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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, 2018 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
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
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
No
No
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Emerging growth company
Accelerated filer
Non-accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 was approximately $943.6 million at June 29, 2018, based on the
closing price of the common stock of $36.60 per share on such date, as reported by NASDAQ.
The number of shares of our Common Stock outstanding at February 20, 2019, was 30,884,393.
Documents Incorporated by Reference
Portions of the registrant’s definitive proxy statement in connection with its annual meeting of stockholders to be held in 2019 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, 2018, which proxy statement
will be filed no later than 120 days after the close of the registrant’s fiscal year December 31, 2018.
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, 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
Item 16—Form 10-K Summary
SIGNATURES
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Our Business
PART I
Item 1—Business
We are an international specialty finance company providing debt recovery solutions and other related services for
consumers across a broad range of financial assets. We primarily 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 and commercial retailers. Defaulted receivables may also include receivables subject to
bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-
performing loans.
Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”) we are a market leader in
portfolio purchasing and recovery in the United States. Through Cabot Credit Management Limited (“CCM”) and its
subsidiaries and European affiliates (collectively, “Cabot”) we are one of the largest credit management services providers in
Europe and a market leader in the United Kingdom and Ireland. These are our primary operations.
We also have additional international investments and operations as we have explored new asset classes and geographies
including: (1) our investments in non-performing loans in Colombia, Peru, Mexico and Brazil; (2) our subsidiary, Baycorp
Holdings Pty Limited (together with its subsidiaries, “Baycorp”), which is one of Australasia’s leading debt resolution
specialists, and (3) an investment in Encore Asset Reconstruction Company (“EARC”) in India. We refer to these additional
international operations as our Latin America and Asia-Pacific (“LAAP”) operations.
To date, operating results from LAAP operations have not been significant to our total consolidated operating results. As a
result, descriptions of our operations in Part I - Item 1 of this Form 10-K will focus primarily on MCM (United States) and
Cabot (Europe) operations.
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 operations centers in 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. Those
accounts are generally serviced in the country of origin.
Company Information
We were incorporated in Delaware in 1999. In June 2013, we completed our merger with Asset Acceptance Capital Corp.,
which was another leading provider of debt recovery solutions in the United States. In July 2013, by acquiring a majority
ownership interest in the indirect holding company of CCM, Janus Holdings S.a r.l., we acquired control of CCM. In February
2014, CCM acquired Marlin Financial Group Limited, a leading acquirer of non-performing consumer debt in the United
Kingdom. In August 2014, we acquired Atlantic Credit & Finance, Inc., which was a market leader in the United States in
buying and collecting on freshly charged-off debt. In June 2015, CCM expanded in the United Kingdom by acquiring Hillesden
Securities Ltd and its subsidiaries (“dlc”). In March 2016, we completed the divestiture of our membership interests in Propel
Acquisition LLC and its subsidiaries (collectively, “Propel”), our tax lien business. In November 2017, CCM strengthened its
debt servicing offerings with the acquisition of Wescot Credit Services Limited, a leading U.K. contingency debt collection and
BPO services company. In July 2018, we completed the purchase of all of the outstanding equity of CCM not owned by us. As
a result, CCM became our wholly owned subsidiary.
Our headquarters is located in San Diego, California 92108 and our telephone number is (877) 445-4581. Our website
address is www.encorecapital.com. The site provides access, free of charge, to relevant investor related information, such as our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports that are filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Sections 13(a) or 15(d)
of the Securities Exchange Act of 1934, 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. 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).
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Our Competitive Advantages
Analytic Strength. We believe that success in our 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.
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.
Strong Capital Stewardship. We continue to maintain a focus on raising and deploying capital prudently to maximize the
return on our invested capital. Our operational scale and geographic diversification enable us to adjust to market trends and
deploy capital to maximize risk-adjusted returns.
Operational Scale and Cost Efficiency. We are a market leader in portfolio purchasing and recovery in the United States
and one of the largest credit management services providers in Europe. This operational scale combined with cost efficiency is
central to our collection and purchasing strategies. We experience considerable cost advantages, stemming from our operations
in India and Costa Rica 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 affordable 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. 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
Continue to Invest in our Core Businesses in the United States. 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 generating strong risk-adjusted returns, we intend to continue
investing in analytics, technology, risk management and compliance. We will also continue investing in initiatives that enhance
our relationships with consumers, expand our digital capabilities and collections, or improve liquidation rates on our portfolios.
We also plan to invest in software and systems designed to better integrate our operations and improve our overall efficiency.
We intend to continue deploying a meaningful amount of capital in our core domestic markets.
Strengthen and Develop our U.K. and European Businesses. We believe we are well-positioned through Cabot to
maintain and strengthen our leading role in the distressed consumer debt sectors in the U.K. and in certain markets within
Europe. We intend to preserve our market leading position in the U.K. by maintaining a high level of collections performance
and compliance. We also intend to continue investing in developing our digital capabilities as well as our leading data,
scorecard and litigation capabilities. We will continue to explore opportunities in new geographies and asset classes.
Purchasing Approach
We provide sellers of delinquent receivables liquidity and immediate value through the purchase of charged-off consumer
receivables. We believe that we are a valuable partner to these sellers given our financial strength, focus on principled intent,
and track record of financial success.
Identify purchase opportunities. We maintain relationships with various financial service providers such as banks, credit
unions, consumer finance companies, retailers, utilities companies and government agencies. These relationships frequently
generate recurring purchase opportunities. We identify purchase opportunities and secure, where possible, exclusive negotiation
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rights. We believe that we are a valued partner for credit originators 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 typically sold either through a general auction, in which the seller requests bids from market participants, or in a
private sale where the buyer negotiates directly with a seller. 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, but can be longer, 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. In the U.S., where we have the ability in many of our forward flow contracts to terminate upon
a certain specified amount of notice, we generally attempt to secure forward flow contracts for receivables because a consistent
volume of receivables over a set duration can enable us to more accurately forecast and plan our operational needs.
Evaluate purchase opportunities using analytical models. Once a portfolio of interest is identified, we obtain detailed
information regarding the portfolio’s accounts, including certain information regarding the consumers themselves. We use this
account-level information to perform due diligence and evaluate the portfolio. We use statistical analysis and forecasting to
analyze this information to create expected future cash forecasts for the portfolio. Our collection expectations are based on,
among other things, demographic data, account characteristics, and credit file variables, which we use to predict a consumer’s
willingness and ability to repay their debt. Our servicing strategy and collections channel capacity are also a major determinant
of collections expectations and portfolio expected value. Additional adjustments to cash expectations 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 to ensure our valuations are aligned with our operations.
Formal approval process. Once we have determined the estimated value of the portfolio and have completed our
qualitative due diligence, we present the purchase opportunity to our investment committee, which either sets the maximum
purchase price for the portfolio based on an Internal Rate of Return (“IRR”) and at times also on other strategic objectives, or
declines to bid. Members of the investment committee vary based on the type and amount of the purchase opportunity, but
typically 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 diversified asset sourcing approach with an account-level
scoring methodology and a disciplined evaluation process.
Collection Approach
MCM (United States)
We continue to expand and build upon the insight developed from previous collections when developing our account
collection strategies for portfolios we have acquired. We refine our collection approach to determine the most effective
collection strategy to pursue for each account. Our current collection approaches consist of:
• Direct Mail and Email. We develop innovative mail and email campaigns offering consumers payment programs,
and occasionally appropriate discounts, to encourage settlement of their accounts.
• Call Centers. We maintain domestic collection call centers in Phoenix, Arizona, St. Cloud, Minnesota, Troy,
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. We continuously 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.
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• 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 their 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 law
firm (and throughout our engagement of any external law firm), we monitor and evaluate the firm’s compliance with
consumer credit laws and regulations, operations, financial condition, and experience, among other key criteria. The
law firms we hire 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.
• Digital Collections. We offer an online payment portal that enhances consumer convenience by providing
consumers the ability to view account details, make payments and submit inquiries online.
•
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.
• No Resale. Our policy is to not resell accounts to third parties in the ordinary course of business.
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. 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 attempt to contact
consumers and assess each consumer’s willingness to pay through analytics, phone calls and/or letters. If the consumer’s
contact information is unavailable or out of date, the account is routed to our skip tracing process, which includes the use of
different skip tracing companies to provide accurate phone numbers and addresses. The consumers that engage with us are
presented with payment plans that are intended to suit their needs or are sometimes offered discounts on their obligations. For
the consumers that do not respond to our calls or our letters we must then decide whether to pursue collections through legal
action. Throughout our ownership period of accounts, we periodically refine our collection approach to determine the most
effective collection strategy to pursue for each account.
Cabot (Europe)
In Europe, we also use direct mail and email, call centers, legal action, third-party collection agencies and digital methods
to pursue collections.
We use insights developed during our purchasing process to build account collection strategies. Our proprietary
consumer-level collectability analysis is the primary determinant of how an account will be serviced post-purchase. We
continuously refine this analysis to determine the most effective collection strategy to pursue for each account we own. We
purchase both paying portfolios, which consist of accounts where over 50% of the investment value is associated with
consumers who are already repaying some of their debt, albeit at levels that still require the debt to be written off under the
originators’ internal accounting policies, and non-paying portfolios, where 50% or more of the investment value is associated
with customers who are not repaying some of their debt, which are higher risk and have less predictable cash flows than paying
portfolios. Paying portfolios tend to have a higher purchase price relative to face value than non-paying accounts due to the
higher expectations for collections, as well as lower anticipated collection costs. Non paying portfolios often consist of a
substantial number of accounts without contact details and for which the vendor has made numerous unsuccessful attempts to
collect.
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We employ a variety of collections strategies from the point of purchase, tailored to both the type of account and the
consumer’s financial strength. For paying accounts, we seek to engage with the consumers to transfer across their payment
stream to us and understand their detailed financial situation. For non-paying accounts, we apply a segmentation framework
tailoring our communication and contact intensity in line with our assessment of their credit bureau data, the size of their debt,
and whether we have an existing relationship with them from other accounts. Where contact is made and consumers indicate
both a willingness and ability to pay, we create tailor-made payment plans to suit the consumer’s situation. In doing so, we
utilize U.K. regulatory protocols to assess affordability and ensure their plan is fair, balanced and sustainable. Where we
identify consumers with an ability to pay but who appear to be unwilling to pay their debt due, we pursue a range of collections
strategies, which may include litigation processes in order to stimulate engagement and enable us to agree to a suitable plan.
Scoring is applied in conjunction with manual selection criteria to determine whether litigation might be an option, also
informing any enforcement action that may be deemed most appropriate to the consumer’s situation. Relationships with
consumers are maintained through the duration of the payment plan, seeking to review plans at least annually in order to take
into account fluctuations in consumers’ financial situations. Again, scoring is used to vary the intensity of contact effort,
mirroring the likelihood of a consumer’s financial situation having changed. In the event that a consumer breaks their plan,
segmentation is used to tailor the communication and contact intensity as we seek to re-engage with the consumer and
understand the reason for the break. By understanding the reason for the break we can tailor the solutions we recommend to
rehabilitate the plan and put the customer back on the path to financial recovery. In this way, we have built strong relationships
with our consumer base with a robust repayment stream, reflected in exceptional customer service scores.
Debt Servicing
Our debt servicing operations, which are primarily performed by subsidiaries of Cabot and Baycorp, include early stage
collections, business process outsourcing and contingent collections for credit originators. We mainly provide debt servicing for
consumer accounts, but also provide services for business-to-business accounts. We believe our debt servicing operations
provide us: exposure to the oversight requirements of financial services clients that drive a continually evolving compliance
agenda; access to proprietary debt purchase opportunities; and an opportunity to support clients across the collections and
recoveries lifecycle, thereby allowing us to remain close to evolving trends.
Seasonality
MCM (United States)
While seasonality does not have a material impact on our business, 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 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.
Cabot (Europe)
While seasonality does not have a material impact on European 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 payment 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.
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Compliance and Enterprise Risk Management
We have established a compliance management system framework, operational procedures, and governance structures to
enable us to conduct business in accordance with applicable rules, regulations, and guidelines. Our philosophy rests on well-
established risk management principles including a model leveraging three lines of defense. Our first line of defense consists
of business lines or other operating units, whose role is to own and manage risks and associated mitigating controls. Our
second line of defense is comprised of strong legal, compliance, and enterprise risk management functions, who ensure that the
business maintains policies and procedures in compliance with existing laws and regulations, advise the business on assessing
risk and strengthening controls, and provide additional, related support. These second-line functions facilitate oversight by our
management and Board of Directors and are responsible for promoting compliance with applicable laws and regulations,
assisting in formulating and maintaining policies and procedures, and engaging in training, risk assessments, testing,
monitoring, complaint response, compliance audits and corrective actions. Our third line of defense is provided by our internal
audit function, providing independent assurance that both first and second line functions are performing their roles
appropriately within the context of our framework.
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 that guide all dealings with our consumers. Our
employees undergo comprehensive training on legal and regulatory compliance, and we engage in regular call monitoring
checks, data checks, performance reviews, and other operational reviews to ensure compliance with company guidelines.
Credit originators who sell us defaulted consumer receivables routinely conduct examinations of our collection practices
and procedures and typically make reports with recommendations to us as to how they believe we can improve those practices
and procedures. We respond to these reports in the ordinary course of business and make changes to our practices and
procedures that we believe are appropriate to address any issues raised in such reports.
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.
Omni-Channel Enabled Dialer Technology. Our call centers employ the use of upgraded dialer technology that expands
our ability to service the consumer in their preferred channel of communication. 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 cybersecurity, to change management, data protection, and segregation of
duties.
Cybersecurity. We divide our cybersecurity and information security functions into the four core tenets 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
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proprietary data throughout its life cycle. 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. To ensure the integrity and reliability of our environment, we
periodically engage outside auditors specializing in cybersecurity to examine and test our technical posture as well as our
detection and response capabilities.
Competition
The consumer credit recovery industry is highly competitive in the United States, the United Kingdom and throughout
Europe. We compete with a wide range of collection and financial services companies, 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.
When purchasing receivables, we compete primarily on the basis of price, 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 in the United States and the United Kingdom are facing difficulties in the portfolio
purchasing market because of the higher cost to operate due to increased regulatory pressure and scrutiny applied by regulators.
In addition, sellers of charged-off consumer receivables are increasingly sensitive to the reputational risks involved in the
industry and are therefore being more selective with buyers in the marketplace. We believe this favors larger participants in this
market, such as us, that are better able to adapt to these pressures.
Government Regulation
MCM (United States)
Our operations in the United States 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. Pursuant to the Dodd-Frank
Wall Street Reform and Consumer Financial Protection Act of 2010 (the “Dodd-Frank Act”), Congress transferred the Federal
Trade Commission’s (“FTC”) 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.
In addition to the FDCPA, the federal laws that directly or indirectly 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 (“TCPA”)
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
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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. In July 2016, the CFPB released an outline of proposals under
consideration for its debt collection rulemaking. The proposals are aimed at ensuring debt collectors, among other things:
collect the correct debt; limit excessive or disruptive communications; stop collecting or suing for debt without proper
documentation; and provide documentation substantiating debt to a consumer upon demand. In addition to consulting with
business representatives, the CFPB will continue to seek input from the public, consumer groups, industry, and other
stakeholders before continuing the rulemaking process. In October 2018, the CFPB issued an agenda that included plans to
issue a Notice of Proposed Rulemaking by March 2019 concerning debt collectors’ and debt buyers’ communications practices
and consumer disclosures.
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. We will continue to cooperate and engage with the CFPB and
work to ensure compliance with the Consent Order, which terminates in September 2020. In addition, we are subject to
ancillary state attorney general investigations related to similar debt collection 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, 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 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
TCPA, which could impact the way consumers may be contacted on their cellular phones and could impact our operations and
financial results. The FCC is currently engaged in further rulemaking regarding the definition of an automatic telephone dialing
system under the TCPA.
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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.
Cabot (Europe)
Our operations in Europe are affected by foreign statutes, rules and regulations. It is our policy to comply with these laws
in all of our recovery activities.
Financial Conduct Authority Regulation. U.K. debt purchase and collections businesses are principally regulated by the
Financial Conduct Authority (“FCA”), the UK Information Commissioner’s Office (“ICO”) and the UK Office of
Communications (“OFCOM”). In March 2016, Cabot Credit Management Group Limited (“CCMG”), a Cabot subsidiary, was
granted FCA authorization to conduct debt purchase and debt collection activities. CCMG appointed other Cabot subsidiaries to
carry out debt-collecting and debt administration services on its behalf. CCMG assumes full regulatory responsibility for such
entities. The FCA regards debt collection as a ‘‘high risk’’ activity and may therefore dedicate special resources to more
intensive monitoring of businesses in this sector. The FCA Handbook sets out the FCA rules and other provisions. Firms
wishing to carry on regulated consumer credit activities must comply with all applicable sections of the FCA Handbook,
including Customer Treatment principles, as well as the applicable consumer credit laws and regulations.
The FCA has applied its rules to consumer credit firms in a number of areas, including its high-level principles and
conduct of business standards. The FCA has significant powers and given the FCA has only been responsible for regulating
consumer credit since April 2014, it is likely that the regulatory requirements applicable to the debt purchase industry will
continue to increase, as the FCA deepens its understanding of the industry through continued supervision. In addition, it is
likely that the compliance framework that will be needed to continue to satisfy the FCA requirements will demand continued
investment and resources in our compliance governance framework.
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A key regulatory change program for 2019 is the implementation of Senior Managers and Certification Regime
(‘‘SMCR’’) for UK operations by December 2019. These requirements duplicate those that are already in place for UK based
Banks and are designed to drive accountability and risk ownership within businesses. This will directly impact CCMG’s senior
management team and the wider requirements will affect the majority of colleagues who will need to be aware and adhere to
the required standards of conduct.
Companies authorized by the FCA must be able to demonstrate that they meet the threshold conditions for authorization
and comply on an ongoing basis with the FCA’s high level standards for authorized firms, such as its Principles for Business
(including the principle of ‘‘treating customers fairly’’), and rules and guidance on systems and controls. In addition to the full
authorization of its business with the FCA, CCMG has appointed certain individuals who have significant control or influence
over the management of the business, known as “Approved Persons,” and are jointly and severally liable for the acts and
omissions of CCMG and its business affairs. Approved Persons are subject to statements of principle and codes of practice
established and enforced by the FCA.
The FCA has the ability to, among other things, impose significant fines, ban certain individuals from carrying on trade
within the financial services industry, impose requirements on a firm’s permission, cease certain products from being collected
upon and in extreme circumstances remove permissions to trade.
In addition to the permissions granted as part of this FCA authorization, in February 2017, CCMG was granted a variation
of permissions from the FCA in order to administer regulated mortgage contracts.
Consumer protection. 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. The FCA is in the process of reviewing the provisions of the Consumer Credit Act
1974, with a view to consider implementing rules into its handbook to replace the legislation. The FCA is expected to issue its
final report by April 2019.
Data protection. In addition to these regulations on debt collection and debt purchase activities, Cabot must comply with
requirements established by the Data Protection Act of 2018 in relation to processing the personal data of its consumers. This
legislation came into effect in May 2018 to implement the EU General Data Protection Regulation (“GDPR”). This
substantially replaced the Data Protection Act of 1998 and introduced significant changes to the data protection regime
including but not limited to: the conditions for obtaining consent to process personal data; transparency and providing
information to individuals regarding the processing of their personal data; enhanced rights for individuals; notification
obligations for personal data breach; and new supervisory authorities, including a European Data Protection Board (“EDPB”).
CCMG has made the required changes in its UK operations across its debt purchasing and servicing businesses to meet the
requirements of the GDPR and the Data Protection Act 2018. A Data Protection Officer has been appointed and is supported by
Privacy Champions at each UK site to promote and enforce good data protection practices.
Ireland. The regulatory regime in the Republic of Ireland has been subject to significant changes in recent years. In July
2015, the Irish Parliament introduced the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 (the “2015
Act”), which requires credit servicing firms to be regulated by the Central Bank of Ireland to ensure regulatory protection for
consumers following the sale of consumer loan portfolios to unregulated entities. Cabot Financial Ireland is authorized by the
Central Bank of Ireland under Part V of the Central Bank Act 1997 as amended by the 2015 Act as a Credit Servicing Firm. As
a result, Cabot Financial Ireland is subject to the Central Bank of Ireland’s supervisory and enforcement regime and is subject
to various regulatory consumer protection codes. Cabot Financial Ireland was already obligated to ensure compliance with
these codes through its contractual agreements to service loans on behalf of various Irish financial institutions and is audited on
a regular basis against such obligations.
In June 2016, the United Kingdom held a referendum in which voters approved the United Kingdom’s withdrawal from
the E.U., commonly referred to as “Brexit.” In March 2017, the United Kingdom formally served notice on the European
Council of its intention to withdraw from the E.U. Brexit continues to create significant uncertainty about the future
relationship between the United Kingdom and the E.U., including with respect to the laws and regulations that will apply as the
United Kingdom determines which E.U. laws to replace or replicate in the event of a withdrawal. Additionally, Brexit could,
among other outcomes, disrupt the free movement of goods, services and people between the United Kingdom and the E.U.,
undermine bilateral cooperation in key policy areas and significantly disrupt trade between the United Kingdom and the E.U.
Given the lack of comparable precedent, it is unclear what financial, trade and legal implications Brexit will have and how it
will affect us.
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
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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, 2018, we had approximately 7,900 employees worldwide. None of our employees in North America
are represented by a labor union or subject to the terms of collective bargaining agreements. We have employees in the U.K.,
Spain, Italy and New Zealand who are represented by collective bargaining agreements. We believe that our relations with our
employees in all locations 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
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.
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.
We enter into “forward flow” contracts, which are commitments to purchase receivables over a duration that is typically
three to twelve months with a specifically defined volume, frequency, and pricing. In periods of decreasing prices, we may end
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up paying an amount higher for such debt portfolios in a forward flow contract than we would otherwise agree to pay at the
time for a spot purchase, which could result in reduced returns. We would likely only be able to terminate such forward flow
agreements in certain limited circumstances.
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.
A significant portion of our portfolio purchases during any period may be concentrated with a small number of sellers,
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 portfolio 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 a result of consolidation in the market, there are 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.
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.
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.
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 generate satisfactory returns, this may adversely affect our business, financial condition and operating results.
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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.
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.
We use internally developed 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. 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.
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.
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 that are recoverable from the consumer,
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.
We are subject to audits conducted by sellers of debt portfolios and may be required to implement specific changes to our
policies and practices as a result of adverse findings by such sellers as a part of the audit process, which could limit our
ability to purchase debt portfolios from them in the future, which could materially and adversely affect our business.
Pursuant to purchase contracts, we are subject to audits that are conducted by sellers of debt portfolios. Such audits may
occur with little notice and the assessment criteria used by each seller varies based on their own requirements, policies and
standards. Although much of the assessment criteria is based on regulatory requirements, we may be asked to comply with
additional terms and conditions that are unique to particular debt originators. From time to time, sellers may believe that we
are not in compliance with certain of their criteria and in such cases, we may be required to dedicate resources and to incur
expenses to address such concerns, including the implementation of new policies and procedures. In addition, to the extent that
we are unable to satisfy the requirements of a particular seller, such seller could remove us from their panel of preferred
purchasers, which could limit our ability to purchase debt portfolios from that seller in the future, which could adversely affect
our business, financial condition and operating results.
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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 be able to secure replacement third-party collection agencies or attorneys or
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.
Changes in accounting standards and their interpretations could adversely affect our operating results.
U.S. GAAP are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of
Certified Public Accountants, the SEC, and various other bodies that promulgate and interpret appropriate accounting
principles. These principles and related implementation guidelines and interpretations can be highly complex and involve
subjective estimates. A change in these principles or interpretations could have a significant effect on our reported financial
results and could affect the reporting of transactions completed before the announcement of a change. For example, in June
2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments (“ASU 2016-13”). ASU 2016-13 could have a significant impact on how we measure and record income
recognized on receivable portfolios. We are required to adopt ASU 2016-13 beginning January 1, 2020, however, there are still
various implementation issues, including outstanding proposed amendments to the guidance that could materially affect our
current interpretation of this standard. Late interpretations of ASU 2016-13 may impact our ability to implement, change
systems, processes and controls in time to implement without negative consequences to our internal control environment. ASU
2016-13 and other new accounting standards could have an adverse effect on our reported financial results, which could in turn
cause our stock price to decline.
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 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.
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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.
Failure to comply with the regulatory regime to which Cabot is subject may adversely affect our business, financial
condition and operating results.
As noted in detail in “Item 1 - Part 1 - Business - Government Regulation” of this Annual Report on Form 10-K, the debt
purchase and collections sector and the broader consumer credit industry in the United Kingdom and the other jurisdictions in
which Cabot operates is highly regulated under various laws and regulations. These laws and regulations are also subject to
review from time to time and may be subject to significant change. In addition, this legislation is principles-based and therefore
the interpretation of compliance is complex and may change over time.
Compliance with this extensive regulatory framework is expensive and labor-intensive. Failure to comply with any
applicable laws, regulations, rules or contractual compliance obligations could result in investigations, information gathering,
public censures, financial penalties, disciplinary measures, liability and/or enforcement actions being brought against Cabot,
including licenses or permissions that Cabot needs to do business not being granted or being revoked or the suspension or
termination of its ability to conduct collections. In addition, Cabot’s debt purchase contracts with vendors include certain
conditions and failure to comply or revocation of a permission or authorization, or other actions taken by Cabot that may
damage the reputation of the vendor, may entitle the vendor to terminate any agreements with Cabot and/or to repurchase debt
portfolios Cabot previously purchased from it. Damage to Cabot’s reputation, whether because of a failure to comply with
applicable laws, regulations or rules, revocation of a permission or authorization, any other regulatory action or Cabot’s failure
to comply with contractual compliance obligations, could deter vendors from choosing Cabot as their debt purchase or
collections provider. Failure to comply with any of the requirements issued by the Financial Conduct Authority (“FCA”) or the
requirements of any applicable legislation or regulation is likely to have serious consequences. For example, the FCA may
undertake investigations and information-gathering in connection with any aspect of Cabot’s operations. The FCA may also
commence disciplinary action against authorized entities within Cabot, which may include public censure or instituting a ban
on conducting business within the consumer credit sector. The FCA may revoke or impose restrictions or temporary
suspensions on Cabot’s authorization, which would be publicly known and involve serious reputational damage, as well as
significantly impact our business. The FCA may impose requirements demanding changes in Cabot’s business practices, which
may interfere with Cabot’s ability to carry on regulated activities and adversely affect its reputation and ability to acquire
additional purchased loan portfolios.
As a debt purchaser, Cabot’s ability to price debt portfolios, trace consumers and develop tailored repayment plans
depends on its ability to use personal data in its consumer data intelligence systems. Depending on their nature and scope,
changes to data protection laws, practices, regulations and guidance could require additional investments and resources in
Cabot’s compliance governance framework, or could alter the way in which Cabot obtains, collects and uses data. The General
Data Protection Regulation (GDPR) (Regulation (EU) 2016/679) (the “EU Data Protection Regulation”) came into effect in
May 2018. The EU Data Protection Regulation introduced substantial changes to the EU data protection regime and has
imposed a substantially higher compliance burden on Cabot. Examples of this higher burden include expanding the requirement
for informed opt in consent by customers to processing of personal data and granting customers a “right to be forgotten,”
restrictions on the use of personal data for profiling purposes, disclosure requirements of data sources to customers, the
possibility of having to deal with a higher number of subject access requests, among other requirements.
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Any of the developments described above, including the FCA’s imposition of additional requirements on Cabot’s
operations or failure by Cabot to maintain FCA authorization for its 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.
Economic conditions and regulatory changes leading up to and following the United Kingdom’s expected exit from the
European Union could have a material adverse effect on our business, financial condition and results of operations.
In June 2016, the United Kingdom held a referendum in which voters approved the United Kingdom’s exit from the E.U.,
commonly referred to as “Brexit.” In March 2017, the United Kingdom formally served notice on the European Council of its
intention to withdraw from the E.U. Brexit continues to create significant uncertainty about the future relationship between the
United Kingdom and the E.U., including with respect to the laws and regulations, such as the E.U. Data Protection Regulation,
that will apply as the United Kingdom determines which E.U. laws to replace or replicate in the event of a withdrawal.
Additionally, Brexit could, among other outcomes, disrupt the free movement of goods, services and people between the U.K.
and the E.U., undermine bilateral cooperation in key policy areas and significantly disrupt trade between the U.K. and the E.U.
Consequences such as deterioration in economic conditions, volatility in currency exchange rates or changes in regulation may
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 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.
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.
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We may make acquisitions that prove unsuccessful and any mergers, acquisitions, dispositions or joint venture activities
may change our business and financial results and introduce new risks.
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. 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. 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. We also pursue dispositions and joint ventures from time to time. Any such transactions could change
our business lines, geographic reach, financial results or capital structure. Our company could be larger or smaller after any
such transactions and may have a different investment profile.
We may consume resources in pursuing business opportunities, financings or other transactions that are not consummated,
which may strain or divert our resources.
We anticipate that the investigation of various transactions, and the negotiation, drafting, and execution of relevant
agreements, disclosure documents and other instruments with respect to such transactions, will require substantial management
time and attention and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is made
not to consummate a specific transaction, the costs incurred up to that point for the proposed transaction likely would not be
recoverable. Furthermore, even if an agreement is reached relating to a specific transaction, we may fail to consummate the
transaction for any number of reasons, including those beyond our control. Any such event could consume significant
management time and result in a loss to us of the related costs incurred, which could adversely affect our financial position and
our business.
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.
