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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
COMMISSION FILE NUMBER: 000-26489
ENCORE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
3111 Camino Del Rio North, Suite 103
San Diego, California
(Address of principal executive offices)
48-1090909
(IRS Employer
Identification No.)
92108
(Zip code)
(877) 445-4581
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 Par Value Per Share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting stock held by non-affiliates of the registrant totaling 23,525,676 shares was approximately
$1,005,487,392 at June 30, 2015, based on the closing price of the common stock of $42.74 per share on such date, as reported by the NASDAQ
Global Select Market.
The number of shares of our Common Stock outstanding at February 9, 2016, was 25,288,136.
Documents Incorporated by Reference
Portions of the registrant’s proxy statement in connection with its annual meeting of stockholders to be held in 2016 are incorporated by
reference in Items 10, 11, 12, 13, and 14 of Part III of this Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Table of Contents
TABLE OF CONTENTS
PART I
Item 1—Business
Item 1A—Risk Factors
Item 1B—Unresolved Staff Comments
Item 2—Properties
Item 3—Legal Proceedings
Item 4—Mine Safety Disclosures
PART II
Item 5—Market for the Registrant’s Common Equity Securities, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6—Selected Financial Data
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A—Quantitative and Qualitative Disclosures about Market Risk
Item 8—Financial Statements and Supplementary Data
Item 9—Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A—Controls and Procedures
Item 9B—Other Information
PART III
Item 10—Directors, Executive Officers and Corporate Governance
Item 11—Executive Compensation
Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13—Certain Relationships and Related Transactions, and Director Independence
Item 14—Principal Accountant Fees and Services
PART IV
Item 15—Exhibits and Financial Statement Schedules
SIGNATURES
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An Overview of Our Business
Nature of Our Business
PART I
Item 1—Business
We are an international specialty finance company providing debt recovery solutions for consumers and property owners
across a broad range of financial assets.
Portfolio Purchasing and Recovery Business
We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working
with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’
unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial
retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy
proceedings.
United States
Through certain subsidiaries, we are a market leader in portfolio purchasing and recovery in the United States, including
Puerto Rico.
Europe
Through our controlling interest in United Kingdom-based Cabot Credit Management Limited (“Cabot”), we are a market
leader in debt management in the United Kingdom and Ireland. Cabot specializes in collecting higher balance, “semi-
performing” accounts (i.e., debt portfolios in which over 50% of the accounts have received a payment in three of the last four
months immediately prior to the portfolio purchase). In February 2014, Cabot acquired Marlin Financial Group Limited
(“Marlin”), a leading acquirer of non-performing consumer debt in the United Kingdom. Marlin is differentiated by its use of
litigation-enhanced collections for non-paying financial services receivables, which complements Cabot’s management of
semi-performing accounts. On June 1, 2015, Cabot continued to expand in the United Kingdom with its acquisition of
Hillesden Securities Ltd and its subsidiaries (“dlc”).
We own a majority ownership interest in Grove Holdings (“Grove”). Through its subsidiaries Grove is a leading specialty
investment firm focused on consumer non-performing loans, including insolvencies in the United Kingdom (in particular,
individual voluntary arrangements, or IVAs) and bank and non-bank receivables in Spain. To date, operating results from Grove
have been immaterial to our total consolidated operating results. As a result, descriptions of our international operations in Part
I - Item 1 of this Form 10-K will focus substantially on our combined Cabot operations and will not include a detailed
discussion of Grove’s operations.
Latin America
Through our majority ownership interest in Refinancia S.A. (“Refinancia”), we are a market leader in debt collection and
management in Colombia and Peru. In addition to purchasing defaulted receivables, Refinancia offers portfolio management
services to banks for non-performing loans. Refinancia also specializes in non-traditional niches in the geographic areas in
which it operates, including providing financial solutions to individuals who have previously defaulted on their obligations. In
addition to operations in Colombia and Peru, we evaluate and purchase non-performing loans in other countries in Latin
America, including Mexico and Brazil. Beginning in December 2014, we began investing in non-performing secured
residential mortgages in Latin America. To date, operating results from our Latin America operations have not been significant
to our total consolidated operating results. As a result, descriptions of our international operations in Part 1 - Item 1 of this
Form 10-K will not include a detailed discussion of our Latin American operations.
Asia Pacific
Through our majority ownership interest in Baycorp Holdings Pty Limited (“Baycorp”), acquired in October 2015, we are
one of Australasia's leading debt resolution specialists. Baycorp specializes in the management of non-performing loans in
Australia and New Zealand. In addition to purchasing defaulted receivables, Baycorp offers portfolio management services to
banks for non-performing loans. To date, Baycorp’s operating results have been immaterial to our total consolidated operating
results. As a result, descriptions of our international operations in Part 1 - Item 1 of this Form 10-K will not include a detailed
discussion of Baycorp’s operations.
Accounts originated in the United States are serviced through our call centers in the United States, India and Costa Rica.
Beginning in January 2014, our India call center also began to service Cabot’s United Kingdom accounts. The balance of our
accounts is serviced in the country of origin for such accounts. Throughout this Annual Report on Form 10-K, when we refer to
our United States operations, we include accounts originated in the United States that are serviced through our call centers in
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the United States, India and Costa Rica. When we refer to our international operations, we are referring to accounts originated
outside of the United States.
Tax Lien Business
Through our subsidiary, Propel Acquisition, LLC and its subsidiaries and affiliates (collectively, “Propel”), we acquire
and service residential and commercial tax liens on real property. To the extent permitted by local law, Propel works directly
with property owners to structure affordable payment plans by paying delinquent property taxes on behalf of such property
owners in exchange for payment agreements collateralized by tax liens on the related properties and purchases tax liens directly
from taxing authorities in several states.
In order to improve our overall corporate invested capital returns, reduce our debt, provide liquidity, and allow us to
tighten our focus on expanding our market leadership in debt buying and servicing in the U.S. and around the world, on
February 19, 2016, we entered into an agreement with certain funds to sell 100% of our membership interests in Propel. The
estimated sales price indicated that Propel’s fair value was less than its carrying value at December 31, 2015 and, as a result,
goodwill at this reporting unit was impaired. Based on the estimated sales price, we recorded a goodwill impairment charge of
$49.3 million for the year ended December 31, 2015. The goodwill impairment charge had no cash flow impact. Refer to Note
17, “Subsequent Event” and Note 15, “Goodwill and Identifiable Intangible Assets” to our consolidated financial statements for
further information on the sale of Propel and the goodwill impairment.
During the course of our ownership, excluding the non-cash goodwill impairment charge discussed above, Propel
contributed $20.6 million of earnings and $35.7 million of EBITDA through December 31, 2015. Including the effect of this
non-cash goodwill impairment charge, the cumulative net loss after the benefit for income taxes amounted to approximately
$10.5 million.
Keys to Success
The foundation of our success is our people, our organizational agility, and our integrity. This foundation supports
strengths in four key areas, which we refer to as our pillars:
•
Superior Analytics, including our extensive investments in data and behavioral science and our use of
sophisticated predictive modeling techniques;
• Operational Scale and Cost Leadership, driven by our specialized call centers, efficient international
operations, and the continuing expansion of our internal legal platform;
•
Strong Capital Stewardship, underpinned by our disciplined ability to raise and deploy capital prudently; and
• Extendable Business Model, driven by our scalable platform that supports strategic investment opportunities in
new asset classes and geographic areas.
Although we have enabled millions of consumers to retire a portion of their outstanding debt, one of the debt collection
industry’s most formidable challenges is that many financially distressed consumers will never make a payment, much less
retire their total debt obligation. In fact, we generate payments from less than one percent of our accounts every month. To
address these challenges, we evaluate portfolios of receivables that are available for purchase using robust, account-level
valuation methods, and we employ proprietary statistical and behavioral models across all our operations. We believe these
business practices contribute to our ability to value portfolios accurately, avoid buying portfolios that are incompatible with our
methods or goals, and align the accounts we purchase with our operational channels to maximize future collections. We also
have one of the industry’s largest databases of financially distressed consumers. We believe that our specialized knowledge,
along with our investments in data and analytic tools, have enabled us to realize significant returns from the receivables we
have acquired. We maintain strong relationships with many of the largest credit providers in the United States. In addition,
through our international subsidiaries, we maintain strong relationships with many of the largest credit providers in the
European and the Latin American markets we serve.
Seasonality
United States
While seasonality does not have a material impact on our portfolio purchasing and recovery segment, collections are
generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth
calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the
other quarters, as our fixed costs are relatively constant and applied against a larger collection base. The seasonal impact on our
business may also be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies.
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Collection seasonality with respect to our portfolio purchasing and recovery segment can also affect revenue as a
percentage of collections, also referred to as our revenue recognition rate. Generally, revenue for each pool group declines
steadily over time, whereas collections can fluctuate from quarter to quarter based on seasonality, as described above. In
quarters with lower collections (e.g., the fourth calendar quarter), the revenue recognition rate can be higher than in quarters
with higher collections (e.g., the first calendar quarter).
In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger
collections, total costs are higher as a result of the additional efforts required to generate those collections. Since revenue for
each pool group declines steadily over time, in quarters with higher collections and higher costs (e.g., the first calendar
quarter), all else being equal, earnings could be lower than in quarters with lower collections and lower costs (e.g., the fourth
calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency
outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites.
International
While seasonality does not have a material impact on Cabot’s operations, collections are generally strongest in the second
and third calendar quarters and slower in the first and fourth quarters, largely driven by the impact of the December holiday
season and the New Year holiday, and the related impact on customers’ ability to repay their balances. This drives a higher level
of plan defaults over this period, which are typically repaired across the first quarter of the following year. The August vacation
season in the United Kingdom also has an unfavorable effect on the level of collections, but this is traditionally compensated
for by higher collections in July and September.
Operating Segments
We conduct business through two reportable segments: portfolio purchasing and recovery, and tax lien business. Financial
information regarding our operating segments and geographic operations is set forth in Note 14, “Segment Information” to our
consolidated financial statements.
Company Information
We were incorporated in Delaware in 1999. Our headquarters is located at 3111 Camino Del Rio North, Suite 103, San
Diego, California 92108 and our telephone number is (877) 445-4581. Investors wishing to obtain more information about us
may access the Investors section of our Internet site at http://www.encorecapital.com. The site provides access, free of charge,
to relevant investor related information, such as Securities and Exchange Commission (“SEC”) filings, press releases, featured
articles, an event calendar, and frequently asked questions. SEC filings are available on our Internet site as soon as reasonably
practicable after being filed with, or furnished to, the SEC. Also available on our website are our Standards of Business
Conduct and charters for the committees of our board of directors. We intend to disclose any amendment to, or waiver of, a
provision of our Standards of Business Conduct on our website. The content of our Internet site is not incorporated by reference
into this Annual Report on Form 10-K. Any materials that we filed with the SEC may also be read and copied at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://
www.sec.gov).
Our Competitive Advantages
Analytic Strength. We believe that success in our portfolio purchasing and recovery business depends on our ability to
establish and maintain an information advantage. Leveraging an industry-leading financially distressed consumer database, our
in-house team of statisticians, business analysts, and software programmers have developed, and continually enhance,
proprietary behavioral and valuation models, custom software applications, and other business tools that guide our portfolio
purchases. Moreover, our collection channels are informed by powerful statistical models specific to each collection activity,
and each year we deploy significant capital to purchase credit bureau and customized consumer data that describe
demographic, account level, and macroeconomic factors related to credit, savings, and payment behavior. Our recent
international expansion has enabled us to collaborate across our operating subsidiaries to employ and enhance our statistical
models throughout the markets we service.
Consumer Intelligence. At the core of our analytic approach is a focus on characterizing our consumers’ willingness and
ability to repay their financial obligations. In this effort, we apply tools and methods from statistics, psychology, economics,
and management science across the full extent of our business. During portfolio valuation, we use an internally developed and
proprietary family of statistical models that determines the likelihood and expected amount of payment for each consumer
within a portfolio. Subsequently, the expectations for each account are aggregated to arrive at a portfolio-level liquidation
solution and a valuation for the entire portfolio is determined. During the collection process, we apply a number of proprietary
operational frameworks to match our collection approach to an individual consumer’s payment behavior.
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Cost Leadership. Cost efficiency is central to our collection and purchasing strategies. We experience considerable cost
advantages, stemming from our operations in India and Costa Rica, our enterprise-wide, activity-level cost database, and the
development and implementation of operational models that enhance profitability. We believe that we are the only company in
our industry with a successful, late-stage collection platform in India. This cost-saving, first-mover advantage helps to reduce
our call center variable cost-to-collect.
Principled Intent. Across the full extent of our operations, we strive to treat consumers with respect, compassion, and
integrity. From discounts and payment plans to hardship solutions, we work with our consumers as they attempt to return to
financial health. We are committed to dialogue that is honorable and constructive, and hope to play an important and positive
role in our consumers’ financial recovery. We believe that our interests, and those of the financial institutions from which we
purchase portfolios, are closely aligned with the interests of government agencies seeking to protect consumer rights. In 2011,
we unveiled the industry’s first and only Consumer Bill of Rights, which codifies our commitment to respectful consumer
treatment. We expect to continue investing in infrastructure and processes that support consumer advocacy and financial
literacy while promoting an appropriate balance between corporate and consumer responsibility.
Our Strategy
We have implemented a business strategy that emphasizes the following three elements:
Continue to Invest in our Core Businesses. Our core domestic portfolio purchasing and recovery business remains critical
to our success. Supply and demand dynamics within the United States have fluctuated over time and will likely continue to do
so. To position ourselves to continue to generate strong risk-adjusted returns in this environment, we continue to make
investments in analytics, technology, risk management, compliance, and initiatives to enhance our relationships with consumers
and improve liquidation rates on our portfolios. We intend to continue to deploy a meaningful amount of capital in our core
domestic markets. Our 2014 acquisition of Atlantic Credit & Finance, Inc. (“Atlantic”) reflects a strategic decision to expand
our core domestic portfolio purchasing and recovery presence. Atlantic is a market leader in buying and collecting on freshly
charged-off debt, which was not an area of strength for us prior to our acquisition of Atlantic. Combined with our expertise in
later stage collections, we believe Atlantic has positioned us to be more competitive in the market.
Expand into New Geographies. We believe we are well-positioned to take a leading role, worldwide, in the distressed debt
and subprime consumer financial sectors. Our current footprint includes our industry-leading U.S. and U.K. core debt recovery
businesses, our presence in Spain, our entrance into the Latin American and Australasian debt markets, and our international
operations through our India and Costa Rica locations. In addition, we are constantly evaluating additional investments in, or
acquisitions of, complementary businesses in order to expand into new geographic markets. For example, we have announced
plans to commence portfolio purchasing and recovery operations in India. As portfolio prices fluctuate and the complexity of
our industry continues to increase, we expect that our international operations will continue to provide a significant competitive
advantage.
Explore Business Model Adjacencies and Expansion. We are working to leverage some of our core competencies, such as
our knowledge of financially distressed consumers, in other areas or for new types of defaulted consumer receivables. We
believe that our existing underwriting and collection processes can be extended to a variety of consumer receivables. These
capabilities may allow us to develop and provide complementary products or services to specified financially distressed
consumer segments.
Acquisition of Portfolio Purchasing and Recovery Receivables
We provide sellers of delinquent receivables liquidity and immediate value through the purchase of charged-off consumer
receivables. We believe that we are an appealing partner for these sellers given our financial strength, focus on principled
intent, and track record of financial success.
United States
Identify purchase opportunities. We maintain relationships with some of the largest credit originators and portfolio
resellers of charged-off consumer receivables in the United States. We identify purchase opportunities and secure, where
possible, exclusive negotiation rights. We believe that we are a valued partner for credit originators and portfolio resellers from
whom we purchase portfolios, and our ability to secure exclusive negotiation rights is typically a result of our strong
relationships and our purchasing scale. Receivable portfolios are sold either through a general auction, where the seller requests
bids from market participants, or through an exclusive negotiation, where the seller and buyer negotiate a sale privately. The
sale transaction can be either for a one-time spot purchase or for a “forward flow” contract. A “forward flow” contract is a
commitment to purchase receivables over a duration that is typically three to twelve months with specifically defined volume,
frequency, and pricing. Typically, these forward flow contracts have provisions that allow for early termination or price re-
negotiation should the underlying quality of the portfolio deteriorate over time or if any particular month’s delivery is
materially different than the original portfolio used to price the forward flow contract. We generally attempt to secure forward
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flow contracts for receivables because a consistent volume of receivables over a set duration can allow us more precision in
forecasting and planning our operational needs.
Evaluate purchase opportunities using account-level analytics. Once a portfolio of interest is identified, we obtain
detailed information regarding the portfolio’s accounts, including certain information regarding the consumers themselves. We
then purchase additional information for the consumers whose accounts we are contemplating purchasing, including credit,
savings, or payment behavior. Our Decision Science team, responsible for asset valuation, statistical analysis, and forecasting,
then analyzes this information to determine the expected value of each potential new consumer. Our collection expectations are
based on these demographic data, account characteristics, and economic variables, which we use to predict a consumer’s
willingness and ability to repay his or her debt. The expected value of collections for each account is aggregated to calculate an
overall value for the portfolio. Additional adjustments are made to account for qualitative factors that may affect the payment
behavior of our consumers (such as prior collection activities, or the underwriting approach of the seller), and servicing related
adjustments to ensure our valuations are aligned with our operations.
Formal approval process. Once we have determined the value of the portfolio and have completed our qualitative
diligence, we present the purchase opportunity to our investment committee, which either sets the maximum purchase price for
the portfolio based on a corporate Internal Rate of Return (“IRR”) or other strategic objectives or declines to bid. Members of
the investment committee include our Chief Executive Officer, Chief Financial Officer, other members of our senior
management team, and experts, as needed.
We believe long-term success is best achieved by combining a diverse asset sourcing approach with an account-level
scoring methodology and a disciplined evaluation process.
International
Through Cabot, we maintain strong relationships with many of the largest financial service providers in the United
Kingdom. Cabot primarily acquires receivable portfolios in negotiated spot transactions, but it also participates in auctions on
occasion. In addition, Cabot purchases a small number of portfolios by entering into forward flow agreements, although it has
substantially moved away from these arrangements.
When Cabot identifies a portfolio of interest, it evaluates account-level information and performs due diligence to
evaluate certain features of the portfolio. Cabot next applies its proprietary, highly automated portfolio pricing models to
further evaluate the portfolio, using separate models depending on the type of account: a paying model for semi-performing
accounts and a regression model for non-performing accounts. Using its substantial database of account holder information,
Cabot carries out additional statistical analysis that is customized to evaluate specific repayment characteristics to further
evaluate the accounts. The results of due diligence and the outputs of the pricing models and data analysis is presented to
Cabot’s pricing committee, which then decides whether to make an indicative bid for the portfolio. If, following the indicative
bid, Cabot is short-listed by the vendor, it then conducts further due diligence on the portfolio and refines its analysis.
Following this additional due diligence, the pricing committee decides whether to submit a final binding offer for the portfolio.
All purchases require approval by the pricing committee. Cabot’s pricing committee includes its Chief Executive Officer,
Financial Director and Chief Investment Officer. We believe that Cabot’s significant industry and management experience
enable it to make informed decisions about the portfolios we acquire through Cabot.
Portfolio Purchasing and Recovery Collection Approach
United States
We expand and build upon the insight developed during our purchase process when developing our account collection
strategies for portfolios we have acquired. Our proprietary consumer-level collectability analysis is the primary determinant of
whether an account is actively serviced post-purchase. Generally, we pursue collection activities on only a fraction of the
accounts we purchase, through one or more of our collection channels. The channel identification process is analogous to a
decision tree where we first differentiate those consumers who we believe are unable to pay from those who we believe are able
to pay. Consumers who we believe are financially incapable of making any payments, or are facing extenuating circumstances
or hardships that would prevent them from making payments, are excluded from our collection process. It is our practice to
assess each consumer’s willingness to pay through analytics, phone calls and/or letters. Despite our efforts to reach consumers
and work out a settlement plan, only a small number of consumers who we contact choose to engage with us. Those who do are
often offered discounts on their obligations or are presented with payment plans that are intended to suit their needs. However,
the majority of consumers we contact do not respond to our calls or our letters and we must then make the decision about
whether to pursue collections through legal action. Throughout our ownership period, we periodically refine our collection
approach to determine the most effective collection strategy to pursue for each account. These strategies consist of:
•
Inactive. We strive to use our financial resources judiciously and efficiently by not deploying resources on accounts
where the prospects of collection are remote based on a consumer’s situation.
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• Direct Mail. We develop innovative, low-cost mail campaigns offering consumers appropriate discounts to
encourage settlement of their accounts.
• Call Centers. We maintain domestic collection call centers in Phoenix, Arizona, St. Cloud, Minnesota, Warren,
Michigan, and Roanoke, Virginia and international call centers in Gurgaon, India and San Jose, Costa Rica. Call
centers generally consist of multiple collection departments. Account managers supervised by group managers are
trained and divided into specialty teams. Account managers assess our consumers’ willingness and capacity to pay.
They attempt to work with consumers to evaluate sources and means of repayment to achieve a full or negotiated
lump sum settlement or develop payment programs customized to the individual’s ability to pay. In cases where a
payment plan is developed, account managers encourage consumers to pay through automatic payment
arrangements. During our new hire training period, we educate account managers to understand and apply
applicable laws and policies that are relevant in the account manager’s daily collection activities. Our ongoing
training and monitoring efforts help ensure compliance with applicable laws and policies by account managers.
•
Skip Tracing. If a consumer’s phone number proves inaccurate when an account manager calls an account, or if
current contact information for a consumer is not available at the time of account purchase, then the account could
be routed to our skip tracing process. We currently use a number of different skip tracing companies to provide
accurate phone numbers and addresses.
• Legal Action. We generally refer accounts for legal action where the consumer has not responded to our direct mail
efforts or our calls and it appears the consumer is able, but unwilling, to pay his or her obligations. When we decide
to pursue legal action, we place the account into our internal legal channel or refer them to our network of retained
law firms. If placed to our internal legal channel, attorneys in that channel will evaluate the accounts and make the
final determination whether to pursue legal action. If referred to our network of retained law firms, we rely on our
law firms’ expertise with respect to applicable debt collection laws to evaluate the accounts placed in that channel in
order to make the decision about whether or not to pursue collection litigation. Prior to engaging an external
collection firm, we evaluate the firm’s compliance with consumer credit laws and regulations, operations, financial
condition, and experience, among other key criteria. The law firms we have hired may also attempt to communicate
with the consumers in an attempt to collect their debts prior to initiating litigation. We pay these law firms a
contingent fee based on amounts they collect on our behalf.
• Third-Party Collection Agencies. We selectively employ a strategy that uses collection agencies. Collection agencies
receive a contingent fee for each dollar collected. Generally, we use these agencies on accounts when we believe
they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. We
also use agencies to initially provide us a way to scale quickly when large purchases are made and as a challenge to
our internal call center collection teams. Prior to engaging a collection agency, we evaluate, among other things,
those aspects of the agency’s business that we believe are relevant to its performance and compliance with consumer
credit laws and regulations.
• Online. We offer an online payment portal that enhances consumer convenience by providing consumers the ability
to make payments and submit inquiries online.
•
Sale. We do not resell accounts to third parties in the ordinary course of our business.
International
Cabot uses insights developed during its purchasing process to build account collection strategies. Cabot’s proprietary
consumer-level collectability analysis is the primary determinant of how an account will be serviced post-purchase. Cabot
continuously refines this analysis to determine the most effective collection strategy to pursue for each account it owns. In
recent years, Cabot has concentrated on buying high-balance financial services debt, both paying and non-paying. Cabot will
attempt to establish contact with these consumers in order to transfer payment arrangements and gauge the willingness of these
consumers to pay. Consumers who Cabot believes are financially incapable of making any payments, those having negative
disposable income, or those experiencing hardship (such as medical issues or mental incapacity), are handled outside of normal
collections processes through dedicated and tailored strategies.
The remaining pool of accounts then receives further evaluation through the combined use of Cabot’s and Marlin’s data
analytics. At that point, Cabot analyzes and determines a consumer’s perceived willingness to pay. Based on that analysis,
Cabot pursues collections through letters and/or phone calls to its consumers. Where contact is made and consumers indicate a
willingness to pay, a patient approach of forbearance is applied using regulatory protocols within the United Kingdom to assess
affordability and ensure that repayment plans are fair and balanced and therefore sustainable. Where the customer is unwilling
to pay, Cabot refers the account to the appropriate escalation point in the collection process, which may include its internal debt
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collection agency, a third-party collection agency or legal action. Cabot also has robust internal legal collection capabilities,
allowing the organization to address consumers across the entire willingness to pay spectrum.
Tax Lien Business
Propel acquires and services residential and commercial tax liens on real property. These liens take priority over most
other liens, including mortgage liens. To the extent permitted by local law, Propel works directly with property owners to
structure affordable payment plans designed to allow them to keep their properties while paying their property tax obligations
over time. In such cases, Propel pays their tax lien obligations to the taxing authority, and the property owners pay Propel at
lower interest rates and/or over a longer period of time than the taxing authorities would ordinarily permit. Propel also
purchases tax liens directly from taxing authorities in certain states. In many cases, these tax liens continue to be serviced by
the taxing authorities. When a taxing authority receives payment for the outstanding taxes, it pays Propel the outstanding
balance of the related lien plus interest, which is either established by statute, negotiated at the time of the purchase, or
determined by the bid Propel submitted to acquire the tax lien.
On February 19, 2016, we entered into an agreement with certain funds to sell 100% of our membership interests in
Propel. The estimated sales price indicated that Propel’s fair value was less than its carrying value at December 31, 2015 and,
as a result, goodwill at this reporting unit was impaired. Based on the estimated sales price, we recorded a goodwill impairment
charge of $49.3 million for the year ended December 31, 2015. Refer to Note 17, “Subsequent Event” and Note 15, “Goodwill
and Identifiable Intangible Assets” to our consolidated financial statements for further information on the sale of Propel and the
goodwill impairment.
Legal, Compliance and Enterprise Risk Management, Oversight
United States
Our legal and compliance oversight functions are divided between our legal, compliance and enterprise risk management
departments. Our legal department manages regulatory oversight, litigation, corporate transactions, and compliance with our
internal ethics policy, while our compliance department tests and monitors adherence to State and Federal regulations and
enterprise risk management manages risk and internal audit.
The legal department is responsible for interpreting and administering our Standards of Business Conduct (the
“Standards”), which apply to all of our directors, officers, and employees and outlines our commitment to a culture of
professionalism and ethical behavior. The Standards promote honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and professional relationships, compliance with applicable laws, rules
and regulations, and full and fair disclosure in reports that we file with, or submit to, the SEC and in other public
communications made by us. As described in the Standards, we have also established a toll-free Compliance Hotline to allow
directors, officers, and employees to report any detected or suspected fraud, misappropriations, or other fiscal irregularities, any
good faith concern about our accounting and/or auditing practices, or any other violations of the Standards.
We continually monitor applicable changes to laws governing statutes of limitations and disclosures to consumers. We
maintain policies, system controls, and processes designed to ensure that accounts past the applicable statute of limitations do
not get placed into legal collections. Additionally, in written and verbal communications with consumers, we provide
disclosures to the consumer that the account is past its applicable statute of limitations and, therefore, we will not pursue
collections through legal means.
The compliance department is responsible for promoting compliance with applicable laws and regulations. The
compliance department facilitates oversight by our Board of Directors and management, assists in formulating policies and
procedures, and engages in training, risk assessments, testing, monitoring and corrective action, complaint response, and
compliance audits.
The enterprise risk management department is responsible for the development and administration of internal policies,
procedures, periodic risk assessments and controls which apply to all of our business units and for performing internal audits
to evaluate the level of compliance to both regulations, such as Sarbanes-Oxley 404, and standards of internal control for
internal operations.
Beyond written policies, one of our core internal goals is the adherence to principled intent as it pertains to all consumer
interactions. We believe that it is in our shareholders’ and our employees’ best interest to treat all consumers with the highest
standards of integrity. Specifically, we have strict policies and a code of ethics, which guide all dealings with our consumers. To
reinforce existing written policies, we have established a number of quality assurance procedures. Through our Quality
Assurance program, our Fair Debt Collection Practices Act training for new account managers, our Fair Debt Collection
Practices Act recertification program for continuing account managers, and our Consumer Support Services department, we
take significant steps to ensure compliance with applicable laws and regulations and seek to promote consumer satisfaction.
Our Quality Assurance team aims to enhance the skills of account managers and to drive compliance initiatives through active
call monitoring, account manager coaching and mentoring, and the tracking and distribution of company-wide best
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practices. Finally, our Consumer Support Services department works directly with consumers to seek to resolve incoming
consumer inquiries and to respond to consumer disputes as they may arise.
International
Cabot has established a compliance framework, operational procedures, and governance structures to enable it to conduct
business in accordance with applicable rules, regulations, and guidelines. Cabot’s employees undergo comprehensive training
on legal and regulatory compliance, and Cabot engages in regular call monitoring checks, data checks, performance reviews,
and other operational reviews to ensure compliance with company guidelines. The laws and regulations under which Cabot
operates have at their core the fair treatment of consumers, which is embedded within Cabot’s processes and culture.
Information Technology
Technical Infrastructure. Our internal network has been configured to be redundant in all critical functions, at all sites.
This redundancy has been implemented within the local area network switches and the data center network and includes fully
redundant Multiprotocol Label Switching (MPLS) networks. We have the capability to handle high transaction volume in our
server network architecture with scalability to meet and exceed our future growth plans. Redundancy, coupled with seamless
scalability and our high performance infrastructure, will allow for rapid business transformation and growth.
Predictive Dialer Technology. Our call centers employ the use of upgraded predictive dialer technology. This technology
allows additional call volume capacity and greater efficiency through shorter wait times and an increase in the number of live
contacts. This technology helps maximize account manager productivity and further optimizes the yield on our portfolio
purchases. Additionally, the use of predictive dialing technology helps us comply with applicable federal and state laws in the
United States that restrict the time, place, and manner in which debt collectors can call consumers. Recognizing mobile phone
dialing has a different set of legal restrictions, we utilize a distinctly different platform for non-consented mobile phones in
order to comply with all laws while providing a framework for us to maximize contact with our consumers.
Computer Hardware. We have made significant improvements in our data centers, and now have redundancy in support
of continued growth. We use a robust computer platform to perform our daily operations, including the collection efforts of our
global workforce. Our custom software applications are integrated within our database server environment allowing us to
process transaction loads with speed and efficiency. The computer platform offers us reliability and expansion opportunities.
Furthermore, this hardware incorporates state of the art data security protection. We back up our data utilizing a tapeless
configuration, and copies are replicated to a secure secondary data center. We also mirror our production data to a remote
location to give us full protection in the event of the loss of our primary data center. To ensure the integrity and reliability of
our computer platform, we periodically engage outside auditors specializing in information technology and cybersecurity to
examine both our operating systems and disaster recovery plans.
Process Control. To provide assurance that our entire infrastructure continues to operate efficiently and securely, we have
developed a strong process and control environment. These governance, risk management, and control protocols govern all
areas of the enterprise: from physical security and cyber security, to change management, data protection, and segregation of
duties.
Cybersecurity. We divide our cybersecurity and information security functions into the four core tenants that we believe
make up a solid information security practice: (1) security strategy and architecture; (2) operational security; (3) vulnerability
and threat management; and (4) IT governance, risk and controls. We invest in cybersecurity and advanced technologies,
including next generation threat prevention and threat intelligence solutions, to protect our organization and consumer and
proprietary data throughout its life cycle. Lastly, we believe that our adoption and implementation of leading security
frameworks for the financial services industry and the regulatory environments and geographies in which we operate
demonstrates our commitment to cybersecurity and information security.
Competition
United States
The consumer credit recovery industry is highly competitive. We compete with a wide range of collection and financial
services companies. We also compete with traditional contingency collection agencies and in-house recovery departments.
Competitive pressures affect the availability and pricing of receivable portfolios, as well as the availability and cost of qualified
recovery personnel. In addition, some of our competitors may have signed forward flow contracts under which credit
originators or portfolio resellers have agreed to transfer charged-off receivables to them in the future, which could restrict those
credit originators or portfolio resellers from selling receivables to us. We believe some of our major competitors, which include
companies that focus primarily on the purchase of charged-off receivable portfolios, have continued to diversify into third-party
agency collections and into offering credit card and other financial services as part of their recovery strategy.
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When purchasing receivables, we compete primarily on the basis of the price paid for receivable portfolios, the ease of
negotiating and closing the prospective portfolio purchases with us, our ability to obtain funding, and our reputation with
respect to the quality of services that we provide. We believe that our ability to compete effectively in this market is also
dependent upon, among other things, our relationships with credit originators and portfolio resellers of charged-off consumer
receivables, and our ability to provide quality collection strategies in compliance with applicable laws.
We believe that smaller competitors are facing difficulties in the portfolio purchasing market because of the higher cost to
operate due to increased regulatory pressure and because sellers of charged-off consumer receivables are being more selective
with buyers in the marketplace, resulting in consolidation within the portfolio purchasing and recovery industry. We believe this
favors larger participants in this market, such as the Company, because the larger market participants are better able to adapt to
these pressures. As smaller competitors limit their participation in or exit the market, it may provide additional opportunities for
us to purchase receivables from competitors or to acquire competitors directly.
The tax lien industry is highly competitive and fragmented. In Texas, Propel competes primarily on the basis of interest
rate, the ease of negotiating and closing the tax liens with the municipality and the consumer, and the reputation with respect to
the quality of services that Propel provides. Outside of Texas, liens are usually sold individually or in bulk to the most
competitive bidders, although sometimes the local governments consider non-monetary factors when awarding bulk liens.
International
When purchasing receivables in the United Kingdom market, Cabot competes on the basis of the price paid for receivable
portfolios, the ease of negotiating and closing the prospective portfolio purchases with Cabot, its ability to obtain funding, and
its reputation with respect to the quality of services it provides. We believe that Cabot’s ability to compete effectively in this
market is also dependent upon, among other things, Cabot’s relationships with credit originators and financial services
companies, its ability to segment portfolios effectively, its high level of compliance governance controls, and its ability to
provide quality collection strategies in compliance with applicable laws.
Similar to certain trends we are observing in the United States, we believe that smaller competitors in the United
Kingdom are facing difficulties in the portfolio purchasing market because of the higher cost to operate due to the increased
regulatory environment and scrutiny applied by regulators, and also because sellers of charged-off consumer receivables are
being more selective with buyers in the marketplace, resulting in consolidation within the portfolio purchasing and recovery
industry and the exit of portfolio purchasing and recovery companies from the marketplace. As in the United States, we believe
this favors larger participants in the market, such as Cabot, because the larger market participants are better able to adapt to
these pressures. As smaller competitors limit their participation in or exit the market, it may provide additional opportunities for
us to purchase receivables from competitors or to acquire competitors directly, as we did through Cabot’s acquisition of Marlin
in February 2014 and dlc in June 2015.
Government Regulation
United States
Our debt purchasing and collection activities are subject to federal, state, and municipal statutes, rules, regulations, and
ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting
consumer accounts. It is our policy to comply with the provisions of all applicable laws in all of our recovery activities. Our
failure to comply with these laws could have a material adverse effect on us to the extent that they limit our recovery activities
or subject us to fines or penalties in connection with such activities.
The federal Fair Debt Collection Practices Act (“FDCPA”) and comparable state and local laws establish specific
guidelines and procedures that debt collectors must follow when communicating with consumers, including the time, place and
manner of the communications, and prohibit unfair, deceptive, or abusive debt collection practices. Until 2011, the Federal
Trade Commission (“FTC”) administered, and had primary responsibility for the enforcement of, the FDCPA. In July 2011,
pursuant to the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (the “Dodd-Frank Act”),
Congress transferred the FTC’s role of administering the FDCPA to the Consumer Financial Protection Bureau (“CFPB”),
along with certain other federal statutes, and gave the CFPB authority to implement regulations under the FDCPA. The FTC
and the CFPB share enforcement responsibilities under the FDCPA.
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In addition to the FDCPA, the federal laws that apply to our business (including the regulations that implement these
laws) include the following:
Dodd-Frank Act, including the Consumer Financial
Protection Act (Title X of the Dodd-Frank Act, “CFPA”)
Electronic Fund Transfer Act
Equal Credit Opportunity Act
Fair Credit Billing Act
Fair Credit Reporting Act (“FCRA”)
Federal Trade Commission Act (“FTCA”)
Gramm-Leach-Bliley Act
Health Insurance Portability and Accountability Act
Servicemembers’ Civil Relief Act
Telephone Consumer Protection Act
Truth In Lending Act
U.S. Bankruptcy Code
Wire Act
Credit CARD Act
Foreign Corrupt Practices Act
The Dodd-Frank Act was adopted to reform and strengthen regulation and supervision of the U.S. financial services
industry. It contains comprehensive provisions governing the oversight of financial institutions, some of which apply to us.
Among other things, the Dodd-Frank Act established the CFPB, which has broad authority to implement and enforce “federal
consumer financial law,” as well as authority to examine financial institutions, including credit issuers that may be sellers of
receivables and debt buyers and collectors such as us, for compliance with federal consumer financial law. The CFPB has
authority to prevent unfair, deceptive, or abusive acts or practices by issuing regulations or by using its enforcement authority
without first issuing regulations. The Dodd-Frank Act also authorizes state officials to enforce regulations issued by the CFPB
and to enforce the CFPA general prohibition against unfair, deceptive, and abusive acts or practices.
The CFPB’s authorities include the ability to issue regulations under all significant federal statutes that affect the
collection industry, including the FDCPA, FCRA, and others. On November 12, 2013, the CFPB published in the Federal
Register an Advance Notice of Proposed Rulemaking seeking comments, data, and information from the public about debt
collection practices to help it determine what rules and other CFPB actions, if any, would be useful under the FDCPA and the
CFPA. The CFPB has indicated that it expects to move forward with the debt collection rulemaking in 2016, including the
possible convening of a panel pursuant to the Small Business Regulatory Enforcement Fairness Act and issuing a Notice of
Proposed Rulemaking.
The Dodd-Frank Act also gave the CFPB supervisory and examination authority over a variety of institutions that may
engage in debt collection, including us. Accordingly, the CFPB is authorized to supervise and conduct examinations of our
business practices. The prospect of supervision has increased the potential consequences of noncompliance with federal
consumer financial law.
The CFPB can conduct hearings, adjudication proceedings, and investigations, either unilaterally or jointly with other
state and federal regulators, to determine if federal consumer financial law has been violated. The CFPB has authority to
impose monetary penalties for violations of applicable federal consumer financial laws (including the CFPA, FDCPA, and
FCRA, among other consumer protection statutes), require remediation of practices, and pursue enforcement actions. The
CFPB also has authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as
well as other kinds of affirmative relief), costs, and monetary penalties ranging from $5,000 per day for ordinary violations of
federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. In
addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the
Dodd-Frank Act, the Dodd-Frank Act empowers state Attorneys General and state regulators to bring civil actions to remedy
violations of state law. The CFPB has been active in its supervision, examination and enforcement of financial services
companies, including bringing enforcement actions, imposing fines and mandating large refunds to customers of several
financial institutions for practices relating to debt collection practices.
On September 9, 2015, we entered into a consent order (the “Consent Order”) with the CFPB in which we settled
allegations arising from our practices between 2011 and 2015. The Consent Order includes obligations on us to, among other
things: (1) follow certain specified operational requirements, substantially all of which are already part of our current
operations; (2) submit to the CFPB for review a comprehensive plan designed to ensure that our debt collection practices
comply with all applicable federal consumer financial laws and the terms of the Consent Order; (3) pay redress to certain
specified groups of consumers; and (4) pay a civil monetary penalty. We will continue to cooperate and engage with the CFPB
and work to ensure compliance with the Consent Order. In addition, we are subject to ancillary state attorney general
investigations related to similar debt collection practices.
We incurred a one-time, after-tax charge of approximately $43 million in the third quarter of 2015. We believe this charge
will cover all related impacts of the Consent Order, including civil monetary penalties, restitution, any such ancillary state
regulatory matters, legal expenses and portfolio allowance charges on several pool groups due to the impact on our current
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estimated remaining collections related to our existing receivable portfolios. We anticipate that after this one-time charge, any
future earnings impact will be immaterial.
In addition, the CFPB has issued guidance in the form of bulletins on debt collection and credit furnishing activities
generally, including one that specifically addresses representations regarding credit reports and credit scores during the debt
collection process, another that focuses on the application of the CFPA’s prohibition of “unfair, deceptive, or abusive” acts or
practices on debt collection and another that discusses the risks that in-person collection of consumer debt may create in
violating the FDPCA and CFPA. The CFPB also accepts debt collection consumer complaints and released template letters for
consumers to use when corresponding with debt collectors. The CFPB makes publicly available its data on consumer
complaints. The Dodd-Frank Act also mandates the submission of multiple studies and reports to Congress by the CFPB, and
CFPB staff regularly make speeches on topics related to credit and debt. All of these activities could trigger additional
legislative or regulatory action. In addition, the CFPB has recently engaged in enforcement activity in sectors adjacent to our
industry, impacting credit originators, collection firms, and payment processors, among others. The CFPB’s enforcement
activity in these spaces, especially in the absence of clear rules or regulatory expectations, can be disruptive to third parties as
they attempt to define appropriate business practices. As a result, certain commercial relationships we maintain may be
disrupted or impacted by changes in third-parties’ business practices or perceptions of elevated risk relating to the debt
collection industry.
Our activities are also subject to federal and state laws concerning identity theft, privacy, data security, the use of
automated dialing equipment, and other laws related to consumers and consumer protection. In response to petitions filed by
third parties, in July 2015, the Federal Communications Commission (“FCC”) released a declaratory ruling interpreting the
Telephone Consumer Protection Act (“TCPA”), which could impact the way consumers may be contacted on their cellular
phones and could impact our operations and financial results.
In addition to the federal statutes detailed above, many states have general consumer protection statutes, laws, regulations,
or court rules that apply to debt purchasing and collection. In a number of states and cities, we must maintain licenses to
perform debt recovery services and must satisfy related bonding requirements. It is our policy to comply with all material
licensing and bonding requirements. Our failure to comply with existing licensing requirements, changing interpretations of
existing requirements, or adoption of new licensing requirements, could restrict our ability to collect in regions, subject us to
increased regulation, increase our costs, or adversely affect our ability to collect our receivables.
State laws, among other things, also may limit the interest rate and the fees that a credit originator may impose on our
consumers, limit the time in which we may file legal actions to enforce consumer accounts, and require specific account
information for certain collection activities. By way of example, the California Fair Debt Buying Practices Act that directly
applies to debt buyers, applies to accounts sold after January 1, 2014. The law requires debt buyers operating in the state to
have in their possession specific account information before debt collection efforts can begin, among other requirements.
Moreover, the New York State Department of Financial Services issued new debt collection regulations, which took effect in
September 2015 and established new requirements for collecting debt in the state. In addition, other state and local
requirements and court rulings in various jurisdictions may also affect our ability to collect.
The relationship between consumers and credit card issuers is also extensively regulated by federal and state consumer
protection and related laws and regulations. These laws may affect some of our operations because the majority of our
receivables originate through credit card transactions. The laws and regulations applicable to credit card issuers, among other
things, impose disclosure requirements when a credit card account is advertised, when it is applied for and when it is opened, at
the end of monthly billing cycles, and at year-end. Federal law requires, among other things, that credit card issuers disclose to
consumers the interest rates, fees, grace periods, and balance calculation methods associated with their credit card accounts.
Some laws prohibit discriminatory practices in connection with the extension of credit. If the originating institution fails to
comply with applicable statutes, rules, and regulations, it could create claims and rights for consumers that would reduce or
eliminate their obligations related to those receivables. When we acquire receivables, we generally require the credit originator
or portfolio reseller to represent that they have complied with applicable statutes, rules, and regulations relating to the
origination and collection of the receivables before they were sold to us.
Federal statutes further provide that, in some cases, consumers cannot be held liable for, or their liability is limited with
respect to, charges to their credit card accounts that resulted from unauthorized use of their credit cards. These laws, among
others, may give consumers a legal cause of action against us, or may limit our ability to recover amounts owing with respect to
the receivables, whether or not we committed any wrongful act or omission in connection with the account.
These laws and regulations, and others similar to the ones listed above, as well as laws applicable to specific types of
debt, impose requirements or restrictions on collection methods or our ability to enforce and recover certain of our receivables.
Effects of the law, including those described above, and any new or changed laws, rules, or regulations, and reinterpretation of
the same, may adversely affect our ability to recover amounts owing with respect to our receivables or the sale of receivables
by creditors and resellers.
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In June 2013, we completed our merger with Asset Acceptance Capital Corp. (“AACC”), another leading provider of debt
recovery solutions in the United States. In January 2012, Asset Acceptance, LLC, a subsidiary of AACC, entered into a consent
decree with the FTC. The consent decree ended an FTC investigation into Asset Acceptance, LLC’s compliance with the
FTCA, FDCPA, and FCRA. As part of the consent decree, Asset Acceptance, LLC agreed to undertake certain consumer
protection practices, including, among other things, furnishing additional disclosures to consumers when collecting debt past
the statute of limitations, and paid a civil penalty of $2,500,000. These practices continue to apply to the portfolios we
purchased as a result of the merger with AACC. We do not expect compliance with the consent decree to have a material effect
on our business.
In order to conduct the tax lien business in the State of Texas, Propel is subject to regulation and licensing by the State of
Texas Office of Consumer Credit Commissioner. Propel is also subject to applicable laws governing the acquisition and
servicing of tax liens and tax lien certificates, including but not limited to various consumer protection, privacy laws and
regulations. There have been assertions that various provisions of the Truth in Lending Act and its implementing regulations
apply to Propel’s business operations in certain states, depending on the method by which the Tax Liens are acquired. Propel
believes these assertions are without merit.
International
As we expand our international footprint, our operations are increasingly affected by foreign statutes, rules and
regulations. It is our policy to comply with these laws in all of our recovery activities. For example, debt collection and debt
purchase activities in the United Kingdom are highly regulated by a number of different governmental bodies.
The regulatory regime to which Cabot is subject is currently experiencing a number of substantial changes. The most
significant changes include the transfer of responsibility for the regulation of consumer credit businesses in the United
Kingdom from the Office of Fair Trading (“OFT”) to the Financial Conduct Authority (“FCA”) which occurred on April 1,
2014; the proposal to have a dedicated pre-action protocol before commencing debt recovery claims in court; and the proposal
by the European Commission that substantial changes be made to the European Union data protection regime.
