Notes to Condensed Consolidated Financial Statements (Unaudited)
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, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings.
Financial Statement Preparation and Presentation
The accompanying interim condensed consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position, results of operations, and cash flows. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. Actual results could materially differ from those estimates.
Basis of Consolidation
The condensed consolidated financial statements have been prepared in conformity with GAAP, and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates VIEs, for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (b) either the obligation to absorb losses or the right to receive benefits. Refer to Note
10
, “Variable Interest Entities,” for further details. All intercompany transactions and balances have been eliminated in consolidation.
Translation of Foreign Currencies
The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments and recorded within other comprehensive income or loss. Transaction gains and losses are included in other income or expense.
Reclassifications
Certain immaterial reclassifications have been made to the condensed consolidated financial statements to conform to the current year’s presentation. For the
three and nine months ended
September 30, 2016
, the Company revised its statements of comprehensive income. The comprehensive loss attributable to Encore increased by
$0.1 million
for the three months ended September 30, 2017 and comprehensive income attributable to Encore increased
$0.8 million
for the nine months ended
September 30, 2016
. This revision was not material. There were no revisions to the statements of financial condition, operations or cash flows.
Change in Accounting Principle
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. Upon adoption of this standard, excess tax benefits and tax deficiencies will be recognized as income tax expense, and the tax effects of exercised or vested awards will be treated as discrete items in the period in which they occur. As such, implementation of this standard could create volatility in an entity’s effective income tax rate on a quarter by quarter basis. The volatility in the effective income tax rate is due primarily to fluctuations in the stock price and the timing of stock option exercises and vesting of restricted share grants. The standard also requires excess tax benefits to be presented as an operating activity on the statement of cash flows rather than as a financing activity. An entity may elect to apply the change in presentation in the statement of cash flows either prospectively or retrospectively to all periods presented. Further, the amendments allow an entity to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings.
ASU 2016-09 became effective for the Company on January 1, 2017. The Company applied the change in presentation to the statement of cash flows retrospectively for all periods presented after adoption date. The Company believes that the new standard may cause volatility in its effective tax rates and earnings per share due to the tax effects related to share-based payments being recorded to the income statement. The volatility in future periods will depend on the Company’s stock price at the awards’ vest dates and the number of awards that vest in each period. The Company will not elect an accounting policy change to record forfeitures as they occur and will continue to estimate forfeitures at each period.
Recent Accounting Pronouncements
Other than the adoption of ASU 2016-09 as discussed in the “Change in Accounting Principle” section above, there have been no new accounting pronouncements made effective during the
nine months ended
September 30, 2017
that have significance, or potential significance, to the Company’s consolidated financial statements.
Recent Accounting Pronouncements Not Yet Effective
In August 2017, the FASB issued ASU No. 2017-12,
Targeted Improvements to Accounting for Hedging Activities
—
Derivatives and He
dging (Topic 815) (“ASU 2017-12”) which amends the hedge accounting recognition and presentation requirements in ASC 815. ASU 2017-12 improves Topic 815 Derivatives and Hedging 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, the ASU 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. The ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company is evaluating the impact of adopting this guidance on its consolidated financial statements as well as whether to adopt the new guidance early.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718) (“ASU 2017-09”). ASU 2017-09 provides clarity in order to reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company does not anticipate that the adoption of ASU 2017-09 will have a material impact on its consolidated financial statements and related disclosures.
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. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact of adopting this guidance on its consolidated financial statements as well as whether to adopt the new guidance early.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is evaluating the impact of adopting this guidance on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The FASB issued ASU 2016-15 to decrease the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update provide guidance on eight specific cash flow issues. ASU 2016-15 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements as well as whether to adopt the new guidance early.