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 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;
differing accounting standards and practices;
increased exposure to U.S. laws that apply abroad, such as the Foreign Corrupt Practices Act, and exposure to
other anti-corruption laws such as 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;
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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 and, in some circumstances, U.S. 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.
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.
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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, primarily the British Pound, 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 financial
condition and operating results.
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, 2018, our
total long-term indebtedness outstanding was approximately $3.5 billion. 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.
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 or exchange of our convertible notes or exchangeable notes, respectively,
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.
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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. We are not restricted under the terms of the indentures governing our convertible notes or
exchangeable 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 our credit facilities and other existing debt currently limit the ability of us and certain of our
subsidiaries to incur certain 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.
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.
Changes in the method pursuant to which the LIBOR rates are determined and potential phasing out of LIBOR after 2021
may affect the value of the financial obligations to be held or issued by us that are linked to LIBOR or our results of
operations or financial condition.
As of December 31, 2018, we held $347.0 million notional amount of interest rate swap agreements and $445.8 million
notional amount of interest rate cap contracts that use the London Interbank Offered Rate (“LIBOR”) as a reference rate and
borrowings under our revolving credit facilities, term loan facilities, and various other debt obligations bear interest based upon
certain reference rates, including LIBOR. On July 27, 2017, the FCA, which regulates LIBOR, announced that it will no longer
persuade or compel banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of
calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve began publishing the
Secured Overnight Financing Rate (“SOFR”) in April 2018 as an alternative for LIBOR. SOFR is a broad measure of the cost
of borrowing cash overnight collateralized by U.S. Treasury securities. A transition away from the widespread use of LIBOR to
SOFR or another benchmark rate may occur over the course of the next few years. Whether or not SOFR attains market traction
as a LIBOR replacement tool remains in question and the future of LIBOR currently is uncertain. As a result, it is not possible
to predict the effect of any changes, establishment of alternative references rates or other reforms to LIBOR that may be
enacted in the U.K. or elsewhere. The elimination of LIBOR or any other changes or reforms to the determination or
supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans,
derivatives and other financial obligations or extensions of credit held by or due to us or on our 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. 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;
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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 or exchangeable 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 conversion of our convertible notes and exchangeable notes and our at-the-market equity offering
program. 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. 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 have registered sales of common stock by certain holders who received shares of our Common
Stock upon completion of the Cabot Transaction. Sales of these registered shares of common stock by such holders may occur
from time to time in the future. We cannot predict the effect that future issuances or sales of our common stock or 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 or exchangeable notes upon a
fundamental change or to settle conversions or exchanges 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 and exchangeable notes will have the right to require us to repurchase their 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 or exchange of notes, unless we elect to deliver solely shares of our common
stock to settle (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 notes converted or exchanged 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 the notes surrendered therefor or to settle conversions or exchanges in cash. In
21
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addition, certain of our debt agreements contain restrictive covenants that limit our ability to engage in specified types of
transactions, which may affect our ability to repurchase our convertible notes or exchangeable notes. Further, our ability to
repurchase our convertible notes or exchangeable notes or to pay cash upon conversion or exchange may be limited by law, by
regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase the notes or to pay cash
upon conversion or exchange of the notes at a time when the repurchase or cash payment upon conversion or exchange is
required by any indenture pursuant to which the convertible notes or exchangeable notes were offered would constitute a
default under the relevant indenture. Such default could constitute a default under other agreements governing our
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 or exchangeable notes.
The conditional conversion feature of our convertible notes or exchangeable 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 or exchangeable notes is triggered, holders
of those notes will be entitled to convert or exchange the notes at any time during specified periods at their option. Even if
holders do not elect to convert or exchange their notes, we could be required under applicable accounting rules to reclassify all
or a portion of the outstanding principal of the relevant series of 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 or exchangeable debt securities that may be settled in cash, such as our convertible
notes and exchangeable 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 or exchange option of convertible or exchangeable debt instruments that may be settled entirely
or partially in cash upon conversion or exchange, such as our convertible notes and exchangeable 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 option would be treated as original issue discount for purposes of accounting for the debt component of the notes,
and that original issue discount is amortized into interest expense over the term of the 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 notes over the respective terms of the 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 notes, which could
adversely affect our reported or future financial results and the trading price of our common stock.
Under certain circumstances, convertible or exchangeable debt instruments that may be settled entirely or partially in cash
(such as our convertible notes and exchangeable notes) 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 or exchange of the notes are not included
in the calculation of diluted earnings per share except to the extent that the conversion or exchange value of the notes exceeds
their respective principal amount. Under the treasury stock method, for diluted earnings per share purposes, the 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 and exchangeable 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.
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.
22
None.
Item 1B—Unresolved Staff Comments
We consider the following properties our principal properties, all of which we lease:
Item 2—Properties
Location
Primary use
San Diego, CA
United Kingdom
India
Troy, MI
St. Cloud, MN
Spain
Roanoke, VA
Australia
Costa Rica
Phoenix, AZ
Corporate headquarters, internal legal and consumer support services
Cabot corporate office, call center, internal legal and consumer support services
Call center and administrative offices
Call center and administrative offices
Call center and administrative offices
Call center and administrative offices
Call center and administrative offices
Baycorp corporate office, call center, and administrative offices
Call center and administrative offices
Call center and administrative offices
We also lease other immaterial office space in the United States, Ireland, France, Italy, 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.
Item 3—Legal Proceedings
The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to
time in the ordinary course of business. Although no assurance can be given with respect to the outcome of these or any other
actions and the effect such outcomes may have, based on our current knowledge, we believe any liability resulting from the
outcome of such disputes, legal actions, regulatory investigations, inquiries, and other actions will not have a material adverse
effect on our business, financial position or results of operations.
For additional information see Note 13, “Commitments and Contingencies” to the consolidated financial statements.
Not applicable.
Item 4—Mine Safety Disclosures
23
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PART II
Item 5—Market for the Registrant’s Common Equity, 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 closing price of our common stock on February 20, 2019, was $32.93 per share and there were 65 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, 2013 through December 31, 2018, with the cumulative total return of (a) the NASDAQ Composite Index, (b) a
peer group used in prior years consisting of Asta Funding, Inc. and PRA Group, Inc., and (c) a revised peer group consisting of
Arrow Global, B2Holding, Hoist Finance, Intrum, Kruk and PRA Group, Inc. We believe this revised peer group, which
includes internationally listed global specialty finance companies, provides a better comparison than the prior custom peer
group, which only included domestic listed companies. The comparison assumes that $100 was invested on December 31,
2013, 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.
Encore Capital Group, Inc.
NASDAQ Composite Index
Prior Peer Group
Revised Peer Group
12/13
12/14
12/15
12/16
12/17
12/18
$
$
$
$
100.00
100.00
100.00
100.00
$
$
$
$
88.34
114.62
109.40
106.47
$
$
$
$
57.86
122.81
66.79
98.97
$
$
$
$
57.00
133.19
75.67
104.62
$
$
$
$
83.76
172.11
63.87
121.25
$
$
$
$
46.76
165.84
47.91
73.05
24
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Dividend Policy
As a public company, we have never declared or paid dividends on our common stock. 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. 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 not permitted to declare and pay
dividends in an amount exceeding, during any fiscal year, 20% of our audited consolidated net income for the then most
recently completed fiscal year. We may also be subject to additional dividend restrictions under future debt agreements or the
terms of securities we may issue in the future.
Share Repurchases
On August 12, 2015, our Board of Directors approved a $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. As of December 31, 2018, we had not
made any repurchases under the share repurchase program.
Recent Sales of Unregistered Securities
In July 2018, in connection with the closing of the Cabot Transaction (as defined below), we issued an aggregate of
4,906,482 shares of our common stock to the sellers named in those certain purchase agreements dated May 7, 2018.
Information regarding this transaction is set forth in our Form 8-K filed on July 30, 2018.
25
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 is 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, 2016, 2015, and 2014,
and for the years ended December 31, 2015 and 2014, was 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, 2018 and 2017, and for the years
ended December 31, 2018, 2017, and 2016, was derived from our audited consolidated financial statements included elsewhere
in this Annual Report on Form 10-K. The Selected Operating Data was derived from our books and records (in thousands,
except per share data):
26
Table of Contents
Revenues
As of and For The Year Ended December 31,
2018
2017
2016
2015
2014
Revenue from receivable portfolios
$
1,167,132
$
1,053,373
$
1,030,792
$
1,065,673
$
975,425
Other revenues
Total revenues
153,425
1,320,557
92,429
82,643
57,531
50,597
1,145,802
1,113,435
1,123,204
1,026,022
Allowance reversals
(allowances) on receivable
portfolios, net
Total revenues, adjusted by net
allowance reversals
(allowances)
Operating expenses
Salaries and employee benefits
Cost of legal collections
General and administrative expenses
Other operating expenses
Collection agency commissions
Depreciation and amortization
Total operating expenses
Income from operations
Other (expense) income
Interest expense
Other (expense) income
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 loss (income) 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
41,473
41,236
(84,177)
6,763
17,407
1,362,030
1,187,038
1,029,258
1,129,967
1,043,429
369,064
205,204
158,352
134,934
47,948
41,228
956,730
405,300
(240,048)
(8,764)
(248,812)
156,488
(46,752)
109,736
—
109,736
315,742
200,058
158,080
104,938
43,703
39,977
862,498
324,540
(204,161)
10,847
(193,314)
131,226
(52,049)
79,177
(199)
78,978
281,097
200,855
134,046
100,737
36,141
34,868
787,744
241,514
(198,367)
14,228
(184,139)
57,375
(38,205)
19,170
(2,353)
16,817
262,281
229,847
191,357
93,210
37,858
33,160
847,713
282,254
(186,556)
2,235
(184,321)
97,933
(27,162)
70,771
(23,387)
47,384
238,942
205,661
139,977
89,934
33,343
27,101
734,958
308,471
(166,942)
113
(166,829)
141,642
(48,569)
93,073
5,205
98,278
6,150
4,250
59,753
(2,249)
5,448
$
115,886
$
83,228
$
76,570
$
45,135
$
103,726
115,886
83,427
78,923
68,522
98,521
—
$
115,886
$
(199)
83,228
$
(2,353)
76,570
$
(23,387)
45,135
5,205
$
103,726
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Earnings 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,
2018
2017
2016
2015
2014
4.09
—
4.09
4.06
—
4.06
$
$
$
$
3.21
(0.01)
3.20
3.16
(0.01)
3.15
$
$
$
$
3.07
(0.09)
2.98
3.05
(0.09)
2.96
$
$
$
$
2.66
(0.91)
1.75
2.57
(0.88)
1.69
$
$
$
$
3.81
0.20
4.01
3.58
0.19
3.77
28,313
28,572
25,972
26,405
25,713
25,909
25,722
26,647
25,853
27,495
$
1,131,898
$
1,058,235
$
906,719
$
1,023,722
$
1,251,360
1,967,620
1,767,644
1,685,604
1,700,725
1,607,497
Cash and cash equivalents
$
157,418
$
212,139
$
149,765
$
123,993
$
91,519
Investment in receivable portfolios, net
Total assets
Total debt
Total liabilities
Total Encore equity
3,137,893
4,631,875
3,490,633
3,812,187
818,009
2,890,613
4,490,712
3,446,876
3,766,801
581,862
2,382,809
3,670,497
2,805,983
3,069,982
559,304
2,440,669
4,174,819
2,944,063
3,526,331
596,453
2,143,560
3,711,631
2,550,646
3,046,692
623,000
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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
We are an international specialty finance company providing debt recovery solutions and other related services for
consumers 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 and commercial retailers. Defaulted receivables may also include receivables subject to
bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-
performing loans.
Encore Capital Group, Inc. (“Encore”) has three primary business units: MCM, which consists of Midland Credit
Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists of Cabot Credit Management Limited
(“CCM”) and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations in
Latin America and Asia-Pacific.
MCM (United States)
Through MCM, we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico.
Cabot (Europe)
Through Cabot, we are one of the largest credit management services providers in Europe and a market leader in the
United Kingdom and Ireland. Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a
range of debt servicing offerings such as early stage collections, business process outsourcing (“BPO”), contingent collections,
trace services and litigation activities. Cabot strengthened its debt servicing offerings with the acquisition of Wescot Credit
Services Limited (“Wescot”), a leading U.K. contingency debt collection and BPO services company in November 2017.
Previously we controlled CCM via our majority ownership interest in an indirect holding company of CCM. In July 2018, we
completed the purchase of all of the outstanding equity of CCM not owned by us (the “Cabot Transaction”). As a result, CCM
became a wholly owned subsidiary of Encore.
LAAP (Latin America and Asia-Pacific)
We invest in non-performing loans in Colombia, Peru, Mexico and Brazil. In December 2018, we completed the sale of
all our interests in Refinancia S.A. and its subsidiaries (collectively, “Refinancia”) to the existing minority shareholders of
Refinancia, and as a result, we no longer consolidate Refinancia. Refinancia remains the servicer for the non-performing loans
we own in Colombia and Peru. This transaction did not have a material impact to our consolidated financial statements.
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Table of Contents
Our subsidiary Baycorp Holdings Pty Limited (together with its subsidiaries, “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. We acquired a majority ownership interest in Baycorp in
October 2015 and acquired the remaining minority equity ownership interest in Baycorp in January 2018.
In India, we have invested in Encore Asset Reconstruction Company (“EARC”), which has completed initial immaterial
purchases.
To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term
growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business through MCM and
strengthening and developing our Cabot business.
Government Regulation
As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in this Annual Report
on Form 10-K, our operations in the United States 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. Additionally, our operations in Europe are affected by
foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations,
ordinances, guidelines and procedures are modified from time to time by the relevant authorities charged with their
administration, which could affect the way we conduct our business.
Portfolio Purchasing and Recovery
MCM (United States)
In the United States, the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt
portfolios. A small percentage of our capital deployment in the United States comprises of receivable portfolios subject to
Chapter 13 and Chapter 7 bankruptcy proceedings.
We purchase receivables based on robust, account-level valuation methods and employ 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 strategies 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.
Cabot (Europe)
In Europe, our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan
accounts. We also purchase certain secured mortgage portfolios and portfolios that are in insolvency status, in particular,
individual voluntary arrangements.
We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level
statistical and behavioral data. This model allows us to value portfolios with a high degree of accuracy and quantify portfolio
performance in order to maximize future collections. As a result, we have been able to realize significant returns from the assets
we have acquired. We maintain strong relationships with many of the largest financial services providers in the United
Kingdom and continue to expand in the United Kingdom and the rest of Europe with our acquisitions of portfolios and other
credit management services providers.
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Table of Contents
Purchases and Collections
Portfolio Pricing, Supply and Demand
MCM (United States)
Industry delinquency and charge-off rates, which had been at historic lows, have continued to increase, creating higher
volumes of charged-off accounts that are sold. In addition, issuers have continued to sell predominantly fresh portfolios. Fresh
portfolios are portfolios that are generally sold within six months of the consumer’s account being charged-off by the financial
institution. Meanwhile pricing remains favorable. In addition to selling a higher volume of charged-off accounts, issuers
continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year.
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. We
believe this favors larger participants, such as Encore, because the larger market participants are better able to adapt to these
pressures and commit to larger forward flow agreements.
Cabot (Europe)
The U.K. market for charged-off portfolios has grown significantly in recent years driven by 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 the level of available liquidity within industry participants and lower return requirements for certain debt purchasers,
pricing will remain elevated. However, we believe that with our competitive advantages, we will continue to be able to generate
strong risk adjusted returns in the U.K. market.
The Spanish debt market continues to be one of the largest in Europe with a significant amount of debt to be sold and
serviced. In particular, we anticipate strong debt purchasing and servicing opportunities in the secured and small and medium
enterprise asset classes given the backlog of non-performing debt that has accumulated in these sectors. Additionally, financial
institutions continue to experience both market and regulatory pressure to dispose of non-performing loans which should
further increase debt purchasing opportunities in Spain.
Although pricing has been elevated, we believe that as our European businesses increase in scale and expand to other
markets, and with continued improvements in liquidation and improved efficiencies in collections, our margins will remain
competitive. Additionally, our continuing investment in our litigation liquidation channel has enabled us to collect from
consumers who have the ability to pay but have so far been unwilling to do so. This also enables us to mitigate some of the
impact of elevated pricing.
Purchases by Geographic Location
The following table summarizes the geographic locations of receivable portfolios we purchased during the periods
presented (in thousands):
United States
Europe
Other geographies
Total purchases
Year Ended December 31,
2018
2017
2016
$
$
637,881
$
535,906
$
455,444
38,573
464,136
58,193
1,131,898
$
1,058,235
$
561,543
264,713
80,463
906,719
During the year ended December 31, 2018, we invested $1,131.9 million to acquire portfolios, primarily charged-off
credit card portfolios, with face values aggregating $8.5 billion, for an average purchase price of 13.3% of face value.
During the year ended December 31, 2017, we invested $1,058.2 million to acquire portfolios, primarily charged-off
credit card portfolios, with face values aggregating $10.1 billion, for an average purchase price of 10.5% of face value.
During the year ended December 31, 2016, we invested $906.7 million to acquire portfolios, primarily charged-off credit
card portfolios, with face values aggregating $9.8 billion, for an average purchase price of 9.2% of face value.
The increase in capital deployment in the United States for the year ended December 31, 2018, as compared to 2017, was
primarily driven by continued growth in the supply of fresh portfolios.
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The decrease in capital deployment in Europe for the year ended December 31, 2018, as compared to 2017, was primarily
the result of our significant capital deployment during the third quarter of 2017 in response to an unusually large volume of
portfolios offered for sale in the U.K. market at that time. Looking forward, in an effort to take advantage of anticipated
attractive market conditions in the United States, we expect to deploy a higher proportion of our capital in the U.S. market in
2019 than we deployed in 2018. Accordingly, we expect to be more selective in our investment decisions in Europe, seeking
higher returns on portfolio purchases, which may result in decreased deployment in Europe.
The decrease in capital deployment in the United States for the year ended December 31, 2017, as compared to 2016, was
primarily the result of our disciplined approach to capital deployment. Due to an improved pricing environment in the United
States and our progress on liquidation improvement initiatives, we were able to deploy capital on portfolios with higher returns
enabling us to purchase similar amounts of total estimated gross collections for less.
The increase in capital deployment in Europe for the year ended December 31, 2017, as compared to 2016, was due to our
continued strategic expansion in the European debt purchasing market.
Typically, the average purchase price as a percentage of face value is higher for fresh portfolios as compared to more
seasoned portfolios because fresh paper generally has higher returns. As a result, in periods that we purchase a higher
percentage of fresh paper (such as was the case in 2018), we expect that our purchase price as a percentage of face value would
be higher than would be in periods where a higher ratio of seasoned paper was purchased.
Collections by Channel and Geographic Location
We currently utilize three channels for the collection of our receivables: call center and digital collections; legal
collections; and collection agencies. The call center and digital collections channel consists of collections that result from our
call centers, direct mail program and online collections. The legal collections channel consists of collections that result from
our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections
from third-party collection agencies that we utilize when we believe they can liquidate better or less expensively than we can or
to supplement capacity in our internal call centers. The collection agencies channel also includes collections on accounts
purchased where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection
channels. The following table summarizes the total collections by collection channel and geographic area (in thousands):
Year Ended December 31,
2018
2017
2016
United States(1):
Call center and digital collections
$
658,272
$
526,429
$
Legal collections
Collection agencies
Subtotal
Europe:
Call center and digital collections
Legal collections
Collection agencies
Subtotal
Other geographies:
Call center and digital collections
Legal collections
Collection agencies
Subtotal
Total collections
__________________
548,374
17,317
1,223,963
546,423
28,089
1,100,941
300,563
152,533
182,081
635,177
86,407
7,908
14,165
108,480
300,545
116,620
137,155
554,320
88,129
7,892
16,362
112,383
$
1,967,620
$
1,767,644
$
(1) Certain reclassifications have been made between collection agencies and call center and digital collections for prior periods.
483,692
557,250
40,778
1,081,720
250,036
122,392
121,572
494,000
79,680
9,936
20,268
109,884
1,685,604
32
Table of Contents
Gross collections increased by $200.0 million, or 11.3%, to $1,967.6 million during the year ended December 31, 2018,
from $1,767.6 million during the year ended December 31, 2017. The increase of collections in the United States was primarily
due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection capacity and our
continued effort in improving liquidation. Our consumer centric collection approach and our capacity buildup are driving a
higher proportion of call center collections compared to legal collections in the United States. The increase in collections in
Europe was primarily the result of implementing certain liquidation improvement initiatives and the favorable impact of
foreign currency translation, which was primarily driven by the weakening of the U.S. dollar against the British Pound.
Gross collections increased $82.0 million, or 4.9%, to $1,767.6 million during the year ended December 31, 2017, from
$1,685.6 million during the year ended December 31, 2016. The increase of collections in the United States was primarily due
to the acquisition of portfolios with higher returns and improved liquidation, partially offset by delays in collections on
portfolios impacted by the hurricanes. The increase in collections in Europe was primarily the result of increased purchasing
volume and implementing certain liquidation improvement initiatives. The increase was partially offset by the unfavorable
impact of foreign currency translation, primarily driven by the strengthening of the U.S. dollar against the British Pound.
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Table of Contents
Results of Operations
Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows (in
thousands, except percentages):
2018
2017
2016
Year Ended December 31,
Revenues
Revenue from receivable portfolios
$ 1,167,132
85.7 % $ 1,053,373
88.7 % $ 1,030,792
Other revenues
Total revenues
153,425
1,320,557
11.3 %
92,429
7.8 %
82,643
97.0 % 1,145,802
96.5 % 1,113,435
100.1 %
8.0 %
108.2 %
Allowance reversals
(allowances) on receivable
portfolios, net
Total revenues, adjusted by net
allowances
Operating expenses
Salaries and employee benefits
Cost of legal collections
General and administrative expenses
Other operating expenses
Collection agency commissions
Depreciation and amortization
Total operating expenses
Income from operations
Other (expense) income
Interest expense
Other (expense) income
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 loss attributable to noncontrolling
interest
Net income attributable to Encore
Capital Group, Inc. stockholders
41,473
3.0 %
41,236
3.5 %
(84,177)
(8.2)%
1,362,030
100.0 % 1,187,038
100.0 % 1,029,258
100.0 %
369,064
205,204
158,352
134,934
47,948
41,228
956,730
405,300
(240,048)
(8,764)
(248,812)
156,488
(46,752)
109,736
—
109,736
27.1 %
15.1 %
11.6 %
9.9 %
3.5 %
3.0 %
70.2 %
29.8 %
(17.6)%
(0.7)%
(18.3)%
11.5 %
(3.4)%
8.1 %
— %
8.1 %
315,742
200,058
158,080
104,938
43,703
39,977
862,498
324,540
(204,161)
10,847
(193,314)
131,226
(52,049)
79,177
(199)
78,978
26.6 %
16.9 %
13.3 %
8.8 %
3.7 %
3.4 %
72.7 %
27.3 %
281,097
200,855
134,046
100,737
36,141
34,868
787,744
241,514
(17.2)%
1.0 %
(16.2)%
(198,367)
14,228
(184,139)
11.1 %
(4.5)%
6.6 %
0.0 %
6.6 %
57,375
(38,205)
19,170
(2,353)
16,817
6,150
0.4 %
4,250
0.4 %
59,753
$ 115,886
8.5 % $
83,228
7.0 % $
76,570
27.3 %
19.5 %
13.0 %
9.8 %
3.5 %
3.4 %
76.5 %
23.5 %
(19.3)%
1.4 %
(17.9)%
5.6 %
(3.7)%
1.9 %
(0.3)%
1.6 %
5.8 %
7.4 %
34
Table of Contents
Results of Operations—Cabot Credit Management Limited
The following table summarizes the operating results contributed by CCM (which does not consolidate the results of its
European affiliate Grove Europe S.á r.l.) during the periods presented (in thousands):
Total revenues, adjusted by net allowances
$
Total operating expenses
Income from operations
Interest expense-non-PEC
PEC interest expense
Other income
Income (loss) before income taxes
(Provision) benefit for income taxes
Net income (loss)
Net (income) loss attributable to noncontrolling interest
Net income (loss) attributable to Encore Capital Group, Inc. stockholders
$
Year Ended December 31,
2018
2017
2016
522,885
(278,676)
244,209
(128,087)
(17,307)
1,383
100,198
(19,884)
80,314
(5,143)
75,171
$
$
399,875
(230,401)
169,474
(105,634)
(25,899)
7,373
45,314
(17,218)
28,096
(1,923)
26,173
$
$
242,114
(197,341)
44,773
(109,178)
(24,297)
15,270
(73,432)
12,073
(61,359)
48,213
(13,146)
Comparison of Results of Operations
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenues
Our revenues consist of revenue from receivable portfolios and other revenues.
Revenue from receivable portfolios 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 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 ZBA 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.
Other revenues consist primarily of fee-based income earned on accounts collected on behalf of others, primarily credit
originators. Certain of our foreign subsidiaries earn fee-based income by providing debt servicing (such as early stage
collections, BPO, contingent collections, trace services and litigation activities) to credit originators for non-performing loans.
We may incur allowance charges when actual cash flows from our receivable portfolios underperform compared to our
expectations or when there is a change in the timing of cash flows. 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 capacity and 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 that have historic
allowance reserves when actual cash flows from these receivable portfolios outperform our expectations.
Total revenues, adjusted by net allowances, were $1,362.0 million during the year ended December 31, 2018, an increase
of $175.0 million, or 14.7%, compared to $1,187.0 million during the year ended December 31, 2017.
35
Table of Contents
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating
results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar
relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of the U.S.
dollar relative to other foreign currencies has a favorable impact on our international revenues. Our revenues were favorably
impacted by foreign currency translation, primarily from the weakening of the U.S. dollar, which devalued, based on average
exchange rates, against the British Pound by approximately 3.5%, during the year ended December 31, 2018 as compared to the
year ended December 31, 2017.
Revenue from receivable portfolios were $1,167.1 million during the year ended December 31, 2018, an increase of
$113.7 million, or 10.8%, compared to revenue of $1,053.4 million during the year ended December 31, 2017. The increase in
revenue from receivable portfolios during the year ended December 31, 2018 compared to 2017 was primarily due to increased
purchase volume, sustained improvements in portfolio collections driven by liquidation improvement initiatives, and the
favorable impact of foreign currency translation, which was primarily the result of the weakening of the U.S. dollar against the
British Pound.
36
Table of Contents
The following tables summarize collections, revenue, end of period receivable balance and other related supplemental
data, by year of purchase (in thousands, except percentages):
Year Ended December 31, 2018
As of
December 31, 2018
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)
$
121,216
$
112,347
92.7% $
9,044
2008
2009(5)
2010(5)
2011
2012
2013
2014
2015
2016
2017
2018
1,652
—
—
14,104
35,927
104,877
94,929
125,673
234,690
315,853
175,042
Subtotal
1,223,963
Europe:
ZBA Adjustment(6)
ZBA(4)
2013
2014
2015
2016
2017
2018
Subtotal
Other geographies:
ZBA(4)
2013
2014
2015
2016
2017
2018
Subtotal
Total
—
184
132,663
129,033
88,002
82,986
152,926
49,383
635,177
11,855
150
5,209
30,677
24,604
23,075
12,910
108,480
237
—
—
12,737
29,762
82,059
51,252
54,052
102,674
147,719
110,323
703,162
798
185
98,307
82,474
49,701
49,078
68,942
36,950
386,435
11,855
—
17,345
20,188
11,268
10,377
6,502
77,535
14.3%
—
—
90.3%
82.8%
78.2%
54.0%
43.0%
43.7%
46.8%
63.0%
57.4%
—%
100.5%
74.1%
63.9%
56.5%
59.1%
45.1%
74.8%
60.8%
100.0%
—
333.0%
65.8%
45.8%
45.0%
50.4%
71.5%
—
—
—
(304)
(273)
—
5,035
(6,226)
(401)
(646)
—
6,229
—
—
29,172
7,956
893
—
—
—
9.6% $
0.0%
—
—
1.1%
2.6%
7.0%
4.4%
4.6%
8.8%
12.7%
9.4%
—
—
—
—
2,905
9,963
25,747
73,615
124,301
236,032
321,730
570,440
60.2%
1,364,733
0.1%
0.0%
8.4%
7.1%
4.3%
4.2%
5.9%
3.1%
—
—
247,672
233,718
183,069
165,432
345,438
428,657
38,021
33.1%
1,603,986
—
—
—
(1,748)
(869)
—
(160)
(2,777)
41,473
1.0%
—
1.5%
1.7%
1.0%
0.9%
0.6%
6.7%
—
—
62,455
19,592
26,779
30,599
29,749
169,174
100.0% $ 3,137,893
—
0.0%
—
—
27.4%
19.7%
23.9%
4.8%
2.8%
3.0%
3.2%
3.1%
3.7%
—
—
3.1%
2.7%
2.0%
2.2%
1.7%
1.5%
2.1%
—
—
2.4%
7.0%
2.5%
2.7%
3.4%
3.2%
2.9%
$ 1,967,620
$ 1,167,132
59.3% $
_______________________
(1) Does not include amounts collected on behalf of others.
(2) Gross revenue excludes the effects of net portfolio allowances or net portfolio allowance reversals.
(3) Revenue recognition rate excludes the effects of net portfolio allowances 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%.
(5) Total collections realized exceed the net book value of the portfolio and have been converted to ZBA.
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Table of Contents
(6) Adjustment resulting from certain ZBA revenue that was classified as collections in cost recovery portfolios in prior periods.