The FCA implemented an interim permission regime whereby businesses that held a consumer credit license were
required to register with the FCA for interim permission before March 31, 2014 in order to continue consumer credit activities
after April 1, 2014. The interim permission regime is expected to continue until April 1, 2017, and during this time businesses
will be called upon at different intervals to apply for authorization to be fully regulated by the FCA. Cabot currently has all
regulatory licenses, permissions, registrations, and authorizations in place with the relevant regulatory bodies in order to
provide and continue debt purchase and collection activities, including holding interim permission with the FCA. In March
2015, Cabot applied for full authorization of its business with the FCA. The FCA typically has 12 months to consider an
application for full authorization. Therefore, Cabot expects the final decision by the FCA regarding its application in March
2016. The FCA may take any one of the following actions with Cabot’s application: (1) the FCA may authorize Cabot to
continue debt purchasing, collecting and associated credit activities without further conditions; (2) the FCA may authorize
Cabot subject to certain conditions, which will require Cabot to take certain actions to either remediate or comply with the
FCA’s conditions; (3) the FCA may require that certain improvements to Cabot’s processes be made as a precursor to
authorization, or appoint a skilled person elected by the FCA to investigate, examine and oversee Cabot’s operations, at Cabot’s
cost; or (4) the FCA may decline to authorize Cabot. In addition to the application for full authorization of its business with the
FCA, Cabot will be required to apply to the FCA to appoint certain individuals who have significant control or influence over
the management of the business, known as “Approved Persons,” and who will jointly and severally be liable for the acts and
omissions of the company and its business affairs. Approved Persons will be subject to statements of principle and codes of
practice established and enforced by the FCA. The FCA may take the following action in connection with the application for
Approved Persons: (a) authorize the Approved Person without further conditions; (b) refuse to authorize the Approved Person;
(c) request that the applicant undertake further qualifications before it authorizes a person to become an Approved Person; or
(d) ban a person from acting as an Approved Person for a period of time or for life.
The FCA has adopted detailed rules relating to conducting consumer credit activities, in addition to putting in place high
level principles and conditions to which it expects businesses and Approved Persons in the sector to adhere. The FCA has
significantly greater powers than the OFT, including, but not limited to, the ability to impose significant fines, ban certain
individuals from carrying on trade within the financial services industry, impose requirements on a firm’s permission, and cease
certain products from being collected upon.
Furthermore, the manner in which court claims are conducted in England and Wales in connection with the recovery of
debt may be subject to significant changes. In September 2014, the Civil Procedure Rules Committee (“CPRC”), an advisory
public body set up by statute and sponsored by the U.K. Ministry of Justice, issued a consultation on proposals to introduce a
designated pre-action protocol for court claims for the recovery of debt. Due to the amount of responses from the industry
against the introduction of a dedicated protocol, the CPRC created a dedicated sub-committee with industry and consumer
group stakeholders. As a consequence, the CPRC issued an updated consultation in September 2015 in order to seek balance
between the interests of the industry and consumer groups. If adopted in its current form, it would require all debt collection
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entities and law firms instructed and acting on behalf of such entities to disclose significant amounts of information relating to
the credit agreement and the state of such credit agreement to a consumer prior to being able to progress a claim to court. In
some circumstances, issuers of debt may not be able to provide this information, and as neither Cabot nor its competitors
currently maintain such documentation to satisfy such obligations, the protocol may limit Cabot’s ability to commence Court
proceedings to recover a debt. Certain other requirements are proposed, which may significantly increase costs and time in
order to initiate a court claim. Cabot, together with other key industry representatives and trade bodies who are all affected by
the proposals, have issued an updated response to the consultation, which is still under consideration. If the CPRC decides to
release an updated protocol, it is anticipated that it will be released during 2016 or 2017.
In addition, the regulatory regime in the United Kingdom relating to the protection of consumers from unfair terms and
practices is subject to change. In October 2015, the U.K. Parliament introduced new laws that reformed most of the previous
U.K. consumer laws and was largely driven by the European Commission’s Directive for Consumer Rights. The U.K.
Consumer Rights Act 2015 introduced enhanced consumer measures that can be imposed on businesses and gives greater
protection to U.K. consumers from unfair business practices and unfair terms in consumer agreements.
Additionally, the Consumer Credit Act of 1974 (and its related regulations) and the U.K. Consumer Rights Act 2015 set
forth requirements for the entry into and ongoing management of consumer credit arrangements in the United Kingdom. A
failure to comply with these requirements can make agreements unenforceable or can result in a requirement that charged and
collected interest be repaid.
In addition to these regulations on debt collection and debt purchase activities, Cabot must comply with requirements
established by the Data Protection Act of 1998 in relation to processing the personal data of its consumers.
The regulatory regime in the Republic of Ireland has been subject to significant changes. In July 2015, the Irish
Parliament introduced the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015, which requires credit
servicing firms to be regulated by the Central Bank of Ireland to ensure regulatory protection for consumers following loan
book sales was published in January 2015. The Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 seeks to
address concerns regarding the loss of regulatory protections for borrowers when portfolio of loans are sold and/or serviced to/
by an unregulated entity. Cabot is registered with and regulated by the Central Bank of Ireland for credit servicing activities and
its activities are subject to detailed rules on consumer protection. Cabot is undergoing the second stage of the authorization
process in which it needs to provide its controls framework on how it ensures regulatory protection for consumers for debt
portfolios it has acquired and manages. Cabot is already contractually obligated to ensure compliance with the relevant
consumer protection codes through its debt sale and management agreements and is audited on a regular basis against such
obligations.
In addition, the other markets in which we currently operate are subject to local laws and regulations, and we have
implemented compliance programs to facilitate compliance with all applicable laws and regulations in those markets. Our
operations outside the United States are subject to the U.S. Foreign Corrupt Practices Act, which prohibits U.S. companies and
their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or
decision of these individuals in order to obtain an unfair advantage, to help, obtain, or retain business.
Employees
As of December 31, 2015, we had approximately 6,700 employees worldwide. None of our employees is represented by
a labor union. We believe that our relations with our employees are good.
Item 1A—Risk Factors
There are risks and uncertainties in our business that could cause our actual results to differ from those anticipated. We
urge you to read these risk factors carefully in connection with evaluating our business and in connection with the forward-
looking statements and other information contained in this Annual Report on Form 10-K. Any of the risks described herein
could affect our business, financial condition, or future results and the actual outcome of matters as to which forward-looking
statements are made. The list of risks is not intended to be exhaustive, and the order in which the risks appear is not intended as
an indication of their relative weight or importance. Additional risks and uncertainties not currently known to us, or that we
currently deem to be immaterial, also may adversely affect our business, financial condition and/or operating results.
Risks Related to Our Business and Industry
Financial and economic conditions affect the ability of consumers to pay their obligations, which could harm our financial
results.
Economic conditions globally and locally directly affect unemployment, credit availability, and real estate values.
Adverse conditions, economic changes, and financial disruptions place financial pressure on the consumer, which may reduce
our ability to collect on our consumer receivable portfolios and may adversely affect the value of our consumer receivable
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portfolios. Further, increased financial pressures on the financially distressed consumer may result in additional regulatory
requirements or restrictions on our operations and increased litigation filed against us. These conditions could increase our
costs and harm our business, financial condition, and operating results.
Our operating results may be affected by factors that could cause them to fluctuate significantly in the future.
Our operating results will likely vary in the future due to a variety of factors that could affect our revenues and operating
expenses. We expect that our operating expenses as a percentage of collections will fluctuate in the future as we expand into
new markets, increase our business development efforts, hire additional personnel, and incur increased insurance and regulatory
compliance costs. In addition, our operating results have fluctuated and may continue to fluctuate as a result of the factors
described below and elsewhere in this Annual Report on Form 10-K:
•
•
•
•
•
the timing and ability of consumers to make payments, including the effects of seasonality and macroeconomic
conditions on their ability to pay;
any charge to earnings resulting from an allowance against the carrying value of our receivable portfolios;
increases in operating expenses associated with the growth or change of our operations or compliance with
increased regulatory and other legal requirements;
the cost of credit; and
the supply of receivables portfolios and tax liens for sale on acceptable terms.
Because we recognize revenue on the basis of projected collections on purchased portfolios, we may experience
variations in quarterly revenue and earnings due to the timing of portfolio purchases.
We may not be able to purchase receivables at favorable prices, which could limit our growth or profitability.
Our ability to continue to operate profitably depends upon the continued availability of receivable portfolios that meet our
purchasing standards and are cost-effective based upon projected collections exceeding our costs. Due, in part, to fluctuating
prices for receivable portfolios and competition within the marketplace, there has been considerable variation in our purchasing
volume and pricing from quarter to quarter and we expect that to continue. The volume of our portfolio purchases may be
limited when prices are high, and may or may not increase when portfolio pricing is more favorable to us. Further, our rates of
return may decline when portfolio prices are high. We do not know how long portfolios will be available for purchase on terms
acceptable to us, or at all.
The availability of receivable portfolios at favorable prices depends on a number of factors, including:
•
•
•
•
•
•
defaults in consumer debt;
continued origination of loans by originating institutions at sufficient volumes;
continued sale of receivable portfolios by originating institutions and portfolio resellers at sufficient volumes and
acceptable price levels;
competition in the marketplace;
our ability to develop and maintain favorable relationships with key major credit originators and portfolio
resellers;
our ability to obtain adequate data from credit originators or portfolio resellers to appropriately evaluate the
collectability of, estimate the value of, and collect on portfolios; and
•
changes in laws and regulations governing consumer lending, bankruptcy, and collections.
In recent periods, portfolio prices have been elevated above historical levels, particularly for fresh portfolios, which are
those portfolios transacted within six months of the consumers’ accounts being charged off by the financial institution. We
believe this elevated pricing is due to a reduction in the supply of charged-off accounts and continued strong demand in the
marketplace. We believe that the reduction in supply is partially due to shifts in underwriting standards by financial institutions,
which have resulted in lower volumes of charged-off accounts. We believe that this reduction in supply is also the result of
certain financial institutions temporarily halting or curtailing their sales of charged-off accounts in response to increased
regulatory pressure on financial institutions. Although we have seen moderation in certain instances, we expect pricing will
remain at elevated levels for some period of time. We are unable to predict the extent to which these financial institutions will
re-commence selling charged-off accounts. Financial institutions might not return to selling charged-off accounts at historical
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levels and certain of them could elect to stop selling charged-off accounts permanently. We are taking measures to improve
liquidation rates on our purchased portfolios so that we can achieve satisfactory returns on recently purchased portfolios despite
their elevated prices. However, there can be no assurance that these measures will be effective in maintaining returns in line
with historical levels, or at all.
In addition, because of the length of time involved in collecting charged-off consumer receivables on acquired portfolios
and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our purchasing
strategies in a timely manner. Ultimately, if we are unable to continually purchase and collect on a sufficient volume of
receivables to generate cash collections that exceed our costs or to generate satisfactory returns, our business, financial
condition and operating results will be adversely affected.
We may experience losses on portfolios consisting of new types of receivables or receivables in new geographies due to our
lack of collection experience with these receivables, which could harm our business, financial condition and operating
results.
We continually look for opportunities to expand the classes of assets that make up the portfolios we acquire. Therefore,
we may acquire portfolios consisting of assets with which we have little or no collection experience or portfolios of receivables
in new geographies where we do not historically maintain an operational footprint. Our lack of experience with these assets
may hinder our ability to generate expected levels of profits from these portfolios. Further, our existing methods of collections
may prove ineffective for these new receivables, and we may not be able to collect on these portfolios. Our inexperience with
these receivables may have an adverse effect on our business, financial condition and operating results.
We may purchase receivable portfolios that are unprofitable or we may not be able to collect sufficient amounts to recover
our costs and to fund our operations.
We acquire and service charged-off receivables that the obligors have failed to pay and the sellers have deemed
uncollectible and have written off. The originating institutions and/or portfolio resellers generally make numerous attempts to
recover on these nonperforming receivables, often using a combination of their in-house collection and legal departments, as
well as third-party collection agencies. In order to operate profitably over the long term, we must continually purchase and
collect on a sufficient volume of charged-off receivables to generate revenue that exceeds our costs. These receivables are
difficult to collect, and we may not be successful in collecting amounts sufficient to cover the costs associated with purchasing
the receivables and funding our operations. If we are not able to collect on these receivables, collect sufficient amounts to cover
our costs or to generate satisfactory returns, this may adversely affect our business, financial condition and operating results.
Sellers may deliver portfolios that contain accounts that do not meet our account collection criteria and cannot be returned,
which could have an adverse effect on our cash flows and our operations.
In the normal course of portfolio acquisitions, some accounts may be included in the portfolios that fail to conform to the
terms of the purchase agreements and we may seek to return these accounts to the sellers for refund. However, we generally
have a limited time in which to return these accounts to the sellers under the terms of our purchase agreements. In addition,
sellers may not be able to meet their contractual obligations to us. Accounts that we are unable to return to sellers may yield no
return. If sellers deliver portfolios containing too many accounts that do not conform to the terms of the purchase agreements,
we may be unable to collect a sufficient amount and the portfolio purchase could generate lower returns or be unprofitable,
which would have an adverse effect on our cash flows and our operations. If cash flows from operations are less than
anticipated, our ability to satisfy our debt obligations and purchase new portfolios and, correspondingly, our business, financial
condition and operating results, may be adversely affected.
A significant portion of our portfolio purchases during any period may be concentrated with a small number of sellers or
resellers, which could adversely affect our volume and timing of purchases.
A significant percentage of our portfolio purchases for any given fiscal quarter or year may be concentrated with a few
large sellers, some of which may also involve forward flow arrangements. We cannot be certain that any of our significant
sellers will continue to sell charged-off receivables to us on terms or in quantities acceptable to us, or that we would be able to
replace these purchases with purchases from other sellers.
A significant decrease in the volume of purchases available from any of our principal sellers on terms acceptable to us
would force us to seek alternative sources of charged-off receivables. Further, we have historically complemented our portfolio
purchases from credit originators by purchasing portfolios from resellers or through the acquisition of portfolios from
competitors looking to exit the market. As consolidation in the market continues, there may be fewer competitors to acquire on
favorable terms. In addition, as the regulatory market continues to evolve, increased documentation requirements for collecting
on portfolios may make purchasing accounts through resellers more difficult. Several larger issuers have also begun to prohibit
resale of portfolios.
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We may be unable to find alternative sources from which to purchase charged-off receivables, and even if we could
successfully replace these purchases, the search could take time and the receivables could be of lower quality, cost more, or
both, any of which could adversely affect our business, financial condition and operating results.
We face intense competition that could impair our ability to maintain or grow our purchasing volumes.
The charged-off receivables purchasing market is highly competitive and fragmented. We compete with a wide range of
other purchasers of charged-off consumer receivables. To the extent our competitors are able to better maximize recoveries on
their assets or are willing to accept lower rates of return, we may not be able to grow or sustain our purchasing volumes or we
may be forced to acquire portfolios at expected rates of return lower than our historical rates of return. Some of our competitors
may obtain alternative sources of financing at more favorable rates than those available to us, the proceeds from which may be
used to fund expansion and to increase the amount of charged-off receivables they purchase.
Barriers to entry into the consumer debt collection industry have traditionally been low. More recently, increased
regulatory standards have made entry into the market more difficult and have resulted in sellers of charged-off consumer
receivables being more selective with buyers in the marketplace. Companies with greater financial resources than we have may
elect at a future date to enter the market for charged-off consumer receivables. We believe that the entrance of new market
participants in our industry could lead to additional upward pricing pressure on charged-off consumer receivables as a result of
increased demand, but also because new purchasers may pay higher prices for the portfolios than more experienced purchasers
would due to a lack of experience, data and analytics necessary to properly assess risks and return potential of the portfolios or
a desire to add size to their existing operations.
We face bidding competition in our acquisition of charged-off consumer receivables. We believe that successful bids are
predominantly awarded based on price and, to a lesser extent, based on service, reputation, and relationships with the sellers of
charged-off receivables. Some of our current competitors, and potential new competitors, may have more effective pricing and
collection models, greater adaptability to changing market needs, and more established relationships in our industry than we do.
Moreover, our competitors may elect to pay prices for portfolios that we determine are not economically sustainable and, in that
event, we may not be able to continue to offer competitive bids for charged-off receivables.
If we are unable to develop and expand our business or to adapt to changing market needs as well as our current or future
competitors, we may experience reduced access to portfolios of charged-off consumer receivables in sufficient face value
amounts at appropriate prices, which could adversely affect our business, financial condition and operating results.
The statistical models we use to project remaining cash flows from our receivable portfolios may prove to be inaccurate and,
if so, our financial results may be adversely affected.
For our U.S. accounts, we use our internally developed statistical models to project the remaining cash flows from our
receivable portfolios. These models consider known data about our consumers’ accounts, including, among other things, our
collection experience and changes in external consumer factors, in addition to data known when we acquired the accounts.
However, we may not be able to achieve the collections forecasted by our models. For our accounts serviced by Cabot, we use
Cabot’s internally developed models to project the remaining cash flows from its receivable portfolios. If we are not able to
achieve the levels of forecasted collection, our revenues will be reduced or we may be required to record an allowance charge,
which may adversely affect our business, financial condition and operating results.
We may incur allowance charges based on the authoritative accounting guidance for loans and debt securities acquired with
deteriorated credit quality.
We account for our portfolio revenue in accordance with the authoritative accounting guidance for loans and debt
securities acquired with deteriorated credit quality. The authoritative guidance limits the revenue that may be accrued to the
excess of the estimate of expected future cash flows over a portfolio’s initial cost and requires that the excess of the contractual
cash flows over the expected cash flows not be recognized as an adjustment of revenue, expense, or on the balance sheet. The
authoritative accounting guidance also freezes the IRR originally estimated when the receivable portfolios are purchased and,
rather than lower the estimated IRR if the expected future cash flow estimates are decreased, the carrying value of our
receivable portfolios would be written down to maintain the then-current IRR. Increases in expected future cash flows would be
recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increased yield then
becomes the new benchmark for allowance testing. Since the authoritative accounting guidance does not permit yields to be
lowered, there is an increased probability of us having to incur allowance charges in the future, which would adversely affect
our business, financial condition and operating results.
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to
earnings.
As of December 31, 2015, we carry approximately $924.8 million in goodwill and approximately $16.2 million in
amortizable intangible assets. Under authoritative guidance, we review our goodwill for potential impairment at least annually,
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and review our amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that may indicate that the carrying value of our goodwill or amortizable
intangible assets may not be recoverable include adverse changes in estimated future cash flows, growth rates and discount
rates. We may be required to record a significant charge in our financial statements during the period in which any impairment
of our goodwill or amortizable intangible assets is determined, which could adversely affect our business, financial condition
and operating results.
Our business is subject to extensive laws and regulations, which have increased and may continue to increase.
As noted in detail in “Item 1 - Part 1 - Business - Government Regulation” of this Annual Report on Form 10-K,
extensive laws and regulations directly apply to key portions of our business. Our failure or the failure of third-party agencies
and attorneys, or the credit originators or portfolio resellers selling receivables to us, to comply with existing or new laws,
rules, or regulations could limit our ability to recover on receivables, affect the willingness of financial institutions to sell
portfolios to us, cause us to pay damages to consumers or result in fines or penalties, which could reduce our revenues, or
increase our expenses, and consequently adversely affect our business, financial condition and operating results.
We sometimes purchase accounts in asset classes that are subject to industry-specific and/or issuer-specific restrictions
that limit the collection methods that we can use on those accounts. Further, we have seen a trend in laws, rules and regulations
requiring increased availability of historic information about receivables in order to collect. If credit originators or portfolio
resellers are unable or unwilling to meet these evolving requirements, we may be unable to collect on certain accounts. Our
inability to collect sufficient amounts from these accounts, through available collections methods, could adversely affect our
business, financial condition and operating results.
In addition, the CFPB has recently engaged in enforcement activity in sectors adjacent to our industry, impacting credit
originators, collection firms, and payment processors, among others. Enforcement activity in these spaces by the CFPB or
others, especially in the absence of clear rules or regulatory expectations, may be disruptive to third parties as they attempt to
define appropriate business practices. As a result, certain commercial relationships we maintain may be disrupted or impacted
by changes in third-parties’ business practices or perceptions of elevated risk relating to the debt collection industry, which
could reduce our revenues, or increase our expenses, and consequently adversely affect our business, financial condition and
operating results.
Additional consumer protection or privacy laws, rules and regulations may be enacted, or existing laws, rules or
regulations may be reinterpreted or enforced in a different manner, imposing additional restrictions or requirements on the
collection of receivables or the facilitation of tax liens. For example, there have been assertions that various provisions of the
Truth in Lending Act and its implementing regulations apply to Propel’s business operations in certain states, depending on the
method by which the Tax Liens are acquired. While Propel believes these assertions are without merit, a determination that the
Truth in Lending Act applies to any of Propel’s operations would subject Propel to new regulatory requirements, which could
adversely affect Propel’s business, financial condition and operating results.
The implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act has subjected and will continue to
subject us to substantial additional federal regulation, and we cannot predict the effect of this regulation on our business,
financial condition and operating results.
Federal and state consumer protection, privacy, and related laws and regulations extensively regulate the relationship
between debt collectors and consumers. In addition, federal and state laws may limit our ability to purchase or recover on our
consumer receivables regardless of any act or omission on our part. On July 21, 2010, the Dodd-Frank Act was enacted. Title X
of the Dodd-Frank Act (also referred to as the Consumer Financial Protection act or “CFPA”) established the CFPB. Pursuant
to the Dodd-Frank Act, the CFPB has rulemaking, supervisory, enforcement, and other authorities relating to consumer
financial products and services, including debt collection. We generally are subject to the CFPB’s rulemaking, supervisory, and
enforcement authority.
Given the uncertainty associated with how provisions of the Dodd-Frank Act will be implemented and enforced by the
CFPB and various regulatory agencies, the full extent of the impact that these requirements will have on us is unclear. Changes
resulting from the Dodd-Frank Act may affect the profitability of business activities, require changes to certain business
practices, or otherwise adversely affect our business. In particular, we expect an increase in the cost of operating due to greater
regulatory oversight, supervision, and compliance with consumer debt servicing and collection practices.
Subject to the provisions of the Dodd-Frank Act, the CFPB has responsibility to implement and enforce “federal
consumer financial law,” and to examine regulated entities for compliance with such law Those laws include, among others,
(1) Title X itself, which prohibits unfair, deceptive, or abusive acts or practices in connection with consumer financial products
and services, and (2) “enumerated consumer laws” (and their implementing regulations), which include the FDCPA, the FCRA,
and others.
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The CFPB’s authorities include the ability to issue regulations under various federal statutes that affect the collection
industry, including the FDCPA, FCRA, and others. This means, for example, that the CFPB has the ability to adopt rules that
interpret any of the provisions of the FDCPA, potentially affecting all facets of debt collection, and our activities. On
November 12, 2013, the CFPB published in the Federal Register an Advance Notice of Proposed Rulemaking seeking
comments, data, and information from the public about debt collection practices to help it determine what rules and other CFPB
actions, if any, would be useful under the FDCPA and the Dodd-Frank Act’s general prohibition against unfair, deceptive, and
abusive acts or practices.
In addition, the CFPB has issued guidance in the form of bulletins on debt collection and credit furnishing activities
generally, including one that specifically addresses representations regarding credit reports and credit scores during the debt
collection process, and another that focuses on the application of the CFPA’s prohibition of “unfair, deceptive, or abusive” acts
or practices on debt collection. The CFPB also accepts debt collection consumer complaints and released template letters for
consumers to use when corresponding with debt collectors. The CFPB makes publicly available its data on consumer
complaints, and consumer complaints against us could result in reputational damage to us. The Dodd-Frank Act also mandates
the submission of multiple studies and reports to Congress by the CFPB, and CFPB staff regularly make speeches on topics
related to credit and debt. All of these activities could trigger additional legislative or regulatory action.
The CFPB is authorized to supervise and conduct examinations of our business practices. The prospect of supervision has
increased the potential consequences of noncompliance with federal consumer financial law. The CFPB can also conduct
hearings and adjudication proceedings, conduct investigations, either unilaterally or jointly with other state and federal
regulators, to determine if federal consumer financial law has been violated. The CFPB has authority to impose monetary
penalties for violations of applicable federal consumer financial laws (including Title X of the Dodd-Frank Act, FDCPA, and
FCRA, among other consumer protection statutes), require remediation of practices, and pursue enforcement actions. The
CFPB also has authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as
well as other kinds of affirmative relief), costs, and monetary penalties ranging from $5,000 per day for ordinary violations of
federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. In
addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the
Dodd-Frank Act, the Dodd-Frank Act empowers state Attorneys General and state regulators to bring civil actions to remedy
violations of state law. The CFPB has been active in its supervision, examination and enforcement of financial services
companies, including bringing enforcement actions imposing fines and mandating large refunds to customers of several
financial institutions for practices relating to debt collection practices.
On September 9, 2015, we entered into a consent order (the “Consent Order”) with the CFPB in which we settled
allegations arising from our practices between 2011 and 2015. The Consent Order includes obligations on us to, among other
things: (1) follow certain specified operational requirements, substantially all of which are already part of our current
operations; (2) submit to the CFPB for review a comprehensive plan designed to ensure that our debt collection practices
comply with all applicable federal consumer financial laws and the terms of the Consent Order; (3) pay redress to certain
specified groups of consumers; and (4) pay a civil monetary penalty. We will continue to cooperate and engage with the CFPB
and work to ensure compliance with the Consent Order. In addition, we are subject to ancillary state attorney general
investigations related to similar debt collection practices.
We incurred a one-time, after-tax charge of approximately $43 million in the third quarter of 2015. We believe this charge
will cover all related impacts of the Consent Order, including civil monetary penalties, restitution, any such ancillary state
regulatory matters, legal expenses and portfolio allowance charges on several pool groups due to the impact on our current
estimated remaining collections related to our existing receivable portfolios. We anticipate that after this one-time charge, any
future earnings impact will be immaterial.
If the CFPB, the FTC, acting under the FTCA or other applicable statute such as the FDCPA, or one or more state
Attorneys General or state regulators believe that we have violated any of the applicable laws or regulations, they could
exercise their enforcement powers in ways that could have an adverse effect on our business, financial condition and operating
results.
We expect that we will be required to invest significant management attention and resources to continue to evaluate,
develop, and make any changes to our policies and procedures necessary to comply with new statutory and regulatory
requirements under the Dodd-Frank Act or other applicable laws, which may negatively affect our results of operations, cash
flows, and our financial condition. However, we cannot predict the scope and substance of the regulations, guidance, and
policies ultimately adopted by the CFPB related to our activities. The CFPB continues to initiate rulemakings, issue regulatory
guidance and bulletins, and exercise its supervisory and enforcement authority. It is therefore unclear at this time what effect
these regulations will have on financial markets generally, original creditors, or our business and service providers; the
additional costs associated with compliance with these regulations; or what changes, if any, to our operations may be necessary
to comply with the CFPB’s expectations or the Dodd-Frank Act. Any of these factors could have an adverse effect on our
business, financial condition and operating results.
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Failure to comply with government regulation could result in the suspension or termination of our ability to conduct
business, may require the payment of significant fines and penalties, or require other significant expenditures.
The collections industry is heavily regulated under various federal, state, and local laws, rules, and regulations. Many
states and several cities require that we be licensed as a debt collection company. The CFPB, FTC, state Attorneys General and
other regulatory bodies have the authority to investigate a variety of matters, including consumer complaints against debt
collection companies, and can bring enforcement actions and seek monetary penalties, consumer restitution, and injunctive
relief. If we, or our third-party collection agencies or law firms fail to comply with applicable laws, rules, and regulations,
including, but not limited to, identity theft, privacy, data security, the use of automated dialing equipment, laws related to
consumer protection, debt collection, and laws applicable to specific types of debt, it could result in the suspension or
termination of our ability to conduct collection operations, which would adversely affect us. Further, our ability to collect our
receivables may be affected by state laws, which require that certain types of account documentation be presented prior to the
institution of any collection activities. In addition, new federal, state or local laws or regulations, or changes in the ways these
rules or laws are interpreted or enforced, could limit our activities in the future and/or significantly increase the cost of
regulatory compliance. Finally, our operations outside the United States are subject to foreign and U.S. laws and regulations
that apply to our international operations, including the Foreign Corrupt Practices Act, the U.K. Bribery Act and other local
laws prohibiting corrupt payments to government officials. Violations of these laws and regulations could result in fines and
penalties, criminal sanctions, prohibitions on the conduct of our business and reputational damage. Any of the foregoing could
have an adverse effect on our business, financial condition and operating results.
Investigations or enforcement actions by governmental authorities may result in changes to our business practices,
negatively affect our portfolio purchasing volume, make collections more difficult or expose us to the risk of fines, penalties,
restitution payments and litigation.
Our business practices may be subject to review from time to time by various governmental authorities. These reviews
may involve governmental authority consideration of individual consumer complaints, or could involve a broader review of our
debt collection policies and practices. These investigations could lead to assertions by governmental authorities that we are not
complying with applicable laws or regulations, in which case authorities may request or seek to impose a range of remedies that
could involve potential compensatory or punitive damage claims, fines, restitutionary payments, sanctions or injunctive relief.
Government authorities could also request, or we may agree to change, practices that we believe are compliant with applicable
law and regulations in order to respond to the concerns of governmental authorities. In addition, negative publicity relating to
investigations or proceedings brought by governmental authorities could have an adverse effect on our reputation, could impair
our relationships with industry participants, and could result in financial institutions reducing or eliminating sales of portfolios
to us. Further, responding to governmental inquiries and investigations and defending lawsuits or other proceedings could
require significant expenditures and could divert management’s attention from our business operations. Any of the foregoing
could have an adverse effect on our business, financial condition and operating results.
Changes to the regulatory regime to which Cabot is subject may adversely affect our business, financial condition and
operating results.
Cabot’s operations are subject to substantial regulations, and the regulatory regime to which it is subject may experience
changes. The Financial Conduct Authority (“FCA”) implemented an interim permission regime whereby businesses that held a
consumer credit license were required to register with the FCA for interim permission before March 31, 2014 in order to
continue consumer credit activities after April 1, 2014. The interim permission regime is expected to continue until April 1,
2017, and during this time businesses will be called upon at different intervals to apply for authorization to be fully regulated
by the FCA. Cabot currently has all regulatory licenses, permissions, registrations and authorizations in place with the relevant
regulatory bodies in order to provide and continue debt purchase and collection activities, including holding interim permission
with the FCA.
Cabot applied for full authorization of its business with the FCA in March 2015. The FCA typically has 12 months to
consider an application for full authorization. Therefore, Cabot expects the final decision by the FCA regarding its application
in March 2016. The FCA may take any one of the following actions with Cabot’s application: (1) the FCA may authorize Cabot
to continue debt purchasing, collecting and associated credit activities without further conditions; (2) the FCA may authorize
Cabot subject to certain conditions, which will require Cabot to take certain actions to either remediate or comply with the
FCA’s conditions; (3) the FCA may require that certain improvements to Cabot’s processes be made as a precursor to
authorization, or appoint a skilled person elected by the FCA to investigate, examine and oversee Cabot’s operations, at Cabot’s
cost; or (4) the FCA may decline to authorize Cabot. In addition to the application for full authorization of its business with the
FCA, Cabot will be required to apply to the FCA to appoint certain individuals who have significant control or influence over
the management of the business, known as “Approved Persons,” and who will jointly and severally be liable for the acts and
omissions of the company and its business affairs. Approved Persons will be subject to statements of principle and codes of
practice established and enforced by the FCA. The FCA may take the following action in connection with the application for
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Approved Persons: (a) authorize the Approved Person without further conditions; (b) refuse to authorize the Approved Person;
(c) request that the applicant undertake further qualifications before it authorizes a person to become an Approved Person; or
(d) ban a person from acting as an Approved Person for a period of time or for life.
The FCA has adopted detailed rules relating to conducting consumer credit activities, in addition to putting in place high
level principles and conditions to which it expects businesses and Approved Persons in the sector to adhere. The FCA has
significantly greater powers than the OFT, including, but not limited to, the ability to impose significant fines, ban certain
individuals from carrying on trade within the financial services industry, impose requirements on a firm’s permission, and cease
certain products from being collected upon.
Furthermore, the regulatory regime in the United Kingdom relating to the protection of consumers from unfair terms and
practices has also undergone changes. In October 2015, the U.K. Parliament introduced new laws, which reformed most of the
previous U.K. consumer laws and was largely driven by the European Commission’s Directive for Consumer Rights. The U.K.
Consumer Rights Act 2015 provides for enhanced consumer measures that can be imposed on businesses and gives greater
protection to U.K. consumers from unfair business practices and unfair terms in consumer agreements.
Finally, the manner in which court claims are conducted in England and Wales in connection with the recovery of debt
may be subject to significant changes. In September 2014, the Civil Procedure Rules Committee (“CPRC”), an advisory public
body set up by statute and sponsored by the U.K. Ministry of Justice, issued a consultation on proposals to introduce a
designated pre-action protocol for court claims for the recovery of debt. Due to the amount of responses from the industry
against the introduction of a dedicated protocol, the CPRC created a dedicated sub-committee with industry and consumer
group stakeholders. As a consequence, the CPRC issued an updated consultation in September 2015 in order to seek balance
between the interests of the industry and consumer groups. If adopted in its current form, the consultation would require all
debt collection entities and law firms instructed and acting on behalf of such entities to disclose significant amounts of
information relating to the credit agreement and the state of such credit agreement to a consumer prior to being able to progress
a claim to court. In some circumstances, issuers of debt may not be able to provide this information and, as neither Cabot nor
its competitors currently maintain documentation to satisfy such obligations, the protocol may limit Cabot’s ability to
commence court proceedings to recover a debt. Certain other requirements are proposed, which may significantly increase the
costs and time to initiate a court claim. Cabot, together with other key industry representatives and trade bodies that are all
affected by the proposals, has issued an updated response to the consultation, which is still under consideration. If the CPRC
decide to release an updated protocol, it is anticipated that such protocol will be released during 2016 or 2017.
It is not yet possible to predict the precise impact that the above-referenced changes will have on Cabot. It is likely that
the rules and regulations applicable to Cabot, and the burden of regulatory scrutiny to which Cabot is subject, will continue to
increase. The FCA’s imposition of additional requirements on Cabot’s operations or failure to authorize Cabot’s collection
activities, the addition, reinterpretation or enforcement of any laws, rules, regulations, or protocols , or increased enforcement
of existing consumer protection or privacy laws, rules and regulations, may adversely affect our ability to collect on receivables
and may increase our costs associated with regulatory compliance, which could adversely affect our business, financial
condition and operating results.
Our business, financial condition and operating results may be adversely affected if consumer bankruptcy filings increase
or if bankruptcy laws change.
Our business model may be uniquely vulnerable to an economic recession, which typically results in an increase in the
amount of defaulted consumer receivables, thereby contributing to an increase in the amount of personal bankruptcy filings.
Under certain bankruptcy filings, a consumer’s assets are sold to repay credit originators, with priority given to holders of
secured debt. Since the defaulted consumer receivables we purchase are generally unsecured, we often are not able to collect on
those receivables. In addition, since we purchase receivables that may have been delinquent for a long period of time, this may
be an indication that many of the consumers from whom we collect will be unable to pay their debts going forward and are
more likely to file for bankruptcy in an economic recession. Furthermore, potential changes to existing bankruptcy laws could
contribute to an increase in consumer bankruptcy filings. We cannot be certain that our collection experience would not decline
with an increase in consumer bankruptcy filings. If our actual collection experience with respect to a defaulted consumer
receivable portfolio is significantly lower than we projected when we purchased the portfolio, our business, financial condition
and operating results could be adversely affected.
We are dependent upon third parties to service a substantial portion of our consumer receivable portfolios.
We use outside collection services to collect a substantial portion of our charged-off receivables. We are dependent upon
the efforts of third-party collection agencies and attorneys to help service and collect our charged-off receivables. Our third-
party collection agencies and attorneys could fail to perform collection services for us adequately, remit those collections to us
or otherwise perform their obligations adequately. In addition, one or more of those third-party collection agencies or attorneys
could cease operations abruptly or become insolvent, or our relationships with such collection agencies or attorneys may
otherwise change adversely. Further, we might not able to secure replacement third-party collection agencies or attorneys or
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promptly transfer account information to our new third-party collection agencies, attorneys or in-house in the event our
agreements with our third-party collection agencies and attorneys were terminated. Any of the foregoing factors could cause
our business, financial condition and operating results to be adversely affected.
Increases in costs associated with our collections through collection litigation can raise our costs associated with our
collection strategies and the individual lawsuits brought against consumers to collect on judgments in our favor.
We hire in-house counsel and contract with a nationwide network of attorneys that specialize in collection matters. In
connection with collection litigation, we advance certain out-of-pocket court costs, which we refer to as deferred court costs.
These court costs may be difficult or impossible to collect, and we may not be successful in collecting amounts sufficient to
cover the amounts deferred in our financial statements. If we are not able to recover these court costs, our business, financial
condition and operating results may be adversely affected.
Further, we have substantial collection activity through our legal channel and, as a consequence, increases in deferred
court costs, increases in costs related to counterclaims, and an increase in other court costs may increase our costs in collecting
on these accounts, which may have an adverse effect on our business, financial condition and operating results.
Our network of third-party agencies and attorneys may not utilize amounts collected on our behalf or amounts we advance
for court costs in the manner for which they were intended.
In the normal course of operations, our third-party collection agencies and attorneys collect funds on our behalf. These
third parties may fail to remit amounts owed to us in a timely manner or at all. Additionally, we advance court costs to our
third-party attorneys, which are intended for their use in filing lawsuits on our behalf. These third-party attorneys may misuse
some or all of the funds we advance to them. Our ability to recoup our funds may be diminished if these third parties become
insolvent or enter into bankruptcy proceedings. If we are not able to recover these funds, our business, financial condition and
operating results may be adversely affected.
A significant portion of our collections relies upon our success in individual lawsuits brought against consumers and our
ability to collect on judgments in our favor.
We generate a significant portion of our revenue by collecting on judgments that are granted by courts in lawsuits filed
against consumers. A decrease in the willingness of courts to grant these judgments, a change in the requirements for filing
these cases or obtaining these judgments, or a decrease in our ability to collect on these judgments could have an adverse effect
on our business, financial condition and operating results. As we increase our use of the legal channel for collections, our short-
term margins may decrease as a result of an increase in upfront court costs and costs related to counter claims. We may not be
able to collect on certain aged accounts because of applicable statutes of limitations and we may be subject to adverse effects of
regulatory changes. Further, courts in certain jurisdictions require that a copy of the account statements or applications be
attached to the pleadings in order to obtain a judgment against consumers. If we are unable to produce those account
documents, these courts could deny our claims, and our business, financial condition and operating results may be adversely
affected.
We are subject to ongoing risks of regulatory investigations and litigation, including individual and class action lawsuits,
under consumer credit, consumer protection, theft, privacy, collections, and other laws, and we may be subject to awards of
substantial damages or be required to make other expenditures or change our business practices as a result.
We operate in an extremely litigious climate and currently are, and may in the future be, named as defendants in
litigation, including individual and class action lawsuits under consumer credit, consumer protection, theft, privacy, data
security, automated dialing equipment, debt collections, and other laws. Many of these cases present novel issues on which
there is no clear legal precedent, which increases the difficulty in predicting both the potential outcomes and costs of defending
these cases. We are subject to ongoing risks of regulatory investigations, inquiries, litigation, and other actions by the CFPB,
FTC, state Attorneys General, or other governmental bodies relating to our activities. These litigation and regulatory actions
involve potential compensatory or punitive damage claims, fines, costs, sanctions, civil monetary penalties, consumer
restitution, or injunctive relief, as well as other forms of relief, that could require us to pay damages, make other expenditures
or result in changes to our business practices. Any changes to our business practices could result in lower collections, increased
cost to collect or reductions in estimated remaining collections. Actual losses incurred by us in connection with judgments or
settlements of these matters may be more than our associated reserves. Further, defending lawsuits and responding to
governmental inquiries or investigations, regardless of their merit, could be costly and divert management’s attention from the
operation of our business. All of these factors could have an adverse effect on our business, financial condition and operating
results.
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Negative publicity associated with litigation, governmental investigations, regulatory actions, and other public statements
could damage our reputation.
From time to time there are negative news stories about our industry or company, especially with respect to alleged
conduct in collecting debt from consumers. These stories may follow the announcements of litigation or regulatory actions
involving us or others in our industry. Negative publicity about our alleged or actual debt collection practices or about the debt
collection industry in general could adversely affect our stock price, our position in the marketplace in which we compete, and
our ability to purchase charged-off receivables, any of which could have an adverse effect on our business, financial condition
and operating results.
We may make acquisitions that prove unsuccessful or our time spent on mergers, acquisitions or joint venture activities may
strain or divert our resources.
From time to time, we may make acquisitions of, or otherwise invest in, other companies that could complement our
business, including the acquisition of entities in diverse geographic regions and entities offering greater access to businesses
and markets that we do not currently serve. We may not be able to successfully acquire other businesses and the acquisitions we
make may be unprofitable or may take some time to achieve profitability. In addition, we may not successfully operate the
businesses that we acquire, or may not successfully integrate these businesses with our own, which may result in our inability
to maintain our goals, objectives, standards, controls, policies, culture, or profitability. Also, minority shareholders in certain
entities that we have acquired have the right, at certain times, to require us to acquire their ownership interest in those entities at
fair value, while others have the right to force a sale of the entity if we choose not to purchase their interests at fair value, which
could result in additional constraints on our resources. Through acquisitions, we may enter markets in which we have limited or
no experience. Any acquisition may result in a potentially dilutive issuance of equity securities, and the incurrence of additional
debt which could reduce our profitability. In addition, our time spent on mergers and acquisitions activities and integrating
acquired businesses may place additional constraints on our resources and divert the attention of our management from other
business concerns, which may adversely affect our business, financial condition and operating results.
We are dependent on our management team for the adoption and implementation of our strategies and the loss of its
services could have an adverse effect on our business.
Our management team has considerable experience in finance, banking, consumer collections, and other industries. We
believe that the expertise of our executives obtained by managing businesses across numerous other industries has been critical
to the enhancement of our operations. Our management team has created a culture of new ideas and progressive thinking,
coupled with increased use of technology and statistical analysis. The management teams at each of our operating subsidiaries
are also important to the success of their respective operations. The loss of the services of one or more key members of
management could disrupt our collective operations and seriously impair our ability to continue to acquire or collect on
portfolios of charged-off receivables and to manage and expand our business, any of which could have an adverse effect on
business, financial condition and operating results.
Regulatory, political, and economic conditions in the foreign countries in which we operate or may operate in the future
expose us to risk, including loss of business.
A significant element of our business strategy is to continue to develop and expand operations in countries outside of the
United States. While wage costs in certain countries in which we operate or may operate in the future are significantly lower
than in the United States, the United Kingdom and other industrialized countries for comparably skilled workers, wages are
increasing at a faster rate than in the United States or the United Kingdom, and we experience or may experience higher
employee turnover in operations in those countries than is typical in our U.S. or U.K. locations. The continuation of these
trends could reduce the cost savings we sought to achieve by establishing a portion of our operations outside of the United
States. We may be adversely affected by changes in inflation, exchange rate fluctuations, interest rates, tax provisions, social
stability or other political, economic or diplomatic developments in or affecting these countries in the future. Changes in the
business or regulatory climate of these countries could have an adverse effect on our business, financial condition and operating
results.
We may not be able to manage our growth effectively, including the expansion of our foreign operations.
We have expanded significantly in recent years. Continued growth will place additional demands on our resources, and
we cannot be sure that we will be able to manage our growth effectively. For example, continued growth could place strains on
our management, operations, and financial resources that our infrastructure, facilities, and personnel may not be able to
adequately support. In addition, the recent expansion of our foreign operations subjects us to a number of additional risks and
uncertainties, including:
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compliance with and changes in international laws, including regulatory and compliance requirements that could
affect our business;
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increased exposure to U.S. laws that apply abroad, such as the Foreign Corrupt Practices Act and the U.K .Bribery
Act;
social, political and economic instability or recessions;
fluctuations in foreign economies and currency exchange rates;
difficulty in hiring, staffing and managing qualified and proficient local employees and advisors to run
international operations;
the difficulty of managing and operating an international enterprise, including difficulties in maintaining effective
communications with employees due to distance, language, and cultural barriers;
difficulties implementing and maintaining effective internal controls and risk management and compliance
initiatives;
potential disagreements with our joint venture business partners;
differing labor regulations and business practices; and
foreign tax consequences.
To support our growth and improve our international operations, we continue to make investments in infrastructure,
facilities, and personnel in our operations; however, these additional investments may not be successful or our investments may
not produce profitable results. If we cannot manage our growth effectively, our business, financial condition and operating
results may be adversely affected.
If our technology and telecommunications systems were to fail, or if we are not able to successfully anticipate, invest in, or
adopt technological advances within our industry, it could have an adverse effect on our operations.
Our success depends in large part on sophisticated computer and telecommunications systems. The temporary or
permanent loss of our computer and telecommunications equipment and software systems, through casualty, operating
malfunction, software virus, or service provider failure, could disrupt our operations. In the normal course of our business, we
must record and process significant amounts of data quickly and accurately to properly bid on prospective acquisitions of
receivable portfolios and to access, maintain, and expand the databases we use for our collection activities. Any simultaneous
failure of our information systems and their backup systems would interrupt our business operations.
In addition, our business relies on computer and telecommunications technologies, and our ability to integrate new
technologies into our business is essential to our competitive position and our success. We may not be successful in
anticipating, investing in, or adopting technological changes on a timely or cost-effective basis. Computer and
telecommunications technologies are evolving rapidly and are characterized by short product life cycles.
We continue to make significant modifications to our information systems to ensure that they continue to be adequate for
our current and foreseeable demands and continued expansion, and our future growth may require additional investment in
these systems. These system modifications may exceed our cost or time estimates for completion or may be unsuccessful. If we
cannot update our information systems effectively, our business, financial condition and operating results may be adversely
affected.
In the event of a cyber security breach or similar incident, our business and operations could suffer.
We rely on information technology networks and systems to process and store electronic information. We collect and
store sensitive data, including personally identifiable information of our consumers, on our information technology networks.
Despite the implementation of security measures, our information technology networks and systems may be vulnerable to
disruptions and shutdowns due to attacks by hackers or breaches due to malfeasance by contractors, employees and others who
have access to our networks and systems. The occurrence of any of these cyber security events could compromise our networks
and the information stored on our networks could be accessed. Any such access could disrupt our operations or result in legal
claims, liability, reputational damage or regulatory penalties under laws protecting the privacy of personal information, any of
which could adversely affect our business, financial condition and operating results.
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We rely on third parties to provide us with services in connection with certain aspects of our business, and any failure by
these third parties to perform their obligations, or our inability to arrange for alternative third party providers for such
services, could have an adverse effect on our business, financial condition and operating results.
We have entered into agreements with third parties to provide us with services in connection with our business, including
payment processing, credit card authorization and processing, payroll processing, record keeping for retirement and benefit
plans and certain information technology functions. Any failure by a third party to provide us with contracted services on a
timely basis or within service level expectations and performance standards may have an adverse effect on our business,
financial condition and operating results. In addition, we may be unable to find, or enter into agreements with, suitable
replacement third party providers for such services, which could adversely affect our business, financial condition and
operating results.
We may not be able to adequately protect the intellectual property rights upon which we rely and, as a result, any lack of
protection may diminish our competitive advantage.
We rely on proprietary software programs and valuation and collection processes and techniques, and we believe that
these assets provide us with a competitive advantage. We consider our proprietary software, processes, and techniques to be
trade secrets, but they are not protected by patent or registered copyright. We may not be able to protect our technology and
data resources adequately, which may diminish our competitive advantage, which may, in turn, adversely affect our business,
financial condition and operating results.