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 Accounting Standards Codification (“ASC”) 310-30, which provides authoritative guidance for the accounting of the Company’s investment in receivable portfolios. Under this new standard, entities will gross up the initial amortized cost for the purchased financial assets with credit deterioration (“PCD assets”), the initial amortized cost will be the sum of (1) the purchase price and (2) the estimate of credit losses as of the date of acquisition. After initial recognition of PCD assets and the related allowance, any change in estimated cash flows (favorable or unfavorable) will be immediately recognized in the income statement because the yield on PCD assets would be locked. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 with early adoption permitted for reporting periods beginning after December 15, 2018. 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 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 PCD assets. A prospective transition approach should be used for PCD assets where upon adoption, the amortized cost basis should be adjusted to reflect the addition of the allowance for credit losses. This transition relief will avoid the need for a reporting entity to reassess its purchased financial assets that exist as of the date of adoption to determine whether they would have met at acquisition the new criteria of more-than insignificant credit deterioration since origination. The transition relief also will allow an entity to accrete the remaining noncredit discount (based on the revised amortized cost basis) into interest income at the effective interest rate at the adoption date of ASU 2016-13. The same transition requirements should be applied to beneficial interests that previously applied Subtopic 310-30 or have a significant difference between contractual cash flows and expected cash flows. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements as well as whether to adopt the new guidance early.
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 all 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. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements as well as whether to adopt the new guidance early.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. 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. In applying ASU 2014-09, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s ASC. ASU 2014-09 is effective for annual reporting periods (including interim periods within that reporting period) beginning after December 15, 2016 and shall be applied using either a full retrospective or modified retrospective approach. Early application is not permitted. In August 2015, FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all public companies for all annual periods beginning after December 15, 2017 with early adoption permitted only as of annual reporting periods beginning after December 31, 2016, including interim periods within the reporting period. In March 2016, the FASB issued ASU 2016-08 as an amendment to ASU 2014-09, which clarifies how to identify the unit of accounting for the principal versus agent evaluation, how to apply the control principle to certain types of arrangements, such as service transactions, and reframed the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent. The Company is evaluating the potential impacts of Topic 606 on its existing revenue recognition policies and procedures. 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. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial statements. The Company plans to adopt Topic 606 under the modified retrospective approach.
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.
Note
2
: Discontinued Operations
On March 31, 2016, the Company completed its previously announced divestiture of its membership interests in Propel Acquisition LLC (“Propel”) pursuant to the Securities Purchase Agreement (the “Purchase Agreement”), dated February 19, 2016, among the Company and certain funds affiliated with Prophet Capital Asset Management LP. Pursuant to the Purchase Agreement, the application of the purchase price formula resulted in cash consideration paid to the Company at closing of
$144.4 million
(net proceeds were
$106.0 million
after divestiture of
$38.4 million
in cash), subject to customary post-closing adjustments. The purchase price was finalized in the first quarter of 2017.
During the three months ended March 31, 2016, the Company recognized a loss of
$3.0 million
related to the sale of Propel, this loss was reduced to
$2.0 million
based on the adjustments recorded in the fourth quarter of 2016 and the first quarter of 2017. Propel represented the Company’s entire tax lien business reportable segment. Propel’s operations are presented as discontinued operations in the Company’s condensed consolidated statements of operations. Certain immaterial costs that may be eliminated as a result of the sale remained in continuing operations.
The following table presents the results of the discontinued operations during the periods presented (
in thousands
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,950
|
|
Salaries and employee benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,860
|
)
|
Other operating expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,473
|
)
|
General and administrative expenses
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,551
|
)
|
Depreciation and amortization
|
—
|
|
|
—
|
|
|
—
|
|
|
(127
|
)
|
Loss from discontinued operations, before income taxes
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,061
|
)
|
Loss on sale of discontinued operations, before income taxes
|
—
|
|
|
—
|
|
|
(322
|
)
|
|
(3,000
|
)
|
Total loss on discontinued operations, before income taxes
|
—
|
|
|
—
|
|
|
(322
|
)
|
|
(4,061
|
)
|
Income tax benefit
|
—
|
|
|
—
|
|
|
123
|
|
|
879
|
|
Total loss from discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(199
|
)
|
|
$
|
(3,182
|
)
|
Note
3
: Earnings Per Share
Basic earnings or loss per share is calculated by dividing net earnings or loss 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. In computing the diluted net loss per share for the three months ended September 30, 2016, dilutive potential common shares are excluded from the diluted loss per share calculation because of their anti-dilutive effect.