Year Ended December 31, 2017
As of
December 31, 2017
Collections
(1)
Gross
Revenue
(2)
Revenue
Recognition
Rate
(3)
Net
Reversal
(Portfolio
Allowance)
Revenue
% of Total
Revenue
Unamortized
Balances
Monthly
IRR
$
139,373
$
132,746
95.2% $
6,942
12.6% $
210
1,891
—
299
16,928
51,300
97,720
77,566
77,785
140,367
72,515
669,327
96,093
82,532
52,969
47,285
37,200
United States:
ZBA(4)
2007(5)
2008
2009(5)
2010(5)
2011
2012
2013
2014
2015
2016
2017
1,548
4,636
—
1,106
20,173
71,301
139,329
142,147
186,391
283,035
111,902
Subtotal
1,100,941
Europe:
2013
2014
2015
2016
2017
146,993
137,806
103,823
97,587
68,111
Subtotal
554,320
316,079
Other geographies:
ZBA(4)
2013
2014
2015
2016
2017
Subtotal
Total
11,409
881
7,808
41,500
35,313
15,472
112,383
11,388
—
16,622
22,073
14,411
3,473
67,967
13.6%
40.8%
—
27.0%
83.9%
71.9%
70.1%
54.6%
41.7%
49.6%
64.8%
60.8%
65.4%
59.9%
51.0%
48.5%
54.6%
57.0%
99.8%
—
212.9%
53.2%
40.8%
22.4%
60.5%
—
613
—
—
—
(2,337)
—
(9,028)
—
—
—
(3,810)
41,716
4,012
—
—
—
0.0%
0.2%
—
0.0%
1.6%
4.9%
9.3%
7.4%
7.4%
13.3%
6.9%
—
—
1,497
—
—
4,598
16,432
48,735
112,788
202,747
369,851
494,880
63.5%
1,251,528
9.1%
7.9%
5.0%
4.5%
3.5%
269,999
288,430
231,691
213,514
451,222
45,728
30.0%
1,454,856
—
—
—
—
(682)
—
(682)
41,236
1.1%
—
1.6%
2.1%
1.4%
0.3%
6.5%
—
140
57,727
34,589
45,058
46,715
184,229
100.0% $ 2,890,613
—
—
5.2%
—
—
25.0%
18.6%
16.0%
4.5%
2.6%
2.6%
2.7%
3.7%
3.1%
2.4%
2.0%
2.0%
1.6%
2.1%
—
—
2.3%
5.0%
2.4%
1.2%
2.5%
3.0%
$ 1,767,644
$ 1,053,373
59.6% $
_______________________
(1) Does not include amounts collected on behalf of others.
(2) Gross revenue excludes the effects of net portfolio allowances or net portfolio allowance reversals.
(3) Revenue recognition rate excludes the effects of net portfolio allowances 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%.
(5) Total collections realized exceed the net book value of the portfolio and have been converted to ZBA.
Other revenues were $153.4 million and $92.4 million for the years ended December 31, 2018 and 2017, respectively.
Other revenues primarily consist of fee-based income earned in Europe for debt servicing and other portfolio management
services for credit originators for non-performing loans. The increase in other revenues was attributable to additional fee-based
income earned from recently acquired fee-based service providers, primarily from the acquisition of Wescot, which was
completed in November 2017 and the favorable impact of foreign currency translation, which was primarily the result of the
weakening of the U.S. dollar against the British Pound.
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Table of Contents
Net allowance reversals were $41.5 million and $41.2 million for the years ended December 31, 2018 and 2017,
respectively. The allowance reversal was primarily a result of sustained improvements in portfolio collections on certain
European portfolios on which we had previously recorded large portfolio allowances in the past. These improvements in
portfolio collections were driven by liquidation improvement initiatives. The portfolio allowance reversals were partially offset
by portfolio allowances recorded on certain pools with shortfalls on projected cash flows.
Operating Expenses
Total operating expenses were $956.7 million during the year ended December 31, 2018, an increase of $94.2 million, or
10.9%, compared to total operating expenses of $862.5 million during the year ended December 31, 2017.
The increase in operating expenses was primarily the result of our investment in collections capacity expansion for our
MCM business, a large increase in collections, expenses associated with Wescot which was acquired in November 2017, and
the Cabot Transaction.
Additionally, our operating results are impacted by foreign currency translation, which represents the effect of translating
operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the
U.S. dollar relative to other foreign currencies has a favorable impact on our international operating expenses, and the
weakening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international operating
expenses. Our operating expenses were unfavorably impacted by foreign currency translation, primarily by the weakening of
the U.S. dollar against the British Pound by approximately 3.5% for the year ended December 31, 2018 as compared to the year
ended December 31, 2017.
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
Salaries and employee benefits increased $53.4 million, or 16.9%, to $369.1 million during the year ended December 31,
2018, from $315.7 million during the year ended December 31, 2017. The increase was primarily the result of an increase in
headcount due to recent acquisitions, initiatives to increase MCM collections capacity and the unfavorable impact of foreign
currency translation, primarily from the weakening of the U.S. dollar against the British Pound.
Stock-based compensation increased $2.6 million, or 24.8%, to $13.0 million during the year ended December 31, 2018,
from $10.4 million during the year ended December 31, 2017. The increase was primarily attributable to increased expenses
related to the Cabot Transaction.
Cost of Legal Collections
Cost of legal collections primarily includes contingent fees paid to our network of attorneys and the cost of litigation. We
pursue legal collections using a network of attorneys that specialize in collection matters and through our internal legal channel.
Under the 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 historical court costs recovery data.
The cost of legal collections increased $5.1 million, or 2.6%, to $205.2 million during the year ended December 31, 2018,
compared to $200.1 million during the year ended December 31, 2017. The cost of legal collections as a percentage of gross
collections through this channel decreased 80 basis points to 29.0% during the year ended December 31, 2018, from 29.8%
during the year ended December 31, 2017.
The cost of legal collections and the cost of legal collections as a percentage of gross collections in the United States
during the year ended December 31, 2018 were consistent as compared to the prior year.
In Europe, we incurred less costs as a percentage of collections in the legal channel during the year ended December 31,
2018 as compared to the prior year, due to higher collections from previous placements.
General and Administrative Expenses
General and administrative expenses increased slightly, or 0.2%, to $158.4 million during the year ended December 31,
2018, from $158.1 million during the year ended December 31, 2017. Excluding the indirect costs relating to the Cabot
Transaction of approximately $8.6 million in 2018 and the costs relating to CCM’s withdrawn IPO of $13.4 million in 2017,
general and administrative expenses increased $5.1 million, or 3.4% during the year ended December 31, 2018 as compared to
the prior year. The increase was attributable to additional infrastructure costs at our domestic sites and additional general and
administrative expenses related to our recent acquisitions and the unfavorable impact of foreign currency translation, primarily
39
Table of Contents
from the weakening of the U.S. dollar against the British Pound. The increase was partially offset by a $6.6 million reversal of
expenses relating to CCM’s legal dispute with the previous owners of its subsidiary, Hillesden Securities Limited, which was
settled in November 2018.
Other Operating Expenses
Other operating expenses increased $30.0 million, or 28.6%, to $134.9 million during the year ended December 31, 2018,
from $104.9 million during the year ended December 31, 2017. The increase in other operating expenses was primarily due to
increases in new domestic marketing programs and mailing initiatives, increases resulting from recent acquisitions and the
impact of foreign currency translation, primarily from the weakening of the U.S. dollar against the British Pound.
Collection Agency Commissions
During the year ended December 31, 2018, we incurred $47.9 million in commissions to third-party collection agencies,
or 22.5% of the related gross collections of $213.6 million. During the period, the commission rate as a percentage of related
gross collections was 15.0% and 22.7% for our collection outsourcing channels in the United States and Europe, respectively.
During the year ended December 31, 2017, we incurred $43.7 million in commissions, or 21.3%, of the related gross
collections of $204.9 million. During 2017, the commission rate as a percentage of related gross collections was 7.3% and
24.6% for our collection outsourcing channels in the United States and Europe, respectively.
Collections through the collection agency channel vary from period to period depending on, among other things, the
number of accounts placed with an agency 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, 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, and commission rates for purchased bankruptcy portfolios are lower than the commission rates for charged-off credit card
accounts. The United States collection agency commission rate is generally lower than the European rate due to a higher
concentration of lower commission rate bankruptcy portfolios collected through the collection agency channel in the United
States.
Depreciation and Amortization
Depreciation and amortization expense increased $1.2 million, or 3.1%, to $41.2 million during the year ended
December 31, 2018, from $40.0 million during the year ended December 31, 2017. The increase was primarily attributable to
additional depreciation and amortization expenses resulting from fixed assets and intangible assets acquired through our recent
acquisitions.
Interest Expense
Interest expense increased $35.8 million to $240.0 million during the year ended December 31, 2018, from $204.2 million
during the year ended December 31, 2017.
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,
2018
186,178
17,307
25,332
11,231
—
240,048
$
$
2017
157,287
25,899
13,502
10,338
(2,865)
204,161
$
$
$
$
$ Change
% Change
28,891
(8,592)
11,830
893
2,865
35,887
18.4 %
(33.2)%
87.6 %
8.6 %
(100.0)%
17.6 %
On July 24, 2018, in connection with the Cabot Transaction, we purchased all outstanding preferred equity certificates
(“PECs”) including accrued interest that were held by Cabot’s minority shareholders. As a result, no PEC interest expense was
incurred subsequent to the Cabot Transaction.
The increase in interest expense during the year ended December 31, 2018 as compared to the year ended December 31,
2017 was primarily attributable to higher expenses relating to loan fees associated with our refinancing activities, higher
interest rates and higher balances on our revolving credit facilities in the United States and at Cabot. During the year ended
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December 31, 2018, interest expense included approximately $9.2 million in fees relating to the refinancing of the Cabot senior
secured notes and approximately $2.5 million of fees for a bridge loan commitment related to the Cabot Transaction. In
addition, the unfavorable impact of foreign currency translation, primarily from the weakening of the U.S. dollar against the
British Pound contributed to the increase. The increase in interest expense during the year ended December 31, 2018 was
partially offset by lower PEC interest expense.
Other Expense or Income
Other expense or income consists primarily of foreign currency exchange gains or losses, interest income and gains or
losses recognized on certain transactions outside of our normal course of business. Other expense was $8.8 million during the
year ended December 31, 2018 and was primarily the result of a loss on a derivative contract of $9.3 million. On May 8, 2018,
in anticipation of the completion of the Cabot Transaction, we entered into a foreign exchange forward contract with a notional
amount of £176.0 million, which was approximately the anticipated cash consideration for the Cabot Transaction. On August 3,
2018, we settled this contract in cash and recognized a total loss of $9.3 million. This loss was substantially offset by the
decrease of final cash consideration in U.S. dollars for the Cabot Transaction. Other income was $10.8 million during the year
ended December 31, 2017 and was primarily due to a gain recognized on the redemption of senior secured notes and foreign
exchange derivative contracts.
Provision for Income Taxes
During the years ended December 31, 2018 and 2017, we recorded income tax provisions for income from continuing
operations of $46.8 million and $52.0 million, respectively.
Enacted on December 22, 2017, the Tax Reform Act introduced significant changes to U.S. income tax law. Effective
2018, the Tax Reform Act reduced the U.S. statutory tax rate from 35% to 21% and, among other changes, created new taxes
on certain foreign-sourced earnings. Due to the timing of the enactment and complexity involved in applying the provision of
the Tax Reform Act, we made reasonable estimates of the effects and recorded provisional amounts in our consolidated
financial statements as of December 31, 2017. As we collected and prepared necessary data, and interpreted the additional
guidance issued by the U.S. Treasury Department, the Internal Revenue Service (“IRS”), and other standard-setting bodies, we
made adjustments to the provisional amounts over the course of the year. The Tax Reform Act subjects U.S. shareholders to a
tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. We have elected to treat taxes due
on future U.S. inclusions in taxable income as a current period expense. The accounting for the tax effects of the Tax Reform
Act has been completed and we recorded immaterial adjustments as of December 22, 2018.
The effective tax rates for the respective periods are shown below:
Federal provision
State provision
Foreign rate differential(1)
Transaction costs(2)
Permanent items(3)
Change in valuation allowance(4)
Other
Effective rate
________________________
Year Ended December 31,
2018
2017
21.0 %
0.1 %
(11.7)%
1.0 %
1.1 %
17.7 %
0.7 %
29.9 %
35.0 %
0.5 %
(20.0)%
5.0 %
10.2 %
8.2 %
0.8 %
39.7 %
(1) Relates primarily to the lower tax rates on the income or loss attributable to international operations.
(2)
In 2018, relates primarily to transaction costs incurred in connection with the Cabot Transaction. In 2017, relates primarily to certain costs related to
the withdrawn IPO that are disallowed for U.K. tax purposes.
(3) Represents a provision for nondeductible items, including nondeductible interest in a foreign subsidiary and certain foreign income taxable in the U.S.
under Internal Revenue Code Section 951 (Subpart F) in 2017.
(4) Valuation allowance recorded as a result of certain foreign subsidiaries’ cumulative operating losses for tax purposes.
The effective tax rate for the year ended December 31, 2018 decreased to 29.9% as compared to 39.7% for the year ended
December 31, 2017. The decrease in effective tax rate was primarily the result of the reduction in the corporate federal tax rate
from 35.0% to 21.0%.
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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 tax rates and higher than anticipated in countries that
have higher statutory tax rates.
During the first quarter of 2019, we received approval from the IRS for a tax accounting method change related to
revenue reporting. The revised tax accounting method will more closely align with the current book accounting method for
revenue reporting. Upon completion of standard IRS audit procedures, we estimate the impact of the revised tax method may
be material and expect to record a one-time tax provision benefit during 2019.
Cost per Dollar Collected
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,
2018
2017
42.4%
27.7%
47.0%
37.9%
44.2%
28.2%
48.6%
39.5%
Our overall cost per dollar collected (or “cost-to-collect”) decreased 160 basis points to 37.9% for the year ended
December 31, 2018 from 39.5% during the prior year.
Cost-to-collect in the United States decreased due to a combination of (a) collection mix shifting towards non-legal
collection, which has a lower cost-to-collect, (b) higher total collections applied against fixed costs, and (c) reduced cost-to-
collect in the legal channel driven by (1) improved court cost recovery rates, (2) increased internal legal collections, which have
a lower cost-to-collect than outsourced legal collections, and (3) for outsourced legal collections, a shift towards new legal
placement batches, which have lower commission rates than older batches.
Cost-to-collect in Europe decreased primarily due to Cabot’s continued investment in operational processes and
technology to drive efficiencies in the collection process and the optimization of collection strategies. Refer to “Cost of Legal
Collections” in the operating expenses section above for further details.
Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on
seasonality, product mix of purchases, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the
changing regulatory and legislative environment.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenues
Total revenues, adjusted by net allowances, were $1,187.0 million during the year ended December 31, 2017, an increase
of $157.8 million, or 15.3%, compared to $1,029.3 million during the year ended December 31, 2016.
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating
results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar
relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of the U.S.
dollar relative to other foreign currencies has a favorable impact on our international revenues. Our revenues were unfavorably
impacted by foreign currency translation, primarily by the weakening of the British Pound, which devalued, based on average
exchange rates, against the U.S. dollar by 4.9%, during the year ended December 31, 2017 as compared to the year
ended December 31, 2016.
Revenue from receivable portfolios was $1,053.4 million during the year ended December 31, 2017, an increase of $22.6
million, or 2.2%, compared to revenue of $1,030.8 million during the year ended December 31, 2016. The increase in revenue
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from receivable portfolios during the year ended December 31, 2017 compared to 2016 was primarily due to increased
purchase volume and sustained improvements in portfolio collections driven by liquidation improvement initiatives partially
offset by the unfavorable impact of foreign currency translation, which was primarily the result of the weakening of the British
Pound against the U.S. dollar.
The following tables summarize collections, revenue, end of period receivable balance and other related supplemental
data, by year of purchase (in thousands, except percentages):
Year Ended December 31, 2017
As of
December 31, 2017
Collections
(1)
Gross
Revenue
(2)
Revenue
Recognition
Rate
(3)
Net
Reversal
(Portfolio
Allowance)
Revenue
% of Total
Revenue
Unamortized
Balances
Monthly
IRR
$
139,373
$
132,746
95.2% $
6,942
12.6% $
210
1,891
—
299
16,928
51,300
97,720
77,566
77,785
140,367
72,515
669,327
96,093
82,532
52,969
47,285
37,200
United States:
ZBA(4)
2007(5)
2008
2009(5)
2010(5)
2011
2012
2013
2014
2015
2016
2017
1,548
4,636
—
1,106
20,173
71,301
139,329
142,147
186,391
283,035
111,902
Subtotal
1,100,941
Europe:
2013
2014
2015
2016
2017
146,993
137,806
103,823
97,587
68,111
Subtotal
554,320
316,079
Other geographies:
ZBA(4)
2013
2014
2015
2016
2017
Subtotal
Total
11,409
881
7,808
41,500
35,313
15,472
112,383
11,388
—
16,622
22,073
14,411
3,473
67,967
13.6%
40.8%
—
27.0%
83.9%
71.9%
70.1%
54.6%
41.7%
49.6%
64.8%
60.8%
65.4%
59.9%
51.0%
48.5%
54.6%
57.0%
99.8%
0.0%
212.9%
53.2%
40.8%
22.4%
60.5%
—
613
—
—
—
(2,337)
—
(9,028)
—
—
—
(3,810)
41,716
4,012
—
—
—
0.0%
0.2%
—
0.0%
1.6%
4.9%
9.3%
7.4%
7.4%
13.3%
6.9%
—
—
1,497
—
—
4,598
16,432
48,735
112,788
202,747
369,851
494,880
63.5% 1,251,528
9.1%
7.8%
5.0%
4.5%
3.5%
269,999
288,430
231,691
213,514
451,222
45,728
30.0% 1,454,856
—
—
—
—
(682)
—
(682)
41,236
1.1%
0.0%
1.6%
2.1%
1.4%
0.3%
6.5%
—
140
57,727
34,589
45,058
46,715
184,229
100.0% $ 2,890,613
—
—
5.2%
—
—
25.0%
18.6%
16.0%
4.5%
2.6%
2.6%
2.7%
3.7%
3.1%
2.4%
2.0%
2.0%
1.6%
2.1%
—
0.0%
2.3%
5.0%
2.4%
1.2%
2.5%
3.0%
$ 1,767,644
$ 1,053,373
59.6% $
________________________
(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%.
(5) Total collections realized exceed the net book value of the portfolio and have been converted to ZBA.
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Table of Contents
Year Ended December 31, 2016
As of
December 31, 2016
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)
$
137,287
$
130,627
95.1% $
2007
2008
2009(5)
2010
2011
2012
2013
2014
2015
2016
2,200
8,687
—
10,402
54,991
113,068
196,752
216,356
231,101
110,876
Subtotal
1,081,720
Europe:
2013
2014
2015
2016
Subtotal
Other geographies:
ZBA(4)
2013
2014
2015
2016
Subtotal
Total
165,616
156,666
127,083
44,635
494,000
7,552
1,548
17,443
57,055
26,286
109,884
748
4,301
—
7,493
35,643
72,877
126,666
112,554
103,073
65,639
659,621
127,606
93,657
62,769
24,733
308,765
7,433
—
17,675
27,810
9,488
62,406
34.0%
49.5%
—
72.0%
64.8%
64.5%
64.4%
52.0%
44.6%
59.2%
61.0%
77.0%
59.8%
49.4%
55.4%
62.5%
98.4%
—
101.3%
48.7%
36.1%
56.8%
6,820
795
2,219
—
—
—
—
—
—
—
12.7% $
0.1%
0.4%
—
0.7%
3.4%
7.1%
12.3%
10.9%
10.0%
6.4%
—
941
3,631
—
807
7,866
38,886
90,720
187,083
313,089
515,260
9,834
64.0% 1,158,283
(76,018)
(13,150)
(4,843)
—
(94,011)
—
—
—
—
—
—
(84,177)
12.4%
9.1%
6.1%
2.4%
256,725
308,568
255,445
230,225
30.0% 1,050,963
0.7%
—
1.7%
2.7%
0.9%
6.0%
—
1,008
56,691
51,758
64,106
173,563
100.0% $ 2,382,809
—
4.5%
5.2%
—
25.0%
17.7%
11.7%
9.1%
4.1%
2.4%
2.4%
3.7%
3.0%
2.1%
1.6%
1.8%
2.1%
—
0.0%
2.2%
3.5%
1.9%
2.4%
2.9%
$ 1,685,604
$ 1,030,792
61.2% $
________________________
(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%.
(5) Total collections realized exceed the net book value of the portfolio and have been converted to ZBA.
Other revenues were $92.4 million and $82.6 million for the years ended December 31, 2017 and 2016, respectively.
Other revenues primarily consist of fee-based income earned at our international subsidiaries that provide portfolio
management services to credit originators for non-performing loans. The increase in other revenues was primarily attributable
to additional fee-based income earned from recently acquired fee-based service providers, including Wescot, which was
acquired by Cabot in November 2017. These increases were partially offset by the unfavorable impact of foreign currency
translation, primarily from the weakening of the British Pound against the U.S. dollar.
Net allowance reversals were $41.2 million and net allowances were $84.2 million for the years ended December 31,
2017 and 2016, respectively. The change was primarily a result of a portfolio allowance charge of $94.0 million recorded
during the third quarter of 2016. This portfolio allowance charge resulted from delays or shortfalls in near term collections
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against our forecasts for certain pools in Europe. These allowance charges, net of portfolio allowance reversals on other pools,
attributed to the net portfolio allowance of $84.2 million during the year ended December 31, 2016.
Operating Expenses
Total operating expenses were $862.5 million during the year ended December 31, 2017, an increase of $74.8 million,
or 9.5%, compared to total operating expenses of $787.7 million during the year ended December 31, 2016.
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
Salaries and employee benefits increased $34.6 million, or 12.3%, to $315.7 million during the year ended December 31,
2017, from $281.1 million during the year ended December 31, 2016. The increase was primarily the result of an increase in
headcount at our domestic sites as part of initiatives to increase collections capacity and an increase at our international
subsidiaries resulting from recent acquisitions. The increase was partially offset by the impact of foreign currency translation,
primarily from the weakening of the British Pound against the U.S. dollar.
Stock-based compensation decreased $2.2 million, or 17.6%, to $10.4 million during the year ended December 31, 2017,
from $12.6 million during the year ended December 31, 2016. The decrease was primarily attributable to larger expense
reversals during the current year as compared to the corresponding periods in the prior year resulting from adjustments to
estimated vesting of certain performance-based awards and reversals for current period actual forfeitures.
Cost of Legal Collections
Cost of legal collections includes primarily contingent fees paid to our network of attorneys and the cost of litigation. We
pursue legal collections using a network of attorneys that specialize in collection matters and through our internal legal channel.
Under the 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 an estimated court cost recovery rate based on our analysis of
historical court costs recovery data. Based on trends of historical court costs recovery data during the year ended December 31,
2016, we noted a decrease in the estimated court cost recovery rate in the United Kingdom. Based on the revised estimated
court cost recovery rate, we recorded an additional court costs reserve in the cost of legal collections of approximately
$11.3 million during the year ended December 31, 2016.
The cost of legal collections decreased slightly by $0.8 million, or 0.4%, to $200.1 million during the year
ended December 31, 2017, compared to $200.9 million during the year ended December 31, 2016. Cost of legal collections in
the United States increased by $9.8 million, or 6.0%, while cost of legal collections in Europe decreased by $11.0 million,
or 30.0% as compared to the prior year. The cost of legal collections as a percentage of gross collections through this
channel increased to 29.8% during the year ended December 31, 2017, from 29.1% during the year ended December 31, 2016.
The cost as a percentage of legal collections in the United States increased to 31.5% during the year ended December 31, 2017
from 29.1% during the prior year and the cost as a percentage of legal collections in Europe decreased to 22.0% during the year
ended December 31, 2017 from 29.9% during the prior year.
The increases in the cost of legal collections and the cost of legal collections as a percentage of gross collections in the
United States during the periods presented were due to increased placements in the legal channel. During the first three quarters
in 2016, we experienced temporary delays in receiving media from issuers required to initiate the legal process for a number of
accounts, as a result, the volume of accounts placed in our legal channel was reduced during that period. Since those temporary
delays subsided in the fourth quarter of 2016, we have increased placement volume in the legal channel and expect increased
volume in our legal channel in the near future.
The decreases in the cost of legal collections and the cost of legal collections as a percentage of gross collections in
Europe during the periods presented were due to the recording of an approximately $11.3 million additional court cost reserve
during the year ended December 31, 2016 as discussed above, and reduction in upfront court costs as a result of fewer accounts
placed in this channel.
General and Administrative Expenses
General and administrative expenses increased $24.1 million, or 17.9%, to $158.1 million during the year
ended December 31, 2017, from $134.0 million during the year ended December 31, 2016. The increase was primarily due to
expenses related to Cabot’s withdrawn IPO of $13.4 million, reduction in gain on reversal of acquisition-related contingent
consideration of approximately $5.3 million, and additional infrastructure costs at our domestic sites. The increase was partially
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offset by reduction in settlement fees and related administrative expenses of $6.3 million, and the impact of foreign currency
translation, primarily from the weakening of the British Pound against the U.S. dollar.
Other Operating Expenses
Other operating expenses increased $4.2 million, or 4.2%, to $104.9 million during the year ended December 31, 2017,
from $100.7 million during the year ended December 31, 2016. The increase in other operating expenses was primarily due to
an increase in new domestic marketing programs and mailing initiatives and increase at our international subsidiaries resulting
from recent acquisitions. The increase was partially offset by the impact of foreign currency translation, primarily from the
weakening of the British Pound against the U.S. dollar.
Collection Agency Commissions
During the year ended December 31, 2017, we incurred $43.7 million in commissions to third-party collection agencies,
or 21.3% of the related gross collections of $204.9 million. During the period, the commission rate as a percentage of related
gross collections was 7.3% and 24.6% for our collection outsourcing channels in the United States and Europe, respectively.
During the year ended December 31, 2016, we incurred $36.1 million in commissions, or 19.8%, of the related gross
collections of $182.6 million. During 2016, the commission rate as a percentage of related gross collections
was 11.9% and 22.7% 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 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, while the commission rates are higher in other European countries where most of the receivables in this channel are
non-performing loans.
Depreciation and Amortization
Depreciation and amortization expense increased $5.1 million, or 14.7%, to $40.0 million during the year
ended December 31, 2017, from $34.9 million during the year ended December 31, 2016. The increase was primarily due to
write-off of certain long-lived and intangible assets in connection with integrating our operating platforms and increase in fixed
assets and intangibles at our international subsidiaries resulting from recent acquisitions.
Interest Expense
Interest expense increased $5.8 million to $204.2 million during the year ended December 31, 2017, from $198.4
million during the year ended December 31, 2016.
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,
2017
157,287
25,899
13,502
10,338
(2,865)
204,161
$
$
2016
159,883
24,297
12,618
10,520
(8,951)
198,367
$
$
$
$
$ Change
% Change
(2,596)
1,602
884
(182)
6,086
5,794
(1.6)%
6.6 %
7.0 %
(1.7)%
(68.0)%
2.9 %
The payment of the accumulated interest on the PECs issued in connection with the acquisition of a controlling interest in
Cabot will only be satisfied in connection with the disposition of the noncontrolling interest of J.C. Flowers and management.
The increase in interest expense during the year ended December 31, 2017 as compared to the corresponding period in
2016 was primarily attributable to higher interest expense in the United States related to our recent issuance of convertible debt,
senior notes and higher weighted interest rates. The increase was partially offset by lower interest expense in our international
operations.
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Other Income
Other income consists primarily of foreign currency exchange gains or losses, interest income, and gains or losses
recognized on certain transactions outside of our normal course of business. Other income was $10.8 million during the year
ended December 31, 2017, down from $14.2 million during the year ended December 31, 2016. The decrease was primarily
due to lower net gain recognized on foreign exchange contracts in the current period compared to prior year.
In 2016, Encore and Cabot collectively began entering into currency exchange forward contracts to reduce the effects of
currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature
within one to three months and are not designated as hedge instruments for accounting purposes. The gains or losses on these
derivative contracts are recognized in other income or expense based on the changes in fair value.
Provision for Income Taxes
During the years ended December 31, 2017 and 2016, we recorded income tax provisions for income from continuing
operations of $52.0 million and $38.2 million, respectively.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by President Trump.
The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S.
corporate tax rate from a top rate of 35% to a flat rate of 21% effective January 1, 2018, while also repealing the deduction for
domestic production activities, implementing elements of a territorial tax system and imposing a repatriation tax on deemed
repatriated earnings of foreign subsidiaries. Shortly after enactment, the SEC staff issued Staff Accounting Bulletin (“SAB”)
118, which provides guidance on accounting for the Tax Reform Act’s impact. In accordance with SAB 118, a company must
reflect the income tax effects of those aspects of the Tax Reform Act for which the accounting under ASC 740 is complete. To
the extent that a company’s accounting for certain income tax effects of the Tax Reform Act is incomplete but it is able to
determine a reasonable estimate, it must record a provisional estimate in the financial statements. As a result of the Tax Reform
Act, we recorded an additional net tax expense of $1.2 million during the year ended December 31, 2017. This net tax expense
represents a provisional amount and our current best estimate. The provisional amount incorporates assumptions made based
upon our current interpretation of the Tax Reform Act and may change as we receive additional clarification and
implementation guidance. We did not record any deemed repatriation tax on unremitted foreign earnings and profits (“E&P”)
due to the deficit in accumulated foreign E&P as of December 31, 2017.