Exchange rate fluctuations could adversely affect our business, financial condition and operating results.
Because we conduct some business in currencies other than U.S. dollars but report our financial results in U.S. dollars,
we face exposure to fluctuations in currency exchange rates upon translation of these business results into U.S. dollars. In the
normal course of business, we employ various strategies to manage these risks, including the use of derivative instruments.
These strategies may not be effective in protecting us against the effects of fluctuations from movements in foreign exchange
rates. Fluctuations in the foreign currency exchange rates could adversely affect our business, financial condition and operating
results.
Taxes could adversely affect our results of operations, cash flows and financial condition.
We are subject to taxes in the United States and, increasingly, in foreign jurisdictions. Significant judgment is required in
determining our worldwide provision for taxes. We regularly are under audit by tax authorities, and economic and
political pressures to increase tax revenues in various jurisdictions may make resolving tax disputes more difficult. The final
determination of tax audits and any related litigation could be different from our historical income tax provisions and
accruals. In addition, potential adverse tax consequences could limit our ability to repatriate funds held in jurisdictions outside
of the United States. Moreover, there may be unfavorable changes in the tax laws (or in the interpretation thereof) in the future.
Accordingly, taxes could have an adverse effect on our results of operations, cash flows and financial condition.
Risks Related to Our Indebtedness and Common Stock
Our significant indebtedness could adversely affect our financial health and could harm our ability to react to changes to
our business.
As described in greater detail in Note 9, “Debt” to our consolidated financial statements, as of December 31, 2015, our
total long-term indebtedness outstanding was approximately $3.2 billion, which includes $1.7 billion of debt at our Cabot
subsidiary. Our substantial indebtedness could have important consequences to investors. For example, it could:
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increase our vulnerability to general economic downturns and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness,
thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general
corporate requirements;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to competitors that have less debt;
increase our exposure to market and regulatory changes that could diminish the amount and value of our
inventory that we borrow against under our secured credit facilities; and
limit, along with the financial and other restrictive covenants contained in the documents governing our
indebtedness, our ability to borrow additional funds, make investments and incur liens, among other things.
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Any of these factors could adversely affect our business, financial condition and operating results. If we do not have
sufficient earnings to service our debt, we may be required to refinance all or part of our existing debt, sell assets, borrow more
money, or sell securities, none of which we can guarantee we will be able to do.
Servicing our indebtedness requires a significant amount of cash, and we may not have sufficient cash flow from our
business to pay our substantial indebtedness.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness or to make
cash payments in connection with any conversion of our convertible notes depends on our future performance, which is subject
to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow
from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to
generate adequate cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring
indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our
indebtedness will depend on the capital markets and our financial condition at that time. We may not be able to engage in any
of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations which
could, in turn, adversely affect our business, financial condition and operating results.
Despite our current indebtedness levels, we may still incur substantially more indebtedness or take other actions which
would intensify the risks discussed above.
Despite our current consolidated indebtedness levels, we and our subsidiaries may be able to incur substantial additional
indebtedness in the future, some of which may be secured indebtedness under our Second Amended and Restated Credit
Agreement (as amended, the “Restated Credit Agreement”), subject to the restrictions contained in our debt instruments. We are
not restricted under the terms of the indentures governing our convertible notes from incurring additional indebtedness,
securing existing or future indebtedness, recapitalizing our indebtedness or taking a number of other actions that could have the
effect of diminishing our ability to make payments on our indebtedness. Although the Restated Credit Agreement and some of
our other existing debt currently limit the ability of us and certain of our subsidiaries to incur additional indebtedness, these
restrictions are subject to a number of qualifications and exceptions and, under certain circumstances, additional indebtedness
incurred in compliance with these restrictions, including additional secured indebtedness, could be substantial. Also, these
restrictions will not prevent us from incurring obligations that do not constitute indebtedness. To the extent new indebtedness or
other new obligations are added to our current levels, the risks described above could intensify. Moreover, if the facilities under
the Restated Credit Agreement are repaid or mature, we may not be subject to similar restrictions under the terms of any
subsequent indebtedness.
We may not be able to continue to satisfy the covenants in our debt agreements.
Our debt agreements impose a number of covenants, including restrictive covenants on how we operate our business.
Failure to satisfy any one of these covenants could result in negative consequences including the following, each of which
could have an adverse effect on our business, financial condition and operating results:
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acceleration of outstanding indebtedness;
exercise by our lenders of rights with respect to the collateral pledged under certain of our outstanding
indebtedness;
our inability to continue to purchase receivables needed to operate our business; or
our inability to secure alternative financing on favorable terms, if at all.
Increases in interest rates could adversely affect our business, financial condition and operating results.
Portions of our outstanding debt bear interest at a variable rate. Increases in interest rates could increase our interest
expense which would, in turn, lower our earnings. We may periodically evaluate whether to enter into derivative financial
instruments, such as interest rate swap agreements, to reduce our exposure to fluctuations in interest rates on variable interest
rate debt and their impact on earnings and cash flows. These strategies may not be effective in protecting us against the effects
of fluctuations from movements in interest rates. Increases in interest rates could adversely affect our business, financial
condition and operating results.
Propel may be unable to securitize additional tax lien assets.
On May 6, 2014, Propel, through its subsidiaries, completed the securitization of a pool of approximately $141.5
million in payment agreements and contracts relating to unpaid real property taxes, assessments, and other charges secured by
liens on real property located in the State of Texas (the “Texas Tax Liens”). In connection with the securitization, investors
purchased approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized by the Texas Tax Liens.
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The transaction provided capital to Propel at a lower cost than other available financing alternatives. Market conditions or other
factors may dictate an inability for Propel to securitize additional tax lien assets in the future, in which case Propel may need to
resort to other, more costly, sources of capital to fund its operations which could, in turn, adversely affect Propel’s business,
financial condition and operating results.
Our common stock price may be subject to significant fluctuations and volatility.
The market price of our common stock has been subject to significant fluctuations. Since the beginning of fiscal year
2015, our stock price has ranged from a low of $28.17 on December 14, 2015 to a high of $44.66 on January 2, 2015. More
recently, on January 19, 2016 we reached a low of $16.09. These fluctuations could continue. Among the factors that could
affect our stock price are:
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our operating and financial performance and prospects;
our ability to repay our debt;
our access to financial and capital markets to refinance our debt;
investor perceptions of us and the industry and markets in which we operate;
future sales of equity or equity-related securities;
changes in earnings estimates or buy/sell recommendations by analysts;
changes in the supply of, demand for or price of portfolios;
our acquisition activity, including our expansion into new markets;
regulatory changes affecting our industry generally or our business and operations;
general financial, domestic, international, economic and other market conditions; and
the number of short positions on our stock at any particular time.
The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated
to the operating performance of companies. The market price of our common stock could fluctuate significantly for many
reasons, including in response to the risks described in this Annual Report on Form 10-K, elsewhere in our filings with the SEC
from time to time or for reasons unrelated to our operations, such as reports by industry analysts, investor perceptions or
negative announcements by our customers, competitors or suppliers regarding their own performance, as well as industry
conditions and general financial, economic and political instability.
The price of our common stock could also be affected by possible sales of our common stock by investors who view our
convertible notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we
expect to develop involving our common stock.
If securities or industry analysts have a negative outlook regarding our stock or our industry, or our operating results do
not meet their expectations, our stock price could decline. The trading market for our common stock is influenced by the
research and reports that industry or securities analysts publish about us. If one or more of the analysts who cover our company
downgrade our stock or if our operating results do not meet their expectations, our stock price could decline.
Future sales of our common stock or the issuance of other equity securities may adversely affect the market price of our
common stock.
In the future, we may sell additional shares of our common stock or other equity or equity-related securities to raise
capital or issue equity securities to finance acquisitions. In addition, a substantial number of shares of our common stock are
reserved for issuance upon the exercise of stock options or vesting of restricted stock awards, upon conversion of our
convertible notes and the warrant transactions entered into in connection with our convertible senior notes due 2017. We are not
restricted from issuing additional common stock, including securities that are convertible into or exchangeable for, or that
represent the right to receive, common stock.
The liquidity and trading volume of our common stock is limited. For the three months ended December 31, 2015, the
average daily trading volume of our common stock was approximately 318,000 shares. The issuance or sale of substantial
amounts of our common stock or other equity or equity-related securities (or the perception that such issuances or sales may
occur) could adversely affect the market price of our common stock as well as our ability to raise capital through the sale of
additional equity or equity-related securities. We cannot predict the effect that future issuances or sales of our common stock or
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other equity or equity-related securities would have on the market price of our common stock.
We may not have the ability to raise the funds necessary to repurchase our convertible notes upon a fundamental change or
to settle conversions in cash, and our future indebtedness may contain limitations on our ability to pay cash upon
conversion of our convertible notes.
Holders of our convertible notes will have the right to require us to repurchase their convertible notes upon the occurrence
of a fundamental change at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any.
In addition, upon a conversion of convertible notes, unless we elect to deliver solely shares of our common stock to settle the
conversion (other than paying cash in lieu of delivering any fractional shares of our common stock), we will be required to
make cash payments for each $1,000 in principal amount of convertible notes converted of at least the lesser of $1,000 and the
sum of certain daily conversion values. However, we may not have enough available cash or be able to obtain financing at the
time we are required to make repurchases of convertible notes surrendered therefor or to settle conversions in cash. In addition,
our Restated Credit Agreement contains certain restrictive covenants that limit our ability to engage in specified types of
transactions, which may affect our ability to repurchase our convertible notes. Further, our ability to repurchase our convertible
notes or to pay cash upon conversion may be limited by law, by regulatory authority or by agreements governing our future
indebtedness. Our failure to repurchase convertible notes or to pay cash upon conversion of the convertible notes at a time
when the repurchase or cash payment upon conversion is required by any indenture pursuant to which the convertible notes
were offered would constitute a default under the relevant indenture. Such default could constitute a default under another
indenture, our Restated Credit Agreement or other agreements governing our future indebtedness. If the repayment of any
indebtedness were to be accelerated, we may not have sufficient funds to repay such indebtedness and repurchase the
convertible notes.
The conditional conversion feature of our convertible notes, if triggered, may adversely affect our financial condition and
operating results.
In the event the conditional conversion feature of any of our convertible notes is triggered, holders of those convertible
notes will be entitled to convert the convertible notes at any time during specified periods at their option. Even if holders do not
elect to convert their convertible notes, we could be required under applicable accounting rules to reclassify all or a portion of
the outstanding principal of the relevant series of convertible notes as a current rather than long-term liability, which would
result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as our convertible notes, could have
a material effect on our reported financial results.
Under U.S. generally accepted accounting principles, or GAAP, an entity must separately account for the debt component
and the embedded conversion option of convertible debt instruments that may be settled entirely or partially in cash upon
conversion, such as our convertible notes, in a manner that reflects the issuer’s economic interest cost. The effect of the
accounting treatment for such instruments is that the value of such embedded conversion option would be treated as original
issue discount for purposes of accounting for the debt component of the convertible notes, and that original issue discount is
amortized into interest expense over the term of the convertible notes using an effective yield method. As a result, we will be
required to record a greater amount of non-cash interest expense as a consequence of the amortization of the original issue
discount to face amount of the convertible notes over the respective terms of the convertible notes and as a consequence of the
amortization of the debt issuance costs. Accordingly, we will report lower net income in our financial results because of the
recognition of both the current period’s amortization of the debt discount and the coupon interest of the convertible notes,
which could adversely affect our reported or future financial results and the trading price of our common stock.
Under certain circumstances, convertible debt instruments (such as our convertible notes) that may be settled entirely or
partially in cash are evaluated for their impact on earnings per share utilizing the treasury stock method, the effect of which is
that any shares issuable upon conversion of the convertible notes are not included in the calculation of diluted earnings per
share except to the extent that the conversion value of the convertible notes exceeds their respective principal amount. Under
the treasury stock method, for diluted earnings per share purposes, the convertible debt instrument is accounted for as if the
number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares,
are issued. We cannot be certain that the accounting standards in the future will continue to permit the use of the treasury stock
method, as is currently the case with our convertible notes. If we are unable to use the treasury stock method in accounting for
any shares issuable upon conversion of our convertible notes, then our diluted earnings per share could be further adversely
affected. In addition, if the conditional conversion feature of our convertible notes is triggered, even if holders of such notes do
not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the
outstanding principal of such notes as a current rather than long-term liability, which could result in a reduction of our net
working capital.
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Provisions in our charter documents and Delaware law may delay or prevent acquisition of us, which could decrease the
value of shares of our common stock.
Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a
third party to acquire us without the consent of our Board of Directors. These provisions include advance notice provisions,
limitations on actions by our stockholders by written consent and special approval requirements for transactions involving
interested stockholders. We are authorized to issue up to five million shares of preferred stock, the relative rights and
preferences of which may be fixed by our Board of Directors, subject to the provisions of our articles of incorporation, without
stockholder approval. The issuance of preferred stock could be used to dilute the stock ownership of a potential hostile acquirer.
The provisions that discourage potential acquisitions of us and adversely affect the voting power of the holders of common
stock may adversely affect the price of our common stock and the value of the Convertible Notes.
We do not intend to pay dividends on our common stock for the foreseeable future.
We have never declared or paid cash dividends on our common stock. In addition, we must comply with the covenants in
our credit facilities if we want to pay cash dividends. We currently intend to retain our future earnings, if any, to finance the
further development and expansion of our business and do not intend to pay cash dividends in the foreseeable future. Any
future determination to pay dividends will be at the discretion of our Board of Directors and will depend upon our financial
condition, operating results, capital requirements, restrictions contained in current or future financing instruments and such
other factors as our Board of Directors deems relevant. As a result, receiving a return on an investment in Encore’s common
stock may only occur if the trading price of our common stock increases.
Item 1B—Unresolved Staff Comments
None.
We lease the following properties with more than 30,000 square feet:
Item 2—Properties
Primary use
Approximate
square footage
Location
San Diego, CA
Phoenix, AZ
St. Cloud, MN
Gurgaon, India
Warren, MI
Roanoke, VA
Corporate headquarters, internal legal and consumer support services
Call center and administrative offices
Call center
Call center and administrative offices
Call center and internal legal
Call center and administrative offices
San Jose, Costa Rica
Call center and administrative offices
United Kingdom
Cabot corporate office, call center, internal legal and consumer support services
Spain
Australia
Call center
Baycorp corporate office, call center, and administrative offices
118,000
31,000
155,000
138,000
100,000
40,000
32,000
364,000
40,000
31,000
The properties listed in the table above are our principal properties and are primarily used in our portfolio purchasing and
recovery business. We also lease other immaterial office space in the United States, Ireland, Colombia, Peru, New Zealand, and
the Philippines.
We believe that our current leased facilities are generally well maintained and in good operating condition. We believe
that these facilities are suitable and sufficient for our operational needs. Our policy is to improve, replace, and supplement the
facilities as considered appropriate to meet the needs of our operations.
Information with respect to this item may be found in Note 13, “Commitments and Contingencies” to the consolidated
financial statements in Item 8, which is incorporated herein by reference.
Item 3—Legal Proceedings
Not applicable.
Item 4—Mine Safety Disclosures
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PART II
Item 5—Market for the Registrant’s Common Equity Securities, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is traded on the NASDAQ Global Select Market under the symbol “ECPG.”
The high and low sales prices of our common stock, as reported by NASDAQ Global Select Market for each quarter
during our two most recent fiscal years, are reported below:
Fiscal Year 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
Market Price
High
Low
44.66
$
44.61
44.43
41.44
51.31
$
46.78
46.40
46.18
36.40
37.89
35.31
28.17
45.05
40.62
42.04
39.62
The closing price of our common stock on February 9, 2016, was $19.91 per share and there were 10 stockholders of
record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we
are unable to estimate the total number of beneficial owners of our stock represented by these stockholders of record.
Performance Graph
The following performance graph and related information shall not be deemed “soliciting material” or “filed” with the
SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or
Securities Exchange Act of 1934, each, as amended, except to the extent that we specifically incorporate it by reference into
such filing.
The following graph compares the total cumulative stockholder return on our common stock for the period from
December 31, 2010 through December 31, 2015, with the cumulative total return of (a) the NASDAQ Composite Index and
(b) Asta Funding, Inc. and PRA Group, Inc., which we believe are comparable companies. The comparison assumes that $100
was invested on December 31, 2010, in our common stock and in each of the comparison indices (including reinvestment of
dividends). The stock price performance reflected in the following graph is not necessarily indicative of future stock price
performance.
29
Table of Contents
Encore Capital Group, Inc.
NASDAQ Composite Index
Peer Group
Dividend Policy
12/10
12/11
12/12
12/13
12/14
12/15
$
$
$
100.00
100.00
100.00
$
$
$
90.66
100.53
90.61
$
$
$
130.58
116.92
140.30
$
$
$
214.33
166.19
202.76
$
$
$
189.34
188.78
221.83
$
$
$
124.01
199.95
135.43
As a public company, we have never declared or paid dividends on our common stock. However, the declaration,
payment, and amount of future dividends, if any, is subject to the discretion of our board of directors, which may review our
dividend policy from time to time in light of the then existing relevant facts and circumstances. Under the terms of our
revolving credit facility, we are permitted to declare and pay dividends in an amount not to exceed, during any fiscal year, 20%
of our audited consolidated net income for the then most recently completed fiscal year, so long as no default or unmatured
default under the facility has occurred and is continuing or would arise as a result of the dividend payment. We may also be
subject to additional dividend restrictions under future debt agreements or the terms of securities we may issue in the future.
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Table of Contents
Share Repurchases
On April 24, 2014, our Board of Directors approved a $50.0 million share repurchase program. During the year ended
December 31, 2015, we repurchased 839,295 shares of our common stock for approximately $33.2 million, which represented
the remaining amount allowed under the share repurchase program.
On August 12, 2015, our Board of Directors approved a new $50.0 million share repurchase program. Repurchases under
this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and
other factors, in the open market, through private transactions, block transactions, or other methods as determined by the
management and our Board of Directors, and in accordance with market conditions, other corporate considerations, and
applicable regulatory requirements. The program does not obligate the Company to acquire any particular amount of common
stock, and it may be modified or suspended at any time at the Company’s discretion. We did not make any repurchases under
the new share repurchase program during the year ended December 31, 2015.
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Table of Contents
Item 6—Selected Financial Data
This table presents selected historical financial data of Encore Capital Group, Inc. and its consolidated subsidiaries. This
information should be carefully considered in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Annual Report on Form 10-K, including the acquisitions described therein that materially affected
our results. The selected financial data in this section are not intended to replace the consolidated financial statements. The
selected financial data (except for “Selected Operating Data”) in the table below, as of December 31, 2013, 2012 and 2011 and
for the years ended December 31, 2012 and 2011, were derived from our audited consolidated financial statements not included
in this Annual Report on Form 10-K. The selected financial data as of December 31, 2015, and 2014 and for the years ended
December 31, 2015, 2014, and 2013, were derived from our audited consolidated financial statements included elsewhere in
this Annual Report on Form 10-K. The Selected Operating Data were derived from our books and records (in thousands, except
per share data):
Revenues
Revenue from receivable portfolios,
net(1)
Other revenues
Net interest income
Total revenues
Operating expenses
Salaries and employee benefits
Cost of legal collections
Other operating expenses
Collection agency commissions
General and administrative expenses
Depreciation and amortization
Goodwill impairment
Total operating expenses
Income from operations
Other (expense) income
Interest expense
Other income (expense)
Total other expense
Income from continuing operations
before income taxes
Provision for income taxes
Income from continuing operations
(Loss) income from discontinued
operations, net of tax
Net income
Net (income) loss attributable to
noncontrolling interest
Net income attributable to Encore
Capital Group, Inc. stockholders
Amounts attributable to Encore
Capital Group, Inc.:
Income from continuing operations
(Loss) income from discontinued
operations, net of tax
Net income
As of and For The Year Ended December 31,
2015
2014
2013
2012
2011
$
1,072,436
$
992,832
$
744,870
$
545,412
$
448,714
60,696
28,440
51,988
27,969
1,161,572
1,072,789
270,334
229,847
98,182
37,858
196,827
33,945
49,277
916,270
245,302
(186,556)
2,235
(184,321)
60,981
(13,597)
47,384
—
47,384
246,247
205,661
93,859
33,343
146,286
27,949
—
753,345
319,444
(166,942)
113
(166,829)
152,615
(52,725)
99,890
(1,612)
98,278
12,588
15,906
773,364
165,040
186,959
66,649
33,097
109,713
13,547
—
575,005
198,359
(73,269)
(4,222)
(77,491)
120,868
(45,388)
75,480
(1,740)
73,740
905
10,460
556,777
101,084
168,703
48,939
15,332
61,798
5,840
—
401,696
155,081
(25,564)
808
(24,756)
130,325
(51,754)
78,571
(9,094)
69,477
(2,249)
5,448
1,559
—
32
—
448,746
77,805
157,050
35,708
14,162
39,760
4,081
—
328,566
120,180
(21,116)
(395)
(21,511)
98,669
(38,076)
60,593
365
60,958
—
$
45,135
$
103,726
$
75,299
$
69,477
$
60,958
45,135
105,338
77,039
78,571
—
$
45,135
$
(1,612)
103,726
$
(1,740)
75,299
$
(9,094)
69,477
$
60,593
365
60,958
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Earnings (loss) per share attributable
to Encore Capital Group, Inc.:
Basic earnings (loss) per share from:
Continuing operations
Discontinued operations
Net basic earnings per share
Diluted earnings (loss) per share from:
Continuing operations
Discontinued operations
Net diluted earnings per share
Weighted-average shares outstanding:
$
$
$
$
$
$
Basic
Diluted
Selected operating data:
Purchases of receivable portfolios, at
cost
Gross collections for the period
Consolidated statements of financial
condition data:
As of and For The Year Ended December 31,
2015
2014
2013
2012
2011
1.75
$
— $
1.75
1.69
$
$
— $
1.69
$
4.07
$
(0.06) $
$
4.01
$
3.83
(0.06) $
$
3.77
$
3.12
(0.07) $
$
3.05
$
2.94
(0.07) $
$
2.87
3.16
$
(0.36) $
$
2.80
$
3.04
(0.35) $
$
2.69
2.47
0.01
2.48
2.36
0.01
2.37
25,722
26,647
25,853
27,495
24,659
26,204
24,855
25,836
24,572
25,690
$
1,023,722
$
1,251,360
$
1,204,779
$
562,335
$
1,700,725
1,607,497
1,279,506
948,055
Cash and cash equivalents
$
153,593
$
124,163
$
126,213
$
17,510
$
Investment in receivable portfolios, net
Total assets
Total debt
Total liabilities
Total Encore equity
________________________
2,440,669
4,219,852
3,216,572
3,571,364
596,453
2,143,560
3,750,135
2,773,554
3,085,196
623,000
1,590,249
2,685,274
1,850,431
2,082,803
571,897
873,119
1,171,340
706,036
765,524
405,816
(1)
Includes net allowance reversal of $6.8 million, $17.4 million, $12.2 million and $4.2 million for the years ended December 31, 2015, 2014, 2013 and
2012, respectively, and net allowance charges of $10.8 million for the year ended December 31, 2011.
33
386,850
761,158
8,047
716,454
812,483
388,950
440,948
371,535
Table of Contents
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Annual Report on Form 10-K contains “forward-looking statements” relating to Encore Capital Group, Inc.
(“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our” or “us”) within the
meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,”
“may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not
limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations,
products or services, and financing needs or plans, as well as assumptions relating to these matters. Although we believe that
the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions
may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-
looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior
management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted
or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many
factors, including but not limited to, those set forth in this Annual Report on Form 10-K under “Part I, Item 1A. Risk Factors,”
could cause our actual results, performance, achievements, or industry results to be very different from the results,
performance, achievements or industry results expressed or implied by these forward-looking statements. Our business,
financial condition, or results of operations could also be materially and adversely affected by other factors besides those
listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to
update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if
experience or future events make it clear that any expected results expressed or implied by these forward-looking statements
will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do
not endorse projections regarding future performance that may be made by third parties.
Our Business and Operating Segments
We are an international specialty finance company providing debt recovery solutions for consumers and property owners
across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face
value and manage them by working with individuals as they repay their obligations and work toward financial recovery.
Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions,
consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include
receivables subject to bankruptcy proceedings. Through certain subsidiaries, we are a market leader in portfolio purchasing and
recovery in the United States, including Puerto Rico. Our subsidiary, Janus Holdings Luxembourg S.a.r.l. (“Janus Holdings”),
through its indirectly held U.K.-based subsidiary, Cabot Credit Management Limited and its subsidiaries (collectively,
“Cabot”), is a market leader in credit management services in the United Kingdom, historically specializing in portfolios
consisting of higher balance, semi-performing accounts (i.e., debt portfolios in which over 50% of the accounts have received a
payment in three of the last four months immediately prior to the portfolio purchase). Cabot’s acquisition of Marlin Financial
Group Limited (“Marlin”), in February 2014, provides Cabot with substantial litigation-enhanced collection capabilities for
non-performing accounts. Cabot continued to expand in the United Kingdom with its acquisition of Hillesden Securities Ltd
and its subsidiaries (“dlc”) in June 2015. Our majority-owned subsidiary, Grove Holdings (“Grove”), is a U.K.-based leading
specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, individual
voluntary arrangements, or “IVAs”) in the United Kingdom and bank and non-bank receivables in Spain. Our majority-owned
subsidiary, Refinancia S.A. (“Refinancia”), through its subsidiaries, is a market leader in debt collection and management in
Colombia and Peru. In addition, through our subsidiary, Propel Acquisition, LLC and its subsidiaries and affiliates (collectively,
“Propel”), we assist property owners who are delinquent on their property taxes by structuring affordable monthly payment
plans and purchase delinquent tax liens directly from taxing authorities. In October 2015, we completed the acquisition of a
controlling stake in Baycorp Holdings Pty Limited (“Baycorp”), one of Australasia's leading debt resolution specialists. The
acquisition of Baycorp expands our operations into Australia and New Zealand and our global reach into 13 countries.
We conduct business through two reportable segments: portfolio purchasing and recovery, and tax lien business. Our
long-term growth strategy involves continuing to invest in our core portfolio purchasing and recovery and tax lien businesses,
expanding into new geographies, and leveraging our core competencies to explore expansion into adjacent asset classes.
Government Regulation
As discussed in more detail under “Part I - Item1 - Business” in this Annual Report on Form 10-K, our U.S. debt
purchasing business and collection activities are subject to federal, state and municipal statutes, rules, regulations and
ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting
consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and
prohibitions on unfair, deceptive or abusive debt collection practices. These rules, regulations, guidelines and procedures are
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Table of Contents
modified from time to time by the relevant authorities charged with their administration which could affect the way we conduct
our business.
For example, the Consumer Finance Protection Bureau (“CFPB”) may adopt new regulations that may affect our industry
and our business. Additionally, the CFPB has supervisory, examination and enforcement authority over our business and is
currently examining the collection practices of participants in the consumer debt buying industry. The CFPB has also recently
engaged in enforcement activity in sectors adjacent to our industry, impacting credit originators, collection firms, and payment
processors, among others. The CFPB’s enforcement activity in these spaces, especially in the absence of clear rules or
regulatory expectations, can be disruptive as industry participants attempt to define appropriate business practices. Similarly, in
response to petitions filed by third parties, in July 2015, the Federal Communications Commission (“FCC”) released a
declaratory ruling interpreting the Telephone Consumer Protection Act (“TCPA”), which could impact the way consumers may
be contacted on their cellular phones and could impact our operations and financial results. As a result of the current regulatory
environment, certain current practices or commercial relationships we maintain may be disrupted or impacted by changes in
our or third-parties’ business practices or perceptions of elevated risk.
On September 9, 2015, we entered into a consent order (the “Consent Order”) with the CFPB in which we settled
allegations arising from our practices between 2011 and 2015. The Consent Order includes obligations on us to, among other
things: (1) follow certain specified operational requirements, substantially all of which are already part of our current
operations; (2) submit to the CFPB for review a comprehensive plan designed to ensure that our debt collection practices
comply with all applicable federal consumer financial laws and the terms of the Consent Order; (3) pay redress to certain
specified groups of consumers; and (4) pay a civil monetary penalty. We will continue to cooperate and engage with the CFPB
and work to ensure compliance with the Consent Order. In addition, we are subject to ancillary state attorney general
investigations related to similar debt collection practices.
We incurred a one-time, after-tax charge of approximately $43 million in the third quarter of 2015. We believe this charge
will cover all related impacts of the Consent Order, including civil monetary penalties, restitution, any such ancillary state
regulatory matters, legal expenses and portfolio allowance charges on several pool groups due to the impact on our current
estimated remaining collections related to our existing receivable portfolios. We anticipate that after this one-time charge, any
future earnings impact will be immaterial.
Portfolio Purchasing and Recovery
United States
Our portfolio purchasing and recovery segment purchases receivables based on robust, account-level valuation methods
and employs proprietary statistical and behavioral models across our U.S. operations. These methods and models allow us to
value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or
goals and align the accounts we purchase with our business channels to maximize future collections. As a result, we have been
able to realize significant returns from the receivables we acquire. We maintain strong relationships with many of the largest
financial service providers in the United States.
While seasonality does not have a material impact on our portfolio purchasing and recovery segment, collections are
generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth
calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the
other quarters, as our fixed costs are relatively constant and applied against a larger collection base. The seasonal impact on our
business may also be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies.
Collection seasonality with respect to our portfolio purchasing and recovery segment can also affect revenue as a
percentage of collections, also referred to as our revenue recognition rate. Generally, revenue for each pool group declines
steadily over time, whereas collections can fluctuate from quarter to quarter based on seasonality, as described above. In
quarters with lower collections (e.g., the fourth calendar quarter), the revenue recognition rate can be higher than in quarters
with higher collections (e.g., the first calendar quarter).
In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger
collections, total costs are higher as a result of the additional efforts required to generate those collections. Since revenue for
each pool group declines steadily over time, in quarters with higher collections and higher costs (e.g., the first calendar
quarter), all else being equal, earnings could be lower than in quarters with lower collections and lower costs (e.g., the fourth
calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency
outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites.
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On August 6, 2014, we acquired all of the outstanding equity interests of Atlantic Credit & Finance, Inc. (“Atlantic”)
pursuant to a stock purchase agreement (the “Atlantic Acquisition”). Atlantic acquires and liquidates fresh consumer finance
receivables originated and charged off by U.S. financial institutions.
Europe
Cabot: Through Cabot, we purchase paying and non-paying receivable portfolios using a proprietary pricing model that
utilizes account-level statistical and behavioral data. This model allows Cabot to value portfolios with a high degree of
accuracy and quantify portfolio performance in order to maximize future collections. As a result, Cabot has been able to realize
significant returns from the assets it has acquired. Cabot maintains strong relationships with many of the largest financial
services providers in the United Kingdom.
While seasonality does not have a material impact on Cabot’s operations, collections are generally strongest in the second
and third calendar quarters and slower in the first and fourth quarters, largely driven by the impact of the December holiday
season and the New Year holiday, and the related impact on its customers’ ability to repay their balances. This drives a higher
level of plan defaults over this period, which are typically repaired across the first quarter of the following year. The August
vacation season in the United Kingdom also has an unfavorable effect on the level of collections, but this is traditionally
compensated for by higher collections in July and September.
On February 7, 2014, Cabot acquired Marlin (the “Marlin Acquisition”), a leading acquirer of non-performing consumer
debt in the United Kingdom. Marlin is differentiated by its proven competitive advantage in the use of litigation-enhanced
collections for non-paying financial services receivables. Marlin’s litigation capabilities have benefited and will continue to
benefit Cabot’s existing portfolio of non-performing accounts. Similarly, we have experienced synergies by applying Cabot’s
collection models to Marlin’s portfolio since the acquisition. Cabot continued to expand in the United Kingdom with its
acquisition of dlc in June 2015 (the “dlc Acquisition”).
Grove: On April 1, 2014, we completed the acquisition of a controlling equity ownership interest in Grove. Grove,
through its subsidiaries and affiliates, is a leading specialty investment firm focused on consumer non-performing loans,
including insolvencies (in particular, IVAs) in the United Kingdom and bank and non-bank receivables in Spain. Grove
purchases portfolio receivables using a proprietary pricing model. This model allows Grove to value portfolios with a high
degree of accuracy and quantify portfolio performance in order to maximize future collections.
Latin America
In December 2013, we acquired a majority ownership interest in Refinancia, a market leader in debt collection and
management in Colombia and Peru. In addition to purchasing defaulted receivables, Refinancia offers portfolio management
services to banks for non-performing loans. Refinancia also specializes in non-traditional niches in the geographic areas in
which it operates, including providing financial solutions to individuals who have previously defaulted on their credit
obligations. In addition to operations in Colombia and Peru, we evaluate and purchase non-performing loans in other countries
in Latin America, including Mexico and Brazil. Beginning in December 2014 we began investing in non-performing secured
residential mortgages in Latin America.
Asia Pacific
Through our acquisition of a majority ownership interest in Baycorp in October 2015 (the “Baycorp Acquisition”), we are
one of Australia’s leading debt resolution specialists. Baycorp specializes in the management of non-performing loans in
Australia and New Zealand. In addition to purchasing defaulted receivables, Baycorp offers portfolio management services to
banks for non-performing loans.
Tax Lien Business
Our tax lien business segment focuses on the property tax financing industry. Propel acquires and services residential and
commercial tax liens on real property. These liens take priority over most other liens, including mortgage liens. To the extent
permitted by local law, Propel works directly with property owners to structure affordable payment plans designed to allow
them to keep their properties while paying their property tax obligations over time. In such cases, Propel pays their tax lien
obligations to the taxing authorities, and the property owners pay Propel at lower interest rates or over a longer period of time
than the taxing authorities would ordinarily permit. Propel also purchases tax liens directly from taxing authorities in certain
states. In many cases, these tax liens continue to be serviced by the taxing authorities. When a taxing authority receives
payment for the outstanding taxes, it pays Propel the outstanding balance of the related lien plus interest, which is either
established by statute, negotiated at the time of the purchase, or determined by the bid Propel submitted to acquire the tax lien.
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On February 19, 2016, we entered into an agreement to sell 100% of our membership interests in Propel at a price that is
lower than Propel’s book value at December 31, 2015. This development, subsequent to year end, indicated that Propel’s fair
value was less than its carrying value at December 31, 2015 and, as a result, goodwill at this reporting unit was impaired. Based
on the estimated sales price, we recorded a goodwill impairment charge of $49.3 million for the year ended December 31,
2015. The goodwill impairment charge had no cash flow impact. Refer to Note 17, “Subsequent Event” and Note 15,
“Goodwill and Identifiable Intangible Assets” to our consolidated financial statements for further information on the sale of
Propel and the goodwill impairment.
Revenue from our tax lien business segment comprised 3%, 3%, and 2% of total consolidated revenues for each of the
years ended December 31, 2015, 2014, and 2013, respectively. Excluding the goodwill impairment charge of $49.3 million
discussed above, operating income from our tax lien business segment comprised 4%, 3%, and 2% of our total consolidated
operating income for each of the years ended December 31, 2015, 2014, and 2013, respectively.
Purchases and Collections
Portfolio Pricing, Supply and Demand
United States
Prices for portfolios offered for sale directly from credit issuers continued to remain elevated during 2015, especially for
fresh portfolios. Fresh portfolios are portfolios that are generally transacted within six months of the consumer’s account being
charged-off by the financial institution. We believe this elevated pricing is due to a reduction in the supply of charged-off
accounts and continued demand in the marketplace. We believe that the reduction in supply is partially due to shifts in
underwriting standards by financial institutions, which have resulted in lower volumes of charged-off accounts. We believe that
this reduction in supply is also the result of certain financial institutions temporarily halting their sales of charged-off accounts.
Although we have seen moderation in certain instances, we expect pricing will remain at elevated levels for some period of
time.
We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high
cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace, resulting
in consolidation within the portfolio purchasing and recovery industry. We believe this favors larger participants in this market,
such as Encore, because the larger market participants are better able to adapt to these pressures. Furthermore, as smaller
competitors limit their participation in or exit the market, it may provide additional opportunities for Encore to purchase
portfolios from competitors or to acquire competitors directly.
Europe
The U.K. market for charged-off portfolios has grown significantly in recent years driven by a consolidation of sellers
and a material backlog of portfolio coming to market from credit issuers who are selling an increasing proportion of their non-
performing loans. Prices for portfolios offered for sale directly from credit issuers remain at levels higher than historical
averages. We expect that as a result of an increase in available funding to industry participants, and lower return requirements
for certain debt purchasers, pricing will remain elevated.
The U.K. insolvency market has seen historically low sales volumes from banks in 2015. We expect there will be
increased purchasing opportunities once large retail banks start to sell their insolvency portfolios.
The Spanish consumer and small and medium enterprise non-performing loan market remains significant, with most of
the major banks selling portfolios in 2015. Competition remains strong in large banking trades, but there remains an
opportunity for incumbent buyers. 2015 has seen multiple complex sales from consolidated regional banks trading at more
favorable returns, as portfolio sale sizes and asset nuances reduce competition.
Although pricing has been elevated, we believe that as our U.K. businesses increase in scale and expand to other
European markets, and with anticipated improvements in liquidation and improved efficiencies in collections, our margins will
remain competitive. Additionally, the acquisition of Marlin resulted in a new liquidation channel for the Company through
litigation, which is enabling Cabot to collect from consumers who have the ability to pay, but have so far been unwilling to do
so.
37
Table of Contents
Purchases by Type and Geographic Location
The following table summarizes the types and geographic locations of consumer receivable portfolios we purchased
during the periods presented (in thousands):
United States:
Credit card
Consumer bankruptcy receivables
Telecom
Subtotal
Europe:
Credit card
IVA
Telecom
Subtotal
Other geographies:
Credit card
Mortgages(1)
Subtotal
Total purchases
Year Ended December 31,
2015
2014
2013
$
481,759
$
525,813
$
24,373
—
506,132
402,424
12,680
8,460
423,564
88,586
5,440
94,026
—
—
525,813
622,419
8,015
1,822
632,256
36,537
56,754
93,291
495,473
39,897
18,876
554,246
620,900
—
—
620,900
29,633
—
29,633
$
1,023,722
$
1,251,360
$
1,204,779
________________________
(1) Beginning in December 2014 we began investing in non-performing secured residential mortgages in Latin America.
During the year ended December 31, 2015, we invested $1.0 billion to acquire portfolios, primarily charged-off credit
card portfolios, with face values aggregating $12.7 billion, for an average purchase price of 8.0% of face value. Purchases of
charged-off credit card portfolios in Europe include $216.0 million of receivables acquired in connection with the dlc
Acquisition. Purchases of charged-off credit card portfolios in other geographies include $60.3 million acquired in connection
with the Baycorp Acquisition.
During the year ended December 31, 2014, we invested $1.3 billion to acquire portfolios, primarily charged-off credit
card portfolios, with face values aggregating $13.8 billion, for an average purchase price of 9.1% of face value. Purchases of
charged-off credit card portfolios in the United States include $105.4 million acquired in connection with the Atlantic
Acquisition. Purchases of charged-off credit card portfolios in Europe include $208.5 million in connection with the Marlin
Acquisition.
During the year ended December 31, 2013, we invested $1.2 billion to acquire portfolios, primarily charged-off credit
card portfolios, with face values aggregating $84.9 billion, for an average purchase price of 1.4% of face value. Purchases of
consumer portfolio receivables in the United States include $383.4 million ($347.7 million for charged-off credit card
portfolios and $35.7 million for consumer bankruptcy receivables) acquired in connection with the merger (the “AACC
Merger”) with Asset Acceptance Capital Corp. (“AACC”). Purchases of charged-off credit card portfolios in Europe include
$559.0 million in connection with our acquisition of a controlling interest in Janus Holdings (the “Cabot Acquisition”).
The average purchase price, as a percentage of face value, varies from period to period depending on, among other
things, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios. The
$384.3 million of portfolios we acquired through the AACC Merger significantly drove down the purchase price as a
percentage of face value for portfolios acquired during the year ended December 31, 2013. The lower purchase rate for the
AACC portfolios was due to our acquisition of all accounts owned by AACC, including accounts where we ascribed no value
and where we are unlikely to attempt to collect. Accounts with no perceived value would typically not be included in a
portfolio purchase transaction, as the sellers would remove them from the accounts being sold to us prior to sale.
38
Table of Contents
Collections by Channel and Geographic Location
We currently utilize various business channels for the collection of our receivables. The following table summarizes the
total collections by collection channel and geographic areas (in thousands):
United States:
Legal collections
Collection sites
Collection agencies(1)
Subtotal
Europe:
Collection sites
Legal collections
Collection agencies
Subtotal
Other geographies:
Collection sites
Legal collections
Collection agencies
Subtotal
Total collections
________________________
Year Ended December 31,
2015
2014
2013
$
633,166
$
610,285
$
480,485
68,283
1,181,934
502,829
79,699
1,192,813
234,904
92,464
148,758
476,126
38,334
1,145
3,186
42,665
221,771
42,456
120,629
384,856
29,828
—
—
29,828
564,645
465,974
104,163
1,134,782
74,916
—
59,343
134,259
—
—
10,465
10,465
$
1,700,725
$
1,607,497
$
1,279,506
(1) Collections through our collection agency channel in the United States include accounts subject to bankruptcy filings collected by others. Additionally,
collection agency collections often include accounts purchased from a competitor where we maintain the collection agency servicing until the accounts
can be recalled and placed in our collection channels.
Gross collections increased $93.2 million, or 5.8%, to $1.7 billion during the year ended December 31, 2015, from $1.6
billion during the year ended December 31, 2014. Gross collections increased $328.0 million, or 25.6%, to $1.6 billion during
the year ended December 31, 2014, from $1.3 billion during the year ended December 31, 2013. The increases in gross
collections were primarily due to increased portfolio purchases in the current and prior years and additional collections from
our recently acquired subsidiaries.
39
Table of Contents
Results of Operations
Results of operations, in dollars and as a percentage of total revenue, were as follows (in thousands, except percentages):
2015
2014
2013
Year Ended December 31,
Revenues
Revenue from receivable portfolios,
net
Other revenues
Net interest income
Total revenues
Operating expenses
Salaries and employee benefits
Cost of legal collections
Other operating expenses
Collection agency commissions
General and administrative expenses
Depreciation and amortization
Goodwill impairment
Total operating expenses
Income from operations
Other (expense) income
Interest expense
Other income (expense)
Total other expense
Income from continuing operations
before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net
of tax
Net income
Net (income) loss attributable to
noncontrolling interest
Net income attributable to Encore
Capital Group, Inc. stockholders
$ 1,072,436
92.3 % $
992,832
92.5 % $ 744,870
60,696
28,440
5.2 %
2.5 %
51,988
27,969
4.9 %
2.6 %
12,588
15,906
96.3 %
1.6 %
2.1 %
1,161,572
100.0 % 1,072,789
100.0 %
773,364
100.0 %
270,334
229,847
98,182
37,858
196,827
33,945
49,277
916,270
245,302
23.3 %
19.8 %
8.5 %
3.3 %
16.9 %
2.9 %
4.2 %
78.9 %
21.1 %
246,247
205,661
93,859
33,343
146,286
27,949
—
753,345
319,444
(186,556)
(16.1)%
2,235
0.2 %
(184,321)
(15.9)%
(166,942)
113
(166,829)
60,981
(13,597)
47,384
—
47,384
5.2 %
(1.1)%
4.1 %
0.0 %
4.1 %
152,615
(52,725)
99,890
(1,612)
98,278
23.0 %
19.2 %
8.7 %
3.1 %
165,040
186,959
66,649
33,097
13.6 %
109,713
2.6 %
0.0 %
70.2 %
29.8 %
(15.6)%
0.0 %
(15.6)%
14.2 %
(4.9)%
9.3 %
(0.1)%
9.2 %
13,547
—
575,005
198,359
(73,269)
(4,222)
(77,491)
120,868
(45,388)
75,480
(1,740)
73,740
(2,249)
(0.2)%
5,448
0.5 %
1,559
$
45,135
3.9 % $
103,726
9.7 % $
75,299
21.3 %
24.2 %
8.6 %
4.3 %
14.2 %
1.8 %
0.0 %
74.4 %
25.6 %
(9.5)%
(0.5)%
(10.0)%
15.6 %
(5.9)%
9.7 %
(0.2)%
9.5 %
0.2 %
9.7 %
40
Table of Contents
Results of Operations—Cabot
The following tables summarize the operating results contributed by Cabot during the periods presented (in thousands):
Year Ended December 31, 2015
Janus Holdings
Encore Europe (1)
Consolidated
Total revenues
Total operating expenses
Income from operations
Interest expense-non-PEC
PEC interest (expense) income
Other income
Income before income taxes
Benefit for income taxes
Net income
Net income attributable to noncontrolling interests
Net income attributable to Encore
Total revenues
Total operating expenses
Income from operations
Interest expense-non-PEC
PEC interest (expense) income
Other expense
(Loss) income before income taxes
Provision for income taxes
Net (loss) income
Net loss attributable to noncontrolling interests
Net (loss) income attributable to Encore
$
— $
$
$
349,379
(188,296)
161,083
(106,318)
(48,013)
591
7,343
1,294
8,637
(1,211)
7,426
$
—
—
—
23,529
—
23,529
—
23,529
(3,705)
19,824
$
349,379
(188,296)
161,083
(106,318)
(24,484)
591
30,872
1,294
32,166
(4,916)
27,250
Year Ended December 31, 2014
Janus Holdings
Encore Europe(1)
Consolidated
$
$
$
286,630
(150,349)
136,281
(96,419)
(43,630)
(646)
(4,414)
(3,241)
(7,655)
1,108
(6,547) $
— $
—
—
—
21,201
—
21,201
—
21,201
3,267
24,468
$
286,630
(150,349)
136,281
(96,419)
(22,429)
(646)
16,787
(3,241)
13,546
4,375
17,921
41
Table of Contents
Total revenues
Total operating expenses
Income from operations
Interest expense-non-PEC
PEC interest (expense) income
Other income
(Loss) income before income taxes
Provision for income taxes
Net (loss) income
Net loss attributable to noncontrolling interests
Net (loss) income attributable to Encore
________________________
Year Ended December 31, 2013
Janus Holdings
Encore Europe(1)
Consolidated
$
$
$
95,491
(48,890)
46,601
(26,265)
(21,616)
98
(1,182)
(1,574)
(2,756)
392
(2,364) $
— $
—
—
—
10,235
—
10,235
—
10,235
1,167
11,402
$
95,491
(48,890)
46,601
(26,265)
(11,381)
98
9,053
(1,574)
7,479
1,559
9,038
(1)
Includes only the results of operations related to Janus Holdings and therefore does not represent the complete financial performance of Encore Europe.
For all periods presented, Janus Holdings recognized all interest expense related to the outstanding preferred equity
certificates (“PECs”) owed to Encore and other minority shareholders, while the interest income from PECs owed to Encore
was recognized at Janus Holdings’ parent company, Encore Europe Holdings, S.a.r.l. (“Encore Europe”), which is a wholly-
owned subsidiary of Encore. Additionally, the net loss recognized at Janus Holdings during the year ended December 31, 2014
was due to Cabot incurring acquisition and integration related charges related to Cabot’s acquisition of Marlin in February
2014.
