148 | 258 | ||||||
Purchases of property and equipment | (265 | ) | (431 | ) | ||||
Net cash provided by investing activities | 5,774 | 19,464 | ||||||
Financing activities | ||||||||
Proceeds from notes payable and other borrowings | 3,000 | 2,088 | ||||||
Repayment of notes payable and other borrowings | (14,555 | ) | (22,516 | ) | ||||
Proceeds from exercise of common stock options and warrants | 144 | 588 | ||||||
Excess tax benefits from stock-based payment arrangements | 730 | — | ||||||
Repayment of capital lease obligations | (59 | ) | (46 | ) | ||||
Net cash used in financing activities | (10,740 | ) | (19,886 | ) | ||||
Net increase (decrease) in cash | (287 | ) | 5,367 | |||||
Cash and cash equivalents, beginning of year | 7,026 | 9,731 | ||||||
Cash and cash equivalents, end of year | $ | 6,739 | $ | 15,098 | ||||
Encore Capital Group, Inc.
Page8 of8
ENCORE CAPITAL GROUP, INC.
Supplemental Financial Information
Reconciliation of Adjusted EBITDA to GAAP Net Income and Operating Expenses, Excluding Stock Option
Expense and Ascension Capital Operating Expenses to GAAP Total Operating Expenses
(Unaudited, In Thousands)
| Three Months Ended March 31, | |||||||
| 2006 | 2005 | ||||||
GAAP net income, as reported | $ | 4,678 | $ | 7,452 | |||
Interest expense | 7,951 | 8,087 | |||||
Provision for income taxes | 3,211 | 5,051 | |||||
Depreciation and amortization | 960 | 511 | |||||
Amount applied to principal on receivable portfolios | 29,579 | 15,160 | |||||
Stock-based compensation expense | 1,381 | — | |||||
Adjusted EBITDA | $ | 47,760 | $ | 36,261 | |||
GAAP total operating expense, as reported | $ | 44,690 | $ | 30,291 | |||
Stock-based compensation expense | (1,381 | ) | — | ||||
Ascension Capital operating expenses | (4,978 | ) | — | ||||
Operating expenses, excluding stock option expense and Ascension Capital operating expenses | $ | 38,331 | $ | 30,291 | |||
# # #