Because of the complexity of the new Global Intangible Low-Taxed Income (“GILTI”) tax rules, we continue to evaluate
this and other provisions of the Tax Reform Act and the application of Accounting Standards Codification 740, “Income Taxes.”
Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S.
inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2)
factoring such amounts into our measurement of its deferred taxes (the “deferred method”). We have not yet adopted an
accounting policy with respect to GILTI at December 31, 2017.
The effective tax rates for the respective periods are shown below:
Federal provision
State provision
Foreign rate differential(1)
Transaction costs(2)
Tax reserves
Permanent items(3)
Change in valuation allowance(4)
Other(5)
Effective rate
47
Year Ended December 31,
2017
2016
35.0 %
0.5 %
(20.0)%
5.0 %
0.0 %
10.2 %
8.2 %
0.8 %
39.7 %
35.0 %
2.3 %
(3.6)%
0.0 %
(3.2)%
14.7 %
20.7 %
0.7 %
66.6 %
Table of Contents
________________________
(1) Relates primarily to the lower tax rate on the income attributable to international operations.
(2) Relates primarily to the effect of certain costs related to the withdrawn Cabot IPO that are disallowed for U.K. tax purposes.
(3) Represents a provision for nondeductible expenses including interest expense reported in a foreign subsidiary and certain foreign income subject to tax
in the U.S. under Internal Revenue Code Section 951 (Subpart F) in 2017, and an overall foreign loss in 2016.
(4) Valuation allowance recorded as a result of certain foreign subsidiaries’ cumulative operating losses for tax purposes.
(5)
Includes the impact from the Tax Reform Act for the year ended December 31, 2017.
The effective tax rate for the year ended December 31, 2017 decreased to 39.7% as compared to 66.6% for the year
ended December 31, 2016. The decrease in effective tax rate was primarily the result of a lower tax rate on income attributable
to international operations and reduced impact of changes in valuation allowances related to certain foreign subsidiaries.
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 tax rates and higher than anticipated in countries that
have higher statutory tax rates.
Cost per Dollar Collected
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,
2017
2016
44.2%
28.2%
48.6%
39.5%
40.5%
32.8%
44.1%
38.5%
Our overall cost per dollar collected (or “cost-to-collect”) for the year ended December 31, 2017 was 39.5%, up 100 basis
points from 38.5% during the prior period. Cost-to collect increased in the United States and other geographies and decreased
in Europe during the periods presented.
Cost-to-collect in the United States increased due to a combination of (a) increased legal spending resulting from
increased placements in the legal channel due to the ceasing of prior temporary delays in receiving media from issuers required
to initiate the legal process, (b) the acquisition of an increased volume of accounts, which generates increased near-term
expenses from account manager hiring, legal placements, and letter volumes and (c) increased investments to increase
collection capacity.
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
48
Table of Contents
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 and exchangeable notes, acquisition, integration and restructuring related expenses, settlement fees and related
administrative expenses, amortization of certain acquired intangible assets and other charges or gains that are not indicative of
ongoing operations.
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 year ended December 31, 2017, includes the effect of approximately 0.2 million common shares that
are issuable upon conversion of certain convertible senior notes because the average stock price during the period exceeded the
conversion price of these notes. However, as described in Note 9, “Debt—Encore Convertible Notes and Exchangeable 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 and exchange price of some 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. There was no dilutive effect relating to our convertible or
exchangeable notes during the year ended December 31, 2018 or during the year ended December 31, 2016.
49
Table of Contents
We have presented the following metrics both including and excluding the dilutive effect of these convertible and
exchangeable notes to better illustrate the economic impact of those notes and the related hedging transactions to shareholders
(in thousands, except per share data):
2018
2017
2016
Year Ended December 31,
Per Diluted
Share—
Accounting
and
Economic
$
Per Diluted
Share—
Accounting
Per
Diluted
Share—
Economic
$
$
Per Diluted
Share—
Accounting
and
Economic
$115,886
$
4.06
$ 83,427
$
3.16
$
3.18
$ 78,923
$
3.05
13,896
0.50
12,353
11,506
0.40
16,628
9,315
8,337
0.33
0.29
—
3,561
2,984
0.10
15,339
—
—
—
—
—
1,182
0.47
0.63
—
0.13
0.58
—
0.05
0.47
11,830
0.63
17,630
—
—
0.46
0.68
—
0.14
2,593
0.10
0.58
—
0.05
—
6,299
—
—
0.24
—
(5,022)
(0.18)
(15,720)
(0.60)
(0.60)
(6,461)
(0.25)
(5,664)
(9,079)
(0.20)
(0.32)
(2,822)
(7,936)
(0.11)
(0.30)
(0.11)
(0.30)
(8,111)
(12,577)
(0.31)
(0.49)
$142,159
$
4.98
$ 106,012
$
4.01
$
4.04
$ 90,126
$
3.48
GAAP net income from continuing
operations attributable to Encore, as
reported
Adjustments:
Convertible and exchangeable notes non-
cash interest and issuance cost
amortization
Acquisition, integration and restructuring
related expenses(1)
Loss on derivatives in connection with the
Cabot Transaction(2)
Amortization of certain acquired
intangible assets(3)
Expenses related to withdrawn Cabot
IPO(4)
Settlement fees and related administrative
expenses(5)
Impact from tax reform(6)
Adjustments attributable to
noncontrolling interest(7)
Net gain on fair value adjustments to
contingent considerations(8)
Income tax effect of the adjustments(9)
Adjusted income from continuing operations
attributable to Encore
________________________
(1) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not
indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our
competitors’ results.
(2) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction. We adjust for
this amount because we believe the loss is not indicative of ongoing operations; therefore, adjusting for this loss enhances comparability to prior
periods, anticipated future periods, and our competitors’ results.
(3) As we acquired debt solution service providers around the world, our acquired intangible assets, such as trade names and customer relationships,
increased substantially. These intangible assets are valued at the time of the acquisition and amortized over their estimated lives. We believe that
amortization of acquisition-related intangible assets, especially the amortization of an acquired company’s trade names and customer relationships, is
the result of pre-acquisition activities. In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by
operations during any reporting period. As a result, the amortization of certain acquired intangible assets is excluded from our adjusted income from
continuing operations attributable to Encore and adjusted income from continuing operations per share.
(4) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM in 2017. We adjust for this amount because we
believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods,
anticipated future periods, and our competitors’ results.
(5) Amount represents litigation and government settlement fees and related administrative expenses for certain TCPA settlements. We believe these fees
and expenses are not indicative of ongoing operations, therefore, adjusting for these expenses enhances comparability to prior periods, anticipated
future periods, and our competitors’ results.
(6) As a result of the Tax Reform Act, we incurred a net additional tax expense of approximately $1.2 million during the year ended December 31, 2017.
We believe the Tax Reform Act related expenses are not indicative of our ongoing operations, therefore adjusting for these expenses enhances
comparability to prior periods, anticipated future periods, and our competitors’ results.
(7) Certain of the above pre-tax adjustments include expenses recognized by our partially-owned subsidiaries. This adjustment represents the portion of the
non-GAAP adjustments that are attributable to noncontrolling interest.
50
Table of Contents
(8) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of
debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to
the Contingent Consideration section of Note 3 “Fair Value Measurements” in the notes to our consolidated financial statements for further details.
(9) Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the
jurisdiction in which the portion of the adjustment occurred.
Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before discontinued operations,
interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration
and restructuring related expenses, settlement fees and related administrative expenses and other charges or gains that are not
indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented
is as follows (in thousands):
GAAP net income, as reported
Adjustments:
Interest expense
Provision for income taxes
Depreciation and amortization
Stock-based compensation expense
Loss on derivative in connection with the Cabot
Transaction(1)
Acquisition, integration and restructuring related expenses(2)
Expenses related to withdrawn Cabot IPO(3)
Loss from discontinued operations, net of tax
Settlement fees and related administrative expenses(4)
Interest income
Net gain on fair value adjustments to contingent
considerations(5)
Adjusted EBITDA
Collections applied to principal balance(6)
________________________
Year Ended December 31,
2018
2017
2016
$
109,736
$
78,978
$
16,817
240,048
46,752
41,228
12,980
9,315
7,523
2,984
—
—
(3,345)
204,161
52,049
39,977
10,399
—
11,962
15,339
199
—
(3,635)
(5,664)
461,557
759,014
$
$
(2,822)
406,607
673,035
$
$
$
$
198,367
38,205
34,868
12,627
—
16,712
—
2,353
6,299
(2,538)
(8,111)
315,599
738,989
(1) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction. We adjust for
this amount because we believe the loss is not indicative of ongoing operations; therefore, adjusting for this loss enhances comparability to prior
periods, anticipated future periods, and our competitors’ results.
(2) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not
indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our
competitors’ results.
(3) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM in 2017. We adjust for this amount because we
believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods,
anticipated future periods, and our competitors’ results.
(4) Amount represents litigation and government settlement fees and related administrative expenses for certain TCPA settlements. We believe these fees
and expenses are not indicative of ongoing operations, therefore, adjusting for these expenses enhances comparability to prior periods, anticipated
future periods, and our competitors’ results.
(5) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of
debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer
to the Contingent Consideration section of Note 3 “Fair Value Measurements” in the notes to our consolidated financial statements for further details.
(6) Amount represents (a) gross collections from receivable portfolios less (b) revenue from receivable portfolios and (c) allowance charges or allowance
reversals on receivable portfolios.
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, acquisition,
integration and restructuring related operating expenses, settlement fees and related administrative expenses and other charges
or gains that are not indicative of ongoing operations. Adjusted operating expenses related to our portfolio purchasing and
recovery business for the periods presented are as follows (in thousands):
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Table of Contents
GAAP total operating expenses, as reported
$
956,730
$
862,498
$
787,744
Year Ended December 31,
2018
2017
2016
Adjustments:
Operating expenses related to non-portfolio purchasing and
recovery business(1)
Stock-based compensation expense
Acquisition, integration and restructuring related operating
expenses(2)
Expenses related to withdrawn Cabot IPO(3)
Settlement fees and related administrative expenses(4)
Net gain on fair value adjustments to contingent
considerations(5)
Adjusted operating expenses related to portfolio purchasing and
recovery business
________________________
(193,715)
(12,980)
(7,523)
(2,984)
—
5,664
(125,028)
(10,399)
(16,628)
(15,339)
—
(110,875)
(12,627)
(17,630)
—
(6,299)
2,822
8,111
$
745,192
$
697,926
$
648,424
(1) Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily
engage in fee-based business, as well as corporate overhead not related to our portfolio purchasing and recovery business.
(2) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not
indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our
competitors’ results.
(3) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM in 2017. We adjust for this amount because we
believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods,
anticipated future periods, and our competitors’ results.
(4) Amount represents litigation and government settlement fees and related administrative expenses for certain TCPA settlements. We believe these fees
and expenses are not indicative of ongoing operations, therefore, adjusting for these expenses enhances comparability to prior periods, anticipated
future periods, and our competitors’ results.
(5) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of
debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to
the Contingent Consideration section of Note 3 “Fair Value Measurements” in the notes to our consolidated financial statements for further details.
Supplemental Performance Data
The tables included in this supplemental performance data section include detail for purchases, collections and ERC by
year of purchase. During any fiscal quarter in which we acquire an entity that has portfolio, the entire historical portfolio of the
acquired company is aggregated into static pools for the quarter of acquisition based on common characteristics, resulting in
pools for that quarter that may consist of several different vintages of portfolio. These quarterly pools are included in the tables
in this section by year of purchase. For example, with the acquisition of Cabot in July 2013, all of Cabot’s historical portfolio to
the date of the acquisition (which included several years of historical purchases at various stages of maturity) is included in
2013 for Europe.
Our collection expectations are based on demographic data, account characteristics, and economic variables. Additional
adjustments are made to account for qualitative factors that may affect the payment behavior of our consumers and servicing
related adjustments to ensure our collection expectations are aligned with our operations. We continue to refine our process of
forecasting collections both domestically and internationally with a focus on operational enhancements. Our collection
expectations vary between types of portfolio and geographic location. For example, in the U.K., due to the higher concentration
of payment plans, as compared to the U.S. and other locations in Europe, we expect to receive streams of collections over
longer periods of time. As a result, past performance of pools in certain geographic locations or of certain types of portfolio are
not necessarily a suitable indicator of future results in other locations or for other types of portfolio.
The supplemental performance data presented in this section is impacted by foreign currency translation, which represents
the effect of translating financial results where the functional currency of our foreign subsidiary is different than our U.S. dollar
reporting currency. For example, the strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable
reporting impact on our international purchases, collections, and ERC, and the weakening of the U.S. dollar relative to other
foreign currencies has a favorable impact on our international purchases, collections, and ERC.
We utilize proprietary forecasting models to continuously evaluate the economic life of each pool.
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Table of Contents
Cumulative Collections to Purchase Price Multiple
The following table summarizes our receivable purchases and related gross collections by year of purchase (in thousands, except multiples):
<2009
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total(2)
Multiple(3)
Cumulative Collections through December 31, 2018
Purchase
Price(1)
$ 1,150,773
252,950
357,304
383,809
548,830
551,955
518,049
499,806
554,404
529,883
635,106
5,982,869
619,079
630,342
423,302
258,856
464,110
455,552
2,851,241
Year of
Purchase
United States:
<2009
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Subtotal
Europe:
2013
2014
2015
2016
2017
2018
Subtotal
Other geographies:
2012
2013
2014
2015
2016
2017
2018
Subtotal
Total
$2,130,303
—
—
—
—
—
—
—
—
—
—
2,130,303
$390,929
96,529
$271,768
206,773
— 125,853
—
—
—
—
—
—
—
—
487,458
$184,022
164,605
288,788
— 123,596
—
—
—
—
—
—
—
604,394
$126,081
111,569
220,686
301,949
— 187,721
—
—
—
—
—
—
—
—
—
—
—
—
948,006
761,011
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
90,827
80,443
156,806
226,521
350,134
230,051
—
—
—
—
—
1,134,782
134,259
—
—
—
—
—
134,259
$
66,219
58,345
111,993
155,180
259,252
397,646
144,178
—
—
—
—
1,192,813
249,307
135,549
—
—
—
—
384,856
$
54,084
42,960
83,578
112,906
176,914
298,068
307,814
105,610
—
—
—
1,181,934
212,129
198,127
65,870
—
—
—
476,126
$
43,876
30,150
55,650
77,257
113,067
203,386
216,357
231,102
110,875
—
—
1,081,720
165,610
156,665
127,084
44,641
—
—
494,000
$
36,141
22,835
40,193
56,287
74,507
147,503
142,147
186,391
283,035
111,902
—
1,100,941
146,993
137,806
103,823
97,587
68,111
—
554,320
$
29,748
18,950
31,699
41,148
48,832
107,399
94,929
125,673
234,690
315,853
175,042
1,223,963
132,663
129,033
88,065
83,107
152,926
49,383
635,177
$ 3,423,998
833,159
1,115,246
1,094,844
1,210,427
1,384,053
905,425
648,776
628,600
427,755
175,042
11,847,325
1,040,961
757,180
384,842
225,335
221,037
49,383
2,678,738
6,721
29,568
86,989
91,039
79,739
57,596
38,457
390,109
$ 9,224,219
—
—
—
—
—
—
—
—
$2,130,303
—
—
—
—
—
—
—
—
$487,458
—
—
—
—
—
—
—
—
$604,394
—
—
—
—
—
—
—
—
$761,011
—
—
—
—
—
—
—
—
$948,006
3,848
6,617
—
—
—
—
—
10,465
$1,279,506
2,561
17,615
9,652
—
—
—
—
29,828
$1,607,497
1,208
10,334
16,062
15,061
—
—
—
42,665
$ 1,700,725
542
4,606
18,403
57,064
29,269
—
—
109,884
$ 1,685,604
551
3,339
9,813
43,499
39,710
15,471
—
112,383
$ 1,767,644
422
2,468
7,991
32,622
28,992
23,075
12,910
108,480
$ 1,967,620
9,132
44,979
61,921
148,246
97,971
38,546
12,910
413,705
$14,939,768
3.0
3.3
3.1
2.9
2.2
2.5
1.7
1.3
1.1
0.8
0.3
2.0
1.7
1.2
0.9
0.9
0.5
0.1
0.9
1.4
1.5
0.7
1.6
1.2
0.7
0.3
1.1
1.6
________________________
(1) Adjusted for the return of items not eligible for sale per the terms of the agreement.
(2) Cumulative collections from inception through December 31, 2018, excluding collections on behalf of others.
(3) Cumulative Collections Multiple (“Multiple”) through December 31, 2018 refers to collections as a multiple of purchase price.
53
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 for purchased receivables, by year of purchase (in thousands, except multiples):
Purchase Price(1)
Historical
Collections(2)
Estimated
Remaining
Collections
Total Estimated
Gross Collections
Total Estimated Gross
Collections to
Purchase Price
$
United States:
<2009
2009
2010
2011
2012
2013(3)
2014(3)
2015
2016
2017
2018
Subtotal
Europe:
2013(3)
2014(3)
2015(3)
2016
2017
2018
Subtotal
Other geographies:
2012
2013
2014
2015
2016
2017
2018
Subtotal
Total
$
________________________
1,150,773
252,950
357,304
383,809
548,830
551,955
518,049
499,806
554,404
529,883
635,106
5,982,869
619,079
630,342
423,302
258,856
464,110
455,552
2,851,241
6,721
29,568
86,989
91,039
79,739
57,596
38,457
390,109
9,224,219
$
$
3,423,998
833,159
1,115,246
1,094,844
1,210,427
1,384,053
905,425
648,776
628,600
427,755
175,042
11,847,325
1,040,961
757,180
384,842
225,335
221,037
49,383
2,678,738
9,132
44,979
61,921
148,246
97,971
38,546
12,910
413,705
14,939,768
$
$
65,947
33,416
60,970
82,322
88,403
164,903
179,022
219,268
429,899
659,288
1,150,073
3,133,511
733,132
623,805
404,528
395,082
671,515
821,522
3,649,584
769
1,808
121,052
65,274
54,315
74,015
63,771
381,004
7,164,099
$
$
3,489,945
866,575
1,176,216
1,177,166
1,298,830
1,548,956
1,084,447
868,044
1,058,499
1,087,043
1,325,115
14,980,836
1,774,093
1,380,985
789,370
620,417
892,552
870,905
6,328,322
9,901
46,787
182,973
213,520
152,286
112,561
76,681
794,709
22,103,867
3.0
3.4
3.3
3.1
2.4
2.8
2.1
1.7
1.9
2.1
2.1
2.5
2.9
2.2
1.9
2.4
1.9
1.9
2.2
1.5
1.6
2.1
2.3
1.9
2.0
2.0
2.0
2.4
(1) Adjusted for Put-Backs and Recalls. Put-backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by
the seller pursuant to specific guidelines as set forth in the respective purchase agreements.
(2) Cumulative collections from inception through December 31, 2018, excluding collections on behalf of others.
(3)
Includes portfolios acquired in connection with certain business combinations.
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Estimated Remaining Gross Collections by Year of Purchase
The following table summarizes our estimated remaining gross collections for purchased receivables by year of purchase
(in thousands):
2019
2020
2021
2022
2023
2024
2025
2026
2027
>2027
Total
Estimated Remaining Gross Collections by Year of Purchase(1), (2)
$
28,325
$
18,164
$
11,251
$
6,209
$
1,998
$
— $
— $
— $
— $
— $
65,947
United States:
<2009
2009
2010
2011
2012
2013(3)
2014(3)
2015
2016
2017
2018
11,603
20,876
27,495
31,676
72,468
62,944
83,089
159,607
252,597
341,162
Subtotal
1,091,842
Europe:
2013(3)
2014(3)
2015(3)
2016
2017
2018
Subtotal
111,658
101,168
69,509
60,966
123,229
124,875
591,405
Other geographies:
2012
2013
2014
2015(3)
2016
2017
2018
Subtotal
Total
281
860
24,167
20,564
17,807
17,821
18,419
99,919
8,122
13,983
18,517
19,716
47,212
41,858
51,889
97,972
147,937
311,566
776,936
101,992
88,775
57,884
61,195
98,534
128,613
536,993
208
518
28,554
14,980
13,202
14,795
14,171
86,428
5,716
9,671
12,688
12,639
21,277
26,357
29,323
60,414
92,864
4,030
6,795
8,806
8,529
13,788
16,940
18,856
36,244
59,420
179,755
112,593
2,847
4,789
6,181
5,979
5,994
11,044
12,590
24,307
36,800
73,928
1,098
3,381
4,352
4,208
1,549
7,255
8,396
16,954
24,584
48,270
461,955
292,210
186,457
120,047
93,650
79,669
49,993
64,276
85,093
103,360
85,250
69,923
43,552
43,710
72,388
85,709
76,782
62,012
37,910
32,642
60,997
70,827
68,653
54,660
32,655
26,610
51,406
61,749
—
1,475
3,069
2,968
1,092
4,904
5,376
11,690
17,006
33,910
81,490
61,121
46,574
27,523
24,687
42,625
53,008
—
—
1,214
2,097
772
3,332
3,640
7,862
11,784
24,447
55,148
54,141
41,099
23,320
30,288
34,538
45,494
—
—
—
591
547
2,272
2,549
5,502
7,936
17,553
36,950
47,584
36,361
20,247
14,635
27,741
38,574
—
—
—
—
204
2,116
3,560
9,347
8,360
6,889
33,416
60,970
82,322
88,403
164,903
179,022
219,268
429,899
659,288
1,150,073
30,476
3,133,511
32,301
43,564
41,935
36,073
74,964
109,313
733,132
623,805
404,528
395,082
671,515
821,522
476,041
400,532
341,170
295,733
255,538
228,880
185,142
338,150
3,649,584
175
366
24,559
10,681
9,496
12,683
10,295
68,255
105
62
—
2
22,128
15,359
7,779
6,411
11,376
7,496
55,357
5,451
3,255
9,600
5,325
—
—
6,285
3,425
2,056
4,903
3,286
—
—
—
2,315
1,485
1,613
2,020
7,433
—
—
—
79
603
925
1,409
3,016
—
—
—
—
—
299
983
1,282
—
—
—
—
—
—
367
367
769
1,808
121,052
65,274
54,315
74,015
63,771
381,004
38,992
19,955
$ 1,783,166
$ 1,400,357
$ 1,006,251
$748,099
$566,619
$435,735
$344,461
$287,044
$223,374
$368,993
$ 7,164,099
________________________
(1) ERC for Zero Basis Portfolios can extend beyond our collection forecasts. As of December 31, 2018, ERC for Zero Basis Portfolios includes
approximately $239.9 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and
other geographies was immaterial.
(2) The collection forecast of each pool in the calculation of accretion revenue is generally estimated up to 120 months in the United States and up to 180
months in Europe. Expected collections beyond the 120-month collection forecast in the United States are included in the presentation of ERC but are
not included in the calculation of IRRs.
(3)
Includes portfolios acquired in connection with certain business combinations.
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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, 2018
Purchase
Price(1)
Unamortized
Balance as a
Percentage of
Purchase Price
Unamortized
Balance as a
Percentage
of Total
United States:
2011
2012
2013(2)
2014(2)
2015
2016
2017
2018
Subtotal
Europe:
2013(2)
2014(2)
2015(2)
2016
2017
2018
Subtotal
Other geographies:
2014
2015
2016
2017
2018
Subtotal
Total
$
$
2,905
9,963
25,747
73,615
124,301
236,032
321,730
570,440
1,364,733
247,672
233,718
183,069
165,432
345,438
428,657
1,603,986
62,455
19,592
26,779
30,599
29,749
169,174
3,137,893
$
$
383,809
548,830
551,955
518,049
499,806
554,404
529,883
635,106
4,221,842
619,079
630,342
423,302
258,856
464,110
455,552
2,851,241
86,989
91,039
79,739
57,596
38,457
353,820
7,426,903
0.8%
1.8%
4.7%
14.2%
24.9%
42.6%
60.7%
89.8%
32.3%
40.0%
37.1%
43.2%
63.9%
74.4%
94.1%
56.3%
71.8%
21.5%
33.6%
53.1%
77.4%
47.8%
42.3%
0.1%
0.3%
0.8%
2.3%
4.0%
7.5%
10.3%
18.2%
43.5%
7.9%
7.4%
5.8%
5.3%
11.0%
13.7%
51.1%
2.0%
0.6%
0.9%
1.0%
0.9%
5.4%
100.0%
________________________
(1) Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. Put-backs (“Put-Backs”) and
recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the
respective purchase agreements.
(2)
Includes portfolios acquired in connection with certain business combinations.
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Table of Contents
Estimated Future Amortization of Portfolios
As of December 31, 2018, we had $3.1 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,
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
United States
Europe
Other
Geographies
Total
Amortization
$
420,299
$
189,349
$
25,209
$
371,331
213,228
131,208
85,243
55,805
38,036
26,612
17,060
5,911
—
—
—
—
—
203,517
192,609
161,592
140,190
128,755
120,142
115,074
109,112
99,979
56,500
34,607
25,669
18,883
8,008
34,018
30,961
30,978
25,659
14,083
4,987
2,076
893
310
—
—
—
—
—
634,857
608,866
436,798
323,778
251,092
198,643
163,165
143,762
127,065
106,200
56,500
34,607
25,669
18,883
8,008
Total
$
1,364,733
$
1,603,986
$
169,174
$
3,137,893
Headcount by Function by Geographic Location
The following table summarizes our headcount by function and by geographic location:
General & Administrative
Account Manager
Total
Headcount as of December 31,
2018
2017
2016
Domestic
International
Domestic
International
Domestic
International
1,060
504
1,564
2,381
3,921
6,302
923
381
1,304
2,693
4,239
6,932
894
287
1,181
2,151
3,371
5,522
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Purchases by Quarter
The following table summarizes the receivable portfolios we purchased by quarter, and the respective purchase prices (in
thousands):
Quarter
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Q1 2018
Q2 2018
Q3 2018
Q4 2018
# of
Accounts
Face Value
Purchase
Price
1,450
$
3,544,338
$
946
874
1,159
807
1,347
1,010
1,434
973
1,031
706
766
2,841,527
1,475,381
1,943,775
1,657,393
2,441,909
3,018,072
2,985,978
1,799,804
2,870,456
1,559,241
2,272,113
256,753
233,116
206,359
210,491
218,727
246,415
292,332
300,761
276,762
359,580
248,691
246,865
Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activity, including the cash flows from discontinued operations, 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,
2018
2017
2016
$
$
186,791
(397,516)
166,377
$
123,818
(452,131)
378,217
130,332
(168,789)
43,253
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 flows are 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 $186.8 million, $123.8 million, and $130.3 million during the years ended
December 31, 2018, 2017, and 2016, respectively. Cash provided by operating activities is affected by net income, various non-
cash add backs in operating activities, including portfolio allowance reversals, and changes in operating assets and liabilities.
The primary drivers of the changes in operating cash flow included cash collections recognized as revenue from receivable
portfolios, income tax payments, and interest payments. Cash collections recognized as revenue from receivable portfolios
were $1,167.1 million, $1,053.4 million, and $1,030.8 million during the years ended December 31, 2018, 2017, and 2016,
respectively. Cash paid for income taxes was $30.2 million, $44.4 million, and $60.1 million for the years ended December 31,
2018, 2017, and 2016, respectively. Interest payments were $198.8 million, $162.5 million, and $147.9 million during the years
ended December 31, 2018, 2017, and 2016, respectively.
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Table of Contents
Investing Cash Flows
Net cash used in investing activities was $397.5 million, $452.1 million and $168.8 million during the years ended
December 31, 2018, 2017 and 2016, respectively. Cash used in investing activities is primarily affected by receivable portfolio
purchases offset by collection proceeds applied to the principal of our receivable portfolios. Receivable portfolio purchases
were $1,131.1 million, $1,045.8 million, and $907.4 million during the years ended December 31, 2018, 2017, and 2016,
respectively. Collection proceeds applied to the principal of our receivable portfolios were $809.7 million, $709.4 million, and
$659.3 million during the years ended December 31, 2018, 2017, and 2016, respectively. Collections proceeds applied to the
principal of receivable portfolios in 2016 included $106.0 million of proceeds from the divestiture of Propel, net of cash
divested.
Financing Cash Flows
Net cash provided by financing activities was $166.4 million, $378.2 million and $43.3 million for the years ended
December 31, 2018, 2017 and 2016, respectively. Cash provided by financing activities is primarily affected by borrowings
under our credit facilities and proceeds from the issuance of convertible and exchangeable notes offset by repayments of
amounts outstanding under our credit facilities, repayments of senior secured notes, and repayments of Encore’s convertible
and exchangeable notes. Borrowings under our credit facilities were $942.2 million, $1,434.5 million and $586.0 million
during the years ended December 31, 2018, 2017, and 2016, respectively. Proceeds from the issuance of convertible and
exchangeable notes were $172.5 million and $150.0 million during the years ended December 31, 2018 and 2017. Repayments
of amounts outstanding under our credit facilities were $571.1 million, $1,168.1 million and $615.9 million and repayments of
senior secured notes were $91.6 million, $204.2 million and $352.5 million during the years ended December 31, 2018, 2017,
and 2016, respectively.
Capital Resources
Historically, we have met our cash requirements by utilizing our cash flows from operations, bank borrowings, debt
offerings, and equity offerings. From time to time, depending on the capital markets, we consider additional financings to fund
our operations and acquisitions. From time to time, we may repurchase outstanding debt or equity and/or restructure or
refinance current debt obligations. Our primary cash requirements have included the purchase of receivable portfolios, entity
acquisitions, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes.