Non-GAAP Disclosure
In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles
(“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-
GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations.
Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business
that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.
Management believes that the presentation of these measures provides investors with greater transparency and facilitates
comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies,
derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance,
competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of,
our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or
calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.
Adjusted Income from Continuing Operations Per Share. Management uses non-GAAP adjusted income from
continuing operations attributable to Encore and adjusted income from continuing operations per share (which we also refer to
from time to time as adjusted earnings per share), to assess operating performance, in order to highlight trends in our business
that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. Adjusted income
from continuing operations attributable to Encore excludes non-cash interest and issuance cost amortization relating to our
convertible notes, one-time charges, acquisition, integration and restructuring related expenses, and non-cash goodwill
impairment charges, all net of tax. The following table provides a reconciliation between income from continuing operations
and diluted income from continuing operations per share attributable to Encore calculated in accordance with GAAP to
adjusted income from continuing operations and adjusted income from continuing operations per share attributable to Encore,
respectively. GAAP diluted earnings per share for the years ended December 31, 2015, 2014, and 2013, includes the effect of
approximately 0.7 million, 1.1 million, and 0.6 million, respectively, common shares that are issuable upon conversion of
certain convertible senior notes because the average stock price during the respective periods exceeded the conversion price of
these notes. However, as described in Note 9, “Debt—Encore Convertible Notes,” in the notes to our consolidated financial
statements, we have certain hedging transactions in place that have the effect of increasing the effective conversion price of
these notes. Accordingly, while these common shares are included in our diluted earnings per share, the hedge transactions will
offset the impact of this dilution and no shares will be issued unless our stock price exceeds the effective conversion price,
thereby creating a discrepancy between the accounting effect of those notes under GAAP and their economic impact. We have
42
Table of Contents
presented the following metrics both including and excluding the dilutive effect of these convertible senior notes to better
illustrate the economic impact of those notes and the related hedging transactions to shareholders, with the GAAP item under
the “Per Diluted Share-Accounting” and “Per Diluted Share-Economic” (non-GAAP) columns, respectively (in thousands,
except per share data):
Year Ended December 31,
2015
Per Diluted
Share—
Accounting
Per
Diluted
Share—
Economic
$
2014
Per Diluted
Share—
Accounting
$
Per
Diluted
Share—
Economic
$
2013
Per Diluted
Share—
Accounting
Per
Diluted
Share—
Economic
$ 45,135
$
1.69
$
1.74
$ 105,338
$
3.83
$
3.99
$ 77,039
$
2.94
$
3.01
6,896
0.26
0.26
6,413
0.23
0.24
3,274
0.12
0.13
8,063
0.30
0.31
9,898
0.36
0.37
18,483
0.71
0.72
42,554
1.60
1.64
31,187
1.17
1.20
—
—
—
—
—
—
—
—
—
(2,291)
(0.08)
(0.08)
—
—
—
—
—
—
—
—
—
GAAP net income from
continuing operations
attributable to
Encore, as reported
Adjustments:
Convertible notes
non-cash interest
and issuance cost
amortization, net
of tax
Acquisition,
integration and
restructuring
related expenses,
net of tax
CFPB / regulatory
one-time charges,
net of tax
Goodwill
impairment, net of
tax
Net effect of non-
recurring tax
adjustments
Adjusted income from
continuing operations
attributable to Encore $133,835
$
5.02
$
5.15
$ 119,358
$
4.34
$
4.52
$ 98,796
$
3.77
$
3.86
Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before interest, taxes, depreciation
and amortization, stock-based compensation expenses, portfolio amortization, one-time charges, acquisition, integration and
restructuring related expenses, and non-cash goodwill impairment charges), which is materially similar to a financial measure
contained in covenants used in the Encore revolving credit and term loan facility, in the evaluation of our operations and
believes that this measure is a useful indicator of our ability to generate cash collections in excess of operating expenses
through the liquidation of our receivable portfolios. Adjusted EBITDA for the periods presented is as follows (in thousands):
43
Table of Contents
GAAP net income, as reported
Adjustments:
Loss from discontinued operations, net of tax
Interest expense
Provision for income taxes
Depreciation and amortization
Amount applied to principal on receivable portfolios
Stock-based compensation expense
Acquisition, integration and restructuring related expenses
CFPB / regulatory one-time charges
Goodwill impairment
Adjusted EBITDA
Year Ended December 31,
2015
2014
2013
$
47,384
$
98,278
$
73,740
—
186,556
13,597
33,945
628,289
22,008
15,553
63,019
49,277
1,612
166,942
52,725
27,949
614,665
17,181
19,299
—
—
1,740
73,269
45,388
13,547
534,654
12,649
29,321
—
—
$
1,059,628
$
998,651
$
784,308
Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of
approximate cash costs to cash collections for our portfolio purchasing and recovery business. Adjusted operating expenses for
our portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out
stock-based compensation expense, operating expenses related to non-portfolio purchasing and recovery business, one-time
charges, and acquisition, integration and restructuring related operating expenses. Operating expenses related to non-portfolio
purchasing and recovery business include operating expenses from our tax lien business and other non-reportable operating
segments, as well as corporate overhead not related to our portfolio purchasing and recovery business. Adjusted operating
expenses related to our portfolio purchasing and recovery business for the periods presented are as follows (in thousands):
Year Ended December 31,
2015
2014
2013
GAAP total operating expenses, as reported
$
916,270
$
753,345
$
575,005
Adjustments:
Stock-based compensation expense
(22,008)
(17,181)
(12,649)
Operating expenses related to non-portfolio purchasing and
recovery business
Acquisition, integration and restructuring related operating
expenses
Operating expenses related to CFPB / regulatory one-time
charges
Adjusted operating expenses related to portfolio purchasing and
recovery business
(157,080)
(97,165)
(36,511)
(15,553)
(19,299)
(25,691)
(54,697)
—
—
$
666,932
$
619,700
$
500,154
Comparison of Results of Operations
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues
Our revenues consist primarily of portfolio revenue, contingent fee income, and net interest income from our tax lien
business.
Portfolio revenue consists of accretion revenue and zero basis revenue. Accretion revenue represents revenue derived
from pools (quarterly groupings of purchased receivable portfolios) with a cost basis that has not been fully amortized.
Revenue from pools with a remaining unamortized cost basis is accrued based on each pool’s effective interest rate applied to
each pool’s remaining unamortized cost basis. The cost basis of each pool is increased by revenue earned and decreased by
gross collections and portfolio allowances. The effective interest rate is the internal rate of return (“IRR”) derived from the
44
Table of Contents
timing and amounts of actual cash received and anticipated future cash flow projections for each pool. All collections realized
after the net book value of a portfolio has been fully recovered, or Zero Basis Portfolios (“ZBA”), are recorded as revenue, or
Zero Basis Revenue. We account for our investment in receivable portfolios utilizing the interest method in accordance with the
authoritative guidance for loans and debt securities acquired with deteriorated credit quality. We incur allowance charges when
actual cash flows from our receivable portfolios underperform compared to our expectations. Factors that may contribute to
underperformance and to the recording of valuation allowances may include both internal as well as external factors. Internal
factors that may have an impact on our collections include operational activities such as the productivity of our collection staff.
External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing
laws or regulations, and the overall condition of the economy. We record allowance reversals on pool groups which have
historic allowance reserves when actual cash flows from these receivable portfolios outperform our expectations. Allowance
reversals are included in portfolio revenue.
Interest income, net of related interest expense represents net interest income on receivables secured by property tax
liens.
Total revenues were $1.2 billion during the year ended December 31, 2015, an increase of $88.8 million, or 8.3%,
compared to total revenues of $1.1 billion during the year ended December 31, 2014.
The following tables summarize collections, revenue, end of period receivable balance and other related supplemental
data, by year of purchase from our portfolio purchasing and recovery segment (in thousands, except percentages):
Year Ended December 31, 2015
As of
December 31, 2015
Collections
(1)
Gross
Revenue
(2)
Revenue
Recognition
Rate
(3)
Net
Reversal
(Portfolio
Allowance)
Revenue
% of Total
Revenue
Unamortized
Balances
Monthly
IRR
$
103,398
$
91,876
88.9% $
11,765
8.6% $
United States:
ZBA(4)
2007
2008
2009
2010
2011
2012
2013
2014
2015
Impact of CFPB
settlement
Subtotal
Europe:
2013
2014
2015
Subtotal
Other geographies:
ZBA(4)
2012
2013
2014
2015
3,150
13,529
18,084
42,615
112,753
176,914
298,068
307,814
105,609
—
1,181,934
212,129
198,127
65,870
476,126
4,565
471
6,507
16,062
15,060
1,118
8,665
10,347
25,629
85,303
108,968
176,878
146,583
47,300
—
702,667
171,750
122,490
38,129
332,369
4,571
—
319
19,910
5,837
35.5%
64.0%
57.2%
60.1%
75.7%
61.6%
59.3%
47.6%
44.8%
—
59.5%
81.0%
61.8%
57.9%
69.8%
100.1%
0.0%
4.9%
124.0%
38.8%
1,009
2,311
—
—
—
—
—
—
—
(8,322)
6,763
—
—
—
—
—
—
—
—
—
—
1,573
5,798
—
3,742
27,257
79,973
161,539
291,402
445,527
—
1,016,811
439,619
444,618
384,231
0.1%
0.8%
1.0%
2.4%
8.0%
10.2%
16.6%
13.8%
4.4%
—
65.9%
16.1%
11.5%
3.6%
31.2%
1,268,468
0.4%
0.0%
0.0%
1.9%
0.5%
—
—
2,480
67,714
85,196
Subtotal
Total
42,665
$ 1,700,725
30,637
$ 1,065,673
71.8%
62.7% $
—
6,763
2.9%
155,390
100.0% $ 2,440,669
45
—
4.6%
10.0%
—
21.2%
18.5%
8.6%
7.4%
3.6%
1.8%
—
4.4%
3.1%
2.1%
1.9%
2.4%
—
—
0.0%
2.4%
2.9%
2.6%
3.2%
Table of Contents
Year Ended December 31, 2014
As of
December 31, 2014
Collections
(1)
Gross
Revenue
(2)
Revenue
Recognition
Rate
(3)
Net
Portfolio
Allowance
Reversal
Revenue
% of Total
Revenue
Unamortized
Balances
Monthly
IRR
United States:
ZBA(4)
$
34,491
$
22,271
64.6% $
12,229
2.3% $
2006
2007
2008
2009
2010
2011
2012
2013
2014
3,067
7,971
27,715
52,661
111,058
154,930
259,252
397,864
143,804
Subtotal
1,192,813
Europe:
2013
2014
Subtotal
Other geographies:
2012
2013
2014
Subtotal
Total
249,307
135,549
384,856
2,561
17,615
9,652
29,828
601
3,316
14,939
39,586
82,375
108,167
137,986
220,121
79,585
708,947
160,074
101,285
261,359
—
3,032
2,087
5,119
19.6%
41.6%
53.9%
75.2%
74.2%
69.8%
53.2%
55.3%
55.3%
59.4%
64.2%
74.7%
67.9%
0.0%
17.2%
21.6%
17.2%
—
1,612
3,566
—
—
—
—
—
—
17,407
—
—
—
—
—
—
—
0.1%
0.3%
1.5%
4.1%
8.4%
11.1%
14.1%
22.6%
8.2%
72.7%
16.4%
10.4%
26.8%
0.0%
0.3%
0.2%
0.5%
—
—
2,603
8,400
7,894
21,180
55,968
150,876
284,819
456,970
988,710
505,213
555,323
1,060,536
505
10,530
83,279
94,314
—
—
4.8%
8.6%
25.6%
22.9%
13.5%
6.4%
5.0%
2.7%
5.0%
2.4%
1.9%
2.1%
0.0%
0.0%
1.8%
1.6%
3.1%
$ 1,607,497
$
975,425
60.7% $
17,407
100.0% $ 2,143,560
________________________
(1) Does not include amounts collected on behalf of others.
(2) Gross revenue excludes the effects of net portfolio allowance or net portfolio allowance reversals.
(3) Revenue recognition rate excludes the effects of net portfolio allowance or net portfolio allowance reversals.
(4) ZBA revenue typically has a 100% revenue recognition rate. However, collections on ZBA pool groups where a valuation allowance remains must first
be recorded as an allowance reversal until the allowance for that pool group is zero. Once the entire valuation allowance is reversed, the revenue
recognition rate will become 100%. ZBA gross revenue includes an immaterial amount of accounts that are returned to the seller in accordance with the
respective purchase agreement (“Put-Backs”).
Portfolio revenue from our portfolio purchasing and recovery segment was $1.1 billion during the year ended
December 31, 2015, an increase of $79.6 million, or 8.0%, compared to revenue of $992.8 million during the year ended
December 31, 2014. The increase in portfolio revenue during the year ended December 31, 2015 compared to 2014 was due to
additional accretion revenue associated with a higher portfolio balance, primarily associated with portfolios acquired through
our increased level of merger and acquisition related activities and increases in yields on certain pool groups due to over-
performance, offset by lower yields on recently formed pool groups.
During the year ended December 31, 2015, we recorded a net portfolio allowance reversal of $6.8 million, compared to a
net portfolio allowance reversal of $17.4 million during the year ended December 31, 2014. During the year ended
December 31, 2015, we recorded a portfolio allowance charge of $8.3 million as a result of a reduction in forecasted cash flows
in certain pool groups related to the CFPB Consent Order discussed in the “Government Regulation” section above. Excluding
this allowance charge, we recorded portfolio allowance reversals of $15.1 million and $17.4 million during the years ended
December 31, 2015 and 2014, respectively. The recording of allowance reversals during the years ended December 31, 2015
and 2014 was primarily due to operational improvements which allowed us to assist our customers to repay their obligations
and increased collections on our ZBA portfolios. Additionally, our refined valuation methodologies have limited the amount of
valuation charges necessary during recent periods.
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Table of Contents
Other revenues were $60.7 million and $52.0 million for the years ended December 31, 2015 and 2014, respectively.
Other revenues primarily represent contingent fee income earned on accounts collected on behalf of others, primarily credit
originators. The increase in other revenues was primarily attributable to contingent fee income earned at our recently acquired
subsidiaries. Net interest income from our tax lien business segment was relatively consistent at $28.4 million and $28.0
million for the years ended December 31, 2015 and 2014, respectively.
Operating Expenses
Total operating expenses were $916.3 million during the year ended December 31, 2015, an increase of $163.0 million,
or 21.6%, compared to total operating expenses of $753.3 million during the year ended December 31, 2014.
Excluding one-time CFPB related settlement charges of $54.7 million recorded in operating expenses and the goodwill
impairment charge of $49.3 million at Propel, operating expenses increased $59.0 million, or 7.8%, to $812.3 million during
the year ended December 31, 2015, as compared to the prior year.
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
Salaries and employee benefits increased $24.1 million, or 9.8%, to $270.3 million during the year ended December 31,
2015, from $246.2 million during the year ended December 31, 2014. The increase was primarily the result of increases in
headcount as a result of our recent mergers and acquisitions and increases in headcount and related compensation expense to
support our growth.
Stock-based compensation increased $4.8 million, or 28.1%, to $22.0 million during the year ended December 31, 2015,
from $17.2 million during the year ended December 31, 2014. This increase was primarily attributable to an increase in the
number of shares granted and the higher fair value of equity awards granted in recent periods.
Salaries and employee benefits broken down between the reportable segments were as follows (in thousands):
Salaries and employee benefits:
Portfolio purchasing and recovery
Tax lien business
Year Ended December 31,
2015
2014
$
$
262,281
8,053
270,334
$
$
238,942
7,305
246,247
Cost of Legal Collections—Portfolio Purchasing and Recovery
The cost of legal collections increased $24.1 million, or 11.8%, to $229.8 million during the year ended December 31,
2015, compared to $205.7 million during the year ended December 31, 2014. The increase reflects an increase in gross legal
collections, which were $725.6 million during the year ended December 31, 2015, up from $653.2 million during the year
ended December 31, 2014. The cost of legal collections remained stable as a percentage of gross collections through this
channel at 31.7% and 31.5% during the years ended December 31, 2015 and 2014, respectively. During the year ended
December 31, 2015, the cost of legal collections was 31.9% and 29.9% in the United States and Europe, respectively. During
the year ended December 31, 2014, the cost of legal collections was 31.4% and 32.1% in the United States and Europe,
respectively.
Other Operating Expenses
Other operating expenses increased $4.3 million, or 4.6%, to $98.2 million during the year ended December 31, 2015,
from $93.9 million during the year ended December 31, 2014. The increases in other operating expenses was primarily the
result of additional other operating expenses at our recently acquired subsidiaries.
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Table of Contents
Other operating expenses broken down between the reportable segments were as follows (in thousands):
Other operating expenses:
Portfolio purchasing and recovery
Tax lien business
Year Ended December 31,
2015
2014
$
$
93,211
4,971
98,182
$
$
89,933
3,926
93,859
Collection Agency Commissions—Portfolio Purchasing and Recovery
During the year ended December 31, 2015, we incurred $37.9 million in commissions to third party collection agencies,
or 17.2% of the related gross collections of $220.2 million. During the period, the commission rate as a percentage of related
gross collections was 14.4% and 18.5% for our collection outsourcing channels in the United States and Europe, respectively.
During the year ended December 31, 2014, we incurred $33.3 million in commissions, or 16.6%, of the related gross
collections of $200.3 million. During 2014, the commission rate as a percentage of related gross collections was 16.2% and
16.9% for our collection outsourcing channels in the United States and Europe, respectively.
Collections through this channel vary from period to period depending on, among other things, the number of accounts
placed with an agency versus the number of accounts collected internally. Commissions, as a percentage of collections in this
channel, also vary from period to period depending on, among other things, the amount of time that has passed since the
charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables. Generally,
freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of
time. Additionally, commission rates are lower in the United Kingdom, where most of the receivables in this channel are semi-
performing loans and IVAs, and higher in other European countries where most of the receivables in this channel are non-
performing loans.
General and Administrative Expenses
General and administrative expenses increased $50.5 million, or 34.5%, to $196.8 million during the year ended
December 31, 2015, from $146.3 million during the year ended December 31, 2014. Excluding one-time acquisition,
integration and restructuring costs and CFPB related settlement charges, which collectively amounted to $67.5 million and
$19.3 million during the years ended December 31, 2015 and 2014, respectively, general and administrative expenses increased
slightly to $129.3 million and $127.0 million during the years ended December 31, 2015 and 2014, respectively due to
additional general and administrative expenses at our recently acquired subsidiaries, offset by lower rent expense of $3.6
million during the year ended December 31, 2015.
General and administrative expenses broken down between the reportable segments were as follows (in thousands):
General and administrative expenses:
Portfolio purchasing and recovery
Tax lien business
Depreciation and Amortization
Year Ended December 31,
2015
2014
$
$
191,357
5,470
196,827
$
$
139,977
6,309
146,286
Depreciation and amortization expense increased $6.0 million, or 21.5%, to $33.9 million during the year ended
December 31, 2015, from $27.9 million during the year ended December 31, 2014. The increase during the year ended
December 31, 2015 was primarily related to increased depreciation expense resulting from the acquisition of fixed assets in the
current and prior years and additional depreciation and amortization expenses resulting from fixed assets and intangible assets
acquired through our recent acquisitions.
Goodwill Impairment
We recorded a goodwill impairment charge at Propel, our tax lien business reporting unit, of $49.3 million during the
year ended December 31, 2015. On February 19, 2016, we entered into an agreement to sell Propel at a price that is lower than
Propel’s book value at December 31, 2015, which triggered the goodwill impairment charge. Refer to Note 15, “Goodwill and
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Table of Contents
Identifiable Intangible Assets” to our consolidated financial statements for further information on the goodwill impairment
charge.
Cost per Dollar Collected—Portfolio Purchasing and Recovery
We utilize adjusted operating expenses in order to facilitate a comparison of approximate cash costs to cash collections
for our portfolio purchasing and recovery business. The calculation of adjusted operating expenses is illustrated in detail in the
“Non-GAAP Disclosure” section. The following table summarizes our overall cost per dollar collected by geographic location
during the periods presented:
United States
Europe
Other geographies
Overall cost per dollar collected
Year Ended December 31,
2015
2014
42.0%
33.0%
32.9%
39.2%
41.7%
29.3%
30.2%
38.6%
Our overall cost per dollar collected (or “cost-to-collect”) for the year ended December 31, 2015 was 39.2%, up 60 basis
points from 38.6% during the prior period. Cabot’s cost-to-collect continues to trend lower than our overall cost-to-collect
because its portfolio includes many consumers who are already on payment plans and historically involves little litigation. As
more of Cabot’s accounts are serviced through its legal channel, we expect to see incremental net collections and a higher
overall cost to collect. As we continue to grow our presence in the Latin American market, we expect to incur upfront cost in
building our collection channels. As a result, cost-to-collect in this region may become elevated in the near term and may
fluctuate over time.
Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on
seasonality, acquisitions, the cost of investments in new operating initiatives, and the changing regulatory and legislative
environment.
Interest Expense—Portfolio Purchasing and Recovery
Interest expense increased $19.6 million to $186.6 million during the year ended December 31, 2015, from $166.9
million during the year ended December 31, 2014.
The following table summarizes our interest expense (in thousands, except percentages):
Stated interest on debt obligations
Interest expense on preferred equity certificates
Amortization of loan fees and other loan costs
Amortization of debt discount
Accretion of debt premium
Total interest expense
Year Ended December 31,
2015
151,616
24,484
11,792
9,410
(10,746)
186,556
$
$
2014
137,274
22,429
9,049
8,423
(10,233)
166,942
$
$
$
$
$ Change
% Change
14,342
2,055
2,743
987
(513)
19,614
10.4%
9.2%
30.3%
11.7%
5.0%
11.7%
The payment of the accumulated interest on the preferred equity certificates (“PECs”) issued in connection with the
Cabot Acquisition will only be satisfied in connection with the disposition of the noncontrolling interests of J.C. Flowers & Co.
LLC and management.
The increase in interest expense was primarily attributable to increased debt levels in the United States and in Europe
related to additional borrowings to finance recent acquisitions and portfolio purchases.
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Table of Contents
Other Income
Other income consists primarily of foreign currency exchange gains or losses and interest income. Other income was $2.2
million during the year ended December 31, 2015, up from $0.1 million during the year ended December 31, 2014. The
increase of other income was primarily attributable to a $1.4 million net change in recognized foreign currency gains and
losses. We recognized a net foreign currency exchange gain of $0.3 million during the year ended December 31, 2105 and a net
foreign currency exchange loss of $1.1 million during the year ended December 31, 2014. The increase in other income was
also a result of an increase in interest income of $0.8 million during the year ended December 31, 2015 as compared to the
prior year.
Provision for Income Taxes
During the years ended December 31, 2015 and 2014, we recorded income tax provisions for income from continuing
operations of $13.6 million and $52.7 million, respectively.
The effective tax rates for the respective periods are shown below:
Federal provision
State (benefit) provision(1)
Federal expense (benefit) of state
International benefit(2)
Tax reserves(3)
Permanent items(4)
Release of valuation allowance
Other(5)
Effective rate
________________________
Year Ended December 31,
2015
2014
35.0 %
(1.2)%
0.4 %
(12.5)%
(3.3)%
9.6 %
(9.1)%
3.4 %
22.3 %
35.0 %
8.2 %
(2.9)%
(3.6)%
0.0 %
4.3 %
0.0 %
(6.4)%
34.6 %
(1) Primarily relates to a beneficial settlement with a state tax authority.
(2) Relates primarily to the lower tax rate on the income attributable to international operations.
(3) Represents a release of reserves for a certain tax position.
(4) Represents a provision for nondeductible items, including the CFPB settlement.
(5)
Includes the effect of discrete items, primarily relates to the recognition of tax benefit as a result of a favorable tax settlement with taxing authorities as
discussed below.
We recognized tax benefits of approximately $10.5 million and $6.3 million during the year ended December 31, 2015
and 2014, respectively. The tax benefit recognized during the year ended December 31, 2015 was primarily due to a favorable
settlement with state and international tax authorities and the release of a valuation reserve at one of our international
subsidiaries. The tax benefits recognized during the year ended December 31, 2014 included a net benefit of approximately
$6.6 million as a result of a favorable settlement with taxing authorities.
Additionally, the effective tax rate for the year ended December 31, 2015 as compared to 2014, decreased as a result of
proportionately more earnings realized in countries that have lower statutory tax rates than the U.S. federal rate. The income tax
provision also decreased due to agreements reached with tax authorities, which generated benefits and the release of valuation
allowances due to continual profitability of a subsidiary.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenues
Total revenues were $1.1 billion during the year ended December 31, 2014, an increase of $299.4 million, or 38.7%,
compared to total revenues of $773.4 million during the year ended December 31, 2013.
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Table of Contents
The following tables summarize collections, revenue, end of period receivable balance and other related supplemental
data, by year of purchase from our portfolio purchasing and recovery segment (in thousands, except percentages):
Year Ended December 31, 2014
As of
December 31, 2014
Collections
(1)
Gross
Revenue
(2)
Revenue
Recognition
Rate
(3)
Net
Portfolio
Allowance
Reversal
Revenue
% of Total
Revenue
Unamortized
Balances
Monthly
IRR
United States:
ZBA(4)
$
34,491
$
22,271
64.6% $
12,229
2.3% $
2006
2007
2008
2009
2010
2011
2012
2013
2014
3,067
7,971
27,715
52,661
111,058
154,930
259,252
397,864
143,804
Subtotal
1,192,813
Europe:
2013
2014
Subtotal
Other geographies:
2012
2013
2014
Subtotal
Total
249,307
135,549
384,856
2,561
17,615
9,652
29,828
601
3,316
14,939
39,586
82,375
108,167
137,986
220,121
79,585
708,947
160,074
101,285
261,359
—
3,032
2,087
5,119
19.6%
41.6%
53.9%
75.2%
74.2%
69.8%
53.2%
55.3%
55.3%
59.4%
64.2%
74.7%
67.9%
0.0%
17.2%
21.6%
17.2%
—
1,612
3,566
—
—
—
—
—
—
17,407
—
—
—
—
—
—
—
0.1%
0.3%
1.5%
4.1%
8.4%
11.1%
14.1%
22.6%
8.2%
72.7%
16.4%
10.4%
26.8%
0.0%
0.3%
0.2%
0.5%
—
—
2,603
8,400
7,894
21,180
55,968
150,876
284,819
456,970
988,710
505,213
555,323
1,060,536
505
10,530
83,279
94,314
—
—
4.8%
8.6%
25.6%
22.9%
13.5%
6.4%
5.0%
2.7%
5.0%
2.4%
1.9%
2.1%
0.0%
0.0%
1.8%
1.6%
3.1%
$ 1,607,497
$
975,425
60.7% $
17,407
100.0% $ 2,143,560
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Table of Contents
Year Ended December 31, 2013
As of
December 31, 2013
Collections
(1)
Gross
Revenue
(2)
Revenue
Recognition
Rate
(3)
Net
Reversal
(Portfolio
Allowance)
Revenue
% of Total
Revenue
Unamortized
Balances
Monthly
IRR
United States:
ZBA(4)
$
27,117
$
17,201
63.4% $
2005
2006
2007
2008
2009
2010
2011
2012
2013
2,364
8,780
12,204
41,512
80,311
156,773
225,546
350,134
230,041
Subtotal
1,134,782
239
3,181
5,409
24,377
54,130
102,595
133,396
162,424
140,760
643,712
10.1%
36.2%
44.3%
58.7%
67.4%
65.4%
59.1%
46.4%
61.2%
56.7%
Europe:
2013
Other geographies:
2012
2013
Subtotal
Total
134,259
84,407
62.9%
3,848
6,617
10,465
1,019
3,521
4,540
26.5%
53.2%
43.4%
9,918
10
(184)
2,001
448
—
—
—
—
—
12,193
—
—
—
—
2.3% $
0.0%
0.4%
0.7%
3.3%
7.4%
14.0%
18.2%
22.2%
19.2%
87.9%
—
—
2,466
5,654
17,617
21,009
50,230
103,025
274,111
466,268
940,380
11.5%
620,312
0.1%
0.5%
0.6%
3,688
25,869
29,557
—
—
5.2%
7.6%
9.5%
18.1%
13.8%
8.9%
4.3%
4.4%
5.7%
2.4%
0.0%
4.4%
3.5%
4.4%
$ 1,279,506
$
732,659
57.3% $
12,193
100.0% $ 1,590,249
________________________
(1) Does not include amounts collected on behalf of others.
(2) Gross revenue excludes the effects of net portfolio allowance or net portfolio allowance reversals.
(3) Revenue recognition rate excludes the effects of net portfolio allowance or net portfolio allowance reversals.
(4) ZBA revenue typically has a 100% revenue recognition rate. However, collections on ZBA pool groups where a valuation allowance remains must first
be recorded as an allowance reversal until the allowance for that pool group is zero. Once the entire valuation allowance is reversed, the revenue
recognition rate will become 100%. ZBA gross revenue includes an immaterial amount of Put-Backs.
Portfolio revenue from our portfolio purchasing and recovery segment was $992.8 million during the year ended
December 31, 2014, an increase of $248.0 million, or 33.3%, compared to revenue of $744.9 million during the year ended
December 31, 2013. The increase in portfolio revenue during the year ended December 31, 2014 compared to 2013 was due to
additional accretion revenue associated with a higher portfolio balance, primarily associated with portfolios acquired through
our increased level of merger and acquisition related activities and increases in yields on certain pool groups due to over-
performance, offset by lower yields on recently formed pool groups.
During the year ended December 31, 2014, we recorded a portfolio allowance reversal of $17.4 million, compared to a
net portfolio allowance reversal of $12.2 million during the year ended December 31, 2013. The recording of net allowance
reversals during the years ended December 31, 2014 and 2013 was primarily due to operational improvements which allowed
us to assist our customers to repay their obligations and increased collections on our ZBA portfolios. Additionally, our refined
valuation methodologies have limited the amount of valuation charges necessary during recent periods.
Other revenues were $52.0 million and $12.6 million for the years ended December 31, 2014 and 2013, respectively.
Other revenues primarily represent contingent fee income at our Cabot, Refinancia and Grove subsidiaries earned on accounts
collected on behalf of others, primarily credit originators. The increase in other revenues during the year ended December 31,
2014 was primarily due to the acquisition of Cabot in July 2013, Refinancia in December 2013 and Grove in April 2014.
Contingent fees from Cabot and Refinancia are only included in the prior year periods since their acquisition dates. Net interest
income from our tax lien business segment was $28.0 million and $15.9 million for the years ended December 31, 2014 and
2013, respectively. The increase for the year ended December 31, 2014 was due to an increase in the balance of receivables
secured by property tax liens, primarily resulting from Propel’s recent acquisition of a portfolio of tax liens and other assets in a
transaction valued at approximately $43.0 million in May 2014.
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Table of Contents
Operating Expenses
Total operating expenses were $753.3 million during the year ended December 31, 2014, an increase of $178.3 million,
or 31.0%, compared to total operating expenses of $575.0 million during the year ended December 31, 2013.
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
Salaries and employee benefits increased $81.2 million, or 49.2%, to $246.2 million during the year ended December 31,
2014, from $165.0 million during the year ended December 31, 2013. The increase was primarily the result of increases in
headcount as a result of our recent mergers and acquisitions and increases in headcount and related compensation expense to
support our growth.
Stock-based compensation increased $4.5 million, or 35.8%, to $17.2 million during the year ended December 31, 2014,
from $12.6 million during the year ended December 31, 2013. This increase was primarily attributable to an increase in the
number of shares granted and the higher fair value of equity awards granted in recent periods.
Salaries and employee benefits broken down between the reportable segments were as follows (in thousands):
Salaries and employee benefits:
Portfolio purchasing and recovery
Tax lien business
Year Ended December 31,
2014
2013
$
$
238,942
7,305
246,247
$
$
159,318
5,722
165,040
Cost of Legal Collections—Portfolio Purchasing and Recovery
The cost of legal collections increased $18.7 million, or 10.0%, to $205.7 million during the year ended December 31,
2014, compared to $187.0 million during the year ended December 31, 2013. These costs represent contingent fees paid to our
network of attorneys, internal legal costs and the cost of litigation. Gross legal collections were $653.2 million during the year
ended December 31, 2014, up from $564.6 million collected during the year ended December 31, 2013. The increase in the cost
of legal collections includes an increase in commissions in the United States, as a result of an increase in gross collections of
$45.6 million, or 8.1%, and an increase in commissions in Europe, as a result of an increase in gross collections of $42.9
million. The cost of legal collections decreased as a percentage of gross collections through this channel to 31.5% during the
year ended December 31, 2014 from 33.1% during the same period in the prior year. This decrease was primarily due to
increased collections from our internal legal channel, for which we do not pay a commission, and to a lesser extent, due to
lower litigation costs as a percent of collections in Europe for accounts placed into Marlin’s legal platform. However, as Cabot
and Marlin continue to increase the number of consumer accounts placed through Marlin’s legal platform, the cost of legal
collections as a percent of collections in Europe will increase, due to an increase in upfront court costs.
Other Operating Expenses
Other operating expenses increased $27.2 million, or 40.8%, to $93.9 million during the year ended December 31, 2014,
from $66.6 million during the year ended December 31, 2013. The increases in other operating expenses was primarily the
result of additional other operating expenses at our recently acquired subsidiaries.
Other operating expenses broken down between the reportable segments were as follows (in thousands):
Other operating expenses:
Portfolio purchasing and recovery
Tax lien business
Year Ended December 31,
2014
2013
$
$
89,933
3,926
93,859
$
$
63,228
3,421
66,649
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Collection Agency Commissions—Portfolio Purchasing and Recovery
During the year ended December 31, 2014, we incurred $33.3 million in commissions to third party collection agencies,
or 16.6% of the related gross collections of $200.3 million. During the period, the commission rate as a percentage of related
gross collections was 16.2% and 16.9% for our collection outsourcing channels in the United States and Europe, respectively.
During the year ended December 31, 2013, we incurred $33.1 million in commissions, or 19.0%, of the related gross
collections of $174.0 million.
Collections through this channel vary from period to period depending on, among other things, the number of accounts
placed with agencies versus accounts collected internally. Commissions, as a percentage of collections in this channel, also vary
from period to period depending on, among other things, the amount of time that has passed since the charge-off of the
accounts placed with an agency. Generally, freshly charged-off accounts have a lower commission rate than accounts that have
been charged off for a longer period of time.
General and Administrative Expenses
General and administrative expenses increased $36.6 million, or 33.3%, to $146.3 million during the year ended
December 31, 2014, from $109.7 million during the year ended December 31, 2013. The increase was primarily the result of
additional general and administrative expenses at our newly acquired subsidiaries, and general increases in expenses to support
our growth. The increase was partially offset by lower one-time acquisition and integration related costs in our portfolio
purchasing and recovery segment. General and administrative expenses include one-time acquisition and integration related
costs of $15.9 million and $21.6 million for the years ended December 31, 2014 and 2013, respectively.
General and administrative expenses broken down between the reportable segments were as follows (in thousands):
General and administrative expenses:
Portfolio purchasing and recovery
Tax lien business
Depreciation and Amortization
Year Ended December 31,
2014
2013
$
$
139,977
6,309
146,286
$
$
106,814
2,899
109,713
Depreciation and amortization expense increased $14.4 million, or 106.3%, to $27.9 million during the year ended
December 31, 2014, from $13.5 million during the year ended December 31, 2013. The increase during the year ended
December 31, 2014 was primarily related to increased depreciation expense resulting from the acquisition of fixed assets in the
current and prior years and additional depreciation and amortization expenses resulting from fixed assets and intangible assets
acquired through our recent acquisitions.
Cost per Dollar Collected—Portfolio Purchasing and Recovery
We utilize adjusted operating expenses in order to facilitate a comparison of approximate cash costs to cash collections
for our portfolio purchasing and recovery business. The calculation of adjusted operating expenses is illustrated in detail in the
“Non-GAAP Disclosure” section. The following table summarizes our overall cost per dollar collected by geographic location
during the periods presented:
United States
Europe
Other geographies
Overall cost per dollar collected
Year Ended December 31,
2014
2013
41.7%
29.3%
30.2%
38.6%
40.6%
27.0%
31.3%
39.1%
Our overall cost per dollar collected for the year ended December 31, 2014 was 38.6%, down 50 basis points from 39.1%
during the prior period. This decrease was primarily due to collections from geographies with a lower cost to collect increasing
as a percent of total collections, offset by higher cost to collect in the United States. During the same periods, cost to collect in
the United States increased to 41.7% from 40.6%. Over time, we expect our cost to collect to remain competitive, but also
54
Table of Contents
expect that it will fluctuate from quarter to quarter based on seasonality, the cost of investments in new operating initiatives,
and the ongoing management of the changing regulatory and legislative environment.
Interest Expense—Portfolio Purchasing and Recovery
Interest expense increased $93.7 million to $166.9 million during the year ended December 31, 2014, from $73.3 million
during the year ended December 31, 2013.
The following table summarizes our interest expense (in thousands, except percentages):
Stated interest on debt obligations
Interest expense on preferred equity certificates
Amortization of loan fees and other loan costs
Amortization of debt discount
Accretion of debt premium
Total interest expense
2014
137,274
22,429
9,049
8,423
(10,233)
166,942
$
$
$
$
Year Ended December 31,
2013
$ Change
% Change
55,703
11,381
4,519
4,492
(2,826)
73,269
$
$
81,571
11,048
4,530
3,931
(7,407)
93,673
146.4%
97.1%
100.2%
87.5%
262.1%
127.8%
The payment of the accumulated interest on the PECs issued in connection with the Cabot Acquisition will only be
satisfied in connection with the disposition of the noncontrolling interests of J.C. Flowers and management.
The increase in interest expense was primarily attributable to interest expense incurred at Cabot during the year ended
December 31, 2014 of $118.8 million, including $22.4 million of interest expense on the preferred equity certificates as
compared to $37.6 million for the year ended December 31, 2013 including $11.4 million of interest expense on the preferred
equity certificates. The increase was also a result of increased interest expense related to additional borrowings to finance
recent acquisitions.
Other Income (Expense)
We recorded a net other income of $0.1 million and a net other expenses of $4.2 million during the years ended
December 31, 2014 and 2013, respectively. The majority of the other expenses recognized during the year ended December 31,
2013 was related to a $3.6 million loss recognized on a foreign currency exchange hedge contract we entered into associated
with the Cabot Acquisition. In anticipation of the Cabot Acquisition, on June 7, 2013, we entered into a European style zero-
cost collar foreign exchange contract with a notional amount of approximately $206.0 million.
Provision for Income Taxes
During the years ended December 31, 2014 and 2013, we recorded income tax provisions for income from continuing
operations of $52.7 million and $45.4 million, respectively.
55
Table of Contents
The effective tax rates for the respective periods are shown below:
Federal provision
State provision
State benefit
Changes in state apportionment(1)
International provision(2)
Permanent items(3)
Other(4)
Effective rate
________________________
Year Ended December 31,
2014
2013
35.0 %
8.2 %
(2.9)%
0.0 %
(3.6)%
4.3 %
(6.4)%
34.6 %
35.0 %
5.8 %
(2.0)%
(0.2)%
(2.2)%
2.4 %
(1.2)%
37.6 %
(1) Represents changes in state apportionment methodologies.
(2) Relates primarily to the lower tax rate on the income attributable to international operations.
(3) Represents a provision for nondeductible items.
(4)
Includes the effect of discrete items, primarily relates to the recognition of tax benefit as a result of a favorable tax settlement with taxing authorities as
discussed below.
The effective tax rate decreased from the year ended December 31, 2014 as compared to 2013, primarily due to a net tax
benefit of approximately $6.6 million recognized as a result of a favorable settlement with taxing authorities related to a
previously uncertain tax position. Additionally, the effective tax rate for the year ended December 31, 2014 as compared to
2013, decreased as a result of proportionately more earnings realized in countries that have lower statutory tax rates than the
United States federal rate. Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely
affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated
in countries that have higher statutory rates.
Supplemental Performance Data—Portfolio purchasing and recovery
The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. For
purposes of calculating its IRRs, the collection forecast of each pool is estimated to be up to 120 months.
56
Table of Contents
Cumulative Collections to Purchase Price Multiple
The following table summarizes our purchases and related gross collections by year of purchase (in thousands, except multiples):
Year of
Purchase
Purchase
Price(1)
<2007
2007
2008
2009
Cumulative Collections through December 31, 2015
2010
2012
2011
2013
2014
2015
Total(2)
CCM(3)
$
Purchased consumer receivables:
United States:
<2007
2007
2008
2009
2010
2011
2012
2013
2014
2015
719,080
204,064
227,755
253,081
345,445
382,310
466,772
513,333
517,074
480,195
4,109,109
$ 1,377,276
—
—
—
—
—
—
—
—
—
1,377,276
Subtotal
Europe:
2013
2014
2015
Subtotal
619,079
630,347
423,528
1,672,954
Other geographies:
2012
2013
2014
2015
Subtotal
6,575
29,568
88,227
94,020
218,390
$
$
$
286,676
68,048
—
—
—
—
—
—
—
—
354,724
$
183,982
145,272
69,049
—
—
—
—
—
—
—
398,303
114,648
111,117
165,164
96,529
—
—
—
—
—
—
487,458
$
73,397
70,572
127,799
206,773
125,465
—
—
—
—
—
604,006
$
52,137
44,035
87,850
164,605
284,541
122,224
—
—
—
—
755,392
36,955
29,619
59,507
111,569
215,088
300,536
186,472
—
—
—
939,746
$
28,242
20,812
41,773
80,443
150,558
225,451
319,114
217,245
—
—
1,083,638
$
22,012
14,431
29,776
58,345
106,079
154,847
233,045
372,967
144,178
—
1,135,680
$
18,835
12,002
23,247
42,960
80,051
112,659
155,647
276,552
307,814
105,588
1,135,355
$ 2,194,160
515,908
604,165
761,224
961,782
915,717
894,278
866,764
451,992
105,588
8,271,578
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
134,259
—
—
134,259
3,848
6,617
—
—
10,465
249,307
135,549
—
384,856
2,561
17,615
9,652
—
29,828
212,129
198,127
65,870
476,126
1,208
10,334
16,062
15,061
42,665
595,695
333,676
65,870
995,241
7,617
34,566
25,714
15,061
82,958
Purchased U.S. bankruptcy receivables:
2010
2011
2012
2013
2014
2015
11,971
1,642
83,159
39,833
—
24,372
160,977
$ 6,161,430
—
—
—
—
—
—
—
$ 1,377,276
Subtotal
Total
—
—
—
—
—
—
—
354,724
$
—
—
—
—
—
—
—
398,303
$
—
—
—
—
—
—
—
487,458
$
388
—
—
—
—
—
388
604,394
$
4,247
1,372
—
—
—
—
5,619
761,011
$
5,598
1,413
1,249
—
—
—
8,260
948,006
6,248
1,070
31,020
12,806
—
—
51,144
$ 1,279,506
5,914
333
26,207
24,679
—
—
57,133
$ 1,607,497
3,527
247
21,267
21,516
—
22
46,579
$ 1,700,725
25,922
4,435
79,743
59,001
—
22
169,123
$ 9,518,900
$
________________________
(1) Adjusted for Put-Backs and Recalls. Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).
(2) Cumulative collections from inception through December 31, 2015, excluding collections on behalf of others.
(3) Cumulative Collections Multiple (“CCM”) through December 31, 2015 refers to collections as a multiple of purchase price.
57
3.1
2.5
2.7
3.0
2.8
2.4
1.9
1.7
0.9
0.2
2.0
1.0
0.5
0.2
0.6
1.2
1.2
0.3
0.2
0.4
2.2
2.7
1.0
1.5
—
—
1.1
1.5
Table of Contents
Total Estimated Collections to Purchase Price Multiple
The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross
collections, by year of purchase (in thousands, except multiples):
Purchase Price(1)
Historical
Collections(2)
Estimated
Remaining
Collections(3)
Total Estimated
Gross Collections
Total Estimated Gross
Collections to
Purchase Price
$
Purchased consumer receivables:
United States:
<2006
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
578,054
141,026
204,064
227,755
253,081
345,445
382,310
466,772
513,333
517,074
480,195
4,109,109
Subtotal
Europe:
2013
2014
2015
619,079
630,347
423,528
1,672,954
Subtotal
Subtotal
Other geographies:
2012
2013
2014
2015
6,575
29,568
88,227
94,020
218,390
Purchased U.S. bankruptcy receivables:
11,971
2010
1,642
2011
83,159
2012
39,833
2013
—
2014
24,372
2015
160,977
6,161,430
Subtotal
Total
$
$
$
$
1,864,849
329,311
515,908
604,165
761,224
961,782
915,717
894,278
866,764
451,992
105,588
8,271,578
595,695
333,676
65,870
995,241
7,617
34,566
25,714
15,061
82,958
25,922
4,435
79,743
59,001
—
22
169,123
9,518,900
$
9,216
7,250
17,558
35,567
64,851
126,329
159,331
246,817
524,675
636,056
717,924
2,545,574
1,146,461
921,199
722,764
2,790,424
2,342
13,330
141,507
158,479
315,658
—
—
19,398
11,917
—
28,369
59,684
5,711,340
$
$
1,874,065
336,561
533,466
639,732
826,075
1,088,111
1,075,048
1,141,095
1,391,439
1,088,048
823,512
10,817,152
1,742,156
1,254,875
788,634
3,785,665
9,959
47,896
167,221
173,540
398,616
25,922
4,435
99,141
70,918
—
28,391
228,807
15,230,240
3.2
2.4
2.6
2.8
3.3
3.1
2.8
2.4
2.7
2.1
1.7
2.6
2.8
2.0
1.9
2.3
1.5
1.6
1.9
1.8
1.8
2.2
2.7
1.2
1.8
—
1.2
1.4
2.5
________________________
(1) Adjusted for Put-Backs and Recalls.
(2) Cumulative collections from inception through December 31, 2015, excluding collections on behalf of others.
(3) Estimated remaining collections (“ERC”) for charged-off consumer receivables includes $91.9 million related to accounts that converted to bankruptcy
after purchase.