A reconciliation of shares used in calculating earnings per basic and diluted shares follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Weighted average common shares outstanding—basic
|
26,011
|
|
|
25,777
|
|
|
25,957
|
|
|
25,690
|
|
Dilutive effect of stock-based awards
|
271
|
|
|
—
|
|
|
214
|
|
|
195
|
|
Dilutive effect of convertible senior notes
|
454
|
|
|
—
|
|
|
235
|
|
|
—
|
|
Weighted average common shares outstanding—diluted
|
26,736
|
|
|
25,777
|
|
|
26,406
|
|
|
25,885
|
|
Anti-dilutive employee stock options outstanding were approximately
13,000
and
138,000
during the
three and nine months ended
September 30, 2017
. Anti-dilutive employee stock options outstanding were approximately
4,000
and
3,000
during the
three and nine months ended
September 30, 2016
.
Note
4
: Fair Value Measurements
The authoritative guidance for fair value measurements defines fair value as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (
i.e.,
the “exit price”). The guidance utilizes a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
|
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
•
|
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)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
September 30, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
$
|
—
|
|
|
$
|
2,097
|
|
|
$
|
—
|
|
|
$
|
2,097
|
|
Interest rate cap contracts
|
—
|
|
|
2,724
|
|
|
—
|
|
|
2,724
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
—
|
|
|
(2,248
|
)
|
|
—
|
|
|
(2,248
|
)
|
Interest rate swap agreements
|
—
|
|
|
(40
|
)
|
|
—
|
|
|
(40
|
)
|
Contingent consideration
|
—
|
|
|
—
|
|
|
(10,382
|
)
|
|
(10,382
|
)
|
Temporary Equity
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
—
|
|
|
—
|
|
|
(160,663
|
)
|
|
(160,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
$
|
—
|
|
|
$
|
1,122
|
|
|
$
|
—
|
|
|
$
|
1,122
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
—
|
|
|
(1,360
|
)
|
|
—
|
|
|
(1,360
|
)
|
Interest rate swap agreements
|
—
|
|
|
(131
|
)
|
|
—
|
|
|
(131
|
)
|
Contingent consideration
|
—
|
|
|
—
|
|
|
(2,531
|
)
|
|
(2,531
|
)
|
Temporary Equity
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
—
|
|
|
—
|
|
|
(45,755
|
)
|
|
(45,755
|
)
|
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. During the three months ended June 30, 2017, the Company recorded additional contingent consideration of approximately
$10.5 million
resulting from Cabot’s acquisition of a debt solution service provider in the United Kingdom. Additionally, the Company reviewed the earn-out analysis for one of its previously acquired entities and determined that, based on actual and forecasted operating performance, there would be no future earn-out payment to the sellers, as a result, the entire liability for the contingent consideration of
$2.8 million
relating to the acquisition of that entity was reversed and recorded as a reduction of general and administrative expenses in the Company’s consolidated statements of operations for the three months ended June 30, 2017. As of
September 30, 2017
, the aggregated fair value of the contingent consideration was approximately
$10.4 million
.
The following table provides a roll forward of the fair value of contingent consideration for the periods ended
September 30, 2017
and
December 31, 2016
(in thousands)
:
|
|
|
|
|
|
Amount
|
Balance at December 31, 2015
|
$
|
10,403
|
|
Change in fair value of contingent consideration
|
(7,602
|
)
|
Effect of foreign currency translation
|
(270
|
)
|
Balance at December 31, 2016
|
2,531
|
|
Issuance of contingent consideration in connection with acquisition
|
10,544
|
|
Change in fair value of contingent consideration
|
(2,392
|
)
|
Payment of contingent consideration
|
(781
|
)
|
Effect of foreign currency translation
|
480
|
|
Balance at September 30, 2017
|
$
|
10,382
|
|
Redeemable Noncontrolling Interest:
Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value and, in some cases, to force a sale of the subsidiary if the Company chooses not to purchase their interests at fair value. The noncontrolling interest subject to these arrangements is 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.