We have a revolving credit facility and term loan facility pursuant to a Third Amended and Restated Credit Agreement
dated December 20, 2016 (as amended, the “Restated Credit Agreement”). The Restated Credit Agreement includes a revolving
credit facility of $894.4 million (the “Revolving Credit Facility”), a term loan facility of $203.7 million (the “Term Loan
Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”). The Senior Secured Credit
Facilities have a five-year maturity, expiring in December 2021, except with respect to (1) revolving commitments under the
Revolving Credit Facility of $10.2 million maturing in February 2019 and (2) a subtranche of the Term Loan Facility of $9.1
million (of which $8.1 million was outstanding as of December 31, 2018) maturing in February 2019. As of December 31,
2018, we had $429.0 million outstanding and $177.5 million of availability under the Revolving Credit Facility and $195.1
million outstanding under the Term Loan Facility.
Through Cabot, we have a revolving credit facility of £385.0 million (approximately $490.4 million) (the “Cabot Credit
Facility”). As of December 31, 2018, we had £233.9 million (approximately $298.0 million) outstanding and £151.1 million
(approximately $192.4 million) of availability under the Cabot Credit Facility.
On August 27, 2018, we established an at-the-market equity offering program (the “ATM Program”) pursuant to which
we may issue and sell shares of Encore’s common stock having an aggregate offering price of $50.0 million in amounts and at
times as we determine from time to time. During the year ended December 31, 2018, we issued 13,600 shares under our ATM
Program, generating proceeds of approximately $0.54 million, net of commissions of approximately $5,000.
We have no obligation to sell any of such shares under our ATM Program. Actual sales will depend on a variety of factors
to be determined by the Company from time to time, including, among others, market conditions, the trading price of our
common stock, our determination of the appropriate sources of funding for the Company, and potential uses of funding
available to us. We intend to use the net proceeds from the offering of such shares, if any, for general corporate purposes, which
could include repayments of our credit facilities from time to time.
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.
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.
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Table of Contents
Our cash and cash equivalents at December 31, 2018 consisted of $25.6 million held by U.S.-based entities and $131.8
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.
Future Contractual Cash Obligations
The following table summarizes our future contractual cash obligations as of December 31, 2018 (in thousands):
Contractual Obligations
Principal payments on debt
Estimated interest payments(1)
Capital leases
Operating leases
Purchase commitments on receivable
portfolios
Payment Due By Period
Total
Less
Than
1 Year
1 – 3 Years
3 – 5 Years
$
3,568,217
$
113,163
$
1,554,127
$
1,852,176
$
729,643
8,168
102,907
191,491
2,507
16,538
351,307
3,827
26,894
185,703
1,834
21,478
More
Than
5 Years
48,751
1,142
—
37,997
400,832
370,832
30,000
—
—
Total contractual cash obligations(2)
$
4,809,767
$
694,531
$
1,966,155
$
2,061,191
$
87,890
________________________
(1) Estimated interest payments are calculated based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as
of December 31, 2018 for variable rate debt, timing of scheduled payments and the term of the debt obligations.
(2) We had approximately $19.9 million of liabilities and accrued interests related to uncertain tax positions at December 31, 2018. We are unable to
reasonably estimate the timing of the cash settlement with the tax authorities due to 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. 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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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 carrying value 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 historical court costs recovery data. We estimate deferral periods for Deferred
Court Costs based on jurisdiction and nature of litigation and write off any Deferred Court Costs not recovered within the
respective deferral period. Collections received through litigation are first applied against related court costs with the balance
applied to the debtors’ account.
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 interest 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 four reporting units identified for goodwill impairment testing purposes. The annual goodwill testing
date for these reporting units is October 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
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 most of our reporting units where we have access to
reliable market participant data, the market approach is conducted in addition to the income approach in determining the 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 or earnings before
interest, tax, depreciation and amortization (“EBITDA”) 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
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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.
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.
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
operations. 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.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements and the impact of those pronouncements, if any, on our
consolidated financial statements is provided in this Annual Report in “Note 1, Ownership, Description of Business, and
Summary of Significant Accounting Policies” to our consolidated financial statements.
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. Our primary risk of loss due to foreign currency exchange rate risk is related to
Euro to British Pound and Indian rupee to U.S. dollar exchange rates. 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.
Beginning in 2016 and through August 2018, we entered into currency exchange forward contracts to reduce the effects of
currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally matured
within one to three months and were not designated as hedge instruments for accounting purposes. The gains or losses on these
derivative contracts were recognized in other income or expense based on fair value changes. We currently do not have any
hedge program that hedges the effects of currency exchange rate fluctuations between the British Pound and Euro.
In addition, we have currency exchange forward contracts that hedge the forecasted monthly cash settlements resulting
from the expenses incurred by our operations in India. These foreign currency forward contracts are designated as cash flow
hedging instruments and qualify for hedge accounting treatment. Gains and losses arising from the effective portion of such
contracts are recorded as a component of accumulated other comprehensive income (“OCI”) as gains and losses on derivative
instruments, net of income taxes. The hedging gains and losses in OCI are subsequently reclassified into earnings in the same
period in which the underlying transactions affect our earnings. Our cash flow hedging instruments are generally considered
effective.
As of December 31, 2018, our outstanding foreign currency forward contracts that hedge our risk of foreign currency
exchange against the Indian rupee had a fair value liability position of $0.2 million. We considered the historical trends in
currency exchange rates and determined that it was reasonably possible that changes in exchange rates of 10% for the Indian
rupee could be experienced in the near term. If the U.S. dollar weakened by 10% against the Indian rupee at December 31,
2018, the result would have had a favorable effect to the fair value of the derivatives of approximately $1.3 million. If the U.S.
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Table of Contents
dollar strengthened by 10% against the Indian rupee at December 31, 2018 the result would have had an unfavorable effect to
the fair value of the derivatives of approximately $1.1 million.
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, 2018, we had six interest rate swap agreements outstanding
with a total notional amount of $368.1 million. As of December 31, 2018, we held two interest rate cap contracts with an
aggregate notional amount of £350.0 million (approximately $445.8 million) used to manage risk related to interest rate
fluctuations. Both the interest rate cap and interest rate swap instruments are designated as cash flow hedges and are accounted
for using hedge accounting.
Our variable interest-bearing debt that is not hedged by derivative financial instruments 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 not
hedged by derivatives increased 50 basis points, interest expense on such outstanding debt would increase by approximately
$5.0 million, on an annualized basis. Conversely, if the market interest rates decreased 50 basis points, our interest expense on
such outstanding debt would decrease by $5.0 million on an annualized basis. These sensitivity calculations consider the impact
of our interest rate cap and interest rate swap agreements.
As of December 31, 2018, the fair value of our outstanding interest rate swap agreements had a fair value liability
position of $4.9 million. If the market interest rates increased 50 basis points, the result would have a favorable effect to the
interest rate swap fair value of $1.8 million. Conversely, if the market interest rates decreased 50 basis points, the result would
have an unfavorable effect to the interest rate swap fair value of $1.8 million. As of December 31, 2018, the fair value of our
outstanding interest rate cap contracts had a fair value asset position of $2.0 million. If the market interest rates increased 50
basis points, the result would have a favorable effect to the interest rate cap fair value of $2.2 million. Conversely, if the market
interest rates decreased 50 basis points, the result would have an unfavorable effect to the interest rate cap fair value of $2.2
million.
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-43.
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 at the reasonable assurance
level 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.
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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, 2018,
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, 2018.
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, 2018, as stated in its report below.
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Table of Contents
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Encore Capital Group, Inc.
San Diego, California
Opinion on Internal Control over Financial Reporting
We have audited Encore Capital Group, Inc.’s (the “Company’s”) internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated statements of financial condition of the Company as of December 31, 2018 and 2017 and
the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in
the period ended December 31, 2018, and the related notes and our report dated February 27, 2019 expressed an unqualified
opinion thereon.
Basis for Opinion
The Company’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 are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB.
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.
Definition and Limitations of Internal Control over Financial Reporting
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.
/s/ BDO USA, LLP
San Diego, California
February 27, 2019
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Changes in Internal Control over Financial Reporting
In 2018, we upgraded our Enterprise Resource Planning (“ERP”) system to a cloud-based platform to increase efficiency
of transaction processing. Other than this upgrade, there were no changes in our system of internal control over financial
reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the quarter
ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
In the course of our ongoing preparations for management’s report on internal control over financial reporting as required
by Section 404 of the Sarbanes-Oxley Act of 2002, we have identified areas in need of improvement and have taken remedial
actions to strengthen the affected controls as appropriate. We make these and other changes, which do not have a material effect
on our overall internal control over financial reporting, to enhance the effectiveness of our internal control over financial
reporting.
None.
Item 9B—Other Information
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PART III
Item 10—Directors, Executive Officers and Corporate Governance
The information under the captions “Election of Directors,” “Executive Officers” and “Section 16(a) Beneficial
Ownership Reporting Compliance,” appearing in the 2019 Proxy Statement to be filed no later than April 30, 2019, is hereby
incorporated by reference.
Item 11—Executive Compensation
The information under the caption “Executive Compensation and Other Information,” appearing in the 2019 Proxy
Statement to be filed no later than April 30, 2019, 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 2019 Proxy Statement to be filed no later than April 30, 2019, 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 2019 Proxy Statement to be filed no later than April 30,
2019, is hereby incorporated by reference.
The information under the caption “Independent Registered Public Accounting Firm,” appearing in the 2019 Proxy
Statement to be filed no later than April 30, 2019, is hereby incorporated by reference.
Item 14—Principal Accountant Fees and Services
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Table of Contents
(a) Financial Statements.
PART IV
Item 15—Exhibits and Financial Statement Schedules
The following consolidated financial statements of Encore Capital Group, Inc. are filed as part of this annual report on
Form 10-K:
Page
F-1
F-2
F-3
F-4
F-5
F-6
F-7
Filed or
Furnished
Herewith
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition at December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
(b) Exhibits.
Exhibit
Number
3.1.1
3.1.2
3.2
4.1
4.2
4.3
4.3.1
4.6
4.6.1
Exhibit Description
Restated Certificate of Incorporation
Certificate of Amendment to the Certificate of
Incorporation
Bylaws, as amended through February 8, 2011
Form of Common Stock Certificate
Third Amended and Restated Senior Secured
Note Purchase Agreement (including the forms
of the Notes), dated as of August 11, 2017, by
and among Encore Capital Group, Inc. and the
purchasers named therein
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
Supplemental Indenture, dated November 6,
2018, to the Indenture, 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
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
Supplemental Indenture, dated November 6,
2018, to the Indenture, 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
Form
S-1/A
File
Number
333-77483
Exhibit
3.1
8-K
000-26489
10-K
S-3
000-26489
333-163876
3.1
3.3
4.7
Filing
Date
6/14/1999
4/4/2002
2/14/2011
12/21/2009
8-K
000-26489
10.1
8/17/2017
8-K
000-26489
4.1
6/24/2013
10-Q
000-26489
4.5
11/7/2018
8-K
000-26489
4.1
3/11/2014
10-Q
000-26489
4.6
11/7/2018
68
Table of Contents
Exhibit
Number
Exhibit Description
Form
Incorporated By Reference
File
Number
Exhibit
Filing
Date
Filed or
Furnished
Herewith
4.7
4.7.1
4.7.2
4.7.3
4.7.4
4.7.5
4.8
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
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
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
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
Fourth Supplemental Indenture dated July 15,
2016 to Indenture dated as of March 27, 2014
by and among Cabot Financial(Luxembourg)
S.A., Cabot Credit Management Limited,
Cabot Financial Limited, Cabot Securitisation
Europe Limited and Citibank, N.A., London
Branch, as trustee
Fifth Supplemental Indenture dated July 11,
2018 to Indenture dated as of March 27, 2014
by and among Cabot Financial(Luxembourg)
S.A., Cabot Financial Limited, and Citibank,
N.A., London Branch, as trustee
Indenture (including form of Note), 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
8-K
000-26489
4.1
3/28/2014
10-K
000-26489
4.25
2/24/2016
10-K
000-26489
4.29
2/24/2016
10-K
000-26489
4.34
2/24/2016
X
8-K
000-26489
4.1
7/13/2018
8-K
000-26489
4.1
11/13/2015
69
Table of Contents
Exhibit
Number
Exhibit Description
Form
Incorporated By Reference
File
Number
Exhibit
Filing
Date
Filed or
Furnished
Herewith
Indenture (including form of Note), dated
October 6, 2016, 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
Indenture (including Form of Note), dated
March 3, 2017, by and among Encore Capital
Group, Inc., Midland Credit Management, Inc.,
as guarantor, and MUFG Union Bank, N.A., as
trustee
Indenture, dated July 20, 2018, between
Encore Capital Europe Finance Limited and
MUFG Union Bank, N.A.
Supplemental Indenture (including the form of
4.50% Exchangeable Senior Notes due 2023),
dated July 20, 2018, among Encore Capital
Europe Finance Limited, Encore Capital
Group, Inc. and MUFG Union Bank, N.A.
Form of Indemnification Agreement
Severance protection letter agreement, dated
March 11, 2009, between Encore Capital
Group, Inc. and Paul Grinberg
Amendment, dated January 9, 2013, to the
Severance Protection Letter Agreement dated
March 11, 2009 between Encore Capital
Group, Inc. and Paul Grinberg
Letter Agreement, dated January 9, 2013,
between Encore Capital Group, Inc. and Paul
Grinberg
Letter Agreement, dated February 24, 2014,
between Encore Capital Group, Inc. and Paul
Grinberg
Transition Letter, dated as of August 8, 2018,
by and between Encore Capital Group, Inc and
Paul Grinberg
Encore Capital Group, Inc. 2005 Stock
Incentive Plan, as amended and restated
Amended Form of Restricted Stock Unit Grant
Notice and Agreement under the Encore
Capital Group, Inc. 2005 Stock Incentive Plan
Form of Non-Incentive Stock Option
Agreement under the Encore Capital Group,
Inc. 2005 Stock Incentive Plan
Encore Capital Group, Inc. 2013 Incentive
Compensation Plan
First Amendment to Encore Capital Group,
Inc. 2013 Incentive Compensation Plan, dated
February 20, 2014
Form of Non-Incentive Stock Option
Agreement under the Encore Capital Group,
Inc. 2013 Incentive Compensation Plan
4.9
4.10
4.11
4.11.1
10.1+
10.2+
10.2.1+
10.2.2+
10.2.3+
10.2.4+
10.3+
10.3.1+
10.3.2+
10.4+
10.4.1+
10.4.2+
8-K
000-26489
4.1
10/7/2016
8-K
000-26489
4.1
3/3/2017
8-K
000-26489
4.1
7/20/2018
8-K
000-26489
4.2
7/20/2018
8-K
000-26489
10.1
5/4/2006
8-K
000-26489
10.2
3/13/2009
8-K
000-26489
10.1
1/15/2013
8-K
000-26489
10.2
1/15/2013
8-K
000-26489
10.1
2/24/2014
8-K
000-26489
10.1
8/8/2018
8-K
000-26489
10.1
6/15/2009
10-Q
000-26489
10.2
7/30/2009
10-Q
000-26489
10.3
11/1/2012
Def
14A
000-26489 Appendix
A
4/26/2013
10-K
000-26489
10.84
2/25/2014
10-Q
000-26489
10.5
8/8/2013
70
Table of Contents
Exhibit
Number
10.4.3+
10.4.4+
10.4.5+
10.4.6+
10.4.7+
10.4.8+
10.4.9+
10.4.10+
10.4.11+
10.4.12+
10.4.13+
10.4.14+
10.5+
10.6+
10.7+
10.8+
10.8.1+
Exhibit Description
Form of Restricted Stock Award Grant Notice
and Agreement (Executive) under the Encore
Capital Group, Inc. 2013 Incentive
Compensation Plan
Form of Restricted Stock Award Grant Notice
and Agreement (Non-Executive) under the
Encore Capital Group, Inc. 2013 Incentive
Compensation Plan
Form of Restricted Stock Unit Grant Notice
and Agreement (Executive) under the Encore
Capital Group, Inc. 2013 Incentive
Compensation Plan
Form of Performance Stock Grant Notice and
Agreement under the Encore Capital Group,
Inc. 2013 Incentive Compensation Plan
Form of Performance Stock Unit Grant Notice
and Agreement under the Encore Capital
Group, Inc. 2013 Incentive Compensation Plan
Form of Restricted Stock Unit Grant Notice
and Agreement (Non-Employee Director)
under the Encore Capital Group, Inc. 2013
Incentive Compensation Plan
Form of Performance Stock Grant Notice and
Agreement (TSR) under the Encore Capital
Group, Inc. 2013 Incentive Compensation Plan
Form of Restricted Stock Award Grant Notice
and Agreement (Executive - Umbrella) under
the Encore Capital Group, Inc. 2013 Incentive
Compensation Plan
Form of Performance Stock Award Grant
Notice and Agreement under the Encore
Capital Group, Inc. 2013 Incentive
Compensation Plan
Form of Restricted Stock Award Grant Notice
and Agreement (Retention) under the Encore
Capital Group, Inc. 2013 Incentive
Compensation Plan
Form of Restricted Cash Award Grant Notice
and Agreement (Retention) under the Encore
Capital Group, Inc. 2013 Incentive
Compensation Plan
Form of Performance Stock Option Agreement
under the Encore Capital Group, Inc. 2013
Incentive Compensation Plan
Encore Capital Group, Inc. Executive
Separation Plan
Employment offer letter dated October 9, 2014
by and between Encore Capital Group, Inc.
and Jonathan Clark
Non-Employee Director Compensation
Program Guidelines, effective September 1,
2018
Non-Employee Director Deferred Stock
Compensation Plan
First Amendment to Non-Employee Director
Deferred Stock Compensation Plan, dated
August 6, 2016
Incorporated By Reference
Form
File
Number
Exhibit
Filing
Date
Filed or
Furnished
Herewith
10-Q
000-26489
10.6
8/8/2013
10-Q
000-26489
10.7
8/8/2013
10-Q
000-26489
10.8
8/8/2013
10-Q
000-26489
10.9
8/8/2013
10-Q
000-26489
10.10
8/8/2013
10-Q
000-26489
10.11
8/8/2013
10-Q
000-26489
10.1
5/10/2016
10-Q
000-26489
10.2
5/10/2016
10-Q
000-26489
10.3
5/10/2016
10-K
000-26489
10.105
2/23/2017
10-K
000-26489
10.106
2/23/2017
10-K
000-26489
10.108
2/23/2017
10-Q
000-26489
10.2
11/6/2014
8-K
000-26489
10.1
2/26/2015
10-Q
000-26489
10.8
11/7/2018
10-Q
000-26489
10.2
8/4/2016
10-Q
000-26489
10.1
11/9/2016
71
Table of Contents
Exhibit
Number
10.9+
10.10+
10.11+
10.11.1+
10.11.2+
10.11.3+
10.11.4+
10.11.5+
10.11.6+
10.11.7+
10.11.8+
10.12
10.12.1
10.12.2
Exhibit Description
Form
Incorporated By Reference
File
Number
Exhibit
Filing
Date
Filed or
Furnished
Herewith
Letter, dated June 15, 2017, from Encore
Capital Group, Inc. to Ashish Masih
Letter, dated June 15, 2017, from Encore
Capital Group, Inc. to Paul Grinberg
The Encore Capital Group, Inc. 2017 Incentive
Award Plan
Form of Restricted Stock Unit Grant Notice
and Award Agreement under the Encore
Capital Group, Inc. 2017 Incentive Award Plan
Form of Restricted Stock Unit Grant Notice
and Award Agreement under the Encore
Capital Group, Inc. 2017 Incentive Award Plan
Form of Restricted Stock Award Grant Notice
and Award Agreement under the Encore
Capital Group, Inc. 2017 Incentive Award Plan
Form of Stock Option Grant Notice and Award
Agreement under the Encore Capital Group,
Inc. 2017 Incentive Award Plan
Form of Performance Share Unit Award Grant
Notice and Award Agreement (EPS) under the
Encore Capital Group, Inc. 2017 Incentive
Award Plan (Executive Separation Plan
Participant)
Form of Performance Share Unit Award Grant
Notice and Award Agreement (EPS) under the
Encore Capital Group, Inc. 2017 Incentive
Award Plan
Form of Performance Share Unit Award Grant
Notice and Award Agreement (TSR) under the
Encore Capital Group, Inc. 2017 Incentive
Award Plan (Executive Separation Plan
Participant)
Form of Performance Share Unit Award Grant
Notice and Award Agreement (TSR) under the
Encore Capital Group, Inc. 2017 Incentive
Award Plan
Third Amended and Restated Credit
Agreement, dated December 20, 2016, 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
Incremental Term Loan and Extension
Agreement, dated March 2, 2017, by and
among Encore Capital Group, Inc., Cathay
Bank, Opus Bank, Umpqua Bank, SunTrust
Bank, and each of the guarantors, party thereto
Incremental Facility Agreement, dated March
29, 2017, by and among Encore Capital Group,
Inc., Woodforest National Bank, SunTrust
Bank, and each of the guarantors, party thereto
8-K
000-26489
10.1
6/20/2017
8-K
000-26489
10.2
6/20/2017
8-K
000-26489
10.3
6/20/2017
8-K
000-26489
10.4
6/20/2017
8-K
000-26489
10.5
6/20/2017
8-K
000-26489
10.6
6/20/2017
8-K
000-26489
10.7
6/20/2017
8-K
000-26489
10.1
3/15/2018
8-K
000-26489
10.2
3/15/2018
8-K
000-26489
10.3
3/15/2018
8-K
000-26489
10.4
3/15/2018
8-K
000-26489
10.1
12/27/2016
10-Q
000-26489
10.2
5/4/2017
10-Q
000-26489
10.4
5/4/2017
72
Table of Contents
Exhibit
Number
10.12.3
10.12.4
10.12.5
10.12.6
10.12.7
10.12.8
10.12.9
10.12.10
10.12.11
10.12.12
Exhibit Description
Form
Incorporated By Reference
File
Number
Exhibit
Filing
Date
Filed or
Furnished
Herewith
Amendment No.1 to Third Amended and
Restated Credit Agreement, dated June 13,
2017, 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
Amendment No. 2 to Third Amended and
Restated Credit Agreement, dated June 29,
2017, 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
Letter Agreement, dated August 3, 2017,
related to the Third Amended and Restated
Credit Agreement dated as of December 20,
2016
Incremental Facility Agreement, dated August
15, 2017, by and among Encore Capital Group,
Inc., DNB Capital, LLC, SunTrust Bank, and
each of the guarantors, party thereto
Incremental Facility Agreement, dated
September 26, 2017, by and among Encore
Capital Group, Inc., Regions Bank, SunTrust
Bank, and each of the guarantors, party thereto
Incremental Facility Agreement, dated January
22, 2018, by and among Encore Capital Group,
Inc., Umpqua Bank, SunTrust Bank, and each
of the guarantors, party thereto
Incremental Facility Agreement, dated March
21, 2018, by and among Encore Capital Group,
Inc., Banc of California, SunTrust Bank and
each of the guarantors, party thereto
Extension Agreement, dated May 29, 2018, by
and among Encore Capital Group, Inc., Fifth
Third Bank, Suntrust Bank, and each of the
guarantors party thereto
Extension Agreement, dated September 20,
2018, by and among Encore Capital Group,
Inc., SunTrust Bank, Bank of America, N.A.,
DNB Capital, LLC, Fifth Third Bank, Western
Alliance Bancorporation, Chang Hwa
Commercial Bank, Ltd., and each of the
guarantors, party thereto
Incremental Facility Agreement, dated
September 20, 2018, by and among Encore
Capital Group, Inc., SunTrust Bank, ING
Capital LLC, MUFG Union Bank, N.A.,
Flagstar Bank, CIBC Bank USA, Umpqua
Bank, Opus Bank, Banc of California,
California Bank and Trust, Western Alliance
Bancorporation, and each of the guarantors,
party thereto
10-Q
000-26489
10.1
8/3/2017
10-Q
000-26489
10.9
8/3/2017
10-Q
000-26489
10.3
11/2/2017
10-Q
000-26489
10.5
11/2/2017
10-Q
000-26489
10.6
11/2/2017
10-K
000-26489
10.12.8
2/21/2018
10-Q
000-26489
10.2
5/8/2018
10-Q
000-26489
10.3
8/8/2018
10-Q
000-26489
10.9
11/7/2018
10-Q
000-26489
10.10
11/7/2018
73
Table of Contents
Exhibit
Number
10.13
10.13.1
10.13.2
10.14
10.14.1
10.15
10.16.4
10.16.5
10.16.6
10.17.1
Exhibit Description
Form
Incorporated By Reference
File
Number
Exhibit
Filing
Date
Filed or
Furnished
Herewith
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
Amendment No. 1, dated December 20, 2016,
to 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
Amendment No. 2, dated August 11, 2017, to
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
Amended and Restated Guaranty, dated
November 5, 2012, by and among certain
subsidiaries of Encore Capital Group, Inc. and
SunTrust Bank, as administrative agent
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
Second Amended and Restated Intercreditor
Agreement, dated as of August 11, 2017, by
and among Encore Capital Group, Inc., certain
of its subsidiaries, SunTrust Bank, as
administrative agent for the lenders, the
holders of the Company’s 7.75% Senior
Secured Notes due 2017, 7.375% Senior
Secured Notes due 2018 and 5.625% Senior
Secured Notes due 2024, and SunTrust Bank,
as collateral agent
Securities Purchase Agreement, dated May 7,
2018, by and among Encore Capital Group,
Inc., JCF III Europe Holdings LP, JCF III
Europe S.à r.l., Janus Holdings Luxembourg
S.à r.l and the other parties named therein
Securities Purchase Agreement, dated May 7,
2018, by and among Encore Capital Group,
Inc., Janus Holdings Luxembourg S.à r.l,
certain management shareholders of Cabot
Holdings S.à r.l. Luxembourg and the other
parties named therein
First Amendment, dated May 10, 2018, to the
Purchase Agreement, dated May 7, 2018, by
and among Encore Capital Group, Inc., Janus
Holdings Luxembourg S.à r.l, certain
management shareholders of Cabot Holdings
S.à r.l. Luxembourg and the other parties
named therein
Letter Agreement, dated June 18, 2013,
between Barclays Bank PLC and Encore
Capital Group, Inc., regarding the Capped Call
Transaction
8-K
000-26489
10.2
11/7/2012
8-K
000-26489
10.1
12/27/2016
10-Q
000-26489
10.4
11/2/2017
8-K
000-26489
10.3
11/7/2012
10-K
000-26489
10.88
2/25/2014
8-K
000-26489
10.2
8/17/2017
8-K
000-26489
10.1
5/8/2018
8-K
000-26489
10.2
5/8/2018
10-Q
000-26489
10.2.1
8/8/2018
8-K
000-26489
10.1
6/24/2013
74
Table of Contents
Exhibit
Number
10.17.2
10.17.3
10.17.4
10.18.1
10.18.2
10.18.3
10.18.4
10.19
10.19.1
10.21.1
10.21.2
10.21.3
Exhibit Description
Form
Incorporated By Reference
File
Number
Exhibit
Filing
Date
Filed or
Furnished
Herewith
Letter Agreement, dated June 18, 2013,
between Credit Suisse International and
Encore Capital Group, Inc., regarding the
Capped Call Transaction
Letter Agreement, dated June 18, 2013,
between Morgan Stanley & Co. International
plc and Encore Capital Group, Inc., regarding
the Capped Call Transaction
Letter Agreement, dated June 18, 2013,
between RBC Capital Markets, LLC and
Encore Capital Group, Inc., regarding the
Capped Call Transaction
Letter Agreement, dated July 18, 2013,
between Barclays Bank PLC and Encore
Capital Group, Inc., regarding the Capped Call
Transaction
Letter Agreement, dated July 18, 2013,
between Credit Suisse International and
Encore Capital Group, Inc., regarding the
Capped Call Transaction
Letter Agreement, dated July 18, 2013,
between Morgan Stanley & Co. International
plc and Encore Capital Group, Inc., regarding
the Capped Call Transaction
Letter Agreement, dated July 18, 2013,
between RBC Capital Markets, LLC and
Encore Capital Group, Inc., regarding the
Capped Call Transaction
Amended and Restated Senior Facilities
Agreement, dated December 12, 2017, 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
Amendment Agreement dated November 5,
2018 to Amend and Restate the Senior
Facilities Agreement, originally dated
September 20, 2012, 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
Letter Agreement, dated March 5, 2014,
between Citibank, N.A. and Encore Capital
Group, Inc., regarding the Base Capped Call
Transaction
Letter Agreement, dated March 5, 2014,
between Credit Suisse International and
Encore Capital Group, Inc., regarding the Base
Capped Call Transaction
Letter Agreement, dated March 5, 2014,
between Morgan Stanley & Co. LLC and
Encore Capital Group, Inc., regarding the Base
Capped Call Transaction
8-K
000-26489
10.2
6/24/2013
8-K
000-26489
10.3
6/24/2013
8-K
000-26489
10.4
6/24/2013
8-K
000-26489
10.1
7/23/2013
8-K
000-26489
10.2
7/23/2013
8-K
000-26489
10.3
7/23/2013
8-K
000-26489
10.4
7/23/2013
10-K
000-26489
10.19
2/21/2018
10-Q
000-26489
10.12
11/7/2018
8-K
000-26489
10.1
3/11/2014
8-K
000-26489
10.2
3/11/2014
8-K
000-26489
10.3
3/11/2014
75
Table of Contents
Exhibit
Number
10.21.4
10.21.5
10.21.6
10.21.7
10.21.8
10.22
10.22.1
10.23.1
10.23.2
10.23.3
10.23.4
10.23.5
Exhibit Description
Form
Incorporated By Reference
File
Number
Exhibit
Filing
Date
Filed or
Furnished
Herewith
Letter Agreement, dated March 5, 2014,
between Société Générale and Encore Capital
Group, Inc., regarding the Base Capped Call
Transaction
Letter Agreement, dated March 6, 2014,
between Citibank, N.A. and Encore Capital
Group, Inc., regarding the Additional Capped
Call Transaction
Letter Agreement, dated March 6, 2014,
between Credit Suisse International and
Encore Capital Group, Inc., regarding the
Additional Capped Call Transaction
Letter Agreement, dated March 6, 2014,
between Morgan Stanley & Co. LLC and
Encore Capital Group, Inc., regarding the
Additional Capped Call Transaction
Letter Agreement, dated March 6, 2014,
between Société Générale and Encore Capital
Group, Inc., regarding the Additional Capped
Call Transaction
Senior Facility Agreement, dated August 23,
2017, between Cabot Securitisation UK
Limited, Cabot Financial (UK) Limited, HSBC
Corporate Trust Company (UK) Limited as
Security Trustee and Senior Agent and
Goldman Sachs International Bank as Senior
Lender
Amendment dated October 4, 2018 to that
Senior Facility Agreement, dated August 23,
2017, between Cabot Securitisation UK
Limited, Cabot Financial (UK) Limited, HSBC
Corporate Trust Company (UK) Limited as
Security Trustee and Senior Agent and
Goldman Sachs International Bank as Senior
Lender
Letter Agreement, dated July 17, 2018,
between Bank of Montreal and Encore Capital
Group, Inc. regarding the Base Capped Call
Transaction
Letter Agreement, dated July 17, 2018,
between Credit Suisse International and
Encore Capital Group, Inc. regarding the Base
Capped Call Transaction
Letter Agreement, dated July 17, 2018,
between Bank of America, N.A. and Encore
Capital Group, Inc. regarding the Base Capped
Call Transaction
Letter Agreement, dated July 19, 2018,
between Bank of Montreal and Encore Capital
Group, Inc. regarding the Additional Capped
Call Transaction
Letter Agreement, dated July 19, 2018,
between Credit Suisse International and
Encore Capital Group, Inc. regarding the
Additional Capped Call Transaction
8-K
000-26489
10.4
3/11/2014
8-K
000-26489
10.5
3/11/2014
8-K
000-26489
10.6
3/11/2014
8-K
000-26489
10.7
3/11/2014
8-K
000-26489
10.8
3/11/2014
8-K
000-26489
4.1
8/28/2017
10-Q
000-26489
10.11
11/7/2018
8-K
000-26489
10.1
7/20/2018
8-K
000-26489
10.2
7/20/2018
8-K
000-26489
10.3
7/20/2018
8-K
000-26489
10.4
7/20/2018
8-K
000-26489
10.5
7/20/2018
76
Table of Contents
Exhibit Description
Form
Incorporated By Reference
File
Number
Exhibit
Filing
Date
Filed or
Furnished
Herewith
Exhibit
Number
10.23.6
21
23
23.1
31.1
31.2
32.1
8-K
000-26489
10.6
7/20/2018
8-K
000-26489
23.1
7/16/2018
Letter Agreement, dated July 19, 2018,
between Bank of America, N.A. and Encore
Capital Group, Inc. regarding the Additional
Capped Call Transaction
List of Subsidiaries
Consent of Independent Registered Public
Accounting Firm, BDO USA, LLP, dated
February 27, 2019
Consent of Independent Registered Public
Accounting Firm, BDO USA, LLP, dated July
16, 2018
Certification of the Principal Executive Officer
pursuant to Rule 13a-14(a) or 15d-14(a) under
the Securities Exchange Act of 1934
Certification of the Principal Financial Officer
pursuant to Rule 13a-14(a) or 15d-14(a) under
the Securities Exchange Act of 1934
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)
X
X
X
X
X
X
X
X
X
X
X
101.INS XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
Document
101.CAL XBRL Taxonomy Extension Calculation
Linkbase Document
101.DEF XBRL Taxonomy Extension Definition
Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase
Document
101.PRE XBRL Taxonomy Extension Presentation
Linkbase Document
+
Management contract or compensatory plan or arrangement.