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Table of Contents
Estimated Remaining Gross Collections by Year of Purchase
The following table summarizes our estimated remaining gross collections by year of purchase (in thousands):
2016
2017
2018
2019
2020
2021
2022
2023
2024
>2024
Total
Estimated Remaining Gross Collections by Year of Purchase(1), (2)
$
— $
— $
— $ — $ — $
Purchased consumer receivables:
United States:
<2006
$
4,206
$
2,604
$
1,438
$
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Subtotal
Europe:
2013
2014
2015
Subtotal
3,297
6,778
13,365
26,743
49,096
62,366
90,300
167,312
195,666
186,945
806,074
183,199
144,718
107,894
435,811
1,864
4,677
8,291
14,725
29,249
37,797
59,713
122,041
158,208
1,041
2,655
5,699
9,297
17,320
22,123
35,759
80,615
97,826
189,846
124,381
771
585
1,627
3,435
6,218
11,303
13,464
22,321
53,749
62,482
81,569
$
197
332
998
2,171
3,308
7,910
8,760
14,335
36,229
41,010
51,917
131
613
1,374
2,081
4,702
6,185
9,352
24,260
26,419
30,256
—
210
871
1,327
3,056
3,521
6,485
15,886
18,854
19,624
69,834
629,015
398,154
257,524
167,167
105,373
197,292
173,733
153,204
136,430
121,102
108,324
158,261
135,508
117,484
103,298
113,372
106,515
89,574
74,305
90,274
63,122
78,759
55,494
468,925
415,756
360,262
314,033
274,498
242,577
192,083
—
—
361
844
1,986
2,289
3,525
10,826
13,367
13,957
47,155
73,177
69,971
48,935
Other geographies:
2012
2013
2014
2015
Subtotal
669
4,555
14,805
46,960
66,989
511
3,441
17,586
37,710
59,248
Purchased U.S. bankruptcy receivables:
2012
2013
2014
2015
Subtotal
Total
11,782
8,064
—
1,260
21,106
5,845
2,243
—
5,993
14,081
384
2,497
46,040
27,231
76,152
1,771
654
—
7,267
9,692
278
1,464
40,366
19,950
62,058
—
397
—
6,963
7,360
213
1,035
13,562
14,990
29,800
—
258
—
5,510
5,768
179
206
2,162
7,942
10,489
—
169
—
850
1,019
108
113
1,602
2,500
4,323
—
111
—
223
334
—
19
1,592
519
2,130
—
21
—
146
167
—
—
—
308
1,291
1,488
2,291
5,656
9,773
9,711
—
—
—
—
416
1,338
2,736
8,101
12,451
9,718
9,216
7,250
17,558
35,567
64,851
126,329
159,331
246,817
524,675
636,056
717,924
30,518
34,760
2,545,574
—
19,637
42,885
62,522
—
—
3,792
366
4,158
—
—
—
99
99
—
1,146,461
3,289
20,668
23,957
921,199
722,764
2,790,424
—
—
—
311
311
—
—
—
58
58
2,342
13,330
141,507
158,479
315,658
19,398
11,917
—
28,369
59,684
$ 1,329,980
$ 1,171,269
$ 899,754
$ 687,204
$ 516,768
$ 391,379
$ 317,068
$ 241,535
$ 97,297
$ 59,086
$ 5,711,340
________________________
(1) ERC for Zero Basis Portfolios can extend beyond our collection forecasts.
(2) ERC for charged-off consumer receivables includes $91.9 million related to accounts that converted to bankruptcy after purchase. The collection
forecast of each pool is generally estimated up to 120 months based on the expected collection period of each pool in the United States and in Europe.
Expected collections beyond the 120 month collection forecast in the United States are included in ERC but are not included in the calculation of IRRs.
59
Table of Contents
Unamortized Balances of Portfolios
The following table summarizes the remaining unamortized balances of our purchased receivable portfolios by year of
purchase (in thousands, except percentages):
Unamortized
Balance as of
December 31, 2015
Purchase
Price(1)
Unamortized
Balance as a
Percentage of
Purchase Price
Unamortized
Balance as a
Percentage
of Total
Purchased consumer receivables:
United States:
2007
2008
2009
2010
2011
2012
2013
2014
2015
Subtotal
Europe:
2013
2014
2015
Subtotal
Other geographies:
2013
2014
2015
Subtotal
Purchased U.S. bankruptcy receivables:
2012
2013
2014
2015
Subtotal
Total
________________________
$
$
1,573
5,798
—
3,742
27,257
62,440
155,875
291,402
420,945
969,032
439,619
444,618
384,231
1,268,468
2,480
67,714
85,196
155,390
17,533
5,664
—
24,582
47,779
2,440,669
$
$
204,064
227,755
253,081
345,445
382,310
466,772
513,333
517,074
480,195
3,390,029
619,079
630,347
423,528
1,672,954
29,568
88,227
94,020
211,815
83,159
39,833
—
24,372
147,364
5,422,162
0.8%
2.5%
0.0%
1.1%
7.1%
13.4%
30.4%
56.4%
87.7%
28.6%
71.0%
70.5%
90.7%
75.8%
8.4%
76.7%
90.6%
73.4%
21.1%
14.2%
—
100.9%
32.4%
45.0%
0.2%
0.6%
0.0%
0.4%
2.8%
6.4%
16.1%
30.1%
43.4%
100.0%
34.6%
35.1%
30.3%
100.0%
1.6%
43.6%
54.8%
100.0%
36.7%
11.9%
—
51.4%
100.0%
100.0%
(1) Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-Backs, Recalls, and other adjustments.
60
Table of Contents
Estimated Future Amortization of Portfolios
As of December 31, 2015, we had $2.4 billion in investment in receivable portfolios. This balance will be amortized
based upon current projections of cash collections in excess of revenue applied to the principal balance. The estimated
amortization of the investment in receivable portfolios balance is as follows (in thousands):
Years Ending December 31,
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Purchased
Consumer
Receivables
United States
Purchased
Consumer
Receivables
Europe
Purchased
Consumer
Receivables
Other
Geographies
Purchased U.S.
Bankruptcy
Receivables
Total
Amortization
$
238,195
$
103,223
$
16,397
$
14,851
$
263,064
167,795
108,740
72,169
46,276
32,933
23,065
12,731
4,064
—
172,585
164,754
151,237
145,282
146,155
157,958
156,988
51,028
19,132
126
15,966
42,265
43,255
22,239
7,765
6,077
756
250
270
150
11,891
7,635
6,593
5,397
939
206
178
89
—
—
372,666
463,506
382,449
309,825
245,087
201,135
197,174
180,987
64,098
23,466
276
Total
$
969,032
$
1,268,468
$
155,390
$
47,779
$
2,440,669
Headcount by Function by Geographic Location
The following table summarizes our headcount by function by geographic location:
General & Administrative
Internal Legal Account Manager
Account Manager
Headcount as of December 31,
2015
2014
2013
Domestic
International
Domestic
International
Domestic
International
944
29
240
1,213
2,198
151
3,103
5,452
1,010
38
313
1,361
1,628
64
2,324
4,016
1,008
63
297
1,368
1,288
61
2,534
3,883
61
Table of Contents
Purchases by Quarter
The following table summarizes the consumer receivable portfolios and bankruptcy receivables we purchased by quarter,
and the respective purchase prices (in thousands):
Quarter
Q1 2013
Q2 2013(1)
Q3 2013(2)
Q4 2013
Q1 2014(3)
Q2 2014
Q3 2014(4)
Q4 2014
Q1 2015
Q2 2015(5)
Q3 2015
Q4 2015(6)
# of
Accounts
Face Value
Purchase
Price
1,678
$
1,615,214
$
23,887
4,232
614
1,104
1,210
2,203
859
734
2,970
1,267
2,363
68,906,743
13,437,807
1,032,472
4,288,159
3,075,343
3,970,145
2,422,128
1,041,011
5,544,885
2,085,381
4,068,252
58,771
423,113
617,852
105,043
467,565
225,762
299,509
258,524
125,154
418,780
187,180
292,608
________________________
(1)
(2)
(3)
(4)
(5)
(6)
Includes $383.4 million of portfolios acquired with a face value of approximately $68.2 billion in connection with the AACC Merger.
Includes $559.0 million of portfolios acquired with a face value of approximately $12.8 billion in connection with the Cabot Acquisition.
Includes $208.5 million of portfolios acquired with a face value of approximately $2.4 billion in connection with the Marlin Acquisition.
Includes $105.4 million of portfolios acquired with a face value of approximately $1.7 billion in connection with the Atlantic Acquisition.
Includes $216.0 million of portfolios acquired with a face value of approximately $3.1 billion in connection with the dlc Acquisition.
Includes $60.3 million of portfolios acquired with a face value of approximately $1.2 billion in connection with the Baycorp Acquisition.
Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activity for the periods presented (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Operating Cash Flows
Year Ended December 31,
2015
2014
2013
$
$
114,425
(472,709)
401,845
$
111,544
(755,197)
626,323
74,775
(217,240)
245,980
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other
than investing and financing activities. Operating cash flow is derived by adjusting net income for non-cash operating items
such as depreciation and amortization, allowance charges and stock-based compensation charges, and changes in operating
assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and
when they are recognized in results of operations.
Net cash provided by operating activities was $114.4 million, $111.5 million, and $74.8 million for the years ended
December 31, 2015, 2014, and 2013, respectively.
Cash provided by operating activities during the year ended December 31, 2015 was primarily related to net income of
$47.4 million and a $49.3 million non-cash add back related to a goodwill impairment charge at Propel, in addition to other
non-cash add backs in operating activities and changes in operating assets and liabilities. Cash provided by operating activities
during the year ended December 31, 2014 was primarily related to net income of $98.3 million and various non-cash add backs
in operating activities and changes in operating assets and liabilities. Cash provided by operating activities during the year
ended December 31, 2013 was primarily related to net income of $73.7 million and various non-cash add backs in operating
activities and changes in operating assets and liabilities.
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Investing Cash Flows
Net cash used in investing activities was $472.7 million, $755.2 million, and $217.2 million for the years ended
December 31, 2015, 2014, and 2013, respectively.
The cash flows used in investing activities during the year ended December 31, 2015 were primarily related to cash paid
for acquisitions, net of cash acquired, of $276.6 million, receivable portfolio purchases (excluding the portfolios acquired from
the dlc Acquisition of $216.0 million and from the acquisition of Baycorp of $60.3 million) of $749.8 million, offset by
collection proceeds applied to the principal of our receivable portfolios in the amount of $635.9 million. The cash flows used in
investing activities during the year ended December 31, 2014 were primarily related to cash paid for acquisitions, net of cash
acquired, of $495.8 million, receivable portfolio purchases (excluding the portfolios acquired from the Marlin Acquisition of
$208.5 million and from the Atlantic Acquisition of $105.4 million) of $863.0 million, offset by collection proceeds applied to
the principal of our receivable portfolios in the amount of $634.0 million. Cash flows used in investing activities during the
year ended December 31, 2013 were primarily related to cash paid for acquisitions, net of cash acquired, of $449.0 million,
receivable portfolio purchases (excluding the portfolios acquired from the AACC Merger of $383.4 million and from the Cabot
Acquisition of $559.0 million) of $249.6 million, and originations or purchases of receivables secured by tax liens of $117.0
million, offset by gross collection proceeds applied to the principal of our receivable portfolios in the amount of $546.4 million.
Financing Cash Flows
Net cash provided by financing activities was $401.8 million, $626.3 million, and $246.0 million for the years ended
December 31, 2015, 2014, and 2013, respectively.
The cash provided by financing activities during the year ended December 31, 2015 primarily reflects $1.1 billion in
borrowings under our credit facilities and $332.7 million of proceeds from the Cabot Floating Rate Notes, offset by $891.8
million in repayments of amounts outstanding under our credit facilities and $33.2 million in repurchases of our common stock.
The cash provided by financing activities during the year ended December 31, 2014 primarily reflects $1.3 billion in
borrowings under our credit facilities, $288.6 million of proceeds from Cabot’s senior secured notes due 2021, $161.0 million
of proceeds from the issuance of Encore’s convertible senior notes due 2021, and $134.0 million of proceeds from the issuance
of Propel’s securitized notes, offset by $1.2 billion in repayments of amounts outstanding under our credit facilities and $33.6
million in purchases of convertible hedge instruments, including the payment for our warrant restrike transaction associated
with our 2017 Convertible Notes. The cash provided by financing activities during the year ended December 31, 2013, reflects
$659.9 million in borrowings under our credit facilities, the $151.7 million of proceeds from Cabot’s senior secured notes due
2020, and $172.5 million of proceeds from the issuance of our 2020 Convertible Notes, offset by $630.2 million repayments of
amounts outstanding under our credit facilities.
Capital Resources
Historically, we have met our cash requirements by utilizing our cash flows from operations, bank borrowings,
convertible debt offerings, and equity offerings. From time to time, depending on the capital markets, we and Cabot consider
additional financings to fund our operations and acquisitions. Our primary cash requirements have included the purchase of
receivable portfolios, the acquisition of U.S. and international entities, operating expenses, the payment of interest and principal
on borrowings, and the payment of income taxes.
On July 9, 2015, we amended our revolving credit facility and term loan facility pursuant to Amendment No. 2 to the
Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). The Restated Credit
Agreement includes a revolving credit facility of $742.6 million (the “Revolving Credit Facility”), a term loan facility of
$158.8 million (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit
Facilities”), and an accordion feature that allows us to increase the Revolving Credit Facility by an additional $250.0 million
($55.0 million of which was exercised in November 2015). Including the accordion feature, the maximum amount that can be
borrowed under the Senior Secured Credit Facilities is $1.1 billion. The Senior Secured Credit Facilities have a five-year
maturity, expiring in February 2019, except with respect to two subtranches of the Term Loan Facility of $60.0 million and $6.3
million, expiring in February 2017 and November 2017, respectively. As of December 31, 2015, we had $770.1 million
outstanding and $107.1 million of availability under the Senior Secured Credit Facilities, excluding the $195.0 million
available under the accordion.
Through Cabot Financial (UK) Limited (“Cabot Financial UK”), an indirect subsidiary, we have a revolving credit
facility of £200.0 million (the “Cabot Credit Facility”). The Cabot Credit Facility includes an uncommitted accordion facility
which will allow the facility to be increased by an additional £50.0 million, subject to obtaining the requisite commitments and
compliance with the terms of Cabot Financial UK’s other indebtedness. As of December 31, 2015, we had £36.5 million
(approximately $54.1 million) outstanding and £163.5 million (approximately $242.3 million) of availability under the Cabot
Credit Facility.
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On June 1, 2015, Cabot entered into a new senior secured bridge facility (the “2015 Senior Secured Bridge Facility”) that
provides an aggregate principal amount of up to £90.0 million. The purpose of the 2015 Senior Secured Bridge Facility was to
provide funding for the financing, in full or in part, of the purchase price for the dlc Acquisition and the payment of costs, fees
and expenses in connection with the dlc Acquisition, and was fully drawn on as of the closing of the dlc Acquisition. The 2015
Senior Secured Bridge Facility had an initial term of one year. In November 2015, Cabot paid off the outstanding balance on
the 2015 Senior Secured Bridge Facility. As a result, at December 31, 2015, there was no amount outstanding on the 2015
Senior Secured Bridge Facility.
On November 11, 2015, Cabot Financial (Luxembourg) II S.A. (the “Cabot Financial II”), an indirect subsidiary of Janus
Holdings, issued €310.0 million (approximately $332.2 million) in aggregate principal amount of Senior Secured Floating Rate
Notes due 2021 (the “Cabot Floating Rate Notes”). The Cabot Floating Rate Notes bear interest at a rate equal to three-month
EURIBOR plus 5.875% per annum, reset quarterly. The Cabot Floating Rate Notes will mature on November 15, 2021.
Propel has an $80.0 million syndicated loan facility (the “Propel Facility I”), with an accordion feature that allows Propel
to increase the Propel Facility I by an additional $20.0 million. The Propel Facility I is used to fund tax liens. As
of December 31, 2015 there was $63.0 million outstanding and $17.0 million of availability under the Propel Facility I,
excluding the $20.0 million available under the accordion.
Propel also has a $150.0 million revolving credit facility (the “Propel Facility II”) that is used to purchase tax liens in
various states directly from taxing authorities. As of December 31, 2015, there was $107.9 million outstanding and $42.1
million of availability under the Propel Facility II.
On April 24, 2014, our Board of Directors approved a $50.0 million share repurchase program. During the year ended
December 31, 2015, we repurchased 839,295 shares of our common stock for approximately $33.2 million, which represented
the remaining amount allowed under the share repurchase program.
On August 12, 2015, our Board of Directors approved a new $50.0 million share repurchase program. Repurchases under
this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and
other factors, in the open market, through private transactions, block transactions, or other methods as determined by the
management and our Board of Directors, and in accordance with market conditions, other corporate considerations, and
applicable regulatory requirements. The program does not obligate the Company to acquire any particular amount of common
stock, and it may be modified or suspended at any time at the Company’s discretion. We did not make any repurchases under
the new share repurchase program during the year ended December 31, 2015.
Currently, all of our portfolio purchases are funded with cash from operations and borrowings under our Senior Secured
Credit Facilities and our Cabot Credit Facility. All of our purchases for receivables secured by property tax liens are funded
with cash from Propel’s operations and borrowings under the Propel Facility I and the Propel Facility II.
We are in compliance with all covenants under our financing arrangements. See Note 9, “Debt” to our consolidated
financial statements for a further discussion of our debt.
Our cash and cash equivalents at December 31, 2015 consisted of $56.9 million held by U.S.-based entities and
$96.7 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested
and may be subject to material tax effects if repatriated. However, we believe that our U.S. sources of cash and liquidity are
sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.
We believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our
expectation of continued positive cash flows from operations, our cash and cash equivalents, our access to capital markets, and
availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and businesses.
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Future Contractual Cash Obligations
The following table summarizes our future contractual cash obligations as of December 31, 2015 (in thousands):
Contractual Obligations
Principal payments on debt
Estimated interest payments(1)
Capital leases
Operating leases
Purchase commitments on receivable
portfolios
Preferred equity certificates(2)
Total contractual cash obligations(3)
________________________
Payment Due By Period
Total
Less
Than
1 Year
1 – 3 Years
3 – 5 Years
More
Than
5 Years
$
2,975,612
$
42,320
$
367,023
$
1,733,914
$
832,355
718,396
11,628
75,813
297,157
221,516
167,253
6,650
17,542
297,157
—
323,076
4,297
28,267
—
—
207,788
681
14,573
—
—
20,279
—
15,431
—
221,516
$
4,300,122
$
530,922
$
722,663
$
1,956,956
$
1,089,581
(1) We calculated estimated interest payments for long-term debt as follows: (a) for the fixed interest bearing debt, such as our senior secured notes and
convertible senior notes, we calculated interest based on the applicable rates and payment dates and (b) for the debt facilities that are subject to variable
interest rates, we estimated the debt balance and interest rates based on our determination of the most likely scenario. We expect to settle such interest
payments with cash flows from operating activities.
(2) As of December 31, 2015, we carried a liability of approximately $221.5 million related to principal and accumulated interests for PECs issued in
connection with the Cabot Acquisition. The PECs have a maturity date of May 2043, accrue interest at 12% per annum, and are held by Cabot’s
noncontrolling interest holders. The future accrued interest is excluded from the table above due to uncertainty in determining the timing of the
payment because the payment will only be satisfied in connection with the disposition of the noncontrolling interests. See Note 9, “Debt” to our
consolidated financial statements for additional information on our PECs.
(3) We had approximately $58.5 million of liabilities and accrued interests related to uncertain tax positions at December 31, 2015. We are unable to
reasonably estimate the timing of the cash settlement with the tax authorities due to the uncertainties related to these tax matters and, as a result, these
obligations are not included in the table. See Note 12, “Income Taxes” to our consolidated financial statements for additional information on our
uncertain tax positions.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.
Critical Accounting Policies and Estimates
We prepare our financial statements, in conformity with GAAP, which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1,
“Ownership, Description of Business and Summary of Significant Accounting Policies” of the notes to consolidated financial
statements describes the significant accounting policies and methods used in the preparation of our consolidated financial
statements.
We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances,
and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates and such differences may
be material. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further
below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors.
Investment in Receivable Portfolios and Related Revenue. As permitted by the authoritative guidance for loans and debt
securities acquired with deteriorated credit quality, static pools are established on a quarterly basis with accounts purchased
during the quarter that have common risk characteristics. Discrete receivable portfolio purchases during a quarter are
aggregated into pools based on these common risk characteristics. Once a static pool is established, the portfolios are
permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related
aggregate contractual receivable balance) is not recorded because we expect to collect a relatively small percentage of each
static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The
purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the
receivable portfolios.
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In compliance with the authoritative guidance, we account for our investments in consumer receivable portfolios using
either the interest method or the cost recovery method. The interest method applies an IRR, to the cost basis of the pool, which
remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows. Subsequent
increases in expected cash flows are generally recognized prospectively through an upward adjustment of the pool’s IRR over
its remaining life. Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to
the cost basis of the pool, and are reflected in the consolidated statements of income as a reduction in revenue, with a
corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial
condition.
We account for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue
from receivable portfolios, for collections applied to the cost basis of receivable portfolios and for provision for loss or
allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis.
The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances.
If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, we account for
that pool using the cost recovery method. The accounts in these portfolios have different risk characteristics than those included
in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash
flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no
revenue is recognized until the purchase price of a cost recovery portfolio has been fully recovered.
Deferred Court Costs. We pursue legal collection using a network of attorneys that specialize in collection matters and
through our internal legal channel. We generally pursue collections through legal means only when we believe a consumer has
sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In connection with our agreements with our
contracted attorneys, we advance certain out-of-pocket court costs, or Deferred Court Costs. We capitalize these costs in the
consolidated financial statements and provide a reserve for those costs that we believe will ultimately be uncollectible. We
determine the reserve based on our analysis of court costs that have been advanced and recovered, or that we anticipate
recovering. We write off any Deferred Court Cost not recovered within five years of placement. Collections received through
litigation are first applied against related court costs with the balance applied to the debtors’ account.
Receivables Secured by Property Tax Liens, Net. Receivables secured by property tax liens are reported at their
outstanding principal balances, adjusted for, if any, charge-offs, allowance for losses, deferred fees or costs, and unamortized
premiums or discounts. Interest income is reported on the interest method and includes amortization of net deferred fees and
costs over the term of the agreements. We accrue interest on all receivable portfolios as the receivables are collateralized by tax
liens that are in a priority position over most other liens on the properties. If there is doubt about the ultimate collection of the
accrued interest on a specific receivable, it would be placed on non-accrual and, at that time, any accrued interest would be
reversed.
The allowance for losses on receivables secured by property tax liens is evaluated on a regular basis by management and
is based upon management’s periodic review of the collectability of the receivables in light of historical experience, adverse
situations that may affect the borrower’s ability to repay, the estimated value of the underlying collateral, and prevailing
economic conditions.
Goodwill and Other Intangible Assets. Business combinations typically result in the recording of goodwill and other
intangible assets. The excess of the purchase price over the fair value assigned to the tangible and identifiable intangible assets,
liabilities assumed, and noncontrolling interests in the acquiree is recorded as goodwill.
Goodwill and indefinite-lived intangible assets are tested at the reporting unit level for impairment annually and in
interim periods if certain events occur indicating that the carrying amounts may be impaired. Determining the number of
reporting units and the fair value of a reporting unit requires us to make judgments and involves the use of significant estimates
and assumptions. We have six reporting units identified for goodwill impairment testing purposes. The annual goodwill testing
date for the five reporting units that are included in the portfolio purchasing and recovery reportable segment is October 1st; the
annual goodwill testing date for the tax lien business reporting unit is April 1st.
We first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill
impairment test. The qualitative factors include economic environment, business climate, market capitalization, operating
performance, competition, and other factors. We may proceed directly to the two-step quantitative test without performing the
qualitative test.
The first step involves measuring the recoverability of goodwill at the reporting unit level by comparing the estimated
fair value of the reporting unit in which the goodwill resides to its carrying value. The second step, if necessary, measures the
amount of impairment, if any, by comparing the implied fair value of goodwill to its carrying value. We apply various valuation
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techniques to measure the fair value of each reporting unit, including the income approach and the market approach. For
goodwill impairment analyses conducted at most of the reporting units, we use the income approach in determining fair value,
specifically the discounted cash flow method, or DCF. In applying the DCF method, an identified level of future cash flow is
estimated. Annual estimated cash flows and a terminal value are then discounted to their present value at an appropriate
discount rate to obtain an indication of fair value. The discount rate utilized reflects estimates of required rates of return for
investments that are seen as similar to an investment in the reporting unit. DCF analyses are based on management’s long-term
financial projections and require significant judgments, therefore, for our Cabot reporting unit, which carries a material
goodwill balance and where we have access to reliable market participant data, the market approach is conducted in addition to
the income approach in determining its fair value. We use a guideline company method under the market approach to estimate
the fair value of equity and market value of invested capital (“MVIC”). The guideline company approach relies on estimated
remaining collections data for each of the selected guideline companies, which enables a direct comparison between the
reporting unit and the selected peer group. We believe that the current methodology used in determining the fair value of our
reporting units represent the best estimate. In addition, we compare the aggregate fair value of the reporting units to our overall
market capitalization.
For our annual goodwill impairment tests performed at October 1, 2015 for the reporting units that are included in our
portfolio purchasing and recovery reportable segment, the estimated fair value of each of these reporting units exceeded its
respective carrying value. As a result, no impairment existed at any of these reporting units.
We have determined, at April 1, 2015, the annual goodwill impairment testing date for our tax lien business reporting
unit, that the estimated fair value exceeded the carrying value. The estimation of fair value was based on a DCF analysis under
the income approach as discussed above. However, as discussed in Note 17 “Subsequent Event” to our consolidated financial
statements, on February 19, 2016, we entered into a securities purchase agreement with certain funds, which provides for the
sale of 100% of Encore’s membership interests in Propel. The purchase price for the transaction is calculated in accordance
with a formula relating to the redemptive value of certain tax liens as well as the book value of certain other assets and
liabilities of Propel, and will be determined at the closing of the transaction. The application of the purchase price formula as
of December 31, 2015 would have resulted in an enterprise value for Propel of $344.3 million. After repayment of third party
debt, the cash consideration payable to Encore would have been $142.8 million. Authoritative guidance defines fair value as the
price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between
market participants at the measurement date (i.e., the “exit price”). In connection with the preparation of our financial
statements and based, in part, on these developments, management believes that the proposed purchase price would indicate
that Propel’s fair value at December 31, 2015 was less than its carrying value. Based on the estimated sales price using the
purchase price formula, we wrote-down the entire goodwill balance of $49.3 million carried at the tax lien business reporting
unit as of December 31, 2015.
Significant judgments are required to estimate the fair value of reporting units including estimating future cash flows,
determining appropriate discount rates, growth rates, comparable guideline companies and other assumptions. Future business
conditions and/or activities could differ materially from the projections made by management, which in turn, could result in the
need for impairment charges. We will perform additional impairment testing if events occur or circumstances change indicating
that the carrying amounts may be impaired.
Redeemable Noncontrolling Interests. Some minority shareholders in certain of our subsidiaries have the right, at certain
times, to require us to acquire their ownership interest in those entities at fair value, while others have the right to force a sale
of the subsidiary if we choose not to purchase their interests at fair value. The noncontrolling interests subject to these
arrangements are included in temporary equity as redeemable noncontrolling interests, and are adjusted to their estimated
redemption amounts each reporting period with a corresponding adjustment to additional paid-in capital. Future reductions in
the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at
the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the
floor. These adjustments do not affect the calculation of earnings per share.
Stock-Based Compensation. We record compensation costs related to our stock-based awards which include stock
options, restricted stock awards, and restricted stock units. We measure stock-based compensation cost at the grant date based
on the fair value of the award. Compensation cost for service-based awards is recognized ratably over the applicable vesting
period. Compensation cost for performance-based awards is reassessed each period and recognized based upon the probability
that the performance targets will be achieved. The amount of stock-based compensation expense recognized during a period is
based on the portion of the awards that are ultimately expected to vest. We have certain share awards that include market
conditions that affect vesting, the fair value of these shares is estimated using a lattice model. Compensation cost for these
awards is not adjusted if the market condition is not met, as long as the requisite service is completed.
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Income Taxes. We use the liability method of accounting for income taxes. When we prepare the consolidated financial
statements, we estimate our income taxes based on the various jurisdictions where we conduct business. This requires us to
estimate our current tax exposure and to assess temporary differences that result from differing treatments of certain items for
tax and accounting purposes. Deferred income taxes are recognized based on the differences between the financial statement
and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected
to reverse. We then assess the likelihood that our deferred tax assets will be realized. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be realized. When we establish a valuation allowance
or increase this allowance in an accounting period, we record a corresponding tax expense in our statement of income. When
we reduce our valuation allowance in an accounting period, we record a corresponding tax benefit in our statement of income.
We include interest and penalties related to income taxes within our provision for income taxes. See Note 12, “Income Taxes”
to our consolidated financial statements for further discussion of income taxes.
Item 7A—Quantitative and Qualitative Disclosures about Market Risk
We are exposed to economic risks from foreign currency exchange rates and interest rates. A portion of these risks is
hedged, but the risks may affect our financial statements.
Foreign Currency Exchange Rates
We have operations in foreign countries, which expose us to foreign currency exchange rate fluctuations due to
transactions denominated in foreign currencies. We continuously evaluate and manage our foreign currency risk through the use
of derivative financial instruments, including foreign currency forward contracts with financial counterparties where
practicable. Such derivative instruments are viewed as risk management tools and are not used for speculative or trading
purposes. As of December 31, 2015, we had 28 outstanding foreign currency forward contracts that hedge our risk of foreign
currency exchange against the Indian rupee. Each contract settles monthly with a notional amount ranging from a U.S. dollar
equivalent of $1.4 million. The contracts hedge the forecasted monthly cash settlements resulting from the expenses incurred
by our operations in India. We have not experienced any hedge ineffectiveness since the inception of the hedging program; a
hypothetical change in the foreign exchange rate against the Indian rupee would not have a material impact on our consolidated
statement of income.
In addition, we are exposed to foreign currency risk that arises from the revaluation of monetary assets and liabilities held
by our subsidiaries that are not denominated in our functional currency. We may hedge currency exposures associated with
certain assets and liabilities denominated in nonfunctional currencies and certain anticipated nonfunctional currency
transactions. We could experience unanticipated gains or losses on anticipated foreign currency cash flows.
The financial statements of certain of our foreign subsidiaries are translated into U.S. dollars from their functional
currencies. We are exposed to foreign currency risk due to the translation and remeasurement of the results of certain
international operations into U.S. dollars as part of the consolidation process. Fluctuations in foreign currency exchange rates
can therefore create volatility in the results of operations and may adversely affect our financial condition. We currently do not
hedge the net assets of these foreign subsidiaries from foreign currency exposure.
Interest Rates
We have variable-interest-bearing borrowings under our credit facilities that subject us to interest rate risk. We have, from
time to time, utilized derivative financial instruments, including interest rate swap contracts and interest rate caps with financial
counterparties to manage our interest rate risk. As of December 31, 2015, we did not have any material interest rate hedge
contracts outstanding.
Our variable-interest-bearing debt is subject to the risk of interest rate fluctuations. Significant increases in future interest
rates on our variable rate debt could lead to a material decrease in future earnings assuming all other factors remained constant.
If the market interest rates for our variable rate agreements increase 10%, interest expense on such outstanding debt would
increase by approximately $5.2 million, on an annualized basis. Conversely, if the market interest rates decreased an average of
10%, our interest expense on such outstanding debt would decrease by $5.2 million on an annualized basis.
Our analysis and methods used to assess and mitigate the risks discussed above should not be considered projections of
future risks.
Item 8—Financial Statements and Supplementary Data
Our consolidated financial statements, the notes thereto and the Report of BDO USA, LLP, our Independent Registered
Public Accounting Firm, are included in this Annual Report on Form 10-K on pages F-1 through F-42.
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Item 9—Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A—Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) and 15d-15(e).
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period
covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective in enabling us to record,
process, summarize and report information required to be included in our periodic SEC filings within the required time period.
Management’s Report on Internal Control over Financial Reporting
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, is responsible for
establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule
13a-15(f) and 15d-15(f)) for Encore Capital Group, Inc. and its subsidiaries (the “Company”). The Company’s internal control
system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the
preparation and fair presentation of published consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable
assurance and may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal
control over financial reporting may vary over time. The Company’s processes contain self-monitoring mechanisms and actions
are taken to correct deficiencies as they are identified.
Management has assessed the effectiveness of Encore’s internal control over financial reporting as of December 31, 2015,
based on the criteria for effective internal control described in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that
the Company’s internal control over financial reporting was effective as of December 31, 2015. Management did not assess the
effectiveness of internal control over financial reporting of dlc and Baycorp because of the timing of the acquisitions, which
were completed on June 1, 2015 and October 21, 2015, respectively. dlc and Baycorp constituted approximately 8.6% of total
assets as of December 31, 2015 and 2.9% and 21.3% of revenues and net income, respectively, for the year then ended.
BDO USA, LLP, the independent registered public accounting firm that audited the consolidated financial statements
included in this Annual Report on Form 10-K, was engaged to attest to and report on the effectiveness of Encore’s internal
control over financial reporting as of December 31, 2015, as stated in its report below.
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Encore Capital Group, Inc.
San Diego, California
We have audited Encore Capital Group, Inc.’s internal control over financial reporting as of December 31, 2015, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Encore Capital Group, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the
internal controls of Hillesden Securities Limited (“dlc”) and Baycorp Holdings Pty Limited (“Baycorp”), which were acquired
on June 1, 2015 and October 21, 2015, respectively, and which are included in the consolidated statement of financial condition
of Encore Capital Group, Inc. as of December 31, 2015, and the related consolidated statements of income, comprehensive income,
equity, and cash flows for the year then ended. dlc and Baycorp combined constituted 8.6% of total assets as of December 31,
2015, and 2.9% and 21.3% of revenues and net income, respectively, for the year then ended. Management did not assess the
effectiveness of internal control over financial reporting of dlc and Baycorp because of the timing of the acquisitions. Our audit
of internal control over financial reporting of Encore Capital Group, Inc. also did not include an evaluation of the internal control
over financial reporting of dlc and Baycorp.
In our opinion, Encore Capital Group, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2015, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated statements of financial condition of Encore Capital Group, Inc. as of December 31, 2015 and 2014, and
the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the
period ended December 31, 2015 and our report dated February 24, 2016 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Costa Mesa, California
February 24, 2016
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Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the quarter ended December 31, 2015 that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B—Other Information
On February 19, 2016, Encore Capital Group, Inc. (the “Company”) entered into a Securities Purchase Agreement (the
“Purchase Agreement”) with certain funds affiliated with Prophet Capital Asset Management LP (“Buyer”), which provides for
the sale of 100% of the Company’s membership interests in Propel Acquisition LLC (“Propel”) to Buyer (the "Transaction").
The purchase price for the Transaction is calculated in accordance with a formula relating to the redemptive value of certain tax
liens as well as the book value of certain other assets and liabilities of Propel, and will be determined at the closing of the
Transaction. The application of the purchase price formula as of December 31, 2015 would have resulted in an enterprise value
for Propel of $344.3 million. After repayment of third party debt, the cash consideration payable to the Company would have
been $142.8 million. The principal business of Propel is the acquisition and servicing of tax liens on residential and commercial
real property.
The Purchase Agreement contains customary representations, warranties and covenants by each of the parties thereto,
including, among others, covenants by the Company to conduct the business of Propel in the ordinary course during the interim
period between execution of the Purchase Agreement and consummation of the Transaction. The obligation of the parties to
close the Transaction is subject to customary closing conditions.
The Purchase Agreement provides for limited termination rights, including, among others, by the mutual consent of the
Company and Buyer, upon certain breaches of representations, warranties, covenants or agreements, and in the event the
Transaction has not been consummated before May 31, 2016. In connection with the execution of the Purchase Agreement the
Company and Buyer entered into a transition services agreement.
There are no material relationships between the Company and Buyer or any of their respective affiliates, other than in
respect of the Purchase Agreement or the related ancillary agreements.
The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by
reference to the complete text of the Purchase Agreement, a copy of which is filed as an Exhibit 2.4 to this Annual Report on
Form 10-K and which is incorporated herein by reference.
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Item 10—Directors, Executive Officers and Corporate Governance
PART III
The information under the captions “Election of Directors,” “Executive Officers” and “Section 16(a) Beneficial
Ownership Reporting Compliance,” appearing in the 2016 Proxy Statement to be filed no later than April 30, 2016, is hereby
incorporated by reference.
Item 11—Executive Compensation
The information under the caption “Executive Compensation and Other Information,” appearing in the 2016 Proxy
Statement to be filed no later than April 30, 2016, is hereby incorporated by reference.
Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information under the captions “Security Ownership of Principal Stockholders and Management” and “Equity
Compensation Plan Information,” appearing in the 2016 Proxy Statement to be filed no later than April 30, 2016, is hereby
incorporated by reference.
Item 13—Certain Relationships and Related Transactions, and Director Independence
The information under the captions “Certain Relationships and Related Transactions” and “Election of Directors—
Corporate Governance—Director Independence,” appearing in the 2016 Proxy Statement to be filed no later than April 30,
2016, is hereby incorporated by reference.
Item 14—Principal Accountant Fees and Services
The information under the caption “Independent Registered Public Accounting Firm,” appearing in the 2016 Proxy
Statement to be filed no later than April 30, 2016, is hereby incorporated by reference.
72
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(a) Financial Statements.
Item 15—Exhibits and Financial Statement Schedules
PART IV
The following consolidated financial statements of Encore Capital Group, Inc. are filed as part of this annual report on
Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition at December 31, 2015 and 2014
Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-6
F-7
(b) Exhibits.
Number
2.1
2.2
2.3
2.4
3.1
3.2
3.3
4.1
4.2*
4.3
Description
Securities Purchase Agreement, dated May 8, 2012, by and among Propel Acquisition LLC and
McCombs Family Partners, Ltd., JHBC Holdings, LLC and Texas Tax Loans, LLC (incorporated by
reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2012)
Agreement and Plan of Merger dated March 6, 2013, by and among Encore Capital Group, Inc.,
Pinnacle Sub, Inc. and Asset Acceptance Capital Corp. (incorporated by reference to Exhibit 2.1 to
the Company’s Current Report on Form 8-K filed on March 6, 2013)
Stock Purchase Agreement, dated August 1, 2014, by and among Encore Capital Group, Inc., the
sellers party thereto, Atlantic Credit & Finance, Inc. and Richard Woolwine as the sellers’
representative (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form
10-Q filed on August 7, 2014)
Securities Purchase Agreement, dated February 19, 2016, by and among Encore Capital Group, Inc.
and certain funds affiliated with Prophet Capital Asset Management LP (filed herewith)
Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 2
to the Company’s Registration Statement on Form S-1/A filed on June 14, 1999, File No.
333-77483)
Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 4, 2002)
Bylaws, as amended through February 8, 2011 (incorporated by reference to Exhibit 3.3 to the
Company’s Annual Report on Form 10-K filed on February 14, 2011)
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.7 to the Company’s
Registration Statement on Form S-3 filed on December 21, 2009, File No. 333-163876)
Amended and Restated Senior Secured Note Purchase Agreement, dated February 10, 2011, by and
among Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life
Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential
Annuities Life Assurance Corporation (incorporated by reference to Exhibit 4.1 to the Company’s
Quarterly Report on Form 10-Q filed on April 27, 2011)
Form of 7.75% Senior Secured Note due 2017 (incorporated by reference to Exhibit 4.2 to the
Company’s Quarterly Report on Form 10-Q filed on April 27, 2011)
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Number
4.4
Description
Form of 7.375% Senior Secured Note due 2018 (incorporated by reference to Exhibit 4.3 to the
Company’s Quarterly Report on Form 10-Q filed on April 27, 2011)
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
Amendment No. 1, dated May 8, 2012, to Amended and Restated Senior Secured Note Purchase
Agreement, dated February 10, 2011, by and among Encore Capital Group, Inc., The Prudential
Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance
and Annuity Company and Prudential Annuities Life Assurance Corporation, and SunTrust Bank as
collateral agent and administrative agent (incorporated by reference to Exhibit 4.1 to the Company’s
Quarterly Report on Form 10-Q filed on May 9, 2012)
Indenture, dated November 27, 2012, between Encore Capital Group, Inc. and Union Bank, N.A., as
trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on 8-K filed on
December 3, 2012)
Indenture (including the form of the Note), dated as of June 24, 2013, by and among Encore Capital
Group, Inc., Midland Credit Management, Inc., as guarantor, and Union Bank, N.A., as trustee
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on
June 24, 2013)
Indenture (including the form of the Note), dated August 2, 2013, by and among Cabot Financial
(Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and all material
subsidiaries of Cabot Financial Limited, as guarantors, J.P. Morgan Europe Limited, as security
agent, and Citibank, N.A., London Branch as trustee (incorporated by reference to Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on August 6, 2013)
Indenture (including the form of the Note), dated September 20, 2012, by and among Cabot
Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited and all
material subsidiaries of Cabot Financial Limited, as guarantors, J.P. Morgan Europe Limited, as
security agent, and Citibank, N.A., London Branch as trustee (incorporated by reference to Exhibit
4.1 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2013)
First Supplemental Indenture, dated June 13, 2013, between Cabot Financial (Luxembourg) S.A.
and Citibank, N.A., London Branch as trustee (incorporated by reference to Exhibit 4.2 to the
Company’s Quarterly Report on Form 10-Q filed on November 7, 2013)
Indenture (including the form of the Note), dated July 25, 2013, by and among Marlin Intermediate
Holdings plc, Marlin Financial Group Limited, Marlin Financial Intermediate Limited, certain
subsidiaries of Marlin Financial Intermediate Limited, The Bank of New York Mellon, London
Branch as trustee, paying agent, transfer agent and registrar, and Royal Bank of Scotland plc, as
security agent (incorporated by reference to Exhibit 4.11 to the Company’s Annual Report on Form
10-K filed on February 25, 2014)
First Supplemental Indenture, dated February 19, 2014, by and among Marlin Intermediate Holdings
plc, Marlin Financial Intermediate II Limited, Cabot Financial Limited the guarantors party thereto
and the Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.12 to the
Company’s Annual Report on Form 10-K filed on February 25, 2014)
Indenture (including form of Note), dated as of March 11, 2014, by and between Encore Capital
Group, Inc., Midland Credit Management, Inc., as guarantor, and Union Bank, N.A., as trustee
(incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on
March 11, 2014)
Second Supplemental Indenture, dated March 14, 2014, by and among Cabot Financial
(Luxembourg) S.A., Cabot Financial Limited, Cabot Credit Management Limited, as guarantor, and
Citibank, N.A., London Branch, as trustee (filed with the Company’s Quarterly Report on Form 10-
Q filed on May 8, 2014)
Second Supplemental Indenture, dated March 14, 2014, by and among Marlin Intermediate
Holdings plc, Cabot Financial Limited, the subsidiary guarantors party thereto and the Bank of New
York Mellon, London Branch, as trustee (filed with the Company’s Quarterly Report on Form 10-Q
filed on May 8, 2014)
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Number
4.16
Description
Indenture (including form of Note), dated March 27, 2014, between Cabot Financial (Luxembourg)
S.A., Cabot Credit Management Limited, Cabot Financial Limited, the subsidiary guarantors party
thereto, J.P. Morgan Europe Limited, as security agent, Citibank, N.A., London Branch as trustee,
principal paying agent and transfer agent and Citigroup Global Markets Deutschland AG, as
registrar (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K
filed on March 28, 2014)
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
Indenture (including form of Note), dated May 6, 2014, by and between PFS Tax Lien Trust 2014-1
and Citibank, N.A., as trustee (filed with the Company’s Quarterly Report on Form 10-Q filed on
May 8, 2014)
First Supplemental Indenture, dated March 14, 2014, by and among Cabot Financial (Luxembourg)
S.A., Cabot Financial Limited, Cabot Credit Management Limited, as guarantor, and Citibank, N.A.,
London Branch, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly
Report on Form 10-Q filed on August 7, 2014)
Third Supplemental Indenture, dated May 19, 2014, by and among Cabot Financial (Luxembourg)
S.A., Cabot Financial Limited, Citibank, N.A., London Branch, as trustee, and the guarantors party
thereto (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K
filed on May 20, 2014)
Second Supplemental Indenture, dated May 19, 2014, by and among Cabot Financial (Luxembourg)
S.A., Cabot Financial Limited, Citibank, N.A., London Branch, as trustee, and the guarantors party
thereto (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K
filed on May 20, 2014)
Third Supplemental Indenture, dated May 19, 2014, by and among Marlin Intermediate Holdings
plc, Cabot Financial Limited, The Bank of New York Mellon, London Branch, as trustee, and the
guarantors party thereto (incorporated by reference to Exhibit 4.3 of the Company’s Current Report
on Form 8-K filed on May 20, 2014)
Fourth Supplemental Indenture, dated May 28, 2015, by and among Cabot Asset Purchases (Ireland)
Limited, Cabot Financial (Ireland) Limited, Cabot Financial (Luxembourg) S.A., Cabot Credit
Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed
herewith)
Third Supplemental Indenture, dated May 28, 2015, by and among Cabot Asset Purchases (Ireland)
Limited, Cabot Financial (Ireland) Limited, Cabot Financial (Luxembourg) S.A., Cabot Credit
Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed
herewith)
Fourth Supplemental Indenture, dated May 28, 2015, by and among Cabot Asset Purchases (Ireland)
Limited, Cabot Financial (Ireland) Limited, Marlin Intermediate Holdings plc, Marlin Financial
Group Limited, Marlin Financial Intermediate Limited, Marlin Financial Intermediate II Limited
and The Bank of New York Mellon, London Branch, as trustee (filed herewith)
Supplemental Indenture, dated May 28, 2015, by and among Cabot Asset Purchases (Ireland)
Limited, Cabot Financial (Ireland) Limited, Cabot Financial (Luxembourg) S.A., Cabot Credit
Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as trustee (filed
herewith)
Fifth Supplemental Indenture, dated July 28, 2015, by and among Hillesden Securities Limited,
Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited
and Citibank, N.A., London Branch, as trustee (filed herewith)
Fourth Supplemental Indenture, dated July 28, 2015, by and among Hillesden Securities Limited,
Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited
and Citibank, N.A., London Branch, as trustee (filed herewith)
Fifth Supplemental Indenture, dated July 28, 2015, by and among Hillesden Securities Limited,
Marlin Intermediate Holdings plc, Marlin Financial Group Limited, Marlin Financial Intermediate
Limited, Marlin Financial Intermediate II Limited and The Bank of New York Mellon, London
Branch, as trustee (filed herewith)
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Number
Description
4.29
4.30
4.31
4.32
4.33
4.34
10.1+
10.2+
10.3
10.4+
10.5+
10.6+
10.7
Second Supplemental Indenture, dated July 28, 2015, by and among Hillesden Securities Limited,
Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited
and Citibank, N.A., London Branch, as trustee (filed herewith)
Indenture, dated November 11, 2015, between Cabot Financial (Luxembourg) II S.A., Cabot Credit
Management Limited, Cabot Financial Limited, the subsidiary guarantors party thereto, J.P. Morgan
Europe Limited, as security agent, Citibank, N.A., London Branch as trustee, principal paying agent
and transfer agent and Citigroup Global Markets Deutschland AG, as registrar (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 13,
2015)
Sixth Supplemental Indenture, dated November 11, 2015, by and among Cabot Financial
(Luxembourg) II S.A., Cabot Financial (Treasury) Ireland, Cabot Financial (Luxembourg) S.A.,
Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as
trustee (filed herewith)
Fifth Supplemental Indenture, dated November 11, 2015, by and among Cabot Financial
(Luxembourg) II S.A., Cabot Financial (Treasury) Ireland, Cabot Financial (Luxembourg) S.A.,
Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as
trustee (filed herewith)
Sixth Supplemental Indenture, dated November 11, 2015, by and among Cabot Financial
(Luxembourg) II S.A., Cabot Financial (Treasury) Ireland, Marlin Intermediate Holdings PLC,
Marlin Financial Group Limited, Marlin Financial Intermediate Limited, Marlin Financial
Intermediate II Limited, and The Bank of New York Mellon, London Branch, as trustee (filed
herewith)
Third Supplemental Indenture, dated November 11, 2015, by and among Cabot Financial
(Luxembourg) II S.A., Cabot Financial (Treasury) Ireland, Cabot Financial (Luxembourg) S.A.,
Cabot Credit Management Limited, Cabot Financial Limited and Citibank, N.A., London Branch, as
trustee (filed herewith)
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on May 4, 2006)
Severance protection letter agreement, dated March 11, 2009, between Encore Capital Group, Inc.
and Paul Grinberg (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on March 13, 2009)
Lease Deed, dated April 22, 2009, between Midland Credit Management India Private Limited and
R.S. Technologies Private Limited, for real property located in Gurgaon, India (incorporated by
reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on April 29, 2009)
Encore Capital Group, Inc. 2005 Stock Incentive Plan, as amended and restated (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 15, 2009)
Amended Form of Stock Option Agreement for awards under the Encore Capital Group, Inc. 2005
Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report
on Form 10-Q filed on July 30, 2009)
Amended Form of Restricted Stock Unit Grant Notice and Agreement under the Encore Capital
Group, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q filed on July 30, 2009)
Lease Deed, dated October 26, 2010, between Midland Credit Management India Private Limited
and R.S. Technologies Private Limited, for real property located in Gurgaon, India (incorporated by
reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K filed on February 14,
2011)
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Number
10.8
Description
Lease Deed, dated March 4, 2011, between Midland Credit Management, Inc. and Teachers
Insurance and Annuity Association of America for the Benefit of its Separate Real Estate Account
for real property located in San Diego, California (the “San Diego Lease”) (incorporated by
reference to Exhibit 10.49 to the Company’s Annual Report on Form 10-K filed on February 9,
2012)
10.9
10.10
10.11
10.12+
10.13+
10.14+
10.15
10.16
10.17
10.18
10.19
10.20
Lease Guaranty, dated March 4, 2011, by Encore Capital Group, Inc., in favor of Teachers Insurance
and Annuity Association of America for the Benefit of its Separate Real Estate Account in
connection with the San Diego Lease (incorporated by reference to Exhibit 10.50 to the Company’s
Annual Report on Form 10-K filed on February 9, 2012)
Credit Facility Loan Agreement, dated May 8, 2012, by and among Texas Capital Bank, National
Association, as administrative agent, certain banks and Propel Financial Services, LLC
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed
on May 9, 2012)
Guaranty Agreement, dated May 8, 2012, with respect to the Credit Facility Loan Agreement, dated
May 8, 2012 (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on
Form 10-Q filed on May 9, 2012)
Form of Restricted Stock Award Grant Notice and Agreement under the Encore Capital Group, Inc.