The components of the change in the redeemable noncontrolling interest for the periods ended
September 30, 2017
and
December 31, 2016
are presented in the following table
(in thousands)
:
|
|
|
|
|
|
Amount
|
Balance at December 31, 2015
|
$
|
38,624
|
|
Addition to redeemable noncontrolling interest
|
826
|
|
Redemption of redeemable noncontrolling interest
|
(3,562
|
)
|
Net loss attributable to redeemable noncontrolling interest
|
(47,831
|
)
|
Adjustment of the redeemable noncontrolling interest to fair value
|
74,194
|
|
Effect of foreign currency translation attributable to redeemable noncontrolling interest
|
(16,496
|
)
|
Balance at December 31, 2016
|
45,755
|
|
Addition to redeemable noncontrolling interest
|
277
|
|
Net income attributable to redeemable noncontrolling interest
|
3,238
|
|
Adjustment of the redeemable noncontrolling interest to fair value
|
107,959
|
|
Effect of foreign currency translation attributable to redeemable noncontrolling interest
|
3,434
|
|
Balance at September 30, 2017
|
$
|
160,663
|
|
Financial Instruments Not Required To Be Carried At Fair Value
Investment in Receivable Portfolios:
The Company records its investment in receivable portfolios at cost, which represents a significant discount from the contractual receivable balances due. The Company computes the fair value of its investment in receivable portfolios using Level 3 inputs by discounting the estimated future cash flows generated by its proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. In accordance with authoritative guidance related to fair value measurements, the Company estimates the average cost to collect and discount rates based on its estimate of what a market participant might use in valuing these portfolios. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.
In the Company’s current analysis, the fair value of investment in receivable portfolios was approximately
$2,860.5 million
and
$2,446.6 million
as of
September 30, 2017
and
December 31, 2016
, respectively, as compared to the carrying value of
$2,728.8 million
and
$2,382.8 million
as of
September 30, 2017
and
December 31, 2016
, respectively. A
100 basis point
fluctuation in the cost to collect and discount rate used would result in an increase or decrease in the fair value of U.S. and European portfolios by approximately
$53.8 million
and
$71.3 million
, respectively, as of
September 30, 2017
. This fair value calculation does not represent, and should not be construed to represent, the underlying value of the Company or the amount that 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 approximates fair value.
Debt:
The majority of Encore and its subsidiaries’ borrowings are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value. These borrowings include Encore’s senior secured notes and borrowings under its revolving credit and term loan facilities, Cabot’s senior secured notes and borrowings under its revolving credit facility, and other borrowing under term and revolving credit facilities at certain of the Company’s subsidiaries.
Encore’s convertible senior notes are carried at historical cost, adjusted for the debt discount. The carrying value of the convertible senior notes was
$513.3 million
and
$416.5 million
as of
September 30, 2017
and
December 31, 2016
, respectively.
The fair value estimate for these convertible senior notes, which incorporates quoted market prices using Level 2 inputs, was approximately
$619.9 million
and
$431.7 million
as of
September 30, 2017
and
December 31, 2016
, respectively.
Cabot’s senior secured notes are carried at historical cost, adjusted for debt discount and debt premium. The carrying value of Cabot’s senior secured notes was
$1.2 billion
and
$1.3 billion
, as of
September 30, 2017
and
December 31, 2016
, respectively. The fair value estimate for these senior notes, which incorporates quoted market prices using Level 2 inputs, was
$1.3 billion
and
$1.3 billion
as of
September 30, 2017
and
December 31, 2016
, respectively.
The Company’s preferred equity certificates are legal obligations to the noncontrolling shareholders of certain subsidiaries. They are carried at the face amount, plus any accrued interest. The Company determined that the carrying value of these preferred equity certificates approximated fair value as of
September 30, 2017
and
December 31, 2016
.