None.
Item 16—Form 10-K Summary
77
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/ ASHISH MASIH
Ashish Masih
President and Chief Executive Officer
Date: February 27, 2019
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/ ASHISH MASIH
Ashish Masih
President and Chief Executive
Officer and Director
(Principal Executive Officer)
February 27, 2019
/s/ JONATHAN C. CLARK
Jonathan C. Clark
/s/ ASHWINI GUPTA
Ashwini Gupta
/s/ WENDY HANNAM
Wendy Hannam
/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
/s/ RICHARD P. STOVSKY
Richard P. Stovsky
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
February 27, 2019
Director
Director
Director
Director
Director
Director
Director
Director
78
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, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
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
Shareholders and Board of Directors
Encore Capital Group, Inc.
San Diego, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Encore Capital Group, Inc. (the
“Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income,
equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2018, 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) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2018, 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 27, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our
opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2001.
San Diego, California
February 27, 2019
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
Deferred court costs, net
Property and equipment, net
Other assets
Goodwill
Total assets
Liabilities and Equity
Liabilities:
Accounts payable and accrued liabilities
Debt, net
Other liabilities
Total liabilities
Commitments and contingencies
Redeemable noncontrolling interest
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, 30,884 shares and
25,801 shares issued and outstanding as of December 31, 2018 and
December 31, 2017, 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,
2018
December 31,
2017
$
$
$
$
157,418
3,137,893
95,918
115,518
257,002
868,126
4,631,875
287,945
3,490,633
33,609
3,812,187
—
—
309
208,498
720,189
(110,987)
818,009
1,679
819,688
4,631,875
$
$
$
$
212,139
2,890,613
79,963
76,276
302,728
928,993
4,490,712
284,774
3,446,876
35,151
3,766,801
151,978
—
258
42,646
616,314
(77,356)
581,862
(9,929)
571,933
4,490,712
The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the consolidated statements of financial
condition above. Most assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs. The liabilities exclude
amounts where creditors or beneficial interest holders have recourse to the general credit of the Company. See Note 10, “Variable Interest Entities” for
additional information on the Company’s VIEs.
Assets
Cash and cash equivalents
Investment in receivable portfolios, net
Deferred court costs, net
Property and equipment, net
Other assets
Goodwill
Accounts payable and accrued liabilities
Debt, net
Other liabilities
Liabilities
December 31,
2018
December 31,
2017
$
$
$
$
448
501,489
—
—
9,563
—
4,556
445,837
46
88,902
1,342,300
26,482
23,138
122,263
724,054
151,208
2,014,202
1,494
See accompanying notes to consolidated financial statements
F-2
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
Revenues
Revenue from receivable portfolios
Other revenues
Total revenues
Allowance reversals (allowances) on receivable portfolios,
net
Total revenues, adjusted by net allowance reversals
(allowances)
Year Ended December 31,
2018
2017
2016
$
$
1,167,132
153,425
1,320,557
$
1,053,373
92,429
1,145,802
1,030,792
82,643
1,113,435
41,473
41,236
(84,177)
1,362,030
1,187,038
1,029,258
Operating expenses
Salaries and employee benefits
Cost of legal collections
General and administrative expenses
Other operating expenses
Collection agency commissions
Depreciation and amortization
Total operating expenses
Income from operations
Other (expense) income
Interest expense
Other (expense) income
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 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 from discontinued operations, net of tax
Net income
Earnings 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
369,064
205,204
158,352
134,934
47,948
41,228
956,730
405,300
(240,048)
(8,764)
(248,812)
156,488
(46,752)
109,736
—
109,736
6,150
115,886
115,886
—
115,886
4.09
—
4.09
4.06
—
4.06
$
$
$
$
$
$
$
315,742
200,058
158,080
104,938
43,703
39,977
862,498
324,540
(204,161)
10,847
(193,314)
131,226
(52,049)
79,177
(199)
78,978
4,250
83,228
83,427
(199)
83,228
3.21
(0.01)
3.20
3.16
(0.01)
3.15
$
$
$
$
$
$
$
281,097
200,855
134,046
100,737
36,141
34,868
787,744
241,514
(198,367)
14,228
(184,139)
57,375
(38,205)
19,170
(2,353)
16,817
59,753
76,570
78,923
(2,353)
76,570
3.07
(0.09)
2.98
3.05
(0.09)
2.96
28,313
28,572
25,972
26,405
25,713
25,909
$
$
$
$
$
$
$
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 income (loss), net of tax:
Change in unrealized gains/losses on derivative instruments:
Unrealized (loss) gain on derivative instruments
Income tax effect
Unrealized (loss) gain on derivative instruments, net of
tax
Change in foreign currency translation:
Year Ended December 31,
2018
2017
2016
$
109,736
$
78,978
$
16,817
(7,658)
1,743
(5,915)
1,242
(200)
1,042
407
(87)
320
Unrealized (loss) gain on foreign currency translation
(36,927)
28,362
(67,943)
Removal of other comprehensive loss in connection with
divestiture
Income tax effect
Unrealized (loss) gain on foreign currency translation,
net of tax
Other comprehensive (loss) income, net of tax
Comprehensive income (loss)
Comprehensive loss (income) attributable to noncontrolling interest:
Net loss
Unrealized loss (income) on foreign currency translation
Comprehensive loss attributable to noncontrolling interest
Comprehensive income attributable to Encore Capital Group, Inc.
stockholders
3,663
—
(33,264)
(39,179)
70,557
6,150
5,548
11,698
—
—
28,362
29,404
108,382
4,250
(1,849)
2,401
—
361
(67,582)
(67,262)
(50,445)
59,753
20,173
79,926
$
82,255
$
110,783
$
29,481
See accompanying notes to consolidated financial statements
F-4
Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Equity
(In Thousands)
Common Stock Additional
Paid-In
Capital
Shares
Par
Accumulated
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Noncontrolling
Interest
Total
Equity
Balance at December 31, 2015
Net income (loss)
Other comprehensive loss, net of tax
Initial noncontrolling interest related to business
combinations
Change in fair value of redeemable noncontrolling
interest
Purchase of noncontrolling interest
Exercise of stock options and issuance of share-based
awards, net of shares withheld for employee taxes
Stock-based compensation
Tax benefit related to stock-based compensation
Reclassification of redeemable equity component of
convertible senior notes
Other
25,288
$ 253
$ 110,533
$
543,489
$
(57,822) $
7,285
$ 603,738
—
—
—
—
—
305
—
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
(14,702)
(1,280)
(4,481)
12,627
(2,324)
3,130
(111)
76,570
—
—
(59,492)
—
—
—
—
—
—
—
(47,089)
(11,922)
64,648
(3,677)
(50,766)
—
—
—
—
—
—
—
—
775
775
—
—
—
—
—
—
—
(74,194)
(1,280)
(4,478)
12,627
(2,324)
3,130
(111)
Balance at December 31, 2016
25,593
256
103,392
560,567
83,228
—
(104,911)
(7,539)
551,765
—
27,555
655
(707)
83,883
26,848
(81,074)
(27,222)
Net income
Other comprehensive income (loss), net of tax
Change in fair value of redeemable noncontrolling
interest
Purchase of noncontrolling interest
Exercise of stock options and issuance of share-based
awards, net of shares withheld for employee taxes
Stock-based compensation
Issuance of convertible senior notes
Settlement and repurchase of convertible senior notes
Reclassification of redeemable equity component of
convertible senior notes
Reclassification of certain income tax effects of items
within accumulated other comprehensive income to
retained earnings
Convertible note hedge transactions
Other
Balance at December 31, 2017
Net income (loss)
Other comprehensive income (loss), net of tax
Change in fair value of redeemable noncontrolling
interest
Purchase of noncontrolling interest
Exercise of stock options and issuance of share-based
awards, net of shares withheld for employee taxes
Issuance of common stock
Stock-based compensation
Issuance of exchangeable notes
Exchangeable notes hedge transactions
Net equity adjustment on Cabot Transaction
Other
—
—
—
—
208
—
—
622
—
—
(622)
—
—
—
—
—
2
—
—
6
—
—
(6)
—
—
—
806
(2,117)
10,399
12,341
(7,881)
2,995
—
3,525
260
25,801
258
42,646
—
—
—
—
163
4,920
—
—
—
—
—
—
—
—
—
2
49
—
—
—
—
—
—
—
19,430
—
(2,510)
181,138
12,980
14,009
(17,785)
(43,097)
1,687
—
—
—
—
—
—
(259)
—
—
616,314
115,886
—
(12,011)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(77,356)
—
(37,294)
—
—
—
—
—
—
—
—
— (108,296)
(2,338)
(1,532)
—
—
—
—
—
—
—
—
(2,115)
10,399
12,341
(7,875)
2,995
(259)
3,519
260
(9,929)
571,933
(1,359)
114,527
920
(36,374)
—
9,626
7,419
9,626
—
—
—
—
—
—
(2,508)
181,187
12,980
14,009
(17,785)
(43,097)
3,663
2,421
7,771
Balance at December 31, 2018
30,884
$ 309
$ 208,498
$
720,189
$
(110,987) $
1,679
$ 819,688
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:
Loss from discontinued operations, net of income taxes
Depreciation and amortization
Interest expense related to financing
Other non-cash expense, net
Stock-based compensation expense
Loss (gain) on derivative instruments, net
Deferred income taxes
(Reversal of) provision for 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 from continuing operations
Net cash provided by operating activities from discontinued operations
Net cash provided by operating activities
Investing activities:
Cash paid for acquisitions, net of cash acquired
Proceeds from divestiture of business, net of cash divested
Purchases of assets held for sale
Purchases of receivable portfolios, net of put-backs
Collections applied to investment in receivable portfolios, net
Purchases of property and equipment
(Payment of) proceeds from derivative instruments, net
Other, net
Net cash used in investing activities from continuing operations
Net cash provided by investing activities from discontinued operations
Net cash used in investing activities
Financing activities:
Payment of loan costs
Payment related to debt financing
Proceeds from credit facilities
Repayment of credit facilities
Proceeds from senior secured notes
Repayment of senior secured notes
Proceeds from issuance of convertible and exchangeable senior notes
Repayment of convertible senior notes
Proceeds from other debt
Repayment of other debt
Payment for the purchase of PECs and noncontrolling interest
Payment of direct and incremental costs relating to Cabot Transaction
Other, net
Net cash provided by financing activities
Net increase 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
Cash and cash equivalents of discontinued operations, end of period
Cash and cash equivalents of continuing operations, 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:
Stock consideration for the Cabot Transaction
Conversion of convertible senior notes
Fixed assets acquired through capital lease
2018
Year Ended December 31,
2017
2016
$
109,736
$
78,978
$
16,817
—
41,228
11,710
20,744
12,980
10,789
16,814
(41,473)
(35,626)
24,284
15,605
186,791
—
186,791
—
(1,877)
—
(1,131,095)
809,688
(67,475)
(18,302)
11,545
(397,516)
—
(397,516)
(11,576)
(11,710)
942,186
(571,144)
—
(91,578)
172,500
—
27,694
(42,456)
(234,101)
(8,622)
(4,816)
166,377
(44,348)
(10,373)
212,139
157,418
—
157,418
198,797
30,247
180,559
—
3,283
$
$
$
$
199
39,977
—
39,591
10,399
(3,915)
28,970
(41,236)
(4,101)
(26,699)
1,655
123,818
—
123,818
(96,390)
—
—
(1,045,829)
709,420
(28,126)
3,533
5,261
(452,131)
—
(452,131)
(28,972)
—
1,434,480
(1,168,069)
325,000
(204,241)
150,000
(125,407)
33,197
(8,910)
(29,731)
—
870
378,217
49,904
12,470
149,765
212,139
—
212,139
162,545
44,365
$
$
$
— $
28,277
3,577
$
$
$
$
2,353
34,868
—
30,623
12,627
(7,816)
(52,905)
84,177
(20,364)
25,417
2,439
128,236
2,096
130,332
(675)
106,041
(19,874)
(907,413)
659,321
(31,668)
8,800
1,994
(183,474)
14,685
(168,789)
(32,338)
—
586,016
(615,857)
442,610
(352,549)
—
—
36,172
(15,388)
(4,842)
—
(571)
43,253
4,796
(8,624)
153,593
149,765
—
149,765
147,899
60,071
—
—
55
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 and other related services for consumers 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 and commercial retailers. Defaulted receivables may also include receivables subject to
bankruptcy proceedings. The Company also provides debt servicing and other portfolio management services to credit
originators for non-performing loans.
Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”), the Company is a market
leader in portfolio purchasing and recovery in the United States. Through Cabot Credit Management plc (“CCM”) and its
subsidiaries and European affiliates (collectively, “Cabot”) the Company is one of the largest credit management services
providers in Europe and a market leader in the United Kingdom and Ireland. These are the Company’s primary operations.
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. Translation gains or losses are the material components
of accumulated 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.
Change in Accounting Principle
On January 1, 2018, we adopted FASB ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”). The core
principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To
achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s)
with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the
transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a
performance obligation. Topic 606 applies to all contracts with customers, except those that are within the scope of other topics
in the FASB’s Accounting Standards Codification (“ASC”). Under the prior accounting standard, the Company recognized fee-
based income when there was persuasive evidence of an arrangement, the sales price was fixed or determinable, the services
had been performed and collectability was reasonably assured.
The Company’s investment in receivable portfolios is outside of the scope of Topic 606 since it is accounted for in
accordance with ASC 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” Certain of the
Company’s foreign subsidiaries earn fee-based income by providing portfolio management services to credit originators for
non-performing loans. Performance obligations for this revenue stream under the new standard primarily arise from debt
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collection and management activities. These performance obligations are typically satisfied when services are performed, or
debt is collected. Consideration is typically variable based on indeterminate volumes or collection activity. Under the new
accounting standard, revenue is recognized over time as a series of single performance obligations when the Company is
entitled to a percentage of collections received, since the customer simultaneously receives and consumes the benefits provided
by the Company’s performance of debt collection and management. The method for measuring progress towards satisfying a
performance obligation is based on transaction volumes or debt collected, depending on whether the contract is based on
services performed or based on commissions. Costs to fulfill a contract are expensed when incurred.
The Company adopted Topic 606 utilizing the modified retrospective method of transition and elected to apply the
revenue standard only to contracts that were not completed as of the adoption date. Prior periods were not restated. The
cumulative effect of adopting this new standard had no impact to retained earnings. The impact of adopting Topic 606 on the
Company’s revenue is not material to any of the periods presented. Fee-based income is included in “Other Revenues” in the
Company’s consolidated statements of operations.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities—
Derivatives and Hedging (“Topic 815” or “ASU 2017-12”) which amends the hedge accounting recognition and presentation
requirements in ASC 815. ASU 2017-12 improves Topic 815 by simplifying and expanding the eligible hedging strategies for
financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and
also simplifies its application through targeted improvements in key practice areas. This includes expanding the list of items
eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, ASU
2017-12 prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended
to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further,
the new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement
to recognize hedge ineffectiveness separately in earnings in the current period. For public entities, ASU 2017-12 is effective for
fiscal years, including interim periods within those fiscal years, beginning after December 15, 2018, with early adoption
permitted in any interim period or fiscal year. The Company early adopted ASU 2017-12 as of the second quarter of 2018
retroactive to January 1, 2018. The adoption of the new standard did not have a material effect on the Company’s financial
position, results of operations, or required presentations.
Recent Accounting Pronouncements
Other than the adoption of the standards discussed in the “Change in Accounting Principle” section above, there have
been no new accounting pronouncements made effective during the year ended December 31, 2018 that have significance, or
potential significance, to the Company’s consolidated financial statements.
Recent Accounting Pronouncements Not Yet Effective
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). The amendments in this
update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to
perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure
that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The
amendments in this update are effective for public companies for annual or any interim goodwill impairments tests in fiscal
years beginning after December 15, 2019. The Company does not expect the adoption of ASU 2017-04 to have a material
impact on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 applies a current expected credit loss model which is a
new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an
impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from
financial assets measured at amortized cost. The estimate of expected credit losses should consider historical information,
current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit
losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the
amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated
balance sheet at the amount expected to be collected. ASU 2016-13 eliminates the current accounting model for loans and debt
securities acquired with deteriorated credit quality under ASC 310-30, which provides authoritative guidance for the accounting
of the Company’s investment in receivable portfolios.
ASU 2016-13 is effective for reporting periods beginning after December 15, 2019. The guidance will be applied on a
modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in
which ASU 2016-13 is adopted. However, the FASB has determined that financial assets for which the guidance in Subtopic
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310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality, has previously been applied should
prospectively apply the guidance in ASU 2016-13 for purchased financial assets with credit deterioration.
On February 27, 2019, the FASB clarified application of the new standard. The Company is in the process of determining
the effects the adoption of ASU 2016-13 will have on its consolidated financial statements. The Company expects ASU
2016-13 could have a significant impact on how it measures and records income recognized on its receivable portfolios. The
Company has established a project management team and is in the process of developing its accounting policy, evaluating the
impact of this pronouncement and researching software resources that can assist with the implementation.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 changes
accounting for leases and requires lessees to recognize the assets and liabilities arising from most leases, including those
classified as operating leases under previous accounting guidance, on the balance sheet and requires disclosure of key
information about leasing arrangements to increase transparency and comparability among organizations. In July 2018, the
FASB issued ASU 2018-10, Codification Improvements to Topic 842, which provides narrow amendments to clarify how to
apply certain aspects of the new lease standard. In July 2018, ASU 2018-11, Leases: Targeted Improvements, was issued to
provide relief to companies from restating comparative periods. Pursuant to ASU 2018-11, in the period of adoption, the
Company will not restate comparative periods presented in its financial statements. The new guidance will be effective for the
Company starting in the first quarter of fiscal year 2019. The Company is finalizing the last phase of implementation of the new
standard which requires recognition of a right-of-use (“ROU”) asset and lease liability for lease terms greater than one year. For
leases with a term of twelve months or less, the Company has made an accounting policy election to not recognize ROU assets
and lease liabilities; and as a result, the lease expense will be amortized over the lease term. The Company selected and is
utilizing a new lease software solution that will facilitate consolidating its leases for reporting purposes. The Company elected
to apply the modified retrospective option and the practical expedient available under the new standard. As a result, the
Company will not (1) reassess whether any expired or existing contracts are or contain a lease, (2) reassess lease classification
for any expired or existing lease or (3) reassess direct costs for any existing leases. The Company continues to evaluate the
effects the adoption will have on its consolidated statements of financial condition but does not expect the new standard to have
a material impact on its consolidated statements of operations or cash flows. The adoption of this new standard will not impact
the Company’s compliance with debt covenants.
With the exception of the updated standards discussed above, there have been no new accounting pronouncements not yet
effective that have significance, or potential significance, to the Company’s consolidated financial statements.
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.
Included in cash and cash equivalents are cash collected on behalf of and due to third party clients. A corresponding
balance is included in accounts payable and accrued liabilities. The balance of cash held for clients was $21.8 million and $21.0
million at December 31, 2018 and 2017, respectively.
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, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by
geographic region or location. Portfolios acquired in business combinations are also grouped into these pools. During any fiscal
quarter in which the Company has an acquisition of an entity that has portfolio, the entire historical portfolio of the acquired
company is aggregated into the pool groups for that quarter, based on common characteristics, resulting in pools for that quarter
that may consist of several different vintages of portfolio. 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
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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 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 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. With gross collections being discounted at monthly IRRs, when collections are lower in the near term, even
if substantially higher collections are expected later in the collection curve, an allowance charge could result.
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. Once the net book value of a static pool has been fully recovered, it becomes zero basis
portfolio (“ZBA”) and all subsequent collections are recognized as ZBA revenue.
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 carrying value of a Cost Recovery Portfolio
has been fully recovered. See Note 5, “Investment in Receivable Portfolios, Net” for further discussion of investment in
receivable portfolios.
Fee-based Income
Certain of the Company’s foreign subsidiaries earn fee-based income by providing portfolio management services to
credit originators for non-performing loans. The Company recognizes fee-based income in accordance with the authoritative
guidance for revenue recognition, specifically principal agent considerations. The revenue recognition guidance requires an
analysis to be completed to determine if certain revenues should be reported gross or reported net of their related operating
expense. This analysis includes an assessment of who establishes pricing and remains the primary obligor on the transaction.
The Company considers each of these factors to determine the correct method of recognizing fee-based income. Fee-based
income is included in “Other Revenues” in the Company’s consolidated statements of operations.
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 interest 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
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
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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 that 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 an estimated
court cost recovery rate established based on its analysis of historical court costs recovery data. The Company estimates
deferral periods for Deferred Court Costs based on jurisdiction and nature of litigation and writes off any Deferred Court Costs
not recovered within the respective deferral period. Collections received from debtors are first applied against related court
costs with the balance applied to the debtors’ account balance. See Note 6, “Deferred Court Costs, Net” 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
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 income. The
Company includes interest and penalties related to income taxes within its provision for income taxes. 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 certain derivative instruments as cash flow hedges. The changes in fair value of derivatives designated as
cash flow hedges is recorded each period, net of tax, in accumulated other comprehensive income or loss until the related
hedged transaction occurs. 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.
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 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
F-11
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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. As of December 31,
2018, we had not made any repurchases under the share repurchase program.
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 and exchangeable senior notes
Weighted average common shares outstanding—diluted
Year Ended December 31,
2018
2017
2016
28,313
259
—
28,572
25,972
255
178
26,405
25,713
196
—
25,909
Anti-dilutive employee stock options outstanding were approximately 66,000, 107,000 and 3,000 for the years ended
December 31, 2018, 2017, and 2016, respectively.
The Company has the following convertible and exchangeable senior notes outstanding: $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”), $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”), $150.0 million convertible senior notes due
2022 at a conversion price equivalent to approximately $45.57 per share of the Company’s common stock (the “2022
Convertible Notes”), and $172.5 million exchangeable senior notes due 2023 at a conversion price equivalent to approximately
$44.62 per share of the Company’s common stock (the “Exchangeable Notes”).
In the event of conversion for the 2020 Convertible Notes, 2021 Convertible Notes, 2022 Convertible Notes and
Exchangeable 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, 2021 and 2022
Convertible Notes and Exchangeable Notes in cash upon conversion. As a result, upon conversion of all the convertible and
exchangeable 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 the “Encore Convertible Notes and Exchangeable Notes” section
of Note 9, “Debt,” the Company entered into certain hedge transactions that have the effect of increasing the effective
conversion price of the 2020 Convertible Notes to $61.55, the 2021 Convertible Notes to $83.14 and the Exchangeable Notes
to $62.48.
Note 2: Cabot Transaction
On July 24, 2018, the Company completed the purchase of all the outstanding interests of CCM not owned by the
Company (the “Cabot Transaction”). As a result, CCM became a wholly owned subsidiary of Encore. The acquisition of the
remaining interest was accounted for as an equity transaction and no gain or loss was recognized in the Company’s
consolidated statements of operations but was reflected as a component of additional paid-in capital in the consolidated
statement of equity. Additionally, in accordance with authoritative guidance and the Company’s policy, the direct and
incremental costs associated with the Cabot Transaction were accounted for as part of the equity transaction. Total
consideration transferred was approximately $414.7 million, which consisted of cash of $234.1 million and the equivalent of
$180.6 million of Encore common stock based on the last reported sale price of Encore common stock per share of $36.80 on
July 24, 2018.
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Cash consideration
Stock consideration
Total consideration transferred
Less: Preferred equity certificates acquired
Consideration transferred to acquire remaining equity interest
Less: Carrying value of redeemable noncontrolling interest
Less: Carrying value of noncontrolling interest
Net loss directly recorded in equity
Direct and incremental transaction costs
Total reduction in additional paid-in capital
Note 3: Fair Value Measurements
(in thousands)
234,101
180,559
414,660
(262,512)
152,148
(127,299)
9,626
34,475
8,622
43,097
$
$
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.
• 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
Interest rate cap contracts
Liabilities
Foreign currency exchange contracts
Interest rate swap agreements
Contingent consideration
Fair Value Measurements as of
December 31, 2018
Level 1
Level 2
Level 3
Total
$
— $
2,023
$
— $
2,023
—
—
—
(237)
(4,881)
—
—
—
(6,198)
(237)
(4,881)
(6,198)
Fair Value Measurements as of
December 31, 2017
Level 1
Level 2
Level 3
Total
Assets
Foreign currency exchange contracts
Interest rate cap contracts
$
— $
—
$
1,912
3,922
— $
—
1,912
3,922
Liabilities
Foreign currency exchange contracts
Interest rate swap agreements
Contingent consideration
Temporary Equity
Redeemable noncontrolling interest
—
—
—
—
(1,110)
(7)
—
—
—
(10,612)
(1,110)
(7)
(10,612)
—
(151,978)
(151,978)
F-13
Table of Contents
Derivative Contracts:
The Company uses derivative instruments to manage 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.
Contingent Consideration:
The Company carries certain contingent liabilities resulting from its mergers and acquisition activities. Certain sellers of
the Company’s acquired entities could earn additional earn-out payments in cash based on the entities’ subsequent operating
performance. The Company recorded the acquisition date fair values of these contingent liabilities, based on the likelihood of
contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to
fair value at each reporting date, based on actual and forecasted operating performance.