2005 Stock Incentive Plan (Non-Executive) (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed on November 1, 2012)
Form of Restricted Stock Award Grant Notice and Agreement under the Encore Capital Group, Inc.
2005 Stock Incentive Plan (Executive) (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q filed on November 1, 2012)
Form of Non-Incentive Stock Option Agreement under the Encore Capital Group, Inc. 2005 Stock
Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q filed on November 1, 2012)
Amended and Restated Credit Agreement, dated November 5, 2012, by and among Encore Capital
Group, Inc., the several banks and other financial institutions and lenders from time to time party
thereto and listed on the signature pages thereof, and SunTrust Bank, as administrative agent and
collateral agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-K
filed on November 7, 2012)
Second Amended and Restated Pledge and Security Agreement, dated November 5, 2012, by and
among Encore Capital Group, Inc., certain of its subsidiaries and SunTrust Bank, as collateral agent
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on 8-K filed on
November 7, 2012)
Amended and Restated Guaranty, dated November 5, 2012, by and among certain subsidiaries of
Encore Capital Group, Inc. and SunTrust Bank, as administrative agent (incorporated by reference
to Exhibit 10.3 to the Company’s Current Report on 8-K filed on November 7, 2012)
Amended and Restated Intercreditor Agreement, dated November 5, 2012, by and among Encore
Capital Group, Inc., certain of its subsidiaries, SunTrust Bank, as administrative agent for the
lenders, and the holders of the Company’s 7.75% Senior Secured Notes due 2017 and 7.375%
Senior Secured Notes due 2018 (incorporated by reference to Exhibit 10.4 to the Company’s Current
Report on 8-K filed on November 7, 2012)
Amendment No. 2 to Note Purchase Agreement, dated November 5, 2012, by and among Encore
Capital Group, Inc., the holders of the Company’s 7.75% Senior Secured Notes due 2017 and
7.375% Senior Secured Notes due 2018, and SunTrust Bank, as collateral agent and administrative
agent (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on 8-K filed on
November 7, 2012)
Letter Agreement, dated November 20, 2012, between Deutsche Bank AG, London Branch and
Encore Capital Group, Inc., regarding the Base Call Option Transaction (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on 8-K filed on December 3, 2012)
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Number
10.21
Description
Letter Agreement, dated November 20, 2012, between RBC Capital Markets, LLC and Encore
Capital Group, Inc., regarding the Base Call Option Transaction (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on 8-K filed on December 3, 2012)
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33+
10.34+
10.35+
Letter Agreement, dated November 20, 2012, between Société Générale and Encore Capital Group,
Inc., regarding the Base Call Option Transaction (incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on 8-K filed on December 3, 2012)
Letter Agreement, dated November 20, 2012, between Deutsche Bank AG, London Branch and
Encore Capital Group, Inc., regarding the Base Warrant Transaction (incorporated by reference to
Exhibit 10.4 to the Company’s Current Report on 8-K filed on December 3, 2012)
Letter Agreement, dated November 20, 2012, between RBC Capital Markets, LLC and Encore
Capital Group, Inc., regarding the Base Warrant Transaction (incorporated by reference to
Exhibit 10.5 to the Company’s Current Report on 8-K filed on December 3, 2012)
Letter Agreement, dated November 20, 2012, between Société Générale and Encore Capital Group,
Inc., regarding the Base Warrant Transaction (incorporated by reference to Exhibit 10.6 to the
Company’s Current Report on 8-K filed on December 3, 2012)
Letter Agreement, dated December 6, 2012, between Deutsche Bank AG, London Branch and
Encore Capital Group, Inc., regarding the Additional Call Option Transaction (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on 8-K filed on December 12, 2012)
Letter Agreement, dated December 6, 2012, between RBC Capital Markets, LLC and Encore
Capital Group, Inc., regarding the Additional Call Option Transaction (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on 8-K filed on December 12, 2012)
Letter Agreement, dated December 6, 2012, between Société Générale and Encore Capital Group,
Inc., regarding the Additional Call Option Transaction (incorporated by reference to Exhibit 10.3 to
the Company’s Current Report on 8-K filed on December 12, 2012)
Letter Agreement, dated December 6, 2012, between Deutsche Bank AG, London Branch and
Encore Capital Group, Inc., regarding the Additional Warrant Transaction (incorporated by reference
to Exhibit 10.4 to the Company’s Current Report on 8-K filed on December 12, 2012)
Letter Agreement, dated December 6, 2012, between RBC Capital Markets, LLC and Encore
Capital Group, Inc., regarding the Additional Warrant Transaction (incorporated by reference to
Exhibit 10.5 to the Company’s Current Report on 8-K filed on December 12, 2012)
Letter Agreement, dated December 6, 2012, between Société Générale and Encore Capital Group,
Inc., regarding the Additional Warrant Transaction (incorporated by reference to Exhibit 10.6 to the
Company’s Current Report on 8-K filed on December 12, 2012)
Incremental Facility Agreement, dated December 6, 2012, among Encore Capital Group, Inc.,
Barclays Bank PLC, SunTrust Bank and each of the guarantors party thereto (incorporated by
reference to Exhibit 10.7 to the Company’s Current Report on 8-K filed on December 12, 2012)
Amendment, dated January 9, 2013, to the Severance Protection Letter Agreement dated March 11,
2009 between Encore Capital Group, Inc. and Paul Grinberg (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 15, 2013)
Letter Agreement, dated January 9, 2013, between Encore Capital Group, Inc. and Paul Grinberg
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
January 15, 2013)
Employment offer letter, dated as of April 8, 2013, by and between Encore Capital Group, Inc. and
Kenneth A. Vecchione (incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed on April 9, 2013)
78
Table of Contents
Number
10.36
Description
Amendment No. 1 and Limited Waiver, dated May 9, 2013, to Amended and Restated Credit
Agreement, dated as of November 5, 2012, by and among Encore Capital Group, Inc., the several
banks and other financial institutions and lenders from time to time party thereto and SunTrust
Bank, as administrative agent and collateral agent (incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q filed on August 8, 2013)
10.37
10.38
10.39+
10.40+
10.41+
10.42+
10.43+
10.44+
10.45+
10.46+
10.47
10.48*
10.49
Second Amended and Restated Senior Secured Note Purchase Agreement, dated May 9, 2013, by
and among Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life
Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential
Annuities Life Assurance Corporation (incorporated by reference to Exhibit 10.3 to the Company’s
Quarterly Report on Form 10-Q filed on August 8, 2013)
Amendment No. 1, dated February 7, 2013, to the Credit Facility Loan Agreement, dated May 8,
2012, by and among Propel Financial Services, LLC, certain banks and Texas Capital Bank,
National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed on August 8, 2013)
Encore Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to
Appendix A of the Company’s definitive Proxy Statement on Schedule 14A filed on April 26, 2013)
Form of Non-Incentive Stock Option Agreement under the Encore Capital Group, Inc. 2013
Incentive Compensation Plan (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly
Report on Form 10-Q filed on August 8, 2013)
Form of Restricted Stock Award Grant Notice and Agreement (Executive) under the Encore Capital
Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.6 to the
Company’s Quarterly Report on Form 10-Q filed on August 8, 2013)
Form of Restricted Stock Award Grant Notice and Agreement (Non-Executive) under the Encore
Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.7 to
the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013)
Form of Restricted Stock Unit Grant Notice and Agreement (Executive) under the Encore Capital
Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.8 to the
Company’s Quarterly Report on Form 10-Q filed on August 8, 2013)
Form of Performance Stock Grant Notice and Agreement under the Encore Capital Group, Inc. 2013
Incentive Compensation Plan (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly
Report on Form 10-Q filed on August 8, 2013)
Form of Performance Stock Unit Grant Notice and Agreement under the Encore Capital Group, Inc.
2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.10 to the Company’s
Quarterly Report on Form 10-Q filed on August 8, 2013)
Form of Restricted Stock Unit Grant Notice and Agreement (Non-Employee Director) under the
Encore Capital Group, Inc. 2013 Incentive Compensation Plan (incorporated by reference to
Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013)
Incremental Facility Agreement, dated May 9, 2013, among Encore Capital Group, Inc., each of the
banks and guarantors party thereto and SunTrust Bank, as administrative agent, issuing bank and
swingline lender (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on
Form 10-Q filed on August 8, 2013)
Tax Lien Loan and Security Agreement, dated May 15, 2013, by and among PFS Financial 1, LLC,
PFS Finance Holdings, LLC, the Borrowers from time to time party thereto and Wells Fargo Bank,
N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on May 20, 2013)
Guaranty and Security Agreement, dated May 15, 2013, by PFS Finance Holdings, LLC, in favor of
Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.14 to the Company’s Quarterly
Report on Form 10-Q filed on August 8, 2013)
79
Table of Contents
Number
10.50
Description
Limited Guarantee, dated May 15, 2013, by Encore Capital Group, Inc., in favor of Wells Fargo
Bank, N.A. (incorporated by reference to Exhibit 10.15 to the Company’s Quarterly Report on
Form 10-Q filed on August 8, 2013)
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
Securities Purchase Agreement, dated May 29, 2013, by and between Encore Capital Group, Inc.
and JCF III Europe S.À R.L. (incorporated by reference to Exhibit 10.16 to the Company’s
Quarterly Report on Form 10-Q filed on August 8, 2013)
Amendment No. 2, dated May 29, 2013, to Amended and Restated Credit Agreement, dated
November 5, 2012, by and among Encore Capital Group, Inc., the guarantors identified therein, the
lenders party thereto and SunTrust Bank, as administrative agent and collateral agent (incorporated
by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q filed on August 8,
2013)
Amendment No. 1, dated May 29, 2013, to Second Amended and Restated Senior Secured Note
Purchase Agreement, dated May 9, 2013, by and between Encore Capital Group, Inc., The
Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement
Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations
(incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q filed
on August 8, 2013)
Letter Agreement, dated June 18, 2013, between Barclays Bank PLC and Encore Capital Group,
Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on June 24, 2013)
Letter Agreement, dated June 18, 2013, between Credit Suisse International and Encore Capital
Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on June 24, 2013)
Letter Agreement, dated June 18, 2013, between Morgan Stanley & Co. International plc and
Encore Capital Group, Inc., regarding the Capped Call Transaction (incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 24, 2013)
Letter Agreement, dated June 18, 2013, between RBC Capital Markets, LLC and Encore Capital
Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed on June 24, 2013)
Amendment, dated July 1, 2013, to Securities Purchase Agreement, dated May 29, 2013, by and
between Encore Capital Group, Inc. and JCF III Europe S.À R.L. (incorporated by reference to
Exhibit 10.23 to the Company’s Quarterly Report on Form 10-Q filed on August 8, 2013)
10.59*
Investors Agreement, dated July 1, 2013, by and between Encore Europe Holdings S.À R.L., JCF III
Europe S.À R.L. and the other parties thereto (incorporated by reference to Exhibit 10.24 to the
Company’s Quarterly Report on Form 10-Q/A filed on December 20, 2013)
10.60
10.61
10.62
10.63
Letter Agreement, dated July 18, 2013, between Barclays Bank PLC and Encore Capital Group,
Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on July 23, 2013)
Letter Agreement, dated July 18, 2013, between Credit Suisse International and Encore Capital
Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on July 23, 2013)
Letter Agreement, dated July 18, 2013, between Morgan Stanley & Co. International plc and Encore
Capital Group, Inc., regarding the Capped Call Transaction (incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 23, 2013)
Letter Agreement, dated July 18, 2013, between RBC Capital Markets, LLC and Encore Capital
Group, Inc., regarding the Capped Call Transaction (incorporated by reference to Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed on July 23, 2013)
80
Table of Contents
Number
10.64
Description
Amended and Restated Senior Facilities Agreement, dated June 28, 2013, by and among Cabot
Financial (UK) Limited, the several guarantors, banks and other financial institutions and lenders
from time to time party thereto and J.P. Morgan Europe Limited as Agent and Security Agent
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed
on November 7, 2013)
10.65
10.66
10.67
10.68
10.69
10.70+
10.71
10.72
10.73+
10.74+
10.75
10.76
Second Amendment to Securities Purchase Agreement, dated September 25, 2013, by and between
Encore Europe Holdings S.À R.L. and JCF III Europe S.À R.L. (incorporated by reference to
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 7, 2013)
Amendment to Letter Agreement, dated December 16, 2013, between Deutsche Bank AG, London
Branch and Encore Capital Group, Inc., regarding the Warrant Transactions (incorporated by
reference to Exhibit 10.77 to the Company’s Annual Report on Form 10-K filed February 25, 2014)
Amendment to Letter Agreement, dated December 16, 2013, between RBC Capital Markets, LLC
and Encore Capital Group, Inc., regarding the Warrant Transactions (incorporated by reference to
Exhibit 10.78 to the Company’s Annual Report on Form 10-K filed February 25, 2014)
Amendment to Letter Agreement, dated December 16, 2013, between Société Générale and Encore
Capital Group, Inc., regarding the Warrant Transactions (incorporated by reference to Exhibit 10.79
to the Company’s Annual Report on Form 10-K filed February 25, 2014)
Amendment No. 2, dated December 27, 2013, to the Credit Facility Loan Agreement, dated May 8,
2012, by and among Propel Financial Services, LLC, certain banks and Texas Capital Bank,
National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on January 2, 2014)
Summary description of director compensation (incorporated by reference to the Company’s Current
Report on Form 8-K filed on February 24, 2014)
Share Sale and Purchase Agreement, dated February 7, 2014, by and among Cabot Financial
Holdings Group Limited, certain funds managed by Duke Street and certain individuals, including
certain executive management of Marlin Financial Group Limited (incorporated by reference to
Exhibit 10.82 to the Company’s Annual Report on Form 10-K filed on February 25, 2014)
Senior Secured Bridge Facilities Agreement, dated February 8, 2014, by and among Cabot Financial
Holdings Group Limited, J.P. Morgan Limited, Deutsche Bank, AG, London Branch, Lloyds Bank
plc and UBS Limited as lead arrangers and J.P. Morgan Europe Limited as agent security agent
(incorporated by reference to Exhibit 10.83 to the Company’s Annual Report on Form 10-K filed on
February 25, 2014)
First Amendment to Encore Capital Group, Inc. 2013 Incentive Compensation Plan, dated
February 20, 2014 (incorporated by reference to Exhibit 10.84 to the Company’s Annual Report on
Form 10-K filed on February 25, 2014)
Letter Agreement, dated February 24, 2014, between Encore Capital Group, Inc. and Paul Grinberg
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
February 24, 2014)
Second Amended and Restated Credit Agreement, dated February 25, 2014, by and among Encore
Capital Group, Inc., the several banks and other financial institutions and lenders from time to time
party thereto and listed on the signature pages thereof, and SunTrust Bank, as administrative agent
and collateral agent (incorporated by reference to Exhibit 10.86 to the Company’s Annual Report on
Form 10-K filed on February 25, 2014)
Amendment No. 2, dated February 25, 2014, to Second Amended and Restated Senior Secured Note
Purchase Agreement, dated May 9, 2013, by and between Encore Capital Group, Inc., The
Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement
Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations
(incorporated by reference to Exhibit 10.87 to the Company’s Annual Report on Form 10-K filed on
February 25, 2014)
81
Table of Contents
Number
10.77
Description
Amendment No. 1, dated February 25, 2014, to Amended and Restated Guaranty, dated November
5, 2012, by and among certain subsidiaries of Encore Capital Group, Inc. and SunTrust Bank, as
administrative agent (incorporated by reference to Exhibit 10.88 to the Company’s Annual Report
on Form 10-K filed on February 25, 2014)
10.78
10.79
10.80
10.81
10.82
10.83
10.84
10.85
10.86+
10.87+
10.88+
10.89+
10.90
Letter Agreement, dated March 5, 2014, between Citibank, N.A. and Encore Capital Group, Inc.,
regarding the Base Capped Call Transaction (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on March 11, 2014)
Letter Agreement, dated March 5, 2014, between Credit Suisse International and Encore Capital
Group, Inc., regarding the Base Capped Call Transaction (incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K filed on March 11, 2014)
Letter Agreement, dated March 5, 2014, between Morgan Stanley & Co. LLC and Encore Capital
Group, Inc., regarding the Base Capped Call Transaction (incorporated by reference to Exhibit 10.3
to the Company’s Current Report on Form 8-K filed on March 11, 2014)
Letter Agreement, dated March 5, 2014, between Société Générale and Encore Capital Group, Inc.,
regarding the Base Capped Call Transaction (incorporated by reference to Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed on March 11, 2014)
Letter Agreement, dated March 6, 2014, between Citibank, N.A. and Encore Capital Group, Inc.,
regarding the Additional Capped Call Transaction (incorporated by reference to Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed on March 11, 2014)
Letter Agreement, dated March 6, 2014, between Credit Suisse International and Encore Capital
Group, Inc., regarding the Additional Capped Call Transaction (incorporated by reference to Exhibit
10.6 to the Company’s Current Report on Form 8-K filed on March 11, 2014)
Letter Agreement, dated March 6, 2014, between Morgan Stanley & Co. LLC and Encore Capital
Group, Inc., regarding the Additional Capped Call Transaction (incorporated by reference to Exhibit
10.7 to the Company’s Current Report on Form 8-K filed on March 11, 2014)
Letter Agreement, dated March 6, 2014, between Société Générale and Encore Capital Group, Inc.,
regarding the Additional Capped Call Transaction (incorporated by reference to Exhibit 10.8 to the
Company’s Current Report on Form 8-K filed on March 11, 2014)
Restricted Stock Award Grant Notice and Agreement, dated March 7, 2014, between Encore Capital
Group, Inc. and Paul Grinberg (incorporated by reference to Exhibit 10.9 to the Company’s
Quarterly Report on Form 10-Q filed on May 8, 2014)
Restricted Stock Award Grant Notice and Agreement, dated April 15, 2013, between Encore Capital
Group, Inc. and Kenneth A. Vecchione (incorporated by reference to Exhibit 10.10 to the
Company’s Quarterly Report on Form 10-Q filed on May 8, 2014)
Restricted Stock Award Grant Notice and Agreement, dated April 15, 2013, between Encore Capital
Group, Inc. and Kenneth A. Vecchione (incorporated by reference to Exhibit 10.11 to the
Company’s Quarterly Report on Form 10-Q filed on May 8, 2014)
Performance Stock Grant Notice and Agreement, dated June 4, 2013, between Encore Capital
Group, Inc. and Kenneth A. Vecchione (incorporated by reference to Exhibit 10.12 to the
Company’s Quarterly Report on Form 10-Q filed on May 8, 2014)
Amendment No. 1 to Tax Lien Loan and Security Agreement, dated May 6, 2014, by and among
PFS Financial 1, LLC, PFS Finance Holdings, LLC, the Borrowers from time to time party thereto
and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.13 to the Company’s Quarterly
Report on Form 10-Q filed on May 8, 2014)
82
Table of Contents
Number
10.91
Description
Amendment No. 1 to Second Amended and Restated Credit Agreement, dated August 1, 2014, by
and among Encore Capital Group, Inc., the several banks and other financial institutions and lenders
from time to time party thereto and listed on the signature pages thereof, and SunTrust Bank, as
administrative agent and collateral agent (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed on August 7, 2014)
10.92
10.93+
10.94+
10.95+
10.96
10.97
10.98*
10.99
10.100
10.101
10.102
Amendment No. 3, dated August 1, 2014, to Second Amended and Restated Senior Secured Note
Purchase Agreement, dated May 9, 2013, by and between Encore Capital Group, Inc., The
Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement
Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed
on August 7, 2014)
Form of Performance Award Agreement (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed on November 6, 2014)
Encore Capital Group, Inc. Executive Separation Plan (incorporated by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q filed on November 6, 2014)
Employment offer letter dated October 9, 2014 by and between Encore Capital Group, Inc. and
Jonathan Clark (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on February 26, 2015)
Amendment Agreement, dated February 5, 2015, for Cabot Financial (UK) Limited, as Parent, with
J.P. Morgan Europe Limited, as Agent, relating to a Senior Facilities Agreement originally dated
September 20, 2012 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q filed on May 7, 2015)
Amendment No. 1 to Limited Guarantee, dated April 3, 2015, by Encore Capital Group, Inc., in
favor of Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q filed on August 10, 2015)
Amendment No. 2 to Tax Lien Loan and Security Agreement, dated April 3, 2015, by and among
PFS Financial 1, LLC, PFS Finance Holdings, LLC, the Borrowers from time to time party thereto
and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q filed on August 10, 2015)
Credit Facility Loan Agreement, dated May 8, 2015, by and among Texas Capital Bank, National
Association, as administrative agent, certain banks and Propel Financial Services, LLC
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed
on August 10, 2015)
Amendment No. 2 to Second Amended and Restated Credit Agreement, dated July 9, 2015, by and
among Encore Capital Group, Inc., the several banks and other financial institutions and lenders
from time to time party thereto and listed on the signature pages thereof, and SunTrust Bank, as
administrative agent and collateral agent (incorporated by reference to Exhibit 10.4 to the
Company’s Quarterly Report on Form 10-Q filed on August 10, 2015)
Amendment No. 4, dated July 9, 2015, to Second Amended and Restated Senior Secured Note
Purchase Agreement, dated May 9, 2013, by and between Encore Capital Group, Inc., The
Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement
Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations
(incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed
on August 10, 2015)
Amendment No. 3 to Tax Lien Loan and Security Agreement, dated October 26, 2015, by and
among PFS Financial 1, LLC, PFS Financial 2, LLC, PFS Finance Holdings, LLC, the Borrowers
from time to time party thereto and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit
10.3 to the Company’s Quarterly Report on Form 10-Q filed on November 5, 2015)
83
Table of Contents
Number
10.103
Description
Amended and Restated Senior Facilities Agreement, dated November 11, 2015, by and among
Cabot Financial (UK) Limited, the several guarantors, banks and other financial institutions and
lenders from time to time party thereto and J.P. Morgan Europe Limited as Agent and Security
Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on November 13, 2015)
10.104
Incremental Facility Agreement, dated November 19, 2015, by and among Encore Capital Group,
Inc., Credit Suisse AG, Northwest Bank, SunTrust Bank, and each of the guarantors, party thereto
(filed herewith)
21
23
31.1
31.2
32.1
List of Subsidiaries (filed herewith)
Consent of Independent Registered Public Accounting Firm, BDO USA, LLP, dated February 24,
2016 (filed herewith)
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934 (filed herewith)
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the
Securities Exchange Act of 1934 (filed herewith)
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS
XBRL Instance Document (filed herewith)
101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
*
+
The asterisk denotes that confidential portions of this exhibit have been omitted in reliance on Rule
24b-2 of the Securities Exchange Act of 1934. The confidential portions have been submitted
separately to the Securities and Exchange Commission.
Management contract or compensatory plan or arrangement.
84
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENCORE CAPITAL GROUP, INC.,
a Delaware corporation
By:
/s/ KENNETH A. VECCHIONE
Kenneth A. Vecchione
President and Chief Executive Officer
Date: February 24, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Name and Signature
Title
Date
/s/ KENNETH A. VECCHIONE
Kenneth A. Vecchione
President and Chief Executive
Officer and Director
(Principal Executive Officer)
February 24, 2016
/s/ JONATHAN C. CLARK
Jonathan C. Clark
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
February 24, 2016
February 24, 2016
February 24, 2016
February 24, 2016
February 24, 2016
February 24, 2016
February 24, 2016
February 24, 2016
February 24, 2016
/s/ ASHWINI GUPTA
Ashwini Gupta
/s/ WENDY HANNAM
Wendy Hannam
/s/ WILLEM MESDAG
Willem Mesdag
/s/ MICHAEL P. MONACO
Michael P. Monaco
/s/ LAURA OLLE
Laura Olle
/s/ FRANCIS E. QUINLAN
Francis E. Quinlan
/s/ NORMAN R. SORENSEN
Norman R. Sorensen
/s/ RICHARD J. SREDNICKI
Richard J. Srednicki
Director
Director
Director
Director
Director
Director
Director
Director
85
Table of Contents
ENCORE CAPITAL GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition at December 31, 2015 and 2014
Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-6
F-7
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Encore Capital Group, Inc.
San Diego, California
We have audited the accompanying consolidated statements of financial condition of Encore Capital Group, Inc.
(“Company”) as of December 31, 2015 and 2014 and the related consolidated statements of income, comprehensive income,
equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Encore Capital Group, Inc. at December 31, 2015 and 2014, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the
United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Encore Capital Group, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and our report dated February 24, 2016, expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Costa Mesa, California
February 24, 2016
F-1
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
Assets
Cash and cash equivalents
Investment in receivable portfolios, net
Receivables secured by property tax liens, net
Property and equipment, net
Deferred court costs, net
Other assets
Goodwill
Total assets
Liabilities and equity
Liabilities:
Accounts payable and accrued liabilities
Debt
Other liabilities
Total liabilities
Commitments and contingencies
Redeemable noncontrolling interest
Redeemable equity component of convertible senior notes
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, 25,288 shares and
25,794 shares issued and outstanding as of December 31, 2015 and
December 31, 2014, respectively
Additional paid-in capital
Accumulated earnings
Accumulated other comprehensive loss
Total Encore Capital Group, Inc. stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities, redeemable equity and equity
December 31,
2015
December 31,
2014
$
$
$
153,593
2,440,669
306,380
73,504
75,239
245,620
924,847
4,219,852
294,243
3,216,572
60,549
3,571,364
38,624
6,126
124,163
2,143,560
259,432
66,969
60,412
197,666
897,933
3,750,135
231,967
2,773,554
79,675
3,085,196
28,885
9,073
—
—
253
110,533
543,489
(57,822)
596,453
7,285
603,738
4,219,852
$
258
125,310
498,354
(922)
623,000
3,981
626,981
3,750,135
$
$
$
$
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. See
Note 10, “Variable Interest Entities” for additional information on the Company’s VIEs.
Assets
Cash and cash equivalents
Investment in receivable portfolios, net
Receivables secured by property tax liens, net
Property and equipment, net
Deferred court costs, net
Other assets
Goodwill
Liabilities
Accounts payable and accrued liabilities
Debt
Other liabilities
December 31,
2015
December 31,
2014
$
$
$
$
57,420
1,197,513
81,149
19,767
33,296
60,640
706,812
142,486
1,747,883
839
44,996
993,462
108,535
15,957
17,317
80,264
671,434
137,201
1,556,956
8,724
See accompanying notes to consolidated financial statements
F-2
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
Year Ended December 31,
2015
2014
2013
Revenues
Revenue from receivable portfolios, net
Other revenues
Net interest income
Total revenues
Operating expenses
Salaries and employee benefits
Cost of legal collections
Other operating expenses
Collection agency commissions
General and administrative expenses
Depreciation and amortization
Goodwill impairment
Total operating expenses
Income from operations
Other (expense) income
Interest expense
Other income (expense)
Total other expense
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Net (income) loss attributable to noncontrolling interest
Net income attributable to Encore Capital Group, Inc. stockholders
Amounts attributable to Encore Capital Group, Inc.:
Income from continuing operations
Loss income from discontinued operations, net of tax
Net income
Earnings (loss) per share attributable to Encore Capital Group,
Inc.:
Basic earnings (loss) per share from:
Continuing operations
Discontinued operations
Net basic earnings per share
Diluted earnings (loss) per share from:
Continuing operations
Discontinued operations
Net diluted earnings per share
Weighted average shares outstanding:
Basic
Diluted
$
$
$
$
$
$
$
$
$
$
$
1,072,436
60,696
28,440
1,161,572
$
992,832
51,988
27,969
1,072,789
270,334
229,847
98,182
37,858
196,827
33,945
49,277
916,270
245,302
(186,556)
2,235
(184,321)
60,981
(13,597)
47,384
—
47,384
(2,249)
45,135
45,135
—
45,135
$
$
$
1.75
$
— $
$
1.75
1.69
$
— $
$
1.69
246,247
205,661
93,859
33,343
146,286
27,949
—
753,345
319,444
(166,942)
113
(166,829)
152,615
(52,725)
99,890
(1,612)
98,278
5,448
103,726
105,338
(1,612)
103,726
$
$
$
4.07
$
(0.06) $
$
4.01
3.83
$
(0.06) $
$
3.77
744,870
12,588
15,906
773,364
165,040
186,959
66,649
33,097
109,713
13,547
—
575,005
198,359
(73,269)
(4,222)
(77,491)
120,868
(45,388)
75,480
(1,740)
73,740
1,559
75,299
77,039
(1,740)
75,299
3.12
(0.07)
3.05
2.94
(0.07)
2.87
25,722
26,647
25,853
27,495
24,659
26,204
See accompanying notes to consolidated financial statements
F-3
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive Income
(In Thousands)
Net income
Other comprehensive (loss) gain, net of tax:
Unrealized (loss) gain on derivative instruments
Unrealized (loss) gain on foreign currency translation
Other comprehensive (loss) gain, net of tax
Comprehensive (loss) income
Comprehensive (gain) loss attributable to noncontrolling interest:
Net (income) loss
Unrealized loss (gain) on foreign currency translation
Comprehensive loss attributable to noncontrolling interests
Comprehensive (loss) income attributable to Encore Capital Group,
Inc. stockholders
Year Ended December 31,
2015
2014
2013
$
47,384
$
98,278
$
73,740
(1,678)
(55,222)
(56,900)
(9,516)
(2,249)
3,390
1,141
2,340
(8,457)
(6,117)
92,161
5,448
3,469
8,917
(817)
7,786
6,969
80,709
1,559
(1,398)
161
$
(8,375) $
101,078
$
80,870
See accompanying notes to consolidated financial statements
F-4
Table of Contents
Balance at December 31, 2012
Net income (loss)
Other comprehensive gain, net of tax
Initial noncontrolling interests related to business
combinations
Change in fair value of redeemable noncontrolling
interests
Exercise of stock options and issuance of share-based
awards, net of shares withheld for employee taxes
Repurchase of common stock
Issuance of common stock
Stock-based compensation
Tax benefit related to stock-based compensation
Issuance of convertible notes, net of hedge
transactions
Balance at December 31, 2013
Net income (loss)
Other comprehensive (loss) gain, net of tax
Initial noncontrolling interests related to business
combinations
Change in fair value of redeemable noncontrolling
interests
Exercise of stock options and issuance of share-based
awards, net of shares withheld for employee taxes
Repurchase of common stock
Stock-based compensation
Tax benefit related to stock-based compensation
Issuance of convertible notes, net of hedge
transactions
Reclassification of redeemable equity component of
convertible senior notes
Balance at December 31, 2014
Net income
Other comprehensive loss, net of tax
Initial noncontrolling interests related to business
combinations
Change in fair value of redeemable noncontrolling
interests
Exercise of stock options and issuance of share-based
awards, net of shares withheld for employee taxes
Repurchase of common stock
Stock-based compensation
Tax benefit related to stock-based compensation
Reclassification of redeemable equity component of
convertible senior notes
Other
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Equity
(In Thousands)
Common Stock Additional
Shares
Par
Paid-In
Capital
Accumulated
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Noncontrolling
Interests
Total
Equity
23,191
$ 232
$
88,029
$
319,329
$
(1,774) $
— $ 405,816
—
—
—
—
618
(24)
1,672
—
—
—
25,457
—
—
—
—
737
(400)
—
—
—
—
25,794
—
—
—
—
333
(839)
—
—
—
—
—
—
—
—
6
—
17
—
—
—
—
—
(1,167)
(4,973)
(729)
62,335
12,649
5,420
—
255
10,255
171,819
—
—
—
—
7
(4)
—
—
—
—
—
—
(5,730)
(15,496)
(16,811)
17,181
11,580
(28,160)
—
258
(9,073)
125,310
—
—
—
—
3
(8)
—
—
—
—
—
—
—
(2,349)
(5,321)
(33,177)
22,008
1,251
2,948
(137)
75,299
—
—
—
—
—
—
—
—
—
394,628
103,726
—
—
—
—
—
—
—
—
—
498,354
45,135
—
—
—
—
—
—
—
—
—
—
6,969
—
—
—
—
—
—
—
—
5,195
—
(6,117)
—
—
—
—
—
—
—
—
(922)
—
(56,900)
—
—
—
—
—
—
—
—
(392)
351
74,907
7,320
4,051
4,051
—
—
—
—
—
—
—
(1,167)
(4,967)
(729)
62,352
12,649
5,420
10,255
4,010
575,907
(935)
102,791
14
(6,103)
892
892
—
—
—
—
—
—
—
(5,730)
(15,489)
(16,815)
17,181
11,580
(28,160)
(9,073)
3,981
626,981
878
—
46,013
(56,900)
2,426
2,426
—
—
—
—
—
—
—
(2,349)
(5,318)
(33,185)
22,008
1,251
2,948
(137)
Balance at December 31, 2015
25,288
$ 253
$ 110,533
$
543,489
$
(57,822) $
7,285
$ 603,738
See accompanying notes to consolidated financial statements
F-5
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
(In Thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2015
Year Ended December 31,
2014
2013
$
47,384
$
98,278
$
73,740
Depreciation and amortization
Goodwill impairment
Non-cash interest expense
Stock-based compensation expense
Recognized loss on termination of derivative contract
Deferred income taxes
Excess tax benefit from stock-based payment arrangements
Reversal of allowances on receivable portfolios, net
Changes in operating assets and liabilities
Deferred court costs and other assets
Prepaid income tax and income taxes payable
Accounts payable, accrued liabilities and other liabilities
Net cash provided by operating activities
Investing activities:
Cash paid for acquisitions, net of cash acquired
Purchases of receivable portfolios, net of put-backs
Collections applied to investment in receivable portfolios, net
Originations and purchases of receivables secured by tax liens
Collections applied to receivables secured by tax liens
Purchases of property and equipment
Other, net
Net cash used in investing activities
Financing activities:
Payment of loan costs
Proceeds from credit facilities
Repayment of credit facilities
Proceeds from senior secured notes
Repayment of senior secured notes
Proceeds from issuance of convertible senior notes
Proceeds from issuance of securitized notes
Repayment of securitized notes
Repayment of preferred equity certificates, net
Purchases of convertible hedge instruments
Repurchase of common stock
Taxes paid related to net share settlement of equity awards
Excess tax benefit from stock-based payment arrangements
Other, net
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes, net
Supplemental schedule of non-cash investing and financing activities:
Fixed assets acquired through capital lease
33,945
49,277
37,745
22,008
—
(32,369)
(1,724)
(6,763)
(41,835)
(34,887)
41,644
114,425
(276,575)
(749,760)
635,899
(219,722)
164,052
(28,647)
2,044
(472,709)
(17,995)
1,073,941
(891,804)
332,693
(15,000)
—
—
(44,251)
—
—
(33,185)
(6,289)
1,724
2,011
401,845
43,561
(14,131)
124,163
153,593
151,946
84,101
$
$
27,949
—
29,380
17,181
—
(48,078)
(11,928)
(17,407)
(15,532)
22,180
9,521
111,544
(495,838)
(862,997)
633,960
(124,533)
122,638
(23,238)
(5,189)
(755,197)
(20,101)
1,343,417
(1,184,244)
288,645
(15,000)
161,000
134,000
(29,753)
(693)
(33,576)
(16,815)
(20,324)
11,928
7,839
626,323
(17,330)
15,280
126,213
124,163
95,034
69,948
$
$
13,547
—
18,136
12,649
3,630
(28,188)
(5,609)
(12,193)
(11,697)
(468)
11,228
74,775
(449,024)
(249,562)
546,366
(116,960)
70,573
(13,423)
(5,210)
(217,240)
(17,207)
659,940
(630,163)
151,670
(13,750)
172,500
—
—
(39,743)
(32,008)
(729)
(9,591)
5,609
(548)
245,980
103,515
5,188
17,510
126,213
50,181
66,759
2,220
$
8,341
$
5,011
$
$
$
See accompanying notes to consolidated financial statements
F-6
Table of Contents
ENCORE CAPITAL GROUP, INC.
Notes to Consolidated Financial Statements
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies
Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an
international specialty finance company providing debt recovery solutions for consumers and property owners across a broad
range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value
and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted
receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer
finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include
receivables subject to bankruptcy proceedings. In addition, the Company assists property owners who are delinquent on their
property taxes by structuring affordable monthly payment plans and purchases delinquent tax liens directly from taxing
authorities.
Basis of Consolidation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in
the United States of America (“GAAP”), and reflect the accounts and operations of the Company and those of its subsidiaries in
which the Company has a controlling financial interest. The Company also consolidates VIEs, for which it is the primary
beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the
entity’s economic performance and (b) either the obligation to absorb losses or the right to receive benefits. Refer to Note 10,
“Variable Interest Entities” for further details. All intercompany transactions and balances have been eliminated in
consolidation.
Translation of Foreign Currencies
The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the
functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates,
and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The
resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are
translated at historical rates, except for the change in retained earnings during the year which is the result of the income
statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent
measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation
adjustments and recorded within other comprehensive income or loss. Transaction gains and losses are included in other
income or expense.
Reclassifications
Certain immaterial reclassifications have been made to the consolidated financial statements to conform to the current
year’s presentation.
Recent Accounting Pronouncements
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate
whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether
limited partnerships and similar legal entities are VIEs or voting interest entities; (2) Eliminate the presumption that a general
partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved
with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from
consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in
accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered
money market funds. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15,
2015. This standard is not expected to have a significant impact to the Company’s financial statements.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. This ASU
requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability, consistent with debt discounts. This ASU is effective beginning January 1, 2016,
with early adoption permitted, and shall be applied retrospectively. Upon adoption of this ASU in the first quarter of 2016, the
Company will change the classification of its debt issuance costs from other assets to a reduction from the debt liability.
F-7
Table of Contents
In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period
Adjustments” (“ASU 2015-16”). ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account
for measurement-period adjustments retrospectively. ASU 2015-16 is effective for public business entities for fiscal years
beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for any interim
and annual financial statements that have not yet been issued. ASU 2015-16 is applied prospectively to adjustments to
provisional amounts that occur after the effective date, i.e., ASU 2015-16 applies to open measurement periods, regardless of
the acquisition date. The Company early adopted this standard in the third quarter of 2015. The adoption of this guidance did
not have a material impact on its consolidated financial statements and footnotes disclosures.
Use of Estimates
The preparation of financial statements, in conformity with GAAP, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could materially differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the date of
purchase. The Company invests its excess cash in bank deposits and money market instruments, which are afforded the highest
ratings by nationally recognized rating firms. The carrying amounts reported in the consolidated statements of financial
condition for cash and cash equivalents approximate their fair value.
Investment in Receivable Portfolios
In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality,
discrete receivable portfolio purchases during the same fiscal quarter are aggregated into pools based on common risk
characteristics. Common risk characteristics include risk ratings (e.g. FICO or similar scores), financial asset type, collateral
type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped
into credit card and telecom, purchased consumer bankruptcy, and mortgage portfolios. We further group these static pools by
geographic region or location. Once a static pool is established, the portfolios are permanently assigned to the pool. The
discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not
recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable
balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios
includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.
In compliance with the authoritative guidance, the Company accounts for its investments in consumer receivable
portfolios using either the interest method or the cost recovery method. The interest method applies an internal rate of return
(“IRR”) to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is an increase in
subsequent expected cash flows. Subsequent increases in expected cash flows are generally recognized prospectively through
an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the
IRR, but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of income
as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the
consolidated statements of financial condition.
The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition
of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios and for provision for loss
or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost
basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances.
If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company
accounts for such portfolios on the cost recovery method (“Cost Recovery Portfolios”). The accounts in these portfolios have
different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary
information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios.
See Note 5, “Investment in Receivable Portfolios, Net” for further discussion of investment in receivable portfolios.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the value assigned to the tangible and identifiable intangible assets,
liabilities assumed, and noncontrolling interests of businesses acquired. Acquired intangible assets other than goodwill are
amortized over their useful lives unless the lives are determined to be indefinite. In accordance with authoritative guidance on
goodwill and other intangible assets, goodwill and other indefinite-lived intangible assets are tested at the reporting unit level
annually for impairment and in interim periods if certain events occur indicating the fair value of a reporting unit may be below
F-8
Table of Contents
its carrying value. See Note 15, “Goodwill and Identifiable Intangible Assets” for further discussion of the Company’s goodwill
and other intangible assets.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation and amortization. The provision for
depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as
follows:
Fixed Asset Category
Leasehold improvements
Furniture, fixtures and equipment
Computer hardware and software
Estimated Useful Life
Lesser of lease term, including periods covered
by renewal options, or useful life
5 to 10 years
3 to 5 years
Maintenance and repairs are charged to expense in the year incurred. Expenditures for major renewals that extend the
useful lives of fixed assets are capitalized and depreciated over the useful lives of such assets.
Deferred Court Costs
The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its
internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has
sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections the
Company is required to pay certain upfront costs to the applicable courts which are recoverable from the consumer (“Deferred
Court Costs”). The Company capitalizes Deferred Court Costs in its consolidated financial statements and provides a reserve
for those costs that it believes will ultimately be uncollectible. The Company determines the reserve based on its analysis of
court costs that have been advanced and those that have been recovered. The Company writes off any Deferred Court Cost not
recovered within five years of placement. Collections received from debtors are first applied to related court costs with the
balance applied to the debtors’ account. See Note 6, “Deferred Court Costs, Net” for further discussion.
Receivables Secured by Property Tax Liens, Net
The Company’s wholly-owned subsidiary Propel Acquisition, LLC and its subsidiaries and affiliates (collectively,
“Propel”), acquires and services residential and commercial tax liens on real property. Propel’s receivables are secured by
property tax liens. Repayment of the property tax liens is generally dependent on the property owner but can also come through
payments from other lien holders or, in less than 0.5% of cases, from foreclosure on the properties. Propel records receivables
secured by property tax liens at their outstanding principal balances, adjusted for, if any, charge-offs, allowance for losses,
deferred fees or costs, and unamortized premiums or discounts. Interest income is reported on the interest method and includes
amortization of net deferred fees and costs over the term of the agreements. Propel accrues interest on all past due receivables
secured by tax liens as the receivables are collateralized by tax liens that are in a priority position over most other liens on the
properties. If there is doubt about the ultimate collection of the accrued interest on a specific portfolio, it would be placed on
non-accrual basis and, at that time, all accrued interest would be reversed. Receivables secured by property tax liens that have
been placed on a non-accrual basis were $0.7 million and zero as of December 31, 2015 and 2014, respectively. The typical
redemption period for receivables secured by property tax liens is less than 84 months.
On May 6, 2014, Propel, through its subsidiaries, completed the securitization of a pool of approximately $141.5
million in receivables secured by property tax liens on real property located in the State of Texas. In connection with the
securitization, investors purchased approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized
by these property tax liens. The special purpose entity that is used for the securitization is consolidated by the Company as a
VIE. The receivables recognized as a result of consolidating this VIE do not represent assets that can be used to satisfy claims
against the Company’s general assets. At December 31, 2015, the Company had approximately $306.4 million in receivables
secured by property tax liens, of which $81.1 million was carried at the VIE. See Note 10, “Variable Interest Entity” for further
discussion.
Income Taxes
The Company uses the liability method of accounting for income taxes in accordance with the authoritative guidance for
Income Taxes. When the Company prepares its consolidated financial statements, it estimates income taxes based on the
various jurisdictions and countries where it conducts business. This requires the Company to estimate current tax exposure and
to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. Deferred
income taxes are recognized based on the differences between the financial statement and income tax bases of assets and
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liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company then
assesses the likelihood that deferred tax assets will be realized. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. When the Company establishes a valuation allowance or increases
this allowance in an accounting period, it records a corresponding tax expense in the consolidated statement of operations. The
Company includes interest and penalties related to income taxes within its provision for income taxes. The Company uses the
income forecasting methodology to recognize the income and expenses of the portfolios with the exception of a certain recently
acquired subsidiary, which uses the cost recovery methodology. See Note 12, “Income Taxes” for further discussion.
Management must make significant judgments to determine the provision for income taxes, deferred tax assets and
liabilities, and any valuation allowance to be recorded against deferred tax assets.