The following table provides a roll-forward of the fair value of contingent consideration for the years ended
December 31, 2018, 2017 and 2016 (in thousands):
Balance at December 31, 2015
Change in fair value of contingent consideration
Time value amortization
Effect of foreign currency translation
Balance at December 31, 2016
Issuance of contingent consideration in connection with acquisition
Change in fair value of contingent consideration
Time value amortization
Payment of contingent consideration
Effect of foreign currency translation
Balance at December 31, 2017
Issuance of contingent consideration in connection with acquisition
Change in fair value of contingent consideration
Payment of contingent consideration
Effect of foreign currency translation
Balance at December 31, 2018
Redeemable Noncontrolling Interest:
Amount
$
$
10,403
(8,111)
509
(270)
2,531
10,808
(2,822)
381
(781)
495
10,612
1,728
(5,664)
(271)
(207)
6,198
Some minority shareholders in certain subsidiaries of the Company had 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 chose not to purchase their interests at fair value. The noncontrolling interest subject to these arrangements is
required to be included in temporary equity as redeemable noncontrolling interest, and is adjusted to its estimated redemption
amount each reporting period. Future reductions in the carrying amount are subject to a “floor” amount that is equal to the fair
value of the redeemable noncontrolling interest at the time it was originally recorded. The recorded value of the redeemable
noncontrolling interest cannot go below the floor level. Adjustments to the carrying amount of redeemable noncontrolling
interest are charged to retained earnings (or to additional paid-in capital if there are no retained earnings) and do not affect net
income or comprehensive income in the consolidated financial statements. In connection with various business transactions,
including the Cabot Transaction, the Company redeemed or deconsolidated all of its redeemable noncontrolling interest during
the year ended December 31, 2018 and no longer carried any redeemable noncontrolling interest as of December 31, 2018.
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Table of Contents
The components of the change in the redeemable noncontrolling interest for the years ended December 31, 2018, 2017
and 2016 are presented in the following table (in thousands):
Balance at December 31, 2015
Addition to redeemable noncontrolling interest
Redemption of redeemable noncontrolling interest
Net loss attributable to redeemable noncontrolling interest
Adjustment of the redeemable noncontrolling interest to fair value
Effect of foreign currency translation attributable to redeemable noncontrolling interest
Balance at December 31, 2016
Addition to redeemable noncontrolling interest
Net loss attributable to redeemable noncontrolling interest
Adjustment of the redeemable noncontrolling interest to fair value
Effect of foreign currency translation attributable to redeemable noncontrolling interest
Balance at December 31, 2017
Redemption of redeemable noncontrolling interest
Deconsolidation upon sale of redeemable noncontrolling interest
Net loss attributable to redeemable noncontrolling interest
Adjustment of the redeemable noncontrolling interest to fair value
Effect of foreign currency translation attributable to redeemable noncontrolling interest
Balance at December 31, 2018
Non-Recurring Fair Value Measurement:
Amount
38,624
826
(3,562)
(47,831)
74,194
(16,496)
45,755
277
(4,905)
108,296
2,555
151,978
(138,835)
5,535
(4,791)
(7,419)
(6,468)
—
$
$
Certain assets are measured at fair value on a nonrecurring basis. These assets include real estate-owned assets classified
as held for sale at the lower of their carrying value or fair value less cost to sell. The fair value of the assets held for sale and
estimated selling expenses were determined at the time of initial recognition using Level 2 measurements. The fair value
estimate of the assets held for sale was approximately $26.7 million and $18.7 million as of December 31,
2018 and December 31, 2017, respectively.
Financial Instruments Not Required To Be Carried At Fair Value
In accordance with the disclosure requirements of ASC Topic 825, “Financial Instruments” (“ASC 825”), the table below
summarizes fair value estimates for the Company's financial instruments that are not required to be carried at fair value. The
total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value
of the Company. The carrying amounts in the following table are recorded in the consolidated balance sheets at December 31,
2018 and December 31, 2017 (in thousands):
December 31, 2018
December 31, 2017
Carrying
Amount
Estimated Fair
Value
Carrying
Amount
Estimated Fair
Value
Financial Assets
Investment in receivable portfolios
$
3,137,893
$
3,525,861
$
2,890,613
$
3,415,325
Deferred court costs
Financial Liabilities
95,918
95,918
79,963
79,963
Encore convertible notes and exchangeable notes(1)
Cabot senior secured notes
619,639
1,109,922
553,744
1,036,905
450,780
1,214,558
520,944
1,258,935
________________________
(1) Carrying amount represents the portion of the convertible and exchangeable notes classified as debt, while estimated fair value pertains to the face
amount of the notes.
Investment in Receivable Portfolios:
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Table of Contents
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 fair value of investment in receivable portfolios was approximately $3,525.9
million and $3,415.3 million as of December 31, 2018 and 2017, respectively, as compared to the carrying value of $3,137.9
million and $2,890.6 million as of December 31, 2018 and 2017, respectively. A 100 basis point increase in the cost to collect
and discount rate used would result in a decrease in the fair value of U.S., European and other geographies portfolios by
approximately $45.3 million, $67.4 million and $5.5 million, respectively, as of December 31, 2018. 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.
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 was $95.9 million and $80.0 million as of December 31, 2018 and
2017, respectively, and approximated fair value.
Debt:
The majority of the Company’s 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, and Cabot’s borrowings under its revolving credit facility. The Company’s
revolving credit and term loan facilities carrying value approximates fair value due to the short-term nature of the interest rate
periods. The fair value of the Company’s senior secured notes was estimated using widely accepted valuation techniques,
including discounted cash flow analyses using available market information on discount and borrowing rates with similar
terms, maturities, and credit ratings. Accordingly, the Company used Level 2 inputs for these debt instrument fair value
estimates.
Encore’s convertible notes and exchangeable notes are carried at historical cost, adjusted for the debt discount. The
carrying value of the convertible notes and exchangeable notes was $619.6 million and $450.8 million, net of the debt discount
of $36.4 million and $32.7 million, as of December 31, 2018 and 2017, respectively. The fair value estimate for these
convertible and exchangeable notes, which incorporates quoted market prices using Level 2 inputs, was approximately $553.7
million and $520.9 million as of December 31, 2018 and 2017, respectively.
Cabot’s senior secured notes are carried at historical cost, adjusted for the debt discount and debt premium. The carrying
value of Cabot’s senior secured notes was $1,109.9 million and $1,214.6 million, net of the debt discount of $1.5 million and
$1.9 million, as of December 31, 2018 and 2017, respectively. The fair value estimate for these senior notes, which
incorporates quoted market prices using Level 2 inputs, was $1,036.9 million and $1,258.9 million as of December 31, 2018
and 2017, respectively.
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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.
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, 2018
December 31, 2017
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Derivatives designated as hedging instruments:
Interest rate cap contracts
Foreign currency exchange contracts
Interest rate swap agreements
Derivatives not designated as hedging
instruments:
Other assets
$
Other liabilities
Other liabilities
Other assets
$
2,023
(237)
Other assets
(4,881) Other liabilities
Interest rate cap contracts
Foreign currency exchange contracts
Other assets
Other liabilities
—
Other assets
— Other liabilities
—
1,912
(7)
3,922
(1,110)
Derivatives Designated as Hedging Instruments
The Company has operations in foreign countries, which expose 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 foreign currency forward contracts with financial counterparties. 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.
Certain of the foreign currency forward contracts are designated as cash flow hedging instruments and qualify for hedge
accounting treatment. Gains and losses arising from such contracts are recorded as a component of accumulated other
comprehensive income (“OCI”) as gains and losses on derivative instruments, net of income taxes. The hedging gains and
losses in OCI are subsequently reclassified into earnings in the same period in which the underlying transactions affect the
Company’s earnings. If all or a portion of the forecasted transaction is cancelled, the accumulated gains or losses in OCI would
be reclassified into earnings.
As of December 31, 2018, the total notional amount of the foreign currency forward contracts that are designated as cash
flow hedging instruments was $12.0 million. All of these outstanding contracts qualified for hedge accounting treatment. The
Company estimates that approximately $0.2 million of net derivative loss included in OCI will be reclassified into earnings
within the next 12 months. No gain or loss was reclassified from OCI into earnings as a result of forecasted transactions that
failed to occur during the years ended December 31, 2018, 2017, or 2016.
The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest
rates on variable interest rate debt and their impact on earnings and cash flows. Under the swap agreements, the Company
receives floating interest rate payments and makes interest payments based on fixed interest rates. In accordance with
authoritative guidance relating to derivatives and hedging transactions, the Company designates its interest rate swap
instruments as cash flow hedges. As of December 31, 2018, there were six interest rate swap agreements outstanding with a
total notional amount of $368.1 million.
As of December 31, 2018, the Company also held two interest rate cap contracts (the “2018 Caps”) with a notional
amount of £350.0 million (approximately $445.8 million) that are used to manage its risk related to interest rate fluctuations on
the Company’s variable interest rate bearing debt. The 2018 Caps mature in 2021 and are structured as a series of European call
options (“Caplets”) such that if exercised, the Company will receive a payment equal to 3-months GBP-LIBOR on a notional
amount equal to the hedged notional amount net of a fixed strike price. Each interest rate reset date, the Company will elect to
exercise the Caplet or let it expire. The potential cash flows from each Caplet are expected to offset any variability in the cash
flows of the interest payments to the extent GBP-LIBOR exceeds the strike price of the Caplets. The Company expects the
hedge relationship to be highly effective and designates the 2018 Caps as cash flow hedge instruments.
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Table of Contents
The following table summarizes the effects of derivatives in cash flow hedging relationships designated as hedging
instruments on the Company’s consolidated statements of income for the years ended December 31, 2018 and 2017 (in
thousands):
Gain (Loss)
Recognized in OCI
2018
2017
Location of Gain (Loss) Reclassified from
OCI into Income
Gain (Loss)
Reclassified
from OCI into
Income
2018
2017
Foreign currency exchange contracts
$ (1,253) $ 2,302 Salaries and employee benefits
$
794
$
1,280
Foreign currency exchange contracts
Interest rate swap agreements
Interest rate cap contracts
(100)
(5,228)
(643)
310 General and administrative expenses
9
Interest expense
— Interest expense
2
(384)
—
76
(110)
—
Derivatives Not Designated as Hedging Instruments
In 2016, the Company began entering into currency exchange forward contracts to reduce the effects of currency
exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature within one to three
months and are not designated as hedge instruments for accounting purposes. The Company continues to monitor the level of
exposure of the foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis.
The gains or losses on these derivative contracts are recognized in other income or expense based on the changes in fair value.
On May 8, 2018, in anticipation of the completion of the Cabot Transaction, Encore entered into a foreign exchange
forward contract with a notional amount of £176.0 million, which was approximately the amount of cash consideration for the
Cabot Transaction. The forward contract settled on August 3, 2018 at a total loss of $9.3 million. This loss was substantially
offset by a decrease in the final purchase price in U.S. dollars for the Cabot Transaction.
The following table summarizes the effects of derivatives not designated as hedging instruments on the Company’s
consolidated statements of income for the years ended December 31, 2018 and 2017 (in thousands):
Derivatives Not Designated as Hedging
Instruments
Location of Derivative Gain (Loss) Recognized
in Income
Amount of Derivative Gain (Loss) Recognized in
Income
2018
2017
2016
Foreign currency exchange contracts
Other (expense) income
$
Interest rate cap contracts
Interest rate swap agreements
Interest expense
Interest expense
(9,221) $
(1,568)
—
1,755
$
8,248
2,026
110
—
144
Note 5: Investment in Receivable Portfolios, Net
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, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by
geographic region or location. Portfolios acquired in business combinations are also grouped into these pools. During any fiscal
quarter in which the Company has an acquisition of an entity that has portfolio, the entire historical portfolio of the acquired
company is aggregated into the pool groups for that quarter, based on common characteristics, resulting in pools for that quarter
that may consist of several different vintages of portfolio. 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 internal rate of return (“IRR”) to the cost
basis of the pool, which remains unchanged throughout the life of the pool, unless there is a significant increase in subsequent
F-18
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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 operations as a
reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the
consolidated statements of financial condition. Due to the discounting of future cashflows using monthly IRRs, an allowance
charge could still result even if substantial higher collections occurring later in the collection curve offset lower collections in
the near term.
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 carrying value 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, 2016
Revenue from receivable portfolios
Allowance reversals on receivable portfolios, net
Net additions on existing portfolios
Additions for current purchases, net
Effect of foreign currency translation
Balance at December 31, 2017
Revenue from receivable portfolios
Allowance reversals on receivable portfolios, net
Net additions on existing portfolios
Additions for current purchases, net
Effect of foreign currency translation
Balance at December 31, 2018
Accretable
Yield
Estimate of
Zero Basis
Cash Flows
$
$
3,092,004
(909,239)
(34,294)
365,357
1,019,856
161,385
3,695,069
(1,041,947)
(32,429)
144,726
1,155,451
(147,699)
3,773,171
$
$
$
365,504
(144,134)
(6,942)
155,160
—
44
369,632
(125,185)
(9,044)
18,114
—
(482)
253,035
$
Total
3,457,508
(1,053,373)
(41,236)
520,517
1,019,856
161,429
4,064,701
(1,167,132)
(41,473)
162,840
1,155,451
(148,181)
4,026,206
During the year ended December 31, 2018, the Company purchased receivable portfolios with a face value of $8.5 billion
for $1.1 billion, or a purchase cost of 13.3% of face value. The estimated future collections at acquisition for all portfolios
purchased during the year amounted to $2.3 billion.
During the year ended December 31, 2017, the Company purchased receivable portfolios with a face value of $10.1
billion for $1.1 billion, or a purchase cost of 10.5% of face value. The estimated future collections at acquisition for all
portfolios purchased during the year amounted to $2.2 billion.
After the net book value of a portfolio has been fully recovered, all collections are recorded as ZBA revenue. During the
years ended December 31, 2018, 2017, and 2016, ZBA revenue was approximately $125.2 million, $144.1 million, and $138.1
million, respectively.
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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, 2018
Accrual Basis
Portfolios
Cost Recovery
Portfolios
Zero Basis
Portfolios
Total
Balance, beginning of period
$
2,879,170
$
11,443
$
— $
2,890,613
Purchases of receivable portfolios
Disposals or transfers to held for sale
Gross collections(1)
Put-backs and Recalls(2)
Foreign currency adjustments
Revenue recognized
Portfolio allowance reversals, net
Reclassification from prior period
1,131,898
(10,852)
(1,832,539)
(14,253)
(98,298)
1,041,947
32,429
—
—
(1,604)
(1,826)
—
(420)
—
—
798
—
—
(133,255)
(176)
—
125,185
9,044
(798)
1,131,898
(12,456)
(1,967,620)
(14,429)
(98,718)
1,167,132
41,473
—
Balance, end of period
Revenue as a percentage of collections(3)
$
3,129,502
$
8,391
$
— $
3,137,893
56.9%
—
93.9%
59.3%
Year Ended December 31, 2017
Accrual Basis
Portfolios
Cost Recovery
Portfolios
Zero Basis
Portfolios
Total
Balance, beginning of period
$
2,368,366
$
14,443
$
— $
2,382,809
Purchases of receivable portfolios
Disposals or transfers to held for sale
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)
1,057,066
(12,695)
(1,613,351)
(2,577)
138,828
909,239
34,294
1,169
(493)
(3,511)
—
(165)
—
—
—
—
(150,782)
(294)
—
144,134
6,942
1,058,235
(13,188)
(1,767,644)
(2,871)
138,663
1,053,373
41,236
$
2,879,170
$
11,443
$
— $
2,890,613
56.4%
—
95.6%
59.6%
Balance, beginning of period
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)
________________________
Year Ended December 31, 2016
Accrual Basis
Portfolios
Cost Recovery
Portfolios
Zero Basis
Portfolios
$
$
2,436,054
906,719
(13,076)
(1,538,663)
(27,561)
(196,842)
892,732
(90,997)
2,368,366
$
$
4,615
—
— $
—
13,076
(2,102)
(1,019)
(127)
—
—
$
14,443
$
—
(144,839)
(33)
(8)
138,060
6,820
— $
95.3%
58.0%
—
Total
2,440,669
906,719
—
(1,685,604)
(28,613)
(196,977)
1,030,792
(84,177)
2,382,809
61.2%
(1) Does not include amounts collected on behalf of others.
(2) Put-backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific
guidelines as set forth in the respective purchase agreements.
(3) Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.
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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, 2015
Provision for portfolio allowances
Reversal of prior allowances
Effect of foreign currency translation
Balance at December 31, 2016
Provision for portfolio allowances
Reversal of prior allowances
Effect of foreign currency translation
Balance at December 31, 2017
Provision for portfolio allowances
Reversal of prior allowances
Effect of foreign currency translation
Balance at December 31, 2018
Note 6: Deferred Court Costs, Net
Valuation
Allowance
60,588
94,011
(9,834)
(7,728)
137,037
12,047
(53,283)
6,775
102,576
14,421
(55,894)
(472)
60,631
$
$
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 that 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 an estimated court cost
recovery rate established based on its analysis of historical court costs recovery data. The Company estimates deferral periods
for Deferred Court Costs based on jurisdiction and nature of litigation and writes off any Deferred Court Costs not recovered
within the respective deferral period. 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 deferral period consist of the following as of the dates presented (in thousands):
Court costs advanced
Court costs recovered
Court costs reserve
Deferred court costs
December 31,
2018
December 31,
2017
$
$
828,713
(336,335)
(396,460)
95,918
$
$
743,584
(299,606)
(364,015)
79,963
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 deferral period
Effect of foreign currency translation
Balance at end of period
December 31,
2018
December 31,
2017
December 31,
2016
(364,015) $
(90,026)
53,383
4,198
(396,460) $
(327,926) $
(82,702)
50,743
(4,130)
(364,015) $
(318,784)
(67,850)
53,527
5,181
(327,926)
$
$
F-21
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Note 7: Property and Equipment, Net
Property and equipment consist of the following, as of the dates presented (in thousands):
Computer equipment and software
Leasehold improvements
Furniture, fixtures and equipment
Telecommunications equipment and other
Less: accumulated depreciation and amortization
December 31,
2018
December 31,
2017
$
172,679
34,817
19,226
3,862
230,584
(115,066)
115,518
$
161,019
21,479
17,712
5,642
205,852
(129,576)
76,276
$
$
Depreciation and amortization expense for continuing operations was $29.5 million, $31.1 million, and $27.7 million for
the years ended December 31, 2018, 2017, and 2016, respectively.
Note 8: Other Assets
Other assets consist of the following (in thousands):
Identifiable intangible assets, net
Other financial receivables
Service fee receivables
Assets held for sale
Prepaid expenses
Deferred tax assets
Security deposits
Derivative instruments
Funds held in escrow
Prepaid income taxes
Other
Total
December 31,
2018
December 31,
2017
$
60,581
$
47,363
28,035
26,664
24,989
24,910
2,667
2,023
—
—
39,770
75,736
37,861
25,609
18,741
27,606
18,773
3,451
5,834
28,199
27,917
33,001
$
257,002
$
302,728
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Note 9: Debt
The Company is in compliance with all covenants under its financing arrangements as of December 31, 2018. 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 and exchangeable notes
Less: debt discount
Cabot senior secured notes
Less: debt discount
Cabot senior revolving credit facility
Cabot securitisation senior facility
Preferred equity certificates
Other credit facilities
Other
Capital lease obligations
Less: debt issuance costs, net of amortization
Total
Encore Revolving Credit Facility and Term Loan Facility
December 31,
2018
December 31,
2017
$
429,000
$
195,056
325,000
656,000
(36,361)
1,111,399
(1,477)
298,005
445,837
—
43,354
64,566
7,563
3,537,942
(47,309)
3,490,633
$
$
328,961
181,687
326,029
483,500
(32,720)
1,216,485
(1,927)
179,008
391,790
253,324
68,001
92,792
6,069
3,492,999
(46,123)
3,446,876
The Company has a revolving credit facility and term loan facility pursuant to a Third Amended and Restated Credit
Agreement dated December 20, 2016 (as amended, the “Restated Credit Agreement”). As of December 31, 2018, the Restated
Credit Agreement includes a revolving credit facility of $894.4 million (the “Revolving Credit Facility”), a term loan facility of
$203.7 million (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit
Facilities”).
Provisions of the Restated Credit Agreement as of December 31, 2018 include, but are not limited to:
• Revolving Credit Facility commitments of (1) $884.2 million that expire in December 2021 and (2) $10.2 million
that expire in February 2019, in each case with interest at a floating rate equal to, at the Company’s option, either:
(a) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300 basis
points depending on the cash flow leverage ratio of Encore and its restricted subsidiaries as defined in the Restated
Credit Agreement; or (b) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on
the cash flow leverage ratio of Encore and its restricted subsidiaries. “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, (iii) reserved adjusted LIBOR determined on a daily basis for a one month interest period, plus
1.0% per annum and (iv) zero;
• A $194.6 million term loan maturing in December 2021, 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
cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges
from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries.
Principal amortizes $15.3 million in each of 2019 and 2020 with the remaining principal due in 2021;
• A $9.1 million term loan maturing in February 2019, 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
cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges
from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. The
remaining principal is due in 2019;
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• A borrowing base under the Revolving Credit Facility equal to 35% of all eligible non-bankruptcy estimated
remaining collections plus 55% of eligible estimated remaining collections for consumer receivables subject to
bankruptcy;
• A maximum cash flow leverage ratio permitted of 3.00:1.00;
• A maximum cash flow first-lien leverage ratio of 2.00:1.00;
• A minimum interest coverage ratio of 1.75:1.00;
• The allowance of indebtedness in the form of senior secured notes not to exceed $350.0 million;
• The allowance of additional unsecured or subordinated indebtedness not to exceed $1.1 billion, including junior lien
indebtedness not to exceed $400.0 million;
• 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 Encore 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;
• A basket to allow for investments in persons organized under the laws of Canada in the amount of $50.0 million;
• A requirement that Encore and its restricted subsidiaries, for the four-month period ending February 2019, have
sufficient cash or availability under the Revolving Credit Facility (excluding availability under revolving
commitments expiring in February 2019) to satisfy any amounts due under the revolving commitments that expire
in February 2019 and the sub-tranche of the Term Loan Facility that expires in February 2019; On February 25,
2019, $10.2 million of revolving commitments under the Company’s Revolving Credit facility and $8.1 million of
outstanding term loans under the Company’s Term Loan Facility matured. All maturing amounts were paid with
cash on hand and available funds under the Revolving Credit Facility. As a result, the requirement to have sufficient
cash or availability under the Revolving Credit facility to satisfy such amounts due on February 25, 2019 is no
longer applicable;
• Collateralization by all assets of the Company, other than the assets of certain foreign subsidiaries and all
unrestricted subsidiaries as defined in the Restated Credit Agreement.
At December 31, 2018, the outstanding balance under the Revolving Credit Facility was $429.0 million, which bore a
weighted average interest rate of 5.01% and 4.03% for the years ended December 31, 2018 and 2017, respectively. Available
capacity under the Revolving Credit Facility, after taking into account borrowing base and applicable debt covenants, was
$177.5 million as of December 31, 2018. At December 31, 2018, the outstanding balance under the Term Loan Facility was
$195.1 million.
Encore Senior Secured Notes
In August 2017, Encore entered into $325.0 million in senior secured notes with a group of insurance companies (the
“Senior Secured Notes”). The Senior Secured Notes bear an annual interest rate of 5.625%, mature in 2024 and beginning in
November 2019 will require quarterly principal payments of $16.3 million. As of December 31, 2018, $325.0 million of the
Senior Secured Notes remained outstanding.
The Senior Secured Notes are guaranteed in full by certain of Encore’s subsidiaries. The Senior Secured Notes are pari
passu with, and are collateralized by the same collateral as the Senior Secured Credit Facilities. The Senior Secured Notes may
F-24
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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, any series of the Senior Secured Notes may be
accelerated at the election of the holder or holders of a majority in principal amount of such series of Senior Secured Notes
upon certain events of default by Encore, including the breach of affirmative covenants regarding guarantors, collateral,
minimum revolving credit facility commitment or the breach of any negative covenant. Encore may prepay the Senior Secured
Notes at any time for any reason. If Encore prepays the Senior Secured Notes, 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 and material terms in the purchase agreement for the Senior Secured
Notes are substantially similar to those in the Restated Credit Agreement. The holders of the Senior Secured Notes 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.
Encore Convertible Notes and Exchangeable Notes
In June and July 2013, Encore issued $172.5 million aggregate principal amount of 3.000% 2020 Convertible Notes that
mature on July 1, 2020 in private placement transactions (the “2020 Convertible Notes”). In March 2014, Encore issued $161.0
million aggregate principal amount of 2.875% 2021 Convertible Notes that mature on March 15, 2021 in private placement
transactions (the “2021 Convertible Notes”). In March 2017, Encore issued $150.0 million aggregate principal amount of
3.250% 2022 Convertible Senior Notes that mature on March 15, 2022 in private placement transactions (the “2022
Convertible Notes” and together with the 2020 Convertible Notes and the 2021 Convertible Notes, the “Convertible Notes”).
The interest on the Convertible Notes is payable semi-annually.
In July 2018, Encore Finance (defined below), a 100% owned finance subsidiary of Encore, issued $172.5
million aggregate principal amount of exchangeable senior notes due 2023 (the “Exchangeable Notes”) which are fully and
unconditionally guaranteed by Encore. The Exchangeable Notes mature on September 1, 2023 and bear interest at a rate
of 4.500% per year, payable semiannually in arrears on March 1 and September 1 of each year, beginning on March 1, 2019.
Unless otherwise indicated in connection with a particular offering of debt securities, Encore will fully and
unconditionally guarantee any debt securities issued by Encore Capital Europe Finance Limited (“Encore Finance”),
a 100% owned finance subsidiary of Encore. Amounts related to Encore Finance are included in the consolidated financial
statements of Encore subsequent to April 30, 2018, the date of the incorporation of Encore Finance.
Prior to the close of business on the business day immediately preceding their respective conversion or exchange date
(listed below), holders may convert or exchange their Convertible Notes or Exchangeable Notes under certain circumstances
set forth in the applicable indentures. On or after their respective conversion or exchange dates until the close of business on
the scheduled trading day immediately preceding their respective maturity date, holders may convert or exchange their notes at
any time. Certain key terms related to the convertible and exchangeable features as of December 31, 2018 are listed below.
2020 Convertible Notes
2021 Convertible Notes
2022 Convertible Notes
2023 Exchangeable
Notes
Initial conversion or
exchange price
Closing stock price at date of
issuance
$
$
Closing stock price date
Conversion or exchange rate
(shares per $1,000 principal
amount)
Conversion or exchange date
45.72
33.35
$
$
59.39
47.51
$
$
45.57
35.05
$
$
44.62
36.45
June 24, 2013
March 5, 2014
February 27, 2017
July 20, 2018
21.8718
16.8386
21.9467
22.4090
January 1, 2020
September 15, 2020
September 15, 2021
March 1, 2023
In the event of conversion or exchange, holders of the Company’s Convertible Notes or Exchangeable 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 and exchanges through combination settlement (i.e.,
convertible or exchangeable 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 and subject to certain restrictions
contained in each of the indentures governing the Convertible Notes and Exchangeable Notes, for the remainder). As a result,
and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion or
exchange spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the
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conversion or exchange spread has a dilutive effect when, during any quarter, the average share price of the Company’s
common stock exceeds the initial conversion or exchange prices listed in the above table.
Authoritative guidance requires that issuers of convertible or exchangeable debt instruments which, upon conversion or
exchange, 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 or nonexchangeable 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.
As discussed above, upon exchange of the Exchangeable Notes, the Company will pay or deliver, as the case may be,
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. However, the Company was required to settle solely in cash all exchanges with an exchange date
occurring before September 28, 2018, the “share reservation date.” As a result and in accordance with authoritative guidance,
the exchange feature of the Exchangeable Notes did not qualify as an equity instrument and was bifurcated at the time of
issuance. On September 28, 2018, the bifurcated derivative met the criteria for equity classification and was recorded in equity
at fair value with no subsequent measurement. All issuance costs relating to the Exchangeable Notes were recorded as debt
issuance costs. 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 and Exchangeable Notes are listed below (in thousands, except
percentages):
Debt component
Equity component
Equity issuance cost
Stated interest rate
Effective interest rate
2020 Convertible
Notes
2021 Convertible
Notes
2022 Convertible
Notes
2023 Exchangeable
Notes
$
$
$
140,247
32,253
1,106
$
$
$
3.000%
6.350%
$
$
$
143,645
17,355
581
2.875%
4.700%
$
$
$
137,266
12,734
398
3.250%
5.200%
157,971
14,009
—
4.500%
6.500%
The balances of the liability and equity components of all the Convertible Notes and Exchangeable Notes outstanding
were as follows (in thousands):
Liability component—principal amount
Unamortized debt discount
Liability component—net carrying amount
Equity component
December 31,
2018
December 31,
2017
$
$
$
656,000
(36,361)
619,639
76,351
$
$
$
483,500
(32,720)
450,780
62,696
The debt discount is being amortized into interest expense over the remaining life of the Convertible Notes and
Exchangeable Notes using the effective interest rates. Interest expense related to the Convertible Notes and Exchangeable
Notes was as follows (in thousands):
Interest expense—stated coupon rate
Interest expense—amortization of debt discount
Total interest expense—convertible notes
Hedge Transactions
Year ended December 31,
2018
2017
$
$
17,518
10,888
28,406
$
$
15,721
9,871
25,592
In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company may be
required to make in the event that the market price of the Company’s common stock becomes greater than the conversion or
exchange prices of the Convertible Notes and the Exchangeable Notes, the Company maintains a hedge program that increases
the effective conversion or exchange price for the 2020 Convertible Notes, the 2021 Convertible Notes and the Exchangeable
Notes. The Company did not hedge the 2022 Convertible Notes.