Stock-Based Compensation
The Company determines stock-based compensation expense for all share-based payment awards based on the
measurement date fair value. The Company has certain share awards that include market conditions that affect vesting, the fair
value of these shares is estimated using a lattice model. Compensation cost is not adjusted if the market condition is not met, as
long as the requisite service is provided. For share awards that require service and performance conditions, the Company
recognizes compensation cost only for those awards expected to meet the service and performance vesting conditions over the
requisite service period of the award. Forfeiture rates are estimated based on the Company’s historical experience. See Note 11,
“Stock-Based Compensation” for further discussion.
Derivative Instruments and Hedging Activities
The Company recognizes all derivative financial instruments in its consolidated financial statements at fair value.
Changes in the fair value of derivative instruments are recorded in earnings unless hedge accounting criteria are met. The
Company designates its foreign currency exchange contracts as cash flow hedges. The effective portion of the changes in fair
value of these cash flow hedges is recorded each period, net of tax, in accumulated other comprehensive income or loss until
the related hedged transaction occurs. Any ineffective portion of the changes in fair value of these cash flow hedges is recorded
in earnings. In the event the hedged cash flow does not occur, or it becomes probable that it will not occur, the Company would
reclassify the amount of any gain or loss on the related cash flow hedge to income or expense at that time. See Note 4,
“Derivatives and Hedging Instruments” for further discussion.
Redeemable Noncontrolling Interests
Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the
Company to acquire their ownership interest in those entities at fair value, while others have the right to force a sale of the
subsidiary if the Company chooses not to purchase their interests at fair value. The noncontrolling interests subject to these
arrangements are included in temporary equity as redeemable noncontrolling interests, and are adjusted to their estimated
redemption amounts each reporting period with a corresponding adjustment to additional paid-in capital. Future reductions in
the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at
the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor
level. These adjustments do not affect the calculation of earnings per share.
Earnings Per Share
Basic earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share is calculated on the basis of the weighted
average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period
using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock, and the
dilutive effect of the convertible senior notes.
On April 24, 2014, the Company’s Board of Directors approved a $50.0 million share repurchase program. In May 2014,
the Company repurchased 400,000 shares of its common stock for approximately $16.8 million. In May 2015, the Company
repurchased 839,295 shares of common stock for approximately $33.2 million, which represented the remaining amount
allowed under this share repurchase program. The Company’s practice is to retire the shares repurchased.
On August 12, 2015, the Company’s Board of Directors approved a new $50.0 million share repurchase program.
Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to
market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as
determined by the Company’s management and Board of Directors, and in accordance with market conditions, other corporate
considerations, and applicable regulatory requirements. The program does not obligate the Company to acquire any particular
amount of common stock, and it may be modified or suspended at any time at the Company’s discretion.
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A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands):
Weighted average common shares outstanding—basic
Dilutive effect of stock-based awards
Dilutive effect of convertible senior notes
Dilutive effect of warrants
Weighted average common shares outstanding—diluted
Year Ended December 31,
2015
2014
2013
25,722
253
672
—
26,647
25,853
556
1,082
4
27,495
24,659
950
595
—
26,204
There were no anti-dilutive employee stock options outstanding during the years ended December 31, 2015, 2014 and
2013.
The Company has the following convertible senior notes outstanding: $115.0 million convertible senior notes due 2017 at
a conversion price equivalent to approximately $31.56 per share of the Company’s common stock (the “2017 Convertible
Notes”), $172.5 million convertible senior notes due 2020 at a conversion price equivalent to approximately $45.72 per share
of the Company’s common stock (the “2020 Convertible Notes”), and $161.0 million convertible senior notes due 2021 at a
conversion price equivalent to approximately $59.39 per share of the Company’s common stock (the “2021 Convertible
Notes”).
In the event of conversion, the 2017 Convertible Notes are convertible into cash up to the aggregate principal amount and
permit the excess conversion premium to be settled in cash or shares of the Company’s common stock. For the 2020
Convertible Notes and 2021 Convertible Notes, the Company has the option to pay cash, issue shares of common stock or any
combination thereof for the aggregate amount due upon conversion. The Company’s intent is to settle the principal amount of
the 2020 and 2021 Convertible Notes in cash upon conversion. As a result, upon conversion of all the convertible senior notes,
only the amounts payable in excess of the principal amounts are considered in diluted earnings per share under the treasury
stock method. Diluted earnings per share during the periods presented above included the effect of the common shares issuable
upon conversion of certain of the convertible senior notes because the average stock price exceeded the conversion price of
these notes. However, as described in Note 9, “Debt-Encore Convertible Notes,” the Company entered into certain hedge
transactions that have the effect of increasing the effective conversion price of the 2017 Convertible Notes to $60.00, the 2020
Convertible Notes to $61.55, and the 2021 Convertible Notes to $83.14. On January 2, 2014 the 2017 Convertible Notes
became convertible as certain conditions for conversion were met in the immediately preceding calendar quarter as defined in
the applicable indenture. However, none of the 2017 Convertible Notes have been converted.
Note 2: Business Combinations
dlc Acquisition
On June 1, 2015, Encore’s U.K.-based subsidiary, Cabot Credit Management Limited and its subsidiaries (collectively,
“Cabot”), acquired Hillesden Securities Ltd and its subsidiaries (“dlc”), a U.K.-based acquirer and collector of non-performing
unsecured consumer debt for approximately £180.6 million (approximately $274.7 million), (the “dlc Acquisition”). The dlc
Acquisition was financed with borrowings under Cabot’s existing revolving credit facility and under Cabot’s senior secured
bridge facility. Refer to Note 9, “Debt” for further details of Cabot’s revolving credit facility and senior secured bridge facility.
The dlc Acquisition was accounted for using the acquisition method of accounting and, accordingly, the tangible and
intangible assets acquired and liabilities assumed were recorded at their estimated fair values as of the date of the acquisition.
Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the
respective assets and liabilities.
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The components of the purchase price allocation for the dlc Acquisition were as follows (in thousands):
Purchase price:
Cash paid at acquisition
Deferred consideration
Total purchase price
Allocation of purchase price:
Cash
Investment in receivable portfolios
Deferred court costs
Property and equipment
Other assets
Liabilities assumed
Identifiable intangible assets
Goodwill
Total net assets acquired
$
$
$
$
268,391
6,306
274,697
30,518
215,988
760
1,327
2,384
(46,435)
3,669
66,486
274,697
The goodwill recognized is primarily attributable to synergies that are expected to be achieved by combining dlc and
Cabot's existing contingent collections operations. The entire goodwill of $66.5 million related to the dlc Acquisition is not
deductible for income tax purposes.
Total acquisition and integration costs related to the dlc Acquisition were approximately $2.8 million for the year ended
December 31, 2015, and have been expensed in the accompanying consolidated statements of income within general and
administrative expenses. The amount of revenue and net income attributable to Encore included in the Company’s consolidated
statement of income for the year ended December 31, 2015 related to dlc was $27.5 million and $6.3 million, respectively.
Pro forma financial information for the dlc Acquisition has not been included as the computation of such information is
impracticable and too onerous due to the complexities of a hypothetical calculation because dlc’s revenue recognition
methodology prior to the dlc Acquisition was significantly different from GAAP.
Atlantic Acquisition
On August 6, 2014, the Company acquired all of the outstanding equity interests of Atlantic Credit & Finance, Inc.
pursuant to a stock purchase agreement (the “Atlantic Acquisition”). The components of the purchase price allocation for the
Atlantic Acquisition were as follows (in thousands):
Purchase price:
Cash paid at acquisition
Allocation of purchase price:
Cash
Investment in receivable portfolios
Deferred court costs
Property and equipment
Other assets
Liabilities assumed
Identifiable intangible assets
Goodwill
Total net assets acquired
$
$
$
196,104
16,743
105,399
995
1,331
14,679
(25,586)
2,595
79,948
196,104
The following summary presents unaudited pro forma consolidated results of operations for the years ended
December 31, 2014 and 2013, as if the Atlantic Acquisition had occurred on January 1, 2013. The following unaudited pro
forma financial information does not necessarily reflect the actual results that would have occurred had Encore and Atlantic
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been combined during the periods presented, nor is it necessarily indicative of the future results of operations of the combined
companies (in thousands):
(Unaudited)
Year Ended December 31,
2014
2013
Consolidated pro forma revenue
$
1,110,872
$
Consolidated pro forma income from continuing operations attributable to Encore
110,016
837,878
81,140
Marlin Acquisition
On February 7, 2014, the Company, through its Cabot subsidiary, completed the acquisition (the “Marlin Acquisition”) of
Marlin Financial Group Limited (“Marlin”).
The components of the purchase price allocation for the Marlin Acquisition were as follows (in thousands):
Purchase price:
Cash paid at acquisition
Allocation of purchase price:
Cash
Investment in receivable portfolios
Deferred court costs
Property and equipment
Other assets
Liabilities assumed
Identifiable intangible assets
Goodwill
Total net assets acquired
$
$
$
274,068
16,342
208,450
914
1,335
18,091
(299,699)
1,819
326,816
274,068
Pro forma financial information for the Marlin Acquisition has not been included as the computation of such information
is impracticable and too onerous due to the complexities of a hypothetical calculation because Marlin’s revenue recognition
methodology prior to the Marlin Acquisition was significantly different from GAAP.
Other Acquisitions
In addition to the dlc Acquisition discussed above, the Company, through its subsidiaries, acquired other businesses
during the year ended December 31, 2015, for total consideration of $49.4 million, net of cash acquired. The initial purchase
price allocation for these other acquisitions were based on the preliminary assessment of assets acquired and liabilities
assumed, which is subject to change within one year of the date of the acquisition. These transactions included the acquisition
of a controlling interest (50.25%) in Baycorp Holdings Pty Limited (“Baycorp”), a debt resolution specialist in Australia. Based
on the preliminary assessment, the fair value of total assets acquired from Baycorp at the time of acquisition was approximately
$76.1 million. These acquisitions were immaterial to the Company’s financial statements individually and in the aggregate
during their respective reporting periods.
In addition to the Atlantic Acquisition and the Marlin Acquisition discussed above, the Company completed certain other
acquisitions during the year ended December 31, 2014. The total considerations transferred net of cash acquired for these
acquisitions were approximately $59.4 million. These acquisitions were immaterial to the Company’s financial statements
individually and in the aggregate during their respective reporting periods.
Note 3: Fair Value Measurements
The authoritative guidance for fair value measurements defines fair value as the price that would be received upon sale of
an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date
(i.e., the “exit price”). The guidance utilizes a fair value hierarchy that prioritizes the inputs used in valuation techniques to
measure fair value into three broad levels. The following is a brief description of each level:
• Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
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• Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These
include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or
liabilities in markets that are not active.
• Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Assets
Foreign currency exchange contracts
$
— $
718
$
— $
718
Fair Value Measurements as of
December 31, 2015
Level 1
Level 2
Level 3
Total
Liabilities
Foreign currency exchange contracts
Interest rate swap agreements
Temporary Equity
Redeemable noncontrolling interests
—
—
—
(601)
(352)
—
—
(601)
(352)
—
(38,624)
(38,624)
Fair Value Measurements as of
December 31, 2014
Level 1
Level 2
Level 3
Total
Assets
Foreign currency exchange contracts
$
— $
768
$
— $
768
Liabilities
Foreign currency exchange contracts
Temporary Equity
Redeemable noncontrolling interests
Derivative Contracts:
—
—
(1,037)
—
(1,037)
—
(28,885)
(28,885)
The Company uses derivative instruments to minimize its exposure to fluctuations in interest rates and foreign currency
exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These
models project future cash flows and discount the future amounts to a present value using market-based observable inputs,
including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Redeemable Noncontrolling Interests:
Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the
Company to acquire their ownership interest in those entities at fair value and, in some cases, to force a sale of the subsidiary if
the Company chooses not to purchase their interests at fair value. The noncontrolling interests subject to these arrangements are
included in temporary equity as redeemable noncontrolling interests, and are adjusted to their estimated redemption amounts
each reporting period with a corresponding adjustment to additional paid-in capital. Future reductions in the carrying amounts
are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were
originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These
adjustments do not affect the calculation of earnings per share.
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The components of the change in the redeemable noncontrolling interests for the years ended December 31, 2015, 2014
and 2013 are presented in the following table (in thousands):
Amount
$
Balance at December 31, 2012
Initial redeemable noncontrolling interest related to business combinations
Net loss attributable to redeemable noncontrolling interests
Adjustment of the redeemable noncontrolling interests to fair value
Effect of foreign currency translation attributable to redeemable noncontrolling interests
Balance at December 31, 2013
Initial redeemable noncontrolling interest related to business combinations
Net loss attributable to redeemable noncontrolling interests
Adjustment of the redeemable noncontrolling interests to fair value
Effect of foreign currency translation attributable to redeemable noncontrolling interests
Balance at December 31, 2014
Initial redeemable noncontrolling interest related to business combinations
Net income attributable to redeemable noncontrolling interests
Adjustment of the redeemable noncontrolling interests to fair value
Effect of foreign currency translation attributable to redeemable noncontrolling interests
Balance at December 31, 2015
$
—
25,517
(1,167)
1,167
1,047
26,564
4,997
(4,513)
5,730
(3,893)
28,885
9,409
1,371
2,349
(3,390)
38,624
Financial Instruments Not Required To Be Carried At Fair Value
Investment in Receivable Portfolios:
The Company records its investment in receivable portfolios at cost, which represents a significant discount from the
contractual receivable balances due. The Company computes the fair value of its investment in receivable portfolios using
Level 3 inputs by discounting the estimated future cash flows generated by its proprietary forecasting models. The key inputs
include the estimated future gross cash flow, average cost to collect, and discount rate. In accordance with authoritative
guidance related to fair value measurements, the Company estimates the average cost to collect and discount rates based on its
estimate of what a market participant might use in valuing these portfolios. The determination of such inputs requires
significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to
include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital.
The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better
information from market participants in the debt recovery and purchasing business.
In the Company’s current analysis, the estimated blended market participant cost to collect and discount rate is
approximately 50.3% and 10.5%, respectively, for U.S. portfolios, approximately 30% and 12.5%, respectively, for Europe
portfolios and approximately 32.5% and 11.0%, respectively for other geographies. Using this method, the fair value of
investment in receivable portfolios approximates the carrying value as of December 31, 2015 and 2014. A 100 basis point
fluctuation in the cost to collect and discount rate used would result in an increase or decrease in the fair value of United States,
Europe and other geographies portfolios by approximately $38.2 million, $53.2 million and $5.8 million, respectively, as of
December 31, 2015. This fair value calculation does not represent, and should not be construed to represent, the underlying
value of the Company or the amount which could be realized if its investment in receivable portfolios were sold. The carrying
value of the investment in receivable portfolios was $2.4 billion and $2.1 billion as of December 31, 2015 and 2014,
respectively.
Deferred Court Costs:
The Company capitalizes deferred court costs and provides a reserve for those costs that it believes will ultimately be
uncollectible. The carrying value of net deferred court costs approximates fair value.
Receivables Secured By Property Tax Liens:
The fair value of receivables secured by property tax liens is estimated by discounting the future cash flows of the
portfolio using a discount rate equivalent to the current rate at which similar portfolios would be originated. For tax liens
purchased directly from taxing authorities, the fair value is estimated by discounting the expected future cash flows of the
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portfolio using a discount rate equivalent to the interest rate expected when acquiring these tax liens. The carrying value of
receivables secured by property tax liens approximates fair value. Additionally, the carrying value of the related interest
receivable also approximates fair value.
Debt:
The majority of Encore and its subsidiaries’ borrowings are carried at historical amounts, adjusted for additional
borrowings less principal repayments, which approximate fair value. These borrowings include Encore’s senior secured notes
and borrowings under its revolving credit and term loan facilities, Propel’s revolving credit facility and securitized notes,
Cabot’s revolving credit facility, and other borrowing under revolving credit facilities at certain of the Company’s subsidiaries.
Encore’s convertible senior notes are carried at historical cost, adjusted for debt discount. The carrying value of the
convertible senior notes was $406.6 million and $397.3 million, as of December 31, 2015 and 2014, respectively. The fair value
estimate for these convertible senior notes, which incorporates quoted market prices using Level 2 inputs, was approximately
$372.2 million and $507.4 million as of December 31, 2015 and 2014, respectively.
Cabot’s senior secured notes are carried at historical cost, adjusted for debt discount and debt premium. The carrying
value of Cabot’s senior secured notes was $1,410.3 million and $1,144.2 million, as of December 31, 2015 and 2014,
respectively. The fair value estimate for these senior notes, which incorporates quoted market prices using Level 2 inputs, was
$1,403.5 million and $1,131.5 million as of December 31, 2015 and 2014, respectively. The Company’s preferred equity
certificates are legal obligations to the noncontrolling shareholders of its certain subsidiaries. They are carried at the face
amount, plus any accrued interest. The Company determined that the carrying value of these preferred equity certificates
approximated fair value as of December 31, 2015 and 2014.
Note 4: Derivatives and Hedging Instruments
The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and
foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment under the
authoritative guidance for derivatives and hedging.
Foreign Currency Exchange Contracts
The Company has operations in foreign countries, which exposes the Company to foreign currency exchange rate
fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company enters into
derivative financial instruments, principally Indian rupee forward contracts, which are designated as cash flow hedges, to
mitigate fluctuations in the cash payments of future forecasted transactions. The Company adjusts the level and use of
derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative
positions on an ongoing basis.
Gains and losses on cash flow hedges are recorded in other comprehensive income (“OCI”) until the hedged transaction
is recorded in the consolidated financial statements. Once the underlying transaction is recorded in the consolidated financial
statements, the Company reclassifies OCI on the derivative into earnings. If all or a portion of the forecasted transaction is
cancelled, this would render all or a portion of the cash flow hedge ineffective and the Company would reclassify the
ineffective portion of the hedge into earnings. The Company generally does not experience ineffectiveness of the hedge
relationship and the accompanying consolidated financial statements do not include any such gains or losses.
As of December 31, 2015, the total notional amount of the forward contracts to buy Indian rupees in exchange for U.S.
dollars was $39.2 million. All of these outstanding contracts qualified for hedge accounting treatment. The Company estimates
that approximately $0.6 million of net derivative gain included in OCI will be reclassified into earnings within the next 12
months. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur
during the years ended December 31, 2015, 2014, or 2013.
The Company does not enter into derivative instruments for trading or speculative purposes.
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The following table summarizes the fair value of derivative instruments as recorded in the Company’s consolidated
statements of financial condition (in thousands):
December 31, 2015
December 31, 2014
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Derivatives designated as hedging instruments:
Foreign currency exchange contracts
Other assets
$
Foreign currency exchange contracts
Other liabilities
718
Other assets
(601) Other liabilities
$
768
(1,037)
Derivatives not designated as hedging
instruments:
Interest rate swap agreements
Other liabilities
(352) Other liabilities
—
The following table summarizes the effects of derivatives in cash flow hedging relationships on the Company’s
statements of income for the years ended December 31, 2015 and 2014 (in thousands):
Gain or (Loss)
Recognized in OCI-
Effective Portion
2015
2014
$
(248) $ 2,281
88
249
Location of Gain
or (Loss)
Reclassified from
OCI into
Income - Effective
Portion
Salaries and
employee
benefits
General and
administrative
expenses
Foreign
currency
exchange
contracts
Foreign
currency
exchange
contracts
Note 5: Investment in Receivable Portfolios, Net
Gain or (Loss)
Reclassified
from OCI into
Income - Effective
Portion
2015
2014
Location of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
Amount of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
2015
2014
$
(472) $ (1,084)
Other (expense)
income
$
— $
—
(74)
(195)
Other (expense)
income
—
—
In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality,
discrete receivable portfolio purchases during the same fiscal quarter are aggregated into pools based on common risk
characteristics. Common risk characteristics include risk ratings (e.g. FICO or similar scores), financial asset type, collateral
type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped
into credit card and telecom, purchased consumer bankruptcy, and mortgage portfolios. We further group these static pools by
geographic region or location. Once a static pool is established, the portfolios are permanently assigned to the pool. The
discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not
recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable
balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios
includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.
In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using
either the interest method or the cost recovery method. The interest method applies an IRR to the cost basis of the pool, which
remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows. Subsequent
increases in expected cash flows are recognized prospectively through an upward adjustment of the pool’s IRR over its
remaining life. Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to the
cost basis of the pool, and are reflected in the consolidated statements of comprehensive income as a reduction in revenue, with
a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of
financial condition.
The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. For
purposes of calculating its IRRs, the collection forecast of each pool is estimated to be up to 120 months.
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The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition
of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios, and for provision for loss
or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost
basis. The cost basis of each pool is increased by revenue earned and portfolio allowance reversals and decreased by gross
collections and portfolio allowances.
If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company
accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have
different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary
information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios.
Under the cost recovery method of accounting, no revenue is recognized until the purchase price of a Cost Recovery Portfolio
has been fully recovered.
Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing
investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future
estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis
has been fully recovered are classified as zero basis cash flows.
The following table summarizes the Company’s accretable yield and an estimate of zero basis future cash flows at the
beginning and end of the period presented (in thousands):
Balance at December 31, 2013
Revenue recognized, net
Net additions on existing portfolios
Additions for current purchases
Effect of foreign currency translation
Balance at December 31, 2014
Revenue recognized, net
Net additions on existing portfolios
Additions for current purchases
Effect of foreign currency translation
Balance at December 31, 2015
Accretable
Yield
Estimate of
Zero Basis
Cash Flows
$
$
2,391,471
(958,332)
340,152
1,332,121
(112,091)
2,993,321
(964,225)
263,713
846,632
(91,801)
3,047,640
$
$
$
8,465
(34,500)
92,427
—
—
66,392
(108,211)
266,252
—
(1,402)
223,031
$
Total
2,399,936
(992,832)
432,579
1,332,121
(112,091)
3,059,713
(1,072,436)
529,965
846,632
(93,203)
3,270,671
During the year ended December 31, 2015, the Company purchased receivable portfolios with a face value of $12.7
billion for $1.0 billion, or a purchase cost of 8.0% of face value. Purchases of charged-off credit card portfolios include $216.0
million of receivables acquired in connection with the dlc Acquisition and $60.3 million acquired in connection with the
acquisition of Baycorp. The estimated future collections at acquisition for all portfolios purchased during the year amounted to
$2.5 billion.
During the year ended December 31, 2014, the Company purchased receivable portfolios with a face value of $13.8
billion for $1.3 billion, or a purchase cost of 9.1% of face value. Purchases of charged-off credit card portfolios include $105.4
million of portfolio acquired in connection with the Atlantic Acquisition and $208.5 million of portfolios acquired in
connection with the Marlin Acquisition. The estimated future collections at acquisition for all portfolios purchased during the
year amounted to $2.8 billion.
All collections realized after the net book value of a portfolio has been fully recovered (“Zero Basis Portfolios”) are
recorded as revenue (“Zero Basis Revenue”). During the years ended December 31, 2015, 2014, and 2013, Zero Basis Revenue
was approximately $96.4 million, $22.3 million, and $17.2 million, respectively.
F-18
Table of Contents
The following tables summarize the changes in the balance of the investment in receivable portfolios during the
following periods (in thousands, except percentages):
Year Ended December 31, 2015
Accrual Basis
Portfolios
Cost Recovery
Portfolios
Zero Basis
Portfolios
Total
Balance, beginning of period
$
2,131,084
$
12,476
$
— $
2,143,560
Purchases of receivable portfolios
Gross collections(1)
Put-backs and Recalls(2)
Foreign currency adjustments
Revenue recognized
Portfolio (allowance) reversals, net
Balance, end of period
Revenue as a percentage of collections(3)
1,023,722
(1,587,525)
(13,009)
(82,443)
969,227
(5,002)
2,436,054
$
—
(5,237)
(20)
(2,604)
—
—
—
(107,963)
(268)
20
96,446
11,765
1,023,722
(1,700,725)
(13,297)
(85,027)
1,065,673
6,763
$
4,615
$
— $
2,440,669
61.1%
0.0%
89.3%
62.7%
Year Ended December 31, 2014
Accrual Basis
Portfolios
Cost Recovery
Portfolios
Zero Basis
Portfolios
Total
Balance, beginning of period
$
1,585,587
$
Purchases of receivable portfolios
Transfer of portfolios
Gross collections(1)
Put-backs and Recalls(2)
Foreign currency adjustments
Revenue recognized
Portfolio allowance reversals, net
Balance, end of period
Revenue as a percentage of collections(3)
1,249,651
(18,682)
(1,563,996)
(15,162)
(64,646)
953,154
5,178
4,662
1,709
18,682
(9,010)
(536)
(3,031)
—
—
$
— $
1,590,249
—
—
(34,491)
(9)
—
22,271
12,229
1,251,360
—
(1,607,497)
(15,707)
(67,677)
975,425
17,407
$
2,131,084
$
12,476
$
— $
2,143,560
60.9%
0.0%
64.6%
60.7%
Year Ended December 31, 2013
Accrual Basis
Portfolios
Cost Recovery
Portfolios
Zero Basis
Portfolios
Total
Balance, beginning of period
$
873,119
$
— $
— $
873,119
Purchases of receivable portfolios
Transfer of portfolios
Gross collections(1)
Put-backs and Recalls(2)
Foreign currency adjustments
Revenue recognized
Portfolio allowance reversals, net
Balance, end of period
Revenue as a percentage of collections(3)
________________________
(1) Does not include amounts collected on behalf of others.
1,203,706
(6,649)
(1,249,625)
(2,331)
49,634
715,458
2,275
1,073
6,649
(2,764)
(296)
—
—
—
—
—
(27,117)
(2)
—
17,201
9,918
1,204,779
—
(1,279,506)
(2,629)
49,634
732,659
12,193
$
1,585,587
$
4,662
$
— $
1,590,249
57.3%
0.0%
63.4%
57.3%
(2) Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represent
accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).
(3) Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.
F-19
Table of Contents
The following table summarizes the change in the valuation allowance for investment in receivable portfolios during the
periods presented (in thousands):
Balance at December 31, 2012
Provision for portfolio allowances
Reversal of prior allowances
Balance at December 31, 2013
Provision for portfolio allowances
Reversal of prior allowances
Balance at December 31, 2014
Provision for portfolio allowances
Reversal of prior allowances
Allowance charged off to investment in receivable portfolios
Balance at December 31, 2015
Note 6: Deferred Court Costs, Net
Valuation
Allowance
105,273
479
(12,672)
93,080
—
(17,407)
75,673
8,322
(15,085)
(8,322)
60,588
$
$
The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its
internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has
sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections the
Company is required to pay certain upfront costs to the applicable courts which are recoverable from the consumer (“Deferred
Court Costs”).
The Company capitalizes Deferred Court Costs in its consolidated financial statements and provides a reserve for those
costs that it believes will ultimately be uncollectible. The Company determines the reserve based on its analysis of court costs
that have been advanced and those that have been recovered. The Company writes off any Deferred Court Cost not recovered
within five years of placement. Collections received from debtors are first applied against related court costs with the balance
applied to the debtors’ account balance.
Deferred Court Costs for the five-year deferral period consist of the following as of the dates presented (in thousands):
Court costs advanced
Court costs recovered
Court costs reserve
December 31,
2015
December 31,
2014
$
$
636,922
(242,899)
(318,784)
75,239
$
$
546,271
(206,287)
(279,572)
60,412
A roll forward of the Company’s court cost reserve is as follows (in thousands):
Balance at beginning of period
Provision for court costs
Net down of reserve after 60 months
Effect of foreign currency translation
Balance at end of period
December 31,
2015
December 31,
2014
December 31,
2013
$
$
(279,572) $
(82,593)
42,745
636
(318,784) $
(210,889) $
(69,062)
—
379
(279,572) $
(149,080)
(61,809)
—
—
(210,889)
F-20
Table of Contents
Note 7: Property and Equipment, Net
Property and equipment consist of the following, as of the dates presented (in thousands):
Furniture, fixtures and equipment
Computer equipment and software
Telecommunications equipment
Leasehold improvements
Other
Less: accumulated depreciation and amortization
December 31,
2015
December 31,
2014
$
$
22,074
127,454
4,029
19,711
1,694
174,962
(101,458)
73,504
$
$
18,472
101,721
3,956
17,964
2,178
144,291
(77,322)
66,969
Depreciation and amortization expense for continuing operations was $29.0 million, $24.4 million, and $12.7 million for
the years ended December 31, 2015, 2014, and 2013, respectively.
Note 8: Other Assets
Other assets consist of the following (in thousands):
December 31,
2015
December 31,
2014
Debt issuance costs, net of amortization
$
45,033
$
Prepaid income taxes
Deferred tax assets
Prepaid expenses
Interest receivable
Identifiable intangible assets, net
Service fee receivables
Other financial receivables
Receivable from seller
Recoverable fees
Security deposits
Funds held in escrow
Other
28,159
27,306
22,002
21,079
18,129
13,708
11,275
8,605
5,350
2,809
—
42,165
$
245,620
$
38,504
—
33,716
21,427
12,187
21,564
7,864
7,467
7,357
2,905
3,617
16,889
24,169
197,666
F-21
Table of Contents
Note 9: Debt
The Company is in compliance with all covenants under its financing arrangements. The components of the Company’s
consolidated debt and capital lease obligations were as follows (in thousands):
Encore revolving credit facility
Encore term loan facility
Encore senior secured notes
Encore convertible notes
Less: Debt discount
Propel facilities
Propel securitized notes
Cabot senior secured notes
Add: Debt premium
Less: Debt discount
Cabot senior revolving credit facility
Preferred equity certificates
Capital lease obligations
Other
December 31,
2015
December 31,
2014
$
627,000
$
143,078
28,750
448,500
(41,867)
170,858
59,996
505,000
146,023
43,750
448,500
(51,202)
84,229
104,247
1,360,000
1,076,952
53,440
(3,184)
54,089
221,516
11,054
83,342
67,259
—
86,368
208,312
15,331
38,785
$
3,216,572
$
2,773,554
Encore Revolving Credit Facility and Term Loan Facility
On July 9, 2015, the Company amended its revolving credit facility and term loan facility pursuant to Amendment No. 2
to the Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). The Restated Credit
Agreement includes a revolving credit facility of $742.6 million (the “Revolving Credit Facility”), a term loan facility of
$158.8 million (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit
Facilities”), and an accordion feature that allows the Company to increase the Senior Secured Credit Facilities by an additional
$250.0 million ($55.0 million of which was exercised in November 2015). Including the accordion feature, the maximum
amount that can be borrowed under the Restated Credit Agreement is $1.1 billion. The Restated Credit Agreement expires in
February 2019, except with respect to two subtranches of the Term Loan Facility of $60.0 million and $6.3 million, maturing in
February 2017 and November 2017, respectively.
Provisions of the Restated Credit Agreement include, but are not limited to:
• The Revolving Credit Facility of $742.6 million with interest at a floating rate equal to, at the Company’s option,
either: (1) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300
basis points depending on the Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that
ranges from 150 to 200 basis points, depending on the Company’s cash flow leverage ratio. “Alternate base rate,” as
defined in the Restated Credit Agreement, means the highest of (i) the per annum rate which the administrative
agent publicly announces from time to time as its prime lending rate, (ii) the federal funds effective rate from time
to time, plus 0.5% per annum or (iii) reserved adjusted LIBOR determined on a daily basis for a one month interest
period, plus 1.0% per annum;
• A $92.5 million five-year term loan with interest at a floating rate equal to, at the Company’s option, either:
(1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the Company’s
cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending
on the Company’s cash flow leverage ratio. Principal amortizes $6.9 million in 2016, $9.3 million in 2017, and $9.3
million in 2018 with the remaining principal due at the end of the term;
• A $60.0 million term loan maturing on February 28, 2017, with interest at a floating rate equal to, at the Company’s
option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 200 to 250 basis points, depending on the
Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 100 to 150 basis
points, depending on the Company’s cash flow leverage ratio. Principal amortizes $4.5 million in 2016 with the
remaining principal due at the end of the term;
F-22
Table of Contents
• A $6.3 million term loan maturing on November 3, 2017, with interest at a floating rate equal to, at the Company’s
option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the
Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis
points, depending on the Company’s cash flow leverage ratio. Principal amortizes $0.6 million in 2016 and $0.5
million in 2017 with the remaining principal due at the end of the term;
• A borrowing base equal to (1) the lesser of (i) 30%—35% (depending on the Company’s trailing 12-month cost per
dollar collected) of all eligible non-bankruptcy estimated remaining collections, currently 33%, plus 55% of eligible
estimated remaining collections for consumer receivables subject to bankruptcy, and (ii) the product of the net book
value of all receivable portfolios acquired on or after January 1, 2005 multiplied by 95%, minus (2) the sum of the
aggregate principal amount outstanding of Encore’s Senior Secured Notes (as defined below) plus the aggregate
principal amount outstanding under the term loans;
•
•
a maximum cash flow leverage ratio permitted of 2.50:1.00;
a maximum cash flow secured leverage ratio of 2.00:1.00;
• The allowance of additional unsecured or subordinated indebtedness not to exceed $1.1 billion;
• Restrictions and covenants, which limit the payment of dividends and the incurrence of additional indebtedness and
liens, among other limitations;
• Repurchases of up to $150.0 million of Encore’s common stock after July 9, 2015, subject to compliance with
certain covenants and available borrowing capacity;
• A change of control definition, that excludes acquisitions of stock by Red Mountain Capital Partners LLC, JCF FPK
I, LP and their respective affiliates of up to 50% of the outstanding shares of Encore’s voting stock;
• Events of default which, upon occurrence, may permit the lenders to terminate the facility and declare all amounts
outstanding to be immediately due and payable;
• A pre-approved acquisition limit of $225.0 million per fiscal year;
• A basket to allow for investments not to exceed the greater of (1) 200% of the consolidated net worth of the
Company and its restricted subsidiaries; and (2) an unlimited amount such that after giving effect to the making of
any investment, the cash flow leverage ratio is less than 1.25:1:00;
• Collateralization by all assets of the Company, other than the assets of certain Propel entities, certain foreign
subsidiaries and all unrestricted subsidiaries as defined in the Restated Credit Agreement.
At December 31, 2015, the outstanding balance under the Restated Credit Agreement was $770.1 million, which bore a
weighted average interest rate of 3.17% and 2.93% for the years ended December 31, 2015 and 2014, respectively. Available
capacity under the Restated Credit Agreement, subject to borrowing base and applicable debt covenants, was $107.1 million as
of December 31, 2015, not including the $195.0 million additional capacity provided by the facility’s remaining accordion
feature.
Encore Senior Secured Notes
In 2010 and 2011 Encore entered into an aggregate of $75.0 million in senior secured notes with certain affiliates of
Prudential Capital Group (the “Senior Secured Notes”). $25.0 million of the Senior Secured Notes bear an annual interest rate
of 7.375%, mature in 2018 and require quarterly principal payments of $1.25 million. Prior to May 2013, these notes required
quarterly payments of interest only. The remaining $50.0 million of Senior Secured Notes bear an annual interest rate of 7.75%,
mature in 2017 and require quarterly principal payments of $2.5 million. Prior to December 2012 these notes required quarterly
interest only payments. As of December 31, 2015, $11.3 million of the 7.375% Senior Secured Notes and $17.5 million of the
7.75% Senior Secured Notes, for an aggregate of $28.8 million, remained outstanding.
The Senior Secured Notes are guaranteed in full by certain of Encore’s subsidiaries. Similar to, and pari passu with, the
Senior Secured Credit Facilities, the Senior Secured Notes are collateralized by the same collateral as our Revolving Credit
Facility. The Senior Secured Notes may be accelerated and become automatically and immediately due and payable upon
certain events of default, including certain events related to insolvency, bankruptcy, or liquidation. Additionally, the Senior
Secured Notes may be accelerated at the election of the holder or holders of a majority in principal amount of the Senior
Secured Notes upon certain events of default by Encore, including the breach of affirmative covenants regarding guarantors,
collateral, most favored lender treatment, minimum revolving credit facility commitment or the breach of any negative
F-23
Table of Contents
covenant. If Encore prepays the Senior Secured Notes at any time for any reason, payment will be at the higher of par or the
present value of the remaining scheduled payments of principal and interest on the portion being prepaid. The discount rate
used to determine the present value is 50 basis points over the then current Treasury Rate corresponding to the remaining
average life of the senior secured notes. The covenants are substantially similar to those in the Restated Credit Agreement.
Prudential Capital Group and the administrative agent for the lenders of the Restated Credit Agreement have an intercreditor
agreement related to their pro rata rights to the collateral, actionable default, powers and duties and remedies, among other
topics. The terms of the Senior Secured Notes were amended in connection with the Restated Credit Agreement in order to
properly align certain provisions between the two agreements.
Encore Convertible Notes
In November and December 2012, Encore sold $115.0 million aggregate principal amount of 3.0% 2017 Convertible
Notes that mature on November 27, 2017 in private placement transactions. In June and July 2013, Encore sold $172.5 million
aggregate principal amount of 3.0% 2020 Convertible Notes that mature on July 1, 2020 in private placement transactions. In
March 2014, Encore sold $161.0 million aggregate principal amount of 2.875% 2021 Convertible Notes that mature on March
15, 2021 in private placement transactions. The interest on these unsecured convertible senior notes (collectively, the
“Convertible Notes”), is payable semi-annually.
Prior to the close of business on the business day immediately preceding their respective conversion date (listed below),
holders may convert their Convertible Notes under certain circumstances set forth in the applicable Convertible Notes
indentures. On or after their respective conversion dates until the close of business on the scheduled trading day immediately
preceding their respective maturity date, holders may convert their Convertible Notes at any time. Certain key terms related to
the convertible features for each of the Convertible Notes as of year ended December 31, 2015 are listed below.
Initial conversion price
Closing stock price at date of issuance
2017 Convertible Notes
2020 Convertible Notes
2021 Convertible Notes
$
$
31.56
25.66
$
$
45.72
33.35
$
$
59.39
47.51
Closing stock price date
November 27, 2012
June 24, 2013
March 5, 2014
Conversion rate (shares per $1,000 principal amount)
Conversion date(1)
31.6832
21.8718
16.8386
May 27, 2017
January 1, 2020
September 15, 2020
_______________________
(1) The 2017 Convertible Notes became convertible on January 2, 2014, as certain early conversion events were satisfied. Refer to “Conversion and
Earnings Per Share impact” section below for further details.
In the event of conversion, the 2017 Convertible Notes are convertible into cash up to the aggregate principal amount of
the notes. The excess conversion premium may be settled in cash or shares of the Company’s common stock at the discretion of
the Company. In the event of conversion, holders of the Company’s 2020 and 2021 Convertible Notes will receive cash, shares
of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s
election. The Company’s current intent is to settle conversions through combination settlement (i.e., convertible into cash up to
the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and shares of the
Company’s common stock, at the Company’s election, for the remainder). As a result, and in accordance with authoritative
guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted
earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect
when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion prices listed
in the above table.
Authoritative guidance related to debt with conversion and other options requires that issuers of convertible debt
instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity
components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability
and equity components and accounted for as debt issuance costs and equity issuance costs, respectively.
F-24
Table of Contents
The debt and equity components, the issuance costs related to the equity component, the stated interest rate, and the
effective interest rate for each of the Convertible Notes are listed below (in thousands, except percentages):
Debt component
Equity component
Equity issuance cost
Stated interest rate
Effective interest rate
2017 Convertible Notes
2020 Convertible Notes
2021 Convertible Notes
$
$
$
$
$
$
100,298
14,702
788
3.000%
6.000%
140,247
32,253
1,106
$
$
$
3.000%
6.350%
143,645
17,355
581
2.875%
4.700%
The balances of the liability and equity components of all of the Convertible Notes outstanding were as follows (in
thousands):
Liability component—principal amount
Unamortized debt discount
Liability component—net carrying amount
Equity component
December 31,
2015
December 31,
2014
$
$
$
448,500
(41,867)
406,633
58,184
$
$
$
448,500
(51,202)
397,298
55,236
The debt discount is being amortized into interest expense over the remaining life of the convertible notes using the
effective interest rates. Interest expense related to the convertible notes was as follows (in thousands):
Interest expense—stated coupon rate
Interest expense—amortization of debt discount
Total interest expense—convertible notes
Convertible Notes Hedge Transactions
Year ended December 31,
2015
2014
$
$
13,245
9,335
22,580
$
$
12,418
8,423
20,841
In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company is required to
make in the event that the market price of the Company’s common stock becomes greater than the conversion price of the
Convertible Notes, the Company maintains a hedge program that increases the effective conversion price for each of the
Convertible Notes. All of the hedge instruments related to the Convertible Notes have been determined to be indexed to the
Company’s own stock and meet the criteria for equity classification. In accordance with authoritative guidance, the Company
recorded the cost of the hedge instruments as a reduction in additional paid-in capital, and will not recognize subsequent
changes in fair value of these financial instruments in its consolidated financial statements.
The initial hedge instruments the Company entered into in connection with its issuance of the 2017 Convertible Notes had
an effective conversion price of $44.19. On December 16, 2013, the Company entered into amendments to the hedge
instruments to further increase the effective conversion price from $44.19 to $60.00. All other terms and settlement provisions
of the hedge instruments remained unchanged. The transaction was completed in February 2014. The Company paid
approximately $27.9 million in total consideration for amending the hedge instruments. The Company recorded the payment as
a reduction of equity in the consolidated statements of financial condition.
The details of the hedge program for each of the Convertible Notes are listed below (in thousands, except conversion
price):
Cost of the hedge transaction(s)
Initial conversion price
Effective conversion price
2017 Convertible Notes
2020 Convertible Notes
2021 Convertible Notes
$
$
$
50,595
31.56
60.00
$
$
$
18,113
45.72
61.55
$
$
$
19,545
59.39
83.14
F-25
Table of Contents
Conversion and Earnings Per Share Impact
During the quarter ending December 31, 2013, the closing price of the Company’s common stock exceeded 130% of the
conversion price of the 2017 Convertible Notes for more than 20 trading days during a 30 consecutive trading day period,
thereby satisfying one of the early conversion events. As a result, the 2017 Convertible Notes became convertible on demand
effective January 2, 2014, and the holders were notified that they could elect to submit their 2017 Convertible Notes for
conversion. The carrying value of the 2017 Convertible Notes continues to be reported as debt as the Company intends to draw
on the Revolving Credit Facility or use cash on hand to settle the principal amount of any such conversions in cash. No gain or
loss was recognized when the debt became convertible. The estimated fair value of the 2017 Convertible Notes was
approximately $109.5 million as of December 31, 2015. In addition, upon becoming convertible, a portion of the equity
component that was recorded at the time of the issuance of the 2017 Convertible Notes was considered redeemable and that
portion of the equity was reclassified to temporary equity in the Company’s consolidated statements of financial condition.
Such amount was determined based on the cash consideration to be paid upon conversion and the carrying amount of the debt.
Upon conversion, the holders of the 2017 Convertible Notes will be paid in cash for the principal amount and issued shares or a
combination of cash and shares for the remaining value of the 2017 Convertible Notes. As a result, the Company reclassified
$6.1 million of the equity component to temporary equity as of December 31, 2015. If a conversion event takes place, this
temporary equity balance will be recalculated based on the difference between the 2017 Convertible Notes principal and the
debt carrying value. If the 2017 Convertible Notes are settled, an amount equal to the fair value of the liability component,
immediately prior to the settlement, will be deducted from the fair value of the total settlement consideration transferred and
allocated to the liability component. Any difference between the amount allocated to the liability and the net carrying amount of
the 2017 Convertible Notes (including any unamortized debt issue costs and discount) will be recognized in earnings as a gain
or loss on debt extinguishment. Any remaining consideration is allocated to the reacquisition of the equity component and will
be recognized as a reduction in stockholders’ equity.
None of the 2017 Convertible Notes were converted during the year ended December 31, 2015 or 2014.
In accordance with authoritative guidance related to derivatives and hedging and earnings per share calculation, only the
conversion spread of the Convertible Notes is included in the diluted earnings per share calculation, if dilutive. Under such
method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company’s common
stock during any quarter exceeds the respective conversion price of each of the Convertible Notes. See “Earnings Per Share” in
Note 1, “Ownership, Description of Business, and Summary of Significant Accounting Policies” for additional information.
Propel Facilities
Propel Facility I
On May 8, 2015, Propel amended its syndicated loan facility (as amended, the “Propel Facility I”). The Propel Facility I
is an $80.0 million facility, with a $20.0 million uncommitted accordion feature, used to originate or purchase tax lien assets.
The Propel Facility I expires in May 2018 and includes the following key provisions:
•
Interest at Propel’s option, at either: (1) LIBOR, plus a spread that ranges from 270 to 320 basis points, depending
on Propel’s cash flow leverage ratio; or (2) the greatest of (a) the rate publicly announced from time to time by
Texas Capital Bank, National Association, as its prime rate, (b) the sum of the federal funds rate for such day plus
50 basis points, or (c) one month LIBOR plus 100 basis points;
• A borrowing base of 90% of the face value of the tax lien assets;
•
Interest payable monthly; principal and interest due at maturity;
• Restrictions and covenants, which limit, among other things, the payment of dividends and the incurrence of
additional indebtedness and liens; and
• Events of default which, upon occurrence, may permit the lenders to terminate the Propel Facility I and declare all
amounts outstanding to be immediately due and payable.
The Propel Facility I is primarily collateralized by the tax liens on real property in Texas and requires Propel to maintain
various financial covenants, including a minimum interest coverage ratio and a maximum cash flow leverage ratio.
At December 31, 2015, the outstanding balance on the Propel Facility I was $63.0 million. The weighted average interest
rate was 3.26% and 3.33% for the years ended December 31, 2015 and 2014, respectively.
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Propel Facility II
On May 15, 2013, the Company, through affiliates of Propel, entered into a $100.0 million revolving credit facility (as
amended, the “Propel Facility II”). The Propel Facility II is used to purchase tax liens and tax lien certificates from taxing
authorities and third parties in various states and expires on May 10, 2019. On May 6, 2014, April 3, 2015 and October 26,
2015, the Propel Facility II was amended to, among other things, increase the commitment amount, modify the interest rate and
permit additional tax lien assets to be included in the borrowing base. The Propel Facility II includes the following key
provisions:
•
Propel can draw up to $150.0 million through May 15, 2017;
• The committed amount can be drawn on a revolving basis until May 15, 2017 (unless terminated earlier in
accordance with the terms of the facility). During the following two years, until the May 10, 2019 expiration date,
no additional draws are permitted, and all proceeds from the tax liens are used to repay any amounts outstanding
under the facility. So long as no events or default have occurred, Propel may extend the expiration date for
additional one year periods.
•
Prior to the expiration of the facility, interest at a per annum floating rate equal to LIBOR plus 2.25%;
• Upon the occurrence of an event of default, interest at 400 basis points plus the greater of (i) a per annum floating
rate equal to LIBOR plus 2.25%, or (ii) Prime Rate, which is defined in the agreement as the rate most recently
announced by the lender at its branch in San Francisco, California, from time to time as its prime commercial rate
for U.S. dollar-denominated loans made in the United States;
•
•
Proceeds from the tax liens are applied to pay interest, principal and other obligations incurred in connection with
the Propel Facility II on a monthly basis as defined in the agreement;
Special purpose entity covenants designed to protect the bankruptcy-remoteness of the borrowers and additional
restrictions and covenants, which limit, among other things, the payment of certain dividends, the occurrence of
additional indebtedness and liens and use of the collections proceeds from certain tax liens; and
• Events of default which, upon occurrence, may permit the lender to terminate the Propel Facility II and declare all
amounts outstanding to be immediately due and payable.