F-26
Table of Contents
The details of the hedge program for each of the Convertible Notes and Exchangeable Notes are listed below (in
thousands, except conversion or exchange price):
Cost of the hedge transaction(s)
Initial conversion or exchange price
Effective conversion or exchange price
Cabot Senior Secured Notes
2020 Convertible
Notes
2021 Convertible
Notes
2023 Exchangeable
Notes
$
$
$
18,113
45.72
61.55
$
$
$
19,545
59.39
83.14
$
$
$
17,785
44.62
62.48
On August 2, 2013, Cabot Financial (Luxembourg) S.A. (“Cabot Financial”), an indirect subsidiary of Encore, issued
£100.0 million (approximately $151.7 million) in aggregate principal amount of 8.375% Senior Secured Notes due 2020 (the
“Cabot 2020 Notes”). In July 2018, Cabot Financial completed an exchange offer for a portion of these outstanding notes and
in November 2018 redeemed the remaining outstanding notes, as further discussed 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”). Interest on the Cabot 2021 Notes is payable semi-
annually, in arrears, on April 1 and October 1 of each year. On July 18, 2018, Cabot Financial completed an exchange offer for
a portion of these outstanding notes, as further discussed below.
On October 6, 2016, Cabot Financial issued £350.0 million (approximately $442.6 million) in aggregate principal amount
of 7.500% Senior Secured Notes due 2023 (the “Cabot 2023 Notes”). Interest on the Cabot 2023 Notes is payable semi-
annually, in arrears, on April 1 and October 1 of each year. The Cabot 2023 Notes were issued at a price equal to 100% of their
face value.
On July 18, 2018, Cabot Financial completed an exchange offer whereby certain holders of the Cabot 2020 Notes and
holders of the Cabot 2021 Notes exchanged their notes for additional Cabot 2023 Notes (the “Exchange Notes”). Pursuant to
the exchange offer, Cabot Financial exchanged £32.2 million (approximately $42.4 million) in aggregate principal amount of
the Cabot 2020 Notes and £95.0 million (approximately $125.2 million) in aggregate principal amount of the Cabot 2021
Notes, at a premium, for a total of £128.4 million (approximately $169.2 million) aggregate principal amount of the Exchange
Notes. On July 18, 2018, Cabot Financial also issued £34.5 million (approximately $45.5 million) aggregate principal amount
of 7.500% additional notes (the “Additional Notes”) at 99.0% plus accrued interest from and including April 1, 2018. Both the
Exchange Notes and the Additional Notes were issued as additional notes under the indenture entered into by Cabot Financial,
among others, dated October 6, 2016, governing the Cabot 2023 Notes and are part of the same series as the currently
outstanding £350.0 million 7.500% Cabot 2023 Notes issued under that indenture. In November 2018, Cabot Financial
redeemed the remaining £67.8 million (approximately $86.5 million) of the Cabot 2020 Notes. The third-party fees relating to
the exchange offer and fees relating to the redemption were approximately $9.2 million and were recorded as interest expense
in the Company’s consolidated statements of operations during the year ended December 31, 2018.
The Cabot 2021 Notes and the Cabot 2023 Notes (together the “Cabot 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 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). Subject to the Intercreditor Agreement described below under “Cabot Senior Revolving Credit Facility”, 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 operations. 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. The Cabot Floating Rate Notes will mature on November 15,
2021.
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
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(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).
Interest expense related to the Cabot senior secured notes 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,
2018
2017
$
$
84,772
$
—
343
85,115
$
93,691
(2,865)
467
91,293
At December 31, 2018, the outstanding balance of the Cabot senior secured notes was $1.1 billion.
Cabot Senior Revolving Credit Facility
On December 12, 2017, Cabot Financial (UK) Limited (“Cabot Financial UK”) entered into an amended and restated
senior secured revolving credit facility agreement (as amended and restated, the “Cabot Credit Facility”). As of December 31,
2018, the Cabot Credit Facility provides for a total committed facility of £385.0 million of which £375.0 million expires in
September 2022 and £10.0 million that expires in September 2021, and included the following key provisions:
•
Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 3.00% per annum, which may decrease to 2.75%
upon certain specified conditions;
• A restrictive covenant that limits the loan to value ratio to 0.75 in the event that the Cabot Credit Facility is more
than 20% utilized;
• 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 0.275 in the event that the Cabot Credit Facility is more than 20% utilized;
• 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, 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 will receive priority with respect to any proceeds received upon any
enforcement action over any such assets.
At December 31, 2018, the outstanding borrowings under the Cabot Credit Facility were approximately $298.0 million.
The weighted average interest rate was 3.73% and 3.60% for the years ended December 31, 2018 and 2017, respectively.
Available capacity under the Cabot Credit Facility, after taking into account borrowing base and applicable debt covenants,
was £151.1 million (approximately $192.4 million) as of December 31, 2018.
Cabot Securitisation Senior Facility
Cabot Securitisation UK Ltd (“Cabot Securitisation”), an indirect subsidiary of Encore, entered into a senior facility
agreement (the “Senior Facility Agreement”) for a committed amount of £300.0 million, of which £300.0 million was drawn as
of December 31, 2018. The Senior Facility Agreement had an initial availability period ending in September 2020 and an initial
repayment date in September 2022. On October 4, 2018, the Senior Facility Agreement was amended to mature in September
2023. The obligations of Cabot Securitisation under the Senior Facility Agreement are secured by first ranking security interests
over all of Cabot Securitisation’s property, assets and rights (including receivables purchased from Cabot Financial UK from
time to time), the book value of which was approximately £381.7 million (approximately $486.2 million) as of December 31,
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2018. Funds drawn under the Senior Facility Agreement will bear interest at a rate per annum equal to LIBOR plus a margin of
2.85%.
At December 31, 2018, the outstanding borrowings under the Cabot Securitisation Senior Facility were approximately
$445.8 million. The weighted average interest rate was 3.46% and 3.10% for the year ended December 31, 2018 and 2017.
On November 1, 2018, Cabot Securitisation UK II Ltd (“Cabot Securitisation II”), an indirect subsidiary of Encore,
entered into a new non-recourse asset backed senior facility of £50.0 million, with a maturity date in September 2023. The
facility is secured by first ranking security interests over all of Cabot Securitisation II’s property, assets and rights. Funds drawn
under this facility will bear interest at a rate per annum equal to LIBOR plus a margin of 4.075%.
Cabot Securitisation and Cabot Securitisation II are securitized financing vehicles and are VIEs for consolidation
purposes. Refer to Note 10, “Variable Interest Entities,” for further details.
Preferred Equity Certificates
The Company previously held PECs as a result of its initial acquisition of CCM in July 2013. The PECs were legal debt
obligations to the noncontrolling shareholders of CCM and they were carried at face amount, plus any accrued interest. The
PECs accrued interest at 12% per annum. On July 24, 2018, in connection with the Cabot Transaction, the Company acquired
all outstanding PECs including accrued interest not owned by the Company of approximately $262.5 million. Subsequent to the
Cabot Transaction, the Company no longer carried any PECs. The accrued interest expense on the PECs was approximately
$17.3 million, $25.9 million, and $24.3 million during the years ended December 31, 2018, 2017 and 2016, respectively.
Capital Lease Obligations
The Company has capital lease obligations primarily for computer equipment. As of December 31, 2018, the Company’s
capital lease obligations were approximately $7.6 million. These capital lease obligations require monthly, quarterly or annual
payments through 2023 and have implicit interest rates that range from zero to approximately 5.7%.
Maturity Schedule
The aggregate amounts of the Company’s debt and capital lease obligations, maturing in each of the next five years and
thereafter are as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
115,377
285,758
1,271,922
231,558
1,622,415
48,750
3,575,780
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
expected losses, or the right to receive 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 consolidates VIEs when it is the primary beneficiary.
The Company evaluates its relationships with its VIEs on an ongoing basis to ensure that it continues to be the primary
beneficiary. A reconsideration event is significant if it changes the design of the entity or the entity’s equity investment at risk.
Prior to the Cabot Transaction, CCM’s indirect holding Company Janus Holdings S.a r.l. (“Janus Holdings”) was a VIE. Upon
completion of the Cabot Transaction on July 24, 2018 and the subsequent change in organizational structure, Janus Holdings no
longer qualified as a VIE and Cabot is consolidated via the voting interest model.
As of December 31, 2018, the Company’s VIEs include certain securitized financing vehicles and other immaterial
special purpose entities that were created to purchase receivable portfolios in certain geographies. The Company is the primary
beneficiary of these VIEs.
F-29
Most 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 VIE.
Note 11: Stock-Based Compensation
In April 2017, Encore’s Board of Directors (the “Board”) approved the Encore Capital Group, Inc. 2017 Incentive Award
Plan (the “2017 Plan”), which was then approved by the Company’s stockholders on June 15, 2017. The 2017 Plan superseded
the Company’s 2013 Incentive Compensation Plan (as amended, the “2013 Plan”), which had previously 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 2017 Plan. Subject to certain adjustments, the Company may
grant awards for an aggregate of 5,713,571 shares of the Company’s common stock under the 2017 Plan. The aggregate number
of shares available for issuance under the 2017 Plan will be reduced by 2.12 shares for each share delivered in settlement of any
full value award and by one share for each share delivered in settlement of any stock option or stock appreciation right. If an
award under the 2017 Plan or the 2013 Plan expires, lapses or is terminated, exchanged for cash, surrendered, repurchased,
canceled without having been fully exercised or forfeited, the unused shares covered by such award will again become or again
be available for award grants under the 2017 Plan. Shares available under the 2017 Plan will be increased by 2.12 shares for
each share subject to a full value award and by one share for each share subject to a stock option or a stock appreciation right,
in each case, that become or again be available for issuance pursuant to the foregoing share counting provisions.
The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted
stock units, dividend equivalent rights, stock appreciation rights, cash awards, performance-based awards and any other types
of awards not inconsistent with the 2017 Plan. The awards under the 2017 Plan consist of compensation subject to authoritative
guidance for stock-based compensation.
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. The Company has elected
a policy of estimating expected forfeitures. Total stock-based compensation expense during the years ended December 31,
2018, 2017, and 2016 was $13.0 million, $10.4 million, and $12.6 million, respectively. The actual tax benefit from stock-
based compensation arrangements totaled $1.3 million, $3.6 million, and $4.9 million for the years ended December 31, 2018,
2017, and 2016, respectively. Cash received from option exercise under all share-based payment arrangements for the years
ended December 31, 2018, 2017 and 2016, was $0.7 million, $0.5 million and $0.4 million, respectively.
The Company’s stock-based compensation arrangements are described below:
Stock Options
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. Other than the Performance Options discussed below, no options have been awarded under the 2013 Plan or
2017 Plan.
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. There were no
options granted during the years ended December 31, 2018, 2017, or 2016. As of December 31, 2018, all outstanding stock
options have been fully vested and all related compensation expenses have been fully recognized.
F-30
Table of Contents
A summary of the Company’s stock option activity as of December 31, 2018, and changes during the year then ended, is
presented below:
Outstanding at December 31, 2017
Exercised
Outstanding at December 31, 2018
Exercisable as of December 31, 2018
Number of
Shares
Weighted Average
Exercise Price
65,766
(10,000)
55,766
55,766
$
$
$
16.27
22.17
15.21
15.21
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
1.13
1.13
$
$
462
462
The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $0.4 million,
$0.8 million and $0.1 million, respectively.
Performance Stock Options
Under the 2017 Plan and the 2013 Plan, the Company granted performance stock options, with an exercise price equal to
the closing price of the Company’s stock at the date of issuance, that vest in equal annual installments over a three year service
period but only if, within four years from the date of grant, the 20 trading day average of the closing price of the Company’s
stock (subject to dividend-related adjustments) exceeds a target equal to a 25% increase from the closing price on the date of
grant. These performance options have a seven-year contractual life.
A summary of the Company’s performance stock option activity as of December 31, 2018, and changes during the year
then ended, is presented below:
Outstanding at December 31, 2017
Exercised
Cancelled/forfeited
Outstanding at December 31, 2018
Vested and expected to vest as of December 31, 2018
Exercisable as of December 31, 2018
Number of
Shares
Weighted Average
Exercise Price
266,522
(16,648)
(33,292)
216,582
211,807
72,198
$
$
$
$
31.43
30.95
30.95
31.54
31.55
31.54
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in thousands)
4.26
4.24
4.26
$
$
$
—
—
—
As of December 31, 2018, there was $0.4 million of total unrecognized compensation cost related to non-vested
performance stock options which is expected to be recognized over a period of approximately 1.0 year.
Non-Vested Shares
The Company’s 2017 Plan (and previously, the 2013 Plan and 2005 Plan), permits restricted stock units, restricted stock
awards, performance stock units, and performance stock awards (collectively “stock awards”). The fair value of non-vested
shares with a service condition and/or a 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 number of shares
needed to satisfy minimal statutory tax withholding requirements. The tax obligations are then paid by the Company on behalf
of the employees.
F-31
Table of Contents
A summary of the status of the Company’s stock awards as of December 31, 2018, and changes during the year then
ended, is presented below:
Non-vested at December 31, 2017
Awarded
Vested
Cancelled
Non-vested at December 31, 2018
________________________
Non-Vested
Shares (1)
Weighted Average
Grant Date
Fair Value
805,757
$
$
519,724
(219,443) $
(246,106) $
$
859,932
30.98
38.52
32.97
33.09
34.43
(1) Certain of the Company’s stock awards have a vesting matrix under which the stock awards can vest at a maximum level that is 200% of the shares that
would vest for achieving the performance goals at target. The number of shares presented is based on achieving the performance goals at target levels
as defined in the stock award agreements. As of December 31, 2018 and 2017, the maximum number of non-vested performance shares that could vest
under the provisions of the agreements was 1,218,359 and 1,038,272, respectively.
Unrecognized compensation expense related to non-vested shares as of December 31, 2018, was $15.7 million. The
weighted-average remaining expense period, based on the unamortized value of these outstanding non-vested shares, was
approximately 1.5 years. The fair value of restricted stock units and restricted stock awards vested for the years ended
December 31, 2018, 2017, and 2016 was $8.8 million, $7.8 million, and $12.5 million, respectively.
Note 12: Income Taxes
Income before provision for income taxes for the years ended December 31, 2018, 2017, and 2016 consisted of the
following (in thousands):
US
Foreign
Total income before provision for income taxes
Year Ended December 31,
2018
2017
2016
$
$
61,972
94,516
156,488
$
$
71,794
59,432
131,226
$
$
112,483
(55,108)
57,375
The provision for income taxes was $46.8 million, $52.0 million, and $38.2 million, for the years ended December 31,
2018, 2017, and 2016, respectively.
The income tax provision for continuing operations consisted of the following (in thousands):
Current expense (benefit):
Federal
State
Foreign
Deferred expense (benefit):
Federal
State
Foreign
Provision for income taxes
Year Ended December 31,
2018
2017
2016
$
$
23,254
2,983
29,532
55,769
(10,447)
(2,169)
3,599
(9,017)
46,752
$
$
$
9,969
(794)
15,690
24,865
16,563
784
9,837
27,184
52,049
$
58,816
1,173
10,364
70,353
(22,951)
25
(9,222)
(32,148)
38,205
Enacted on December 22, 2017, the Tax Reform Act introduced significant changes to U.S. income tax law. Effective
2018, the Tax Reform Act reduced the U.S. statutory tax rate from 35% to 21% and, among other changes, created new taxes
on certain foreign-sourced earnings. Due to the timing of the enactment and complexity involved in applying the provision of
the Tax Reform Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its
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consolidated financial statements as of December 31, 2017. As the Company collected and prepared necessary data, and
interpreted the additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service (“IRS”), and other
standard-setting bodies, adjustments to the provisional amounts have been made during the year ended December 31, 2018. The
Tax Reform Act subjects U.S. shareholders to a tax on global intangible low-taxed income ("GILTI") earned by certain foreign
subsidiaries. The Company has elected to treat taxes due on future U.S. inclusions in taxable income as a current period
expense. The accounting for the tax effects of the Tax Reform Act has been completed and the Company recorded immaterial
adjustments as of December 22, 2018.
The reconciliation of federal statutory income tax rate to our effective income tax rate is as follows:
Federal provision
State provision
Foreign rate differential(1)
Transaction costs(2)
Permanent items(3)
Change in valuation allowance(4)
Other
Effective rate
________________________
Year Ended December 31,
2018
2017
2016
21.0 %
0.1 %
(11.7)%
1.0 %
1.1 %
17.7 %
0.7 %
29.9 %
35.0 %
0.5 %
(20.0)%
5.0 %
10.2 %
8.2 %
0.8 %
39.7 %
35.0 %
2.3 %
(3.6)%
0.0 %
14.7 %
20.7 %
(2.5)%
66.6 %
(1) Relates primarily to the lower tax rates on the income or loss attributable to international operations.
(2)
In 2018, relates primarily to transaction costs incurred in connection with the Cabot Transaction. In 2017, relates primarily to certain costs related to
the withdrawn IPO costs that are disallowed for U.K. tax purposes.
(3) Represents a provision for nondeductible items, including nondeductible interest in a foreign subsidiary and certain foreign income taxable in the U.S.
under Internal Revenue Code Section 951 (Subpart F) in 2017, and an overall foreign loss in 2016.
(4) Valuation allowance recorded as a result of certain foreign subsidiaries’ cumulative operating losses for tax purposes.
The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2026. The impact
of the tax holiday in Costa Rica for the year ended December 31, 2018 was immaterial.
The Company has not provided for applicable income or 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, 2018, was approximately $154.0 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 to
the complexities of a hypothetical calculation.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our
deferred tax assets and liabilities are as follows (in thousands):
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Table of Contents
Deferred tax assets:
Net operating losses
Accrued expenses
Differences in income recognition related to receivable portfolios
Other
Difference in basis of bond and loan costs
Prepaid expenses
Stock-based compensation expense
State taxes
Total deferred tax assets
Valuation allowance
Total deferred tax assets net of valuation allowance
Deferred tax liabilities:
Deferred court costs
Other
Difference in basis of depreciable and amortizable assets
State taxes
Total deferred tax liabilities
Net deferred tax asset(1)
________________________
$
December 31,
2018
December 31,
2017
$
42,013
$
17,715
13,857
4,825
3,728
2,949
2,796
174
88,057
(46,516)
41,541
(23,484)
(3,403)
(1,937)
—
(28,824)
12,717
$
46,615
14,708
20,612
522
7,878
—
4,777
—
95,112
(34,642)
60,470
(20,207)
(9,144)
(20,632)
(1,237)
(51,220)
9,250
(1) The Company operates in multiple jurisdictions. In accordance with authoritative guidance relating to income taxes, deferred tax assets and liabilities
are netted for each tax-paying component of the Company within a particular tax jurisdiction and presented as a single amount in the statement of
financial condition.
As of December 31, 2018, certain of the Company's foreign subsidiaries have net operating loss carry forwards of
approximately $214.9 million, which will begin to expire in 2025. Certain of the Company's domestic subsidiaries have state
net operating losses of approximately $9.6 million, which will generally begin to expire in 2020.
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. As of December 31, 2018, valuation allowances increased to $46.5
million, as compared to $34.6 million as of December 31, 2017. The increase was primarily related to the recording of
valuation allowance at certain of the Company’s foreign subsidiaries that have cumulative operating losses. At this time, the
Company does not have enough positive evidence to support the fact that the net operating loss carryforwards at these
jurisdictions can be realized, therefore, the Company has recorded valuation allowances against the current and previously
established deferred tax assets.
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Table of Contents
A reconciliation of the beginning and ending amounts of unrecognized tax benefit is as follows (in thousands):
Balance at December 31, 2015
Decreases related to prior year tax positions
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, 2016
Increases related to current year tax positions
Decreases related to settlements with taxing authorities
Decreases related to current year tax positions
Balance at December 31, 2017
Increases related to prior year tax positions
Increases related to current year tax positions
Decrease related to expiration of statute of limitations
Decreases related to settlements with taxing authorities
Balance at December 31, 2018
Amount
47,949
(1,657)
2,505
1,259
(31,111)
18,945
5,902
(228)
(4,599)
20,020
256
1,958
(3,221)
(461)
18,552
$
$
The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $19.9 million, $22.2 million and
$21.2 million at December 31, 2018, 2017, and 2016 respectively. At December 31, 2018, 2017 and 2016, there was $13.0
million, $9.9 million and $7.1 million, respectively, of unrecognized tax benefit that if recognized, would result in a net tax
benefit. During the year ended December 31, 2018, the decrease in the Company's gross unrecognized tax benefit was primarily
related to expiration of state statute of limitations. During the year ended December 31, 2017, the increase in the Company's
gross unrecognized tax benefit was primarily related to prepaid services to be performed within three and a half months of
December 31, 2017. During the year ended December 31, 2016, the decrease in the Company's gross unrecognized tax benefit
was primarily related to a settlement with tax authorities for unrecognized tax benefits associated with amortization of
receivable portfolios. The uncertain tax benefit is recorded as “Other liabilities” in the Company's consolidated statements of
financial condition.
The Company believes that an adequate provision has been made for any adjustments that may result from tax
examinations. However, it is reasonably possible that certain changes may occur within the next 12 months, which could
significantly increase or decrease the balance of the Company’s gross unrecognized tax benefits.
The Company recognizes interest and penalties related to unrecognized tax benefits in its tax expense. The Company
recognized expense of approximately $0.6 million, $0.8 million and $0.5 million in interest and penalties during the years
ended December 31, 2018, 2017 and 2016, respectively. Interest and penalties accrued as of December 31, 2018 and 2017 were
$1.4 million and $2.2 million, respectively.
The Company files federal, state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. For
U.S. federal and state tax returns, the Company is no longer subject to tax examinations for years prior to 2014. For non-U.S.
tax returns, the Company is generally not subject to tax examinations for years prior to 2012. The Company is subject to the
examination of its income tax returns by the IRS and other tax authorities, and the timing of the resolution of income tax
examinations cannot be predicted with certainty. The Company's management regularly assesses the likelihood of adverse
outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If any
issues addressed in the Company’s tax examinations are resolved in a manner not consistent with management's expectations,
the Company could be required to adjust its provision for income taxes in the period such resolution occurs.
During the first quarter of 2019, the Company received approval from the IRS for a tax accounting method change related
to revenue reporting. The revised tax accounting method will more closely align with the current book accounting method for
revenue reporting. Upon completion of standard IRS audit procedures, the Company estimates the impact of the revised tax
method may be material and expects to record a one-time tax provision benefit during 2019.
Note 13: Commitments and Contingencies
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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. 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. The Company’s legal costs are recorded to expense as incurred.
As of December 31, 2018, the Company has no material reserves for legal matters.
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 $25.2 million, $21.3 million, and $20.3
million during the years ended December 31, 2018, 2017, and 2016, 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):
2019
2020
2021
2022
2023
Thereafter
Total minimal leases payments
Less: Interest
Present value of minimal lease payments
Purchase Commitments
Capital
Leases
Operating
Leases
Total
$
$
$
$
2,507
1,983
1,844
1,630
204
—
8,168
(605)
7,563
16,538
13,850
13,044
11,737
9,741
37,997
102,907
$
$
19,045
15,833
14,888
13,367
9,945
37,997
111,075
In the normal course of business, the Company enters into forward flow purchase agreements and other purchase
commitment agreements. As of December 31, 2018, the Company had entered into agreements to purchase receivable
portfolios with a face value of approximately $2,894.9 million for a purchase price of approximately $400.8 million. Most
purchase commitments do not extend 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
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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, 2018, 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’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. Prior to the first quarter 2016 the Company had determined that it had two reportable segments: portfolio
purchasing and recovery and tax lien business. On March 31, 2016, the Company completed the divestiture of its membership
interests in Propel, which comprised the entire tax lien business segment. Propel’s operations are presented as discontinued
operations in the Company’s consolidated statements of operations. Beginning in the first quarter 2016, the Company
determined it has several operating segments that meet the aggregation criteria, and therefore, it has one reportable segment,
portfolio purchasing and recovery, based on similarities among the operating units including economic characteristics, the
nature of the services, the nature of the production process, customer types for their services, the methods used to provide their
services and the nature of the regulatory environment.
The following tables present information about geographic areas in which the Company operates (in thousands):
Revenues(1):
United States
International
Europe(2)
Other geographies
Total
________________________
Year Ended December 31,
2018
2017
2016
$
$
709,493
$
665,564
$
669,636
556,265
96,272
1,362,030
$
427,655
93,819
1,187,038
$
270,411
89,211
1,029,258
(1) Revenues are attributed to countries based on location of customer.
(2) Based on the financial information that is used to produce the general-purpose financial statements, providing further geographic information is
impracticable.
Long-lived assets(1):
United States
International
United Kingdom
Other foreign countries
Total
________________________
(1) Long-lived assets consist of property and equipment, net.
Note 15: Goodwill and Identifiable Intangible Assets
December 31,
2018
December 31,
2017
$
$
76,791
$
40,550
27,454
11,273
38,727
115,518
$
25,287
10,439
35,726
76,276
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 performs its annual goodwill impairment assessment
as of October 1. As of October 1, 2018, the Company had four reporting units that carried goodwill.
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,
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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 most of the Company’s
reporting units where the Company has access to reliable market participant data, the market approach is conducted in addition
to the income approach in determining the 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 or the earnings before interest, tax, depreciation and amortization
(“EBITDA”) for each of the selected guideline companies, which enables a direct comparison between the reporting unit and
the selected peer group. The Company leveraged the most recent transaction data combined with qualitative and quantitative
assessments for the goodwill impairment testing at its Cabot reporting unit. 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.
According to authoritative guidance, if the carrying amount of a reporting unit is zero or negative, the traditional step two
of the impairment test should be performed to measure the amount of impairment loss, if any, when it is more likely than not
that a goodwill impairment exists. In considering whether it is more likely than not that a goodwill impairment exists, an entity
can perform a step zero qualitative analysis. The Company conducted a qualitative analysis for its reporting unit with negative
carrying value and concluded that there was no indication that goodwill impairment existed.
Based on the annual goodwill impairment tests performed at October 1, 2018, no impairment existed at any of the
Company’s reporting units. In December 2018, the Company completed the sale of all our interests in Refinancia S.A. and its
subsidiaries (collectively, “Refinancia”) to the existing minority shareholders of Refinancia. As a result, the Company no longer
consolidates Refinancia and the goodwill carried at Refinancia was eliminated from the Company’s consolidated statements of
financial position.
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.
The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment. The
following table summarizes the activity in the Company’s goodwill balance, as follows (in thousands):
Balance, Balance at beginning of period:
Goodwill acquired
Goodwill adjustment
Goodwill eliminated in connection with divestiture
Effect of foreign currency translation
Balance at end of period:
2018
2017
$
$
928,993
$
—
(2,213)
(13,347)
(45,307)
868,126
$
785,032
79,372
—
—
64,589
928,993
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The Company’s acquired intangible assets are summarized as follows (in thousands):
Customer relationships
Developed technologies
Trade name and other
Total intangible assets
As of December 31, 2018
As of December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
$
73,458
$
(17,025) $
56,433
$
73,875
$
7,461
8,346
(6,446)
(5,213)
1,015
3,133
6,683
14,413
89,265
$
(28,684) $
60,581
$
94,971
$
(6,800) $
(5,411)
(7,024)
(19,235) $
67,075
1,272
7,389
75,736
The weighted-average useful lives of intangible assets at the time of acquisition were as follows:
Customer relationships
Developed technologies
Trade name and other
Weighted-Average
Useful Lives
10
6
8
The amortization expense for intangible assets subject to amortization was $11.7 million, $8.9 million, and $7.2 million
for the years ended December 31, 2018, 2017, and 2016, respectively. Estimated future amortization expense related to finite-
lived intangible assets at December 31, 2018 is as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
8,501
8,434
8,110
7,554
7,293
20,689
60,581
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Note 16: Quarterly Information (Unaudited)
The following table summarizes quarterly financial data for the periods presented (in thousands, except per share
amounts):
2018
Gross collections
Total revenues, adjusted by net allowance reversals
(allowances)
Total operating expenses
Income from continuing operations
Net income
Amounts attributable to Encore Capital Group,
Inc.:
Income from continuing operations
Net income attributable to Encore Capital Group,
Inc. stockholders
Earnings per share attributable to Encore Capital
Group, Inc.:
From continuing operations:
Basic
Diluted
From net income:
Basic
Diluted
2017
Gross collections
Total revenues, adjusted by net allowance reversals
(allowances)
Total operating expenses
Income (loss) from continuing operations
Net income (loss)
Amounts attributable to Encore Capital Group,
Inc.:
Income (loss) from continuing operations
Net income (loss)
Earnings (loss) 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
$
489,102
$
496,093
$
498,843
$
483,582
326,788
238,336
23,713
23,713
21,827
21,827
349,747
246,314
26,974
26,974
26,298
26,298
336,774
239,246
13,016
13,016
20,725
20,725
$
$
0.84
0.83
0.84
0.83
$
$
1.01
1.00
1.01
1.00
$
$
0.69
0.69
0.69
0.69
348,721
232,834
46,033
46,033
47,036
47,036
1.51
1.50
1.51
1.50
440,863
$
446,182
$
442,996
$
437,603
271,941
196,100
15,178
14,979
22,297
22,098
290,917
210,323
19,076
19,076
20,255
20,255
306,699
202,829
42,144
42,144
28,194
28,194
$
$
0.86
0.85
0.85
0.85
$
$
0.78
0.77
0.78
0.77
$
$
1.08
1.05
1.08
1.05
317,481
253,246
2,779
2,779
12,681
12,681
0.49
0.48
0.49
0.48
$
$
$
$
$
F-40