The Propel Facility II is collateralized by tax liens acquired under the Propel Facility II. At December 31, 2015, the
outstanding balance on the Propel Facility II was $107.9 million. The weighted average interest rate was 2.62% and 3.85% for
the years ended December 31, 2015 and 2014, respectively.
Propel Term Loan Facility
On May 2, 2014, the Company, through affiliates of Propel, entered into a $31.9 million term loan facility (the “Propel
Term Loan Facility”). The Propel Term Loan Facility was entered into to fund the acquisition of a portfolio of tax liens and
other assets in a transaction valued at approximately $43.0 million. In July 2015, Propel paid off the outstanding balance on the
Propel Term Loan Facility.
Propel Securitized Notes
On May 6, 2014, Propel, through its affiliates, completed the securitization of a pool of approximately $141.5 million in
payment agreements and contracts relating to unpaid real property taxes, assessments, and other charges secured by liens on
real property located in the State of Texas (the “Securitized Texas Tax Liens”). In connection with the securitization, investors
purchased, in a private placement, approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized
by the Securitized Texas Tax Liens (the “Propel Securitized Notes”), due May 15, 2029. The payment agreements and contracts
will continue to be serviced by Propel.
The Propel Securitized Notes are payable solely from the collateral and represent non-recourse obligations of the
consolidated securitization entity PFS Tax Lien Trust 2014-1, a Delaware statutory trust and an affiliate of Propel. Interest
accrues monthly at the rate of 1.44% per annum. Principal and interest on the Propel Securitized Notes are payable on the 15th
day of each calendar month. Propel used the net proceeds to pay down borrowings under the Propel Facility I, pay certain
expenses incurred in connection with the issuance of the Propel Securitized Notes and fund certain reserves.
At December 31, 2015, the outstanding balance on the Propel Securitized Notes was $60.0 million and the balance of the
collateral was $81.1 million.
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Cabot Senior Secured Notes
On September 20, 2012, Cabot Financial (Luxembourg) S.A. (“Cabot Financial”), an indirect subsidiary of Encore,
issued £265.0 million (approximately $438.4 million) in aggregate principal amount of 10.375% Senior Secured Notes due
2019 (the “Cabot 2019 Notes”). Interest on the Cabot 2019 Notes is payable semi-annually, in arrears, on April 1 and October 1
of each year.
On August 2, 2013, Cabot Financial issued £100 million (approximately $151.7 million) in aggregate principal amount of
8.375% Senior Secured Notes due 2020 (the “Cabot 2020 Notes”). Interest on the Cabot 2020 Notes is payable semi-annually,
in arrears, on February 1 and August 1 of each year.
Of the proceeds from the issuance of the Cabot 2020 Notes, approximately £75.0 million (approximately $113.8 million)
was used to repay all amounts outstanding under the senior credit facilities of Cabot Financial (UK) Limited (“Cabot Financial
UK”), an indirect subsidiary of Encore, and £25.0 million (approximately $37.9 million) was used to partially repay a portion
of the J Bridge preferred equity certificates (the “J Bridge PECs”) to an affiliate of J.C. Flowers & Co. LLC (“J.C. Flowers”),
discussed in further detail below.
On March 27, 2014, Cabot Financial issued £175.0 million (approximately $291.8 million) in aggregate principal amount
of 6.500% Senior Secured Notes due 2021 (the “Cabot 2021 Notes” and, together with the Cabot 2019 Notes and the Cabot
2020 Notes, the “Cabot Notes”). Interest on the Cabot 2021 Notes is payable semi-annually, in arrears, on April 1 and
October 1 of each year, beginning on October 1, 2014. The total debt issuance cost associated with the Cabot 2021 Notes was
approximately $7.5 million.
Approximately £105.0 million (approximately $174.8 million) of the proceeds from the issuance of the Cabot 2021 Notes
was used to repay all amounts outstanding under the senior secured bridge facilities that Cabot Financial UK entered into in
connection with the Marlin Acquisition.
The Cabot Notes are fully and unconditionally guaranteed on a senior secured basis by the following indirect subsidiaries
of the Company: Cabot Credit Management Limited (“CCM”), Cabot Financial Limited, and all material subsidiaries of Cabot
Financial Limited (other than Cabot Financial and Marlin Intermediate Holdings plc). The Cabot Notes are secured by a first
ranking security interest in all the outstanding shares of Cabot Financial and the guarantors (other than CCM and Marlin
Midway Limited) and substantially all the assets of Cabot Financial and the guarantors (other than CCM). The guarantees
provided in respect of the Cabot Notes are pari passu with each such guarantee given in respect of the Cabot Floating Rate
Notes, Marlin Bonds and the Cabot Credit Facility described below.
On November 11, 2015, Cabot Financial (Luxembourg) II S.A. (“Cabot Financial II”), an indirect subsidiary of Encore,
issued €310.0 million (approximately $332.2 million) in aggregate principal amount of Senior Secured Floating Rate Notes due
2021 (the “Cabot Floating Rate Notes”). The Cabot Floating Rate Notes were issued at a 1%, or €3.1 million (approximately
$3.4 million), original issue discount, which is being amortized over the life of the notes and included as interest expense in the
Company’s consolidated statements of income. The Cabot Floating Rate Notes bear interest at a rate equal to three-month
EURIBOR plus 5.875% per annum, reset quarterly. Interest on the Cabot Floating Rate Notes is payable quarterly in arrears on
February 15, May 15, August 15 and November 15 of each year, beginning on February 15, 2016. The Cabot Floating Rate
Notes will mature on November 15, 2021. Loan fees associated with the Cabot Floating Rate Notes during the year ended
December 31, 2015 were approximately £5.8 million (approximately $8.7 million) and capitalized as debt issuance costs.
The Cabot Floating Rate Notes are fully and unconditionally guaranteed on a senior secured basis by the following
indirect subsidiaries of the Company: CCM, Cabot Financial Limited and all material subsidiaries of Cabot Financial Limited
(other than Cabot Financial II and Marlin Intermediate Holdings plc). The Cabot Floating Rate Notes are secured by a first-
ranking security interest in all the outstanding shares of Cabot Financial II and the guarantors (other than CCM and Marlin
Midway Limited) and substantially all the assets of Cabot Financial II and the guarantors (other than CCM).
On July 25, 2013, Marlin Intermediate Holdings plc, a subsidiary of Marlin, issued £150.0 million (approximately $246.5
million) in aggregate principal amount of 10.5% Senior Secured Notes due 2020 (the “Marlin Bonds”). Interest on the Marlin
Bonds is payable semi-annually, in arrears, on February 1 and August 1 of each year. Cabot assumed the Marlin Bonds as a
result of the Marlin Acquisition. The carrying value of the Marlin Bonds was adjusted to approximately $284.2 million to
reflect the fair value of the Marlin Bonds at the time of acquisition.
The Marlin Bonds are fully and unconditionally guaranteed on a senior secured basis by Cabot Financial Limited and
each of Cabot Financial Limited’s material subsidiaries other than Marlin Intermediate Holdings plc, each of which is an
indirect subsidiary of the Company. The guarantees provided in respect of the Marlin Bonds are pari passu with each such
guarantee given in respect of the Cabot Notes, the Cabot Floating Rate Notes and the Cabot Credit Facility.
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Interest expense related to the Cabot Notes, Cabot Floating Rate Notes, and Marlin Bonds was as follows (in thousands):
Interest expense—stated coupon rate
Interest income—accretion of debt premium
Interest expense—amortization of debt discount
Total interest expense—Cabot senior secured notes
Year ended December 31,
2015
2014
$
$
$
98,988
(10,747)
75
88,316
$
97,028
(10,233)
—
86,795
At December 31, 2015, the outstanding balance on the Cabot Notes, Cabot Floating Rate Notes, and Marlin Bonds was
$1.4 billion.
Cabot Senior Revolving Credit Facility
On September 20, 2012, Cabot Financial UK entered into an agreement for a senior committed revolving credit facility of
£50.0 million (approximately $82.7 million) (the “Cabot Credit Agreement”). Since such date there have been a number of
amendments made, including, but not limited to, increases in the lenders’ total commitments thereunder. On November 11,
2015, Cabot Financial UK amended and restated its existing senior secured revolving credit facility agreement to, among other
things, increase the total committed amount of the facility to £200.0 million (approximately $304.0 million) and extend the
termination date to September 24, 2018 (as amended and restated, the “Cabot Credit Facility”). The Cabot Credit Facility also
includes an uncommitted accordion provision which will allow the facility to be increased by an additional £50.0 million,
subject to obtaining the requisite commitments and compliance with the terms of Cabot Financial UK’s other indebtedness,
among other conditions precedent. Loan fees associated with amending the Cabot Credit Facility during the year ended
December 31, 2015 were approximately £4.8 million (approximately $7.2 million) and capitalized as debt issuance costs.
The Cabot Credit Facility has a six-year term expiring in September 2018, and includes the following key provisions:
•
Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 3.5%;
• A restrictive covenant that limits the loan to value ratio to 0.75;
• A restrictive covenant that limits the super senior loan (i.e. the Cabot Credit Facility and any super priority hedging
liabilities) to value ratio to 0.25;
• Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence
of additional indebtedness and liens; and
• Events of default which, upon occurrence, may permit the lenders to terminate the Cabot Credit Facility and declare
all amounts outstanding to be immediately due and payable.
The Cabot Credit Facility is unconditionally guaranteed by the following indirect subsidiaries of the Company: CCM,
Cabot Financial Limited, and all material subsidiaries of Cabot Financial Limited. The Cabot Credit Facility is secured by first
ranking security interests in all the outstanding shares of Cabot Financial UK and the guarantors (other than CCM) and
substantially all the assets of Cabot Financial UK and the guarantors (other than CCM). Pursuant to the terms of intercreditor
agreements entered into with respect to the relative positions of the Cabot Notes, the Cabot Floating Rate Notes, the Marlin
Bonds and the Cabot Credit Facility, any liabilities in respect of obligations under the Cabot Credit Facility that are secured by
assets that also secure the Cabot Notes, the Cabot Floating Rate Notes and the Marlin Bonds will receive priority with respect
to any proceeds received upon any enforcement action over any such assets.
At December 31, 2015, the outstanding borrowings under the Cabot Credit Facility were approximately $54.1 million.
The weighted average interest rate was 3.86% and 4.34% for the years ended December 31, 2015 and 2014, respectively.
Cabot 2015 Senior Secured Bridge Facility
The dlc Acquisition was financed with borrowings under the existing Cabot Credit Facility and under a new senior
secured bridge facility entered into by Cabot on June 1, 2015 (the “2015 Senior Secured Bridge Facility”).
The 2015 Senior Secured Bridge Facility provided an aggregate principal amount of up to £90.0 million. The purpose of
the 2015 Senior Secured Bridge Facility was to provide funding for the financing, in full or in part, of the purchase price of the
dlc Acquisition and the payment of costs, fees and expenses in connection with the dlc Acquisition, and was fully drawn as of
F-29
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the closing of the dlc Acquisition. The 2015 Senior Secured Bridge Facility had an initial term of one year and could be
extended for an additional year if it was not repaid during the first year of issuance.
Prior to the initial maturity date, the rate of interest payable under the 2015 Senior Secured Bridge Facility was the
aggregate, per annum, of (i) LIBOR (set to a minimum of 1%), plus (ii) an initial spread of 6.00% per annum (such spread
stepping up by 50 basis points for each three-month period that the 2015 Senior Secured Bridge Facility remains outstanding),
not to exceed total caps set forth in the senior secured bridge facility agreement.
Loan fees associated with the 2015 Senior Secured Bridge Facility were approximately $1.4 million for the year ended
December 31, 2015. These fees were recognized as interest expense in the Company’s consolidated financial statements.
In November 2015, Cabot paid off the outstanding balance on the 2015 Senior Secured Bridge Facility. As a result, at
December 31, 2015, there was no amount outstanding under the 2015 Senior Secured Bridge Facility.
Preferred Equity Certificates
On July 1, 2013, the Company, through its wholly owned subsidiary Encore Europe Holdings, S.a.r.l. (“Encore Europe”),
completed the acquisition of Cabot (the “Cabot Acquisition”) by acquiring 50.1% of the equity interest in Janus Holdings
S.a.r.l. (“Janus Holdings”). Encore Europe purchased from J.C. Flowers: (i) E Bridge preferred equity certificates issued by
Janus Holdings, with a face value of £10,218,574 (approximately $15.5 million) (and any accrued interest thereof) (the “E
Bridge PECs”), (ii) E preferred equity certificates issued by Janus Holdings with a face value of £96,729,661 (approximately
$147.1 million) (and any accrued interest thereof) (the “E PECs”), (iii) 3,498,563 E shares of Janus Holdings (the “E Shares”),
and (iv) 100 A shares of Cabot Holdings S.a.r.l. (“Cabot Holdings”), the direct subsidiary of Janus Holdings, for an aggregate
purchase price of approximately £115.1 million (approximately $175.0 million). The E Bridge PECs, E PECs, and E Shares
represent 50.1% of all of the issued and outstanding equity and debt securities of Janus Holdings. The remaining 49.9% of
Janus Holdings’ equity and debt securities are owned by J.C. Flowers and include: (a) J Bridge PECs with a face value of
£10,177,781 (approximately $15.5 million), (b) J preferred equity certificates with a face value of £96,343,515 (approximately
$146.5 million) (the “J PECs”), (c) 3,484,597 J shares of Janus Holdings (the “J Shares”), and (d) 100 A shares of Cabot
Holdings. All of the PECs accrue interest at 12% per annum. Since PECs are legal form debt, the J Bridge PECs, J PECs and
any accrued interests thereof are classified as liabilities and are included in debt in the Company’s accompanying consolidated
statements of financial condition. In addition, certain other minority owners hold PECs at the Cabot Holdings level (the
“Management PECs”). These PECs are also included in debt in the Company’s accompanying consolidated statements of
financial condition. The E Bridge PECs and E PECs held by the Company, and their related interest eliminate in consolidation
and therefore are not included in debt in the Company’s consolidated statements of financial condition. The J Bridge PECs, J
PECs, and the Management PECs do not require the payment of cash interest expense as they have characteristics similar to
equity with a preferred return. The ultimate payment of the accumulated interest would be satisfied only in connection with the
disposition of the noncontrolling interests of J.C. Flowers and management.
On June 20, 2014, Encore Europe converted all of its E Bridge PECs into E Shares and E PECs, and J.C. Flowers
converted all of its J Bridge PECs into J Shares and J PECs, in proportion to the number of E Shares and E PECs, or J Shares
and J PECs, as applicable, outstanding on the closing date of the Cabot Acquisition.
As of December 31, 2015, the outstanding balance of the PECs, including accrued interest, was approximately $221.5
million.
Capital Lease Obligations
The Company has capital lease obligations primarily for computer equipment. As of December 31, 2015, the Company’s
combined obligations for capital leases were approximately $11.1 million. These capital lease obligations require monthly,
quarterly or annual payments through 2020 and have implicit interest rates that range from zero to approximately 11.4%.
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Table of Contents
Maturity Schedule
The aggregate amounts of the Company’s debt, including PECs, accrued interests on PECs, and capital lease obligations,
maturing in each of the next five years and thereafter are as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total
$
$
48,634
122,478
248,649
1,190,075
544,475
1,053,872
3,208,183
Note 10: Variable Interest Entities
A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of
the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb
losses, or the right to receive the expected residual returns of the entity. The primary beneficiary is identified as the variable
interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic
performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially
be significant to the VIE.
The Company’s VIEs include its subsidiary Janus Holdings and its special purpose entity used for the Propel
securitization.
Janus Holdings is the immediate parent company of Cabot. The Company has determined that Janus Holdings is a VIE
and the Company is the primary beneficiary of the VIE. The key activities that affect Cabot’s economic performance include,
but are not limited to, operational budgets and purchasing decisions. Through its control of the board of directors of Janus
Holdings, the Company controls the key operating activities at Cabot.
Propel used a special purpose entity to issue asset-backed securities to investors. The Company has determined that it is a
VIE and Propel is the primary beneficiary of the VIE. Propel has the power to direct the activities of the VIE because it has the
ability to exercise discretion in the servicing of the financial assets and to add assets to revolving structures. As discussed in
Note 17, “Subsequent Event,” on February 19, 2016, the Company entered into an agreement to sell 100% of its membership
interests in Propel. Since Propel is the primary beneficiary of the VIE used for securitization, the Company will no longer
consolidate this VIE subsequent to the sale of Propel.
Assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy
claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not
represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the
consolidated VIEs.
The Company evaluates its relationships with the VIEs on an ongoing basis to ensure that it continues to be the primary
beneficiary.
Note 11: Stock-Based Compensation
In April 2013, Encore’s Board of Directors (the “Board”) approved the Encore Capital Group, Inc. 2013 Incentive
Compensation Plan (as amended, the “2013 Plan”), which was then approved by the Company’s stockholders on June 5, 2013.
The 2013 Plan superseded the Company’s 2005 Stock Incentive Plan (“2005 Plan”). Board members, employees, and
consultants of Encore and its subsidiaries and affiliates are eligible to receive awards under the 2013 Plan. Subject to certain
adjustments, the Company may grant awards for an aggregate of 2,500,000 shares of the Company’s common stock under the
2013 Plan. Any shares subject to awards made under the 2013 Plan that terminate by expiration, forfeiture, cancellation,
payment of exercise price, payment of withholding tax obligation or otherwise without the issuance of such shares shall again
be available for issuance or payment of awards under the 2013 Plan. The 2013 Plan provides for the grant of incentive stock
options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights,
cash awards, performance-based awards and any other types of awards not inconsistent with the 2013 Plan. The awards under
the 2013 Plan consist of compensation subject to authoritative guidance for stock-based compensation.
F-31
Table of Contents
In accordance with authoritative guidance for stock-based compensation, compensation expense is recognized only for
those shares expected to vest, based on the Company’s historical experience and future expectations. Total compensation
expense during the years ended December 31, 2015, 2014, and 2013 was $22.0 million, $17.2 million, and $12.6 million,
respectively.
The Company’s stock-based compensation arrangements are described below:
Stock Options
The 2013 Plan permits the granting of stock options. No options have been awarded under the 2013 Plan. Under the 2005
Plan, option awards were generally granted with an exercise price equal to the market price of the Company’s stock at the date
of issuance. They generally vest over three to five years of continuous service, and have ten-year contractual terms.
The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. All
options are amortized ratably over the requisite service periods of the awards, which are generally the vesting periods.
The fair value for options granted is estimated at the date of grant using a Black-Scholes option-pricing model. There
were no options granted during the years ended December 31, 2015, 2014, or 2013. As of December 31, 2015, all outstanding
stock options have been fully vested and all related compensation expenses have been fully recognized.
A summary of the Company’s stock option activity as of December 31, 2015, and changes during the year then ended, is
presented below:
Number of
Shares
Option Price
Per Share
Weighted Average
Exercise Price
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at December 31, 2014
Exercised
Outstanding at December 31, 2015
Exercisable at December 31, 2015
170,815
(51,936)
118,879
$2.89 –$24.65
$
2.89 –24.65
$2.89 –$24.65
118,879
$2.89 –$24.65
$
$
14.84
18.71
16.23
16.23
$
$
1,528
1,528
The total intrinsic value of options exercised during the years ended December 31, 2015, 2014, and 2013 was $1.2
million, $29.6 million, and $16.9 million, respectively. As of December 31, 2015, the weighted-average remaining contractual
life of options outstanding and options exercisable was 4.6 years.
Non-Vested Shares
The Company’s 2013 Plan (and previously, the 2005 Plan), permits restricted stock units, restricted stock awards, and
performance share awards. The fair value of non-vested shares with service condition and/or performance condition that affect
vesting is equal to the closing sale price of the Company’s common stock on the date of issuance. Compensation cost is
recognized only for the awards that ultimately vest. The Company has certain share awards that include market conditions that
affect vesting, the fair value of these shares is estimated using a lattice model. Compensation cost is not adjusted if the market
condition is not met, as long as the requisite service is provided. For the majority of non-vested shares, shares are issued on the
vesting dates net of the amount of shares needed to satisfy minimal statutory tax withholding requirements. The tax obligations
are then paid by the Company on behalf of the employees.
A summary of the status of the Company’s restricted stock units and restricted stock awards as of December 31, 2015,
and changes during the year then ended, is presented below:
Non-vested at December 31, 2014
Awarded
Vested
Cancelled/forfeited
Non-vested at December 31, 2015
Non-Vested
Shares
Weighted Average
Grant Date
Fair Value
1,102,281
$
712,666
$
(430,813) $
(79,863) $
$
1,304,271
35.60
42.21
35.90
42.22
38.71
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Table of Contents
Unrecognized compensation cost related to non-vested shares as of December 31, 2015, was $21.0 million. The
weighted-average remaining expense period, based on the unamortized value of these outstanding non-vested shares, was
approximately 2.0 years. The fair value of restricted stock units and restricted stock awards vested for the years ended
December 31, 2015, 2014, and 2013 was $16.5 million, $20.2 million, and $11.5 million, respectively.
Note 12: Income Taxes
The Company recorded income tax provisions for continuing operations of $13.6 million, $52.7 million, and $45.4
million, during the years ended December 31, 2015, 2014 and 2013, respectively.
The effective tax rates for the respective periods are shown below:
Federal provision
State (benefit) provision(1)
Federal expense (benefit) of state
Changes in state apportionment(2)
International benefit(3)
Tax reserves(4)
Permanent items(5)
Release of valuation allowance
Other(6)
Effective rate
________________________
Year Ended December 31,
2015
2014
2013
35.0 %
(1.2)%
0.4 %
0.0 %
(12.5)%
(3.3)%
9.6 %
(9.1)%
3.4 %
22.3 %
35.0 %
8.2 %
(2.9)%
0.0 %
(3.6)%
0.0 %
4.3 %
0.0 %
(6.4)%
34.6 %
35.0 %
5.8 %
(2.0)%
(0.2)%
(2.2)%
0.0 %
2.4 %
0.0 %
(1.2)%
37.6 %
(1) Change from 2014 to 2015 relates primarily to a beneficial settlement with a state tax authority.
(2) Represents changes in state apportionment methodologies.
(3) Relates primarily to the lower tax rate on the income attributable to international operations.
(4) Represents release of reserves taken for a certain tax position.
(5) Represents a provision for nondeductible items, including the CFPB settlement.
(6)
Includes the effect of discrete items, primarily relates to the recognition of tax benefit as a result of a favorable tax settlement with taxing authorities as
discussed below.
Due to a one-time charge resulting from a settlement with the Consumer Finance Protection Bureau (“CFPB”), discussed
in detail in Note 13, “Commitments and Contingencies,” the Company incurred a $10.0 million civil monetary penalty related
to the CFPB settlement which is not deductible for income tax purposes during the year ended December 31, 2015.
The pretax income from continuing operations consisted of the following (in thousands):
Domestic
Foreign
Year Ended December 31,
2015
2014
2013
$
$
22,104
38,877
60,981
$
$
131,434
21,181
152,615
$
$
105,009
15,859
120,868
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Table of Contents
The provision for income taxes consisted of the following (in thousands):
Current expense:
Federal
State
Foreign
Deferred (benefit) expense:
Federal
State
Foreign
Year Ended December 31,
2015
2014
2013
$
$
42,459
567
7,124
50,150
(35,353)
(1,409)
209
(36,553)
13,597
$
$
71,002
7,741
3,752
82,495
(33,398)
2,710
918
(29,770)
52,725
$
$
50,304
7,196
4,052
61,552
(13,134)
(2,369)
(661)
(16,164)
45,388
The components of deferred tax assets and liabilities consisted of the following (in thousands):
December 31,
2015
December 31,
2014
$
1,301
$
Deferred tax assets:
Stock-based compensation expense
Accrued expenses
Differences in income recognition related to receivable portfolios
State and international operating losses
Difference in basis of depreciable assets
Capitalized legal fees—international
Cumulative translation adjustment
Tax benefit of uncertain tax positions
Difference in basis of bond and loan costs
Difference in basis of intangible assets
Other
Valuation allowance
Deferred tax liabilities:
State taxes
Deferred court costs
Difference in basis of amortizable assets
Difference in basis of depreciable assets
Differences in income recognition related to receivable portfolios
Deferred debt cancellation income
Other
Net deferred tax asset
$
7,899
33,652
15,234
3,069
4,143
958
1,349
9,480
18,089
2,372
(4,517)
93,029
(690)
(25,277)
(14,988)
(9,163)
(17,432)
(1,957)
(46)
(69,553)
23,476
$
7,143
6,701
31,799
12,917
2,077
4,365
4,036
1,247
10,455
—
376
(10,047)
71,069
(1,643)
(19,550)
(10,682)
(7,868)
(16,308)
(2,602)
(3,533)
(62,186)
8,883
Valuation allowances are recognized on deferred tax assets if the Company believes that it is more likely than not that
some or all of the deferred tax assets will not be realized. The Company believes the majority of the deferred tax assets will be
realized due to the reversal of certain significant temporary differences and anticipated future taxable income from operations.
The valuation allowance of $4.5 million as of December 31, 2015 had been reduced from $10.0 million as of December 31,
2014, due to the release of a valuation allowance associated with one of the Company’s international subsidiaries. Based on
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current information, the Company believes that the subsidiary will have sufficient income in the future that will allow the
utilization of the net operating loss that gave rise to the deferred tax asset and associated valuation allowance.
The differences between the total income tax expense and the income tax expense computed using the applicable federal
income tax rate of 35.0% per annum were as follows (in thousands):
Computed “expected” Federal income tax expense
(Decrease) increase in income taxes resulting from:
State income taxes, net
Foreign non-taxed income, rate differential
Other adjustments, net
Year Ended December 31,
2015
2014
2013
21,343
$
53,415
$
42,304
(460)
(7,609)
323
13,597
$
8,118
(5,453)
(3,355)
52,725
$
3,138
(2,647)
2,593
45,388
$
$
The Company has not provided for U.S. income taxes or foreign withholding taxes on the undistributed earnings from
continuing operations of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries
as of December 31, 2015, were approximately $35.1 million. Such undistributed earnings are considered permanently
reinvested. The Company does not provide deferred taxes on translation adjustments on unremitted earnings under the
indefinite reversal exception. Determination of the amount of unrecognized deferred tax liability related to these earnings is not
practicable due the complexities of a hypothetical calculation.
The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2018 and a 50%
tax holiday for the subsequent four years. The impact of the tax holiday in Costa Rica for the year ended December 31, 2015
was immaterial.
A reconciliation of the beginning and ending amount of the Company’s unrecognized tax benefit is as follows (in
thousands):
Balance at December 31, 2012
Decreases related to prior year tax positions
Increases related to current and prior year tax positions
Balance at December 31, 2013
Increases related to prior year tax positions
Increases related to current year tax positions
Decreases related to settlements with taxing authorities
Balance at December 31, 2014
Increases related to prior year tax positions
Increases related to current year tax positions
Decreases related to prior year tax positions
Balance at December 31, 2015
Amount
1,784
(712)
70,201
71,273
33,027
1,329
(67,204)
38,425
5,835
11,882
(8,193)
47,949
$
$
The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $58.5 million, $44.4 million and
$83.0 million at December 31, 2015, 2014, and 2013 respectively. At December 31, 2015, 2014 and 2013, there were $14.9
million, $12.7 million and $13.5 million, respectively, of unrecognized tax benefits that if recognized, would result in a net tax
benefit. During the year ended December 31, 2015, the increase in the Company’s gross unrecognized tax benefit was primarily
associated with certain business combinations. During the year ended December 31, 2014, the decrease in total gross
unrecognized tax benefits was due to a favorable tax settlement in November 2014 with taxing authorities related to a
previously uncertain tax position. The result of the settlement was a reduction in the unrecognized tax benefit offset by an
increase in current taxes payable and deferred tax liabilities. Additionally, the Company recorded a net tax benefit as a result of
the settlement of approximately $6.6 million. The Company anticipates that the unrecognized tax benefits will decrease by
approximately $32.0 million in the next twelve months due to a settlement with taxing authorities. The uncertain tax benefit is
included in “Other liabilities” in the Company’s consolidated statements of financial condition.
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The Company recognizes interest and penalties related to unrecognized tax benefits in its tax expense. The Company
recognized expense of approximately $0.3 million and $1.3 million in interest and penalties during the years ended December
31, 2015 and 2014, respectively.
The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations.
The 2012 through 2015 tax years remain subject to examination by federal taxing authorities, 2011 through 2015 tax years
generally remain subject to examination by state tax authorities, and the 2012 through 2015 tax years remain subject to
examination by foreign tax authorities. Tax years from 2008 forward remain open at certain of the Company’s subsidiaries for
adjustment for federal and state tax purposes.
Certain of the Company’s foreign subsidiaries have net operating loss carry forwards in the amount of approximately
$63.5 million, which can be carried forward indefinitely. One of the Company’s domestic subsidiaries has a net operating loss
carry forward in the approximate amount of $1.6 million which will begin to expire in 2024 unless previously utilized.
Note 13: Commitments and Contingencies
Litigation and Regulatory
The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to
time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions
based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act
(“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or
alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to
collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its
collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and
regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or
changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation,
negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot
determine the substance or timing of any eventual outcome.
On May 19, 2008, an action captioned Brent v. Midland Credit Management, Inc. et. al was filed in the United States
District Court for the Northern District of Ohio Western Division, in which the plaintiff filed a class action counter-claim
against two of the Company’s subsidiaries (the “Midland Defendants”). The complaint alleged that the Midland Defendants’
business practices violated consumers’ rights under the FDCPA and the Ohio Consumer Sales Practices Act. The Company has
vigorously denied the claims asserted against it in these matters, but has agreed to a proposed settlement to avoid the burden
and expense of continued litigation. Subject to court approval, settlement awards to eligible class members, as well as fees and
costs, will be paid from a settlement fund of approximately $5.2 million, which has already been paid by the Company and its
insurer. If the number of class members who make claims exceeds a certain level, the total settlement could increase to an
amount not to exceed $5.7 million. On October 14, 2014, the district court issued an order granting final approval of the parties’
revised agreed upon settlement of this lawsuit. That order has been appealed by an objector to the settlement, which appeal
remains pending.
On November 2, 2010 and December 17, 2010, two national class actions entitled Robinson v. Midland Funding LLC and
Tovar v. Midland Credit Management, respectively, were filed in the United States District Court for the Southern District of
California. The complaints allege that certain of the Company’s subsidiaries violated the TCPA by calling consumers’ cellular
phones without their prior express consent. The complaints seek monetary damages under the TCPA, injunctive relief, and
other relief, including attorney fees. On May 10, 2011 and May 11, 2011 two class actions entitled Scardina v. Midland Credit
Management, Inc., Midland Funding LLC and Encore Capital Group, Inc. and Martin v. Midland Funding, LLC, respectively,
were filed in the United States District Court for the Northern District of Illinois. The complaints allege on behalf of a putative
class of Illinois consumers that certain of the Company’s subsidiaries violated the TCPA by calling consumers’ cellular phones
without their prior express consent. The complaints seek monetary damages under the TCPA, injunctive relief, and other relief,
including attorney fees. On July 28, 2011, the Company filed a motion to transfer the Scardina and Martin cases to the United
States District Court for the Southern District of California to be consolidated with the Tovar and Robinson cases. On
October 11, 2011, the United States Judicial Panel on Multidistrict Litigation granted the Company’s motion to transfer. All
four of these cases, along with a number of additional cases brought against the Company that allege violations of the TCPA,
are now pending in the United States District Court for the Southern District of California in a multidistrict litigation titled In re
Midland Credit Management Inc. Telephone Consumer Protection Act Litigation. The lead plaintiffs filed an amended
consolidated complaint on July 11, 2012. The Company has vigorously denied the claims asserted against it in these matters,
but has agreed to a proposed class settlement to avoid the burden and expense of continued litigation. The proposed class
settlement is intended to resolve all cases involved in multi-district litigation, and all claims against the Company for alleged
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violations of the TCPA that occurred before August 31, 2014, other than those of persons who exclude themselves from class
settlement. The settlement agreement, which is subject to court approval, would require the Company to contribute $2.0
million to a settlement fund, to be disbursed among eligible class members, and to set aside $13.0 million in debt forgiveness to
be allocated among eligible class members. In addition, the settlement agreement provides that the Company will pay plaintiffs’
attorney fees in an amount to be determined by the court, and for the costs associated with administering the class relief.
On September 9, 2015, the Company entered into a consent order (the “Consent Order”) with the CFPB in which it settled
allegations arising from its practices between 2011 and 2015. The Consent Order includes obligations on the Company to,
among other things: (1) follow certain specified operational requirements, substantially all of which are already part of the
Company’s current operations; (2) submit to the CFPB for review a comprehensive plan designed to ensure that its debt
collection practices comply with all applicable federal consumer financial laws and the terms of the Consent Order; (3) pay
redress to certain specified groups of consumers; and (4) pay a civil monetary penalty. The Company will continue to cooperate
and engage with the CFPB and work to ensure compliance with the Consent Order. In addition, the Company is subject to
ancillary state attorney general investigations related to similar debt collection practices.
The Company incurred a one-time, after-tax charge of approximately $43 million in the third quarter of 2015. The
Company believes this charge will cover all related impacts of the Consent Order, including civil monetary penalties,
restitution, any such ancillary state regulatory matters, legal expenses and portfolio allowance charges on several pool groups
due to the impact on the Company’s current estimated remaining collections related to its existing receivable portfolios. The
Company anticipates that after this one-time charge, any future earnings impact will be immaterial.
In certain legal proceedings, the Company may have recourse to insurance or third party contractual indemnities to cover
all or portions of its litigation expenses, judgments, or settlements. In accordance with authoritative guidance, the Company
records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably
estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the
minimum estimated liability. The Company continuously assesses the potential liability related to its pending litigation and
regulatory matters and revises its estimates when additional information becomes available. As of December 31, 2015, other
than reserves related to the CFPB Consent Order, ancillary state regulatory matters and the TCPA settlement fund discussed
above, the Company has no material reserves for legal matters. Additionally, based on the current status of litigation and
regulatory matters, either the estimate of exposure is immaterial to the Company’s financial statements or an estimate cannot
yet be determined. The Company’s legal costs are recorded to expense as incurred.
Leases
The Company leases office facilities in the United States, Europe, and other geographies. The leases are structured as
operating leases, and the Company incurred related rent expense in the amounts of $19.4 million, $23.0 million, and $12.0
million during the years ended December 31, 2015, 2014, and 2013, respectively.
The Company has capital lease obligations primarily for certain computer equipment. Refer to Note 9, “Debt—Capital
Lease Obligations” for additional information on the Company’s capital leases. Amortization of assets under capital leases is
included in depreciation and amortization expense.
Future minimum lease payments under lease obligations consist of the following for the years ending December 31, (in
thousands):
2016
2017
2018
2019
2020
Thereafter
Total minimal leases payments
Less: Interest
Present value of minimal lease payments
Capital
Leases
Operating
Leases
Total
17,542
16,008
12,259
8,294
6,279
15,431
75,813
$
$
24,192
19,132
13,432
8,725
6,530
15,431
87,442
$
$
6,650
3,124
1,173
431
251
—
11,629
(575)
11,054
$
$
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Table of Contents
Purchase Commitments
In the normal course of business, the Company enters into forward flow purchase agreements and other purchase
commitment agreements. As of December 31, 2015, the Company has entered into agreements to purchase receivable portfolios
with a face value of approximately $1.8 billion for a purchase price of approximately $297.2 million. The Company has no
purchase commitments extending past one year.
Guarantees
Encore’s Certificate of Incorporation and indemnification agreements between the Company and its officers and directors
provide that the Company will indemnify and hold harmless its officers and directors for certain events or occurrences arising
as a result of the officer or director serving in such capacity. The Company has also agreed to indemnify certain third parties
under certain circumstances pursuant to the terms of certain underwriting agreements, registration rights agreements, credit
facilities, portfolio purchase and sale agreements, and other agreements entered into by the Company in the ordinary course of
business. The maximum potential amount of future payments the Company could be required to make under these
indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is
minimal and, as of December 31, 2015, has no liabilities recorded for these agreements.
Note 14: Segment Information
The Company conducts business through several operating segments that meet the aggregation criteria under
authoritative guidance related to segment reporting. The Company has determined that it has two reportable segments: portfolio
purchasing and recovery, and tax lien business. The Company’s management relies on internal management reporting processes
that provide segment revenue, segment operating income, and segment asset information in order to make financial decisions
and allocate resources.
Segment operating income includes income from operations before depreciation, amortization of intangible assets, and
stock-based compensation expense. The following table provides a reconciliation of revenue and segment operating income by
reportable segment to consolidated results and was derived from the segments’ internal financial information as used for
corporate management purposes (in thousands):
Revenues:
Portfolio purchasing and recovery
Tax lien business
Operating income (loss):
Portfolio purchasing and recovery
Tax lien business
Depreciation and amortization
Stock-based compensation
Other expense
Income from continuing operations before income taxes
Year Ended December 31,
2015
2014
2013
$
$
$
$
1,129,967
31,605
1,161,572
337,422
(36,167)
301,255
(33,945)
(22,008)
(184,321)
60,981
$
$
$
$
1,043,429
29,360
1,072,789
352,754
11,820
364,574
(27,949)
(17,181)
(166,829)
152,615
$
$
$
$
756,277
17,087
773,364
219,510
5,045
224,555
(13,547)
(12,649)
(77,491)
120,868
Additionally, assets are allocated to operating segments for management review. As of December 31, 2015, total segment
assets were $3.8 billion and $377.5 million for the portfolio purchasing and recovery segment and tax lien business segment,
respectively.
As discussed in Note 17, “Subsequent Event,” on February 19, 2016, the Company entered into an agreement to sell
Propel which represents the entire tax lien business reportable segment. As the Company’s Board of Directors did not approve a
plan to sell Propel until 2016, the tax lien business did not qualify as held for sale as of December 31, 2015.
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Table of Contents
The following table presents information about geographic areas in which the Company operates (in thousands):
Revenues(1):
United States
Europe
Other geographies
________________________
(1) Revenues are attributed to countries based on location of customer.
Note 15: Goodwill and Identifiable Intangible Assets
Year Ended December 31,
2015
2014
2013
$
$
741,010
376,055
44,507
1,161,572
$
$
752,607
295,173
25,009
1,072,789
$
$
673,302
95,491
4,571
773,364
In accordance with authoritative guidance, goodwill is tested for impairment at the reporting unit level annually and in
interim periods if certain events occur that indicate that the fair value of a reporting unit may be below its carrying value.
Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and
involves the use of significant estimates and assumptions. The Company has six reporting units for goodwill impairment testing
purposes. The annual goodwill testing date for the five reporting units that are included in the portfolio purchasing and recovery
reportable segment is October 1st; the annual goodwill testing date for the tax lien business reporting unit is April 1st.
The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. The qualitative factors include economic environment, business climate, market capitalization,
operating performance, competition, and other factors. The Company may proceed directly to the two-step quantitative test
without performing the qualitative test.
The first step involves measuring the recoverability of goodwill at the reporting unit level by comparing the estimated
fair value of the reporting unit in which the goodwill resides to its carrying value. The second step, if necessary, measures the
amount of impairment, if any, by comparing the implied fair value of goodwill to its carrying value. The Company applies
various valuation techniques to measure the fair value of each reporting unit, including the income approach and the market
approach. For goodwill impairment analyses conducted at most of the reporting units, the Company uses the income approach
in determining fair value, specifically the discounted cash flow method, or DCF. In applying the DCF method, an identified
level of future cash flow is estimated. Annual estimated cash flows and a terminal value are then discounted to their present
value at an appropriate discount rate to obtain an indication of fair value. The discount rate utilized reflects estimates of
required rates of return for investments that are seen as similar to an investment in the reporting unit. DCF analyses are based
on management’s long-term financial projections and require significant judgments, therefore, for the Company’s Cabot
reporting unit, which carries a material goodwill balance and where the Company has access to reliable market participant data,
the market approach is conducted in addition to the income approach in determining its fair value. The Company uses a
guideline company method under the market approach to estimate the fair value of equity and the market value of invested
capital (“MVIC”). The guideline company approach relies on estimated remaining collections data for each of the selected
guideline companies, which enables a direct comparison between the reporting unit and the selected peer group. The Company
believes that the current methodology used in determining the fair value at its reporting units represent its best estimates. In
addition, the Company compares the aggregate fair value of the reporting units to its overall market capitalization.
For the Company’s annual goodwill impairment tests performed at October 1, 2015 for its reporting units that are
included in the portfolio purchasing and recovery reportable segment, the estimated fair value of each of these reporting units
exceeded its respective carrying value. As a result, no impairment existed at any of these reporting units.
The Company determined, at April 1, 2015, the annual goodwill impairment testing date for its tax lien business reporting
unit, that the estimated fair value exceeded the carrying value. The estimation of fair value was based on a DCF analysis under
the income approach as discussed above. However, as discussed in Note 17, Subsequent Event, on February 19, 2016, the
Company entered into an agreement with certain funds which provides for the sale of 100% of the Company’s membership
interests in Propel. The purchase price for the transaction is calculated in accordance with a formula relating to the redemptive
value of certain tax liens as well as the book value of certain other assets and liabilities of Propel, and will be determined at the
closing of the transaction. The application of the purchase price formula as of December 31, 2015 would have resulted in an
enterprise value for Propel of $344.3 million. After repayment of third party debt, the cash consideration payable to the
Company would have been $142.8 million. Authoritative guidance defines fair value as the price that would be received upon
sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement
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Table of Contents
date (i.e., the “exit price”). In connection with the preparation of its financial statements, considering these developments,
management believes that the proposed purchase price indicates that Propel’s fair value at December 31, 2015 was less than its
carrying value. Based on the estimated sales price at closing, the Company wrote-down the entire goodwill balance of $49.3
million carried at the tax lien business reporting unit as of December 31, 2015.
Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded
goodwill and long-lived assets. Further adverse changes in the Company’s actual or expected operating results, market
capitalization, business climate, economic factors or other negative events that may be outside the control of management could
result in a material non-cash impairment charge in the future.
Goodwill was allocable to reporting units included in the Company’s reportable segments. The following table
summarizes the activity in the Company’s goodwill balance, as follows (in thousands):
Balance, December 31, 2014
Goodwill acquired
Goodwill impairment
Goodwill adjustment(1)
Effect of foreign currency translation
Balance, December 31, 2015
______________________
(1) Represents purchase accounting adjustments.
Portfolio
Purchasing and
Recovery
Tax Lien
Business
Total
$
$
848,656
$
49,277
$
114,730
—
2,410
(40,949)
924,847
—
(49,277)
—
—
$
— $
897,933
114,730
(49,277)
2,410
(40,949)
924,847
The Company’s acquired intangible assets are summarized as follows (in thousands):
As of December 31, 2015
As of December 31, 2014
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
5,716
$
(1,263) $
4,453
$
5,437
$
(743) $
Customer relationships
Developed technologies
Trade name and other
Other intangibles—indefinite
lived
8,141
11,304
1,962
(3,793)
(3,938)
—
4,348
7,366
1,962
8,353
10,458
1,962
Total intangible assets
$
27,123
$
(8,994) $
18,129
$
26,210
$
The weighted-average useful lives of intangible assets at the time of acquisition were as follows:
Customer relationships
Developed technologies
Trade name and other
F-40
(2,194)
(1,709)
4,694
6,159
8,749
—
(4,646) $
1,962
21,564
Weighted-Average
Useful Lives
10
5
6
Table of Contents
The amortization expense for intangible assets that are subject to amortization was $5.0 million, $3.6 million, and $0.8
million for the years ended December 31, 2015, 2014, and 2013, respectively. Estimated future amortization expense related to
finite-lived intangible assets at December 31, 2015 is as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total
$
$
4,323
3,943
2,341
1,186
1,109
3,265
16,167
Note 16: Quarterly Information (Unaudited)
The following table summarizes quarterly financial data for the periods presented (in thousands, except per share
amounts):
2015
Gross collections
Revenues
Total operating expenses
Net income (loss)
Net income (loss) attributable to Encore Capital
Group, Inc. stockholders
Earnings (loss) per share attributable to Encore
Capital Group, Inc.:
Basic
Diluted
2014
Gross collections
Revenues
Total operating expenses
Income from continuing operations
Net income
Amounts attributable to Encore Capital Group,
Inc.:
Income from continuing operations
Net income
Earnings per share attributable to Encore Capital
Group, Inc.:
From continuing operations:
Basic
Diluted
From net income:
Basic
Diluted
March 31
June 30
September 30
December 31
Three Months Ended
$
425,071
285,663
199,627
29,967
$
437,324
290,356
203,352
25,185
$
421,753
287,796
253,307
(9,364)
416,577
297,757
259,984
1,596
29,425
27,657
(10,959)
(988)
$
1.13
1.08
$
1.07
1.03
(0.43) $
(0.43)
(0.04)
(0.04)
396,674
$
409,280
$
407,220
$
253,741
185,472
18,830
18,830
23,180
23,180
269,195
190,689
21,353
21,353
23,561
23,561
273,282
188,960
30,138
30,138
30,335
30,335
$
$
0.90
0.82
0.90
0.82
$
$
0.91
0.86
0.91
0.86
$
$
1.17
1.11
1.17
1.11
394,323
276,571
188,224
29,569
27,957
28,262
26,650
1.09
1.04
1.03
0.98
$
$
$
$
$
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Note 17: Subsequent Event
On February 19, 2016, the Company entered into a securities purchase agreement with certain funds affiliated with
Prophet Capital Asset Management LP (“Buyer”), which provides for the sale of 100% of the Company’s membership interests
in Propel to Buyer (the “Transaction”). The purchase price for the Transaction is calculated in accordance with a formula
relating to the redemptive value of certain tax liens as well as the book value of certain other assets and liabilities of Propel, and
will be determined at the closing of the Transaction. The application of the purchase price formula as of December 31, 2015
would have resulted in an enterprise value for Propel of $344.3 million. After repayment of third party debt, the cash
consideration payable to the Company would have been $142.8 million. Based on the proposed selling price, the Company
concluded that the entire goodwill balance of $49.3 million related to Propel was impaired as of December 31, 2015. As the
Company’s Board of Directors did not approve a plan to sell Propel until 2016, the tax lien business did not qualify as held for
sale as of December 31, 2015.
The Company recognized a pre-tax impairment charge for goodwill of $49.3 million, or $1.17 per diluted share, after the
effect of income taxes for the year ended December 31, 2015.
Propel represented the Company’s entire tax lien business reportable segment. Revenue from this segment comprised 3%,
3%, and 2% of the Company’s total consolidated revenues for each of the years ended December 31, 2015, 2014, and 2013,
respectively. Excluding the goodwill impairment charge of $49.3 million discussed above, operating income from this segment
comprised 4%, 3%, and 2% of the Company’s total consolidated operating income for each of the years ended December 31,
2015, 2014, and 2013, respectively. Refer to Note 14, “Segment Information” for further details of revenues and operating
income of the Company’s tax lien business segment.
F-42