Note
5
: 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 condensed consolidated statements of financial condition
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Balance Sheet
Location
|
|
Fair Value
|
|
Balance Sheet
Location
|
|
Fair Value
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
Other assets
|
|
$
|
1,840
|
|
|
Other assets
|
|
$
|
707
|
|
Foreign currency exchange contracts
|
Other liabilities
|
|
—
|
|
|
Other liabilities
|
|
(51
|
)
|
Interest rate swap agreements
|
Other liabilities
|
|
(40
|
)
|
|
Other liabilities
|
|
(131
|
)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
Foreign currency exchange contracts
|
Other assets
|
|
257
|
|
|
Other assets
|
|
415
|
|
Foreign currency exchange contracts
|
Other liabilities
|
|
(2,248
|
)
|
|
Other liabilities
|
|
(1,309
|
)
|
Interest rate cap contracts
|
Other assets
|
|
2,724
|
|
|
Other assets
|
|
—
|
|
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 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 the Company’s earnings. If all or a portion of the forecasted transaction is cancelled, this would render all or a portion of the cash flow hedge ineffective and the Company would reclassify the ineffective portion of the hedge into earnings. The Company generally does not experience ineffectiveness of the hedge relationship and the accompanying consolidated financial statements do not include any such gains or losses.
As of
September 30, 2017
, the total notional amount of the forward contracts that are designated as cash flow hedging instruments was
$16.8 million
. All of these outstanding contracts qualified for hedge accounting treatment. The Company estimates that approximately
$1.8 million
of net derivative gain included in OCI will be reclassified into earnings within the next 12 months.
No
gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the
nine months ended
September 30, 2017
and
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. As of
September 30, 2017
, the Company had
t
wo
interest rate swap agreements outstanding with a total notional amount of
$30.0 million
Australian dollars (approximately
$23.5 million
U.S. dollars). These interest rate swap instruments are designated as cash flow hedges and accounted for using hedge accounting.
The following table summarizes the effects of derivatives in cash flow hedging relationships designated as hedging instruments on the Company’s condensed consolidated statements of operations for the
three and nine months ended
September 30, 2017
and
2016
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Hedging Instruments
|
|
Gain or (Loss)
Recognized in OCI-
Effective Portion
|
|
Location of Gain
or (Loss)
Reclassified from
OCI into
Income - Effective
Portion
|
|
Gain or (Loss)
Reclassified
from OCI into
Income - Effective
Portion
|
|
Location of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
|
|
Amount of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
|
|
Three Months Ended
September 30,
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
Three Months Ended
September 30,
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
Foreign currency exchange contracts
|
|
$
|
(27
|
)
|
|
$
|
989
|
|
|
Salaries and
employee
benefits
|
|
$
|
286
|
|
|
$
|
151
|
|
|
Other (expense)
income
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency exchange contracts
|
|
70
|
|
|
171
|
|
|
General and
administrative
expenses
|
|
35
|
|
|
26
|
|
|
Other (expense)
income
|
|
—
|
|
|
—
|
|
Interest rate swap agreements
|
|
10
|
|
|
—
|
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
Other (expense)
income
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Hedging Instruments
|
|
Gain or (Loss)
Recognized in OCI-
Effective Portion
|
|
Location of Gain
or (Loss)
Reclassified from
OCI into
Income - Effective
Portion
|
|
Gain or (Loss)
Reclassified
from OCI into
Income - Effective
Portion
|
|
Location of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
|
|
Amount of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
|
|
Nine Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
Foreign currency exchange contracts
|
|
$
|
1,708
|
|
|
$
|
1,284
|
|
|
Salaries and
employee
benefits
|
|
$
|
758
|
|
|
$
|
683
|
|
|
Other (expense)
income
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency exchange contracts
|
|
310
|
|
|
(19
|
)
|
|
General and
administrative
expenses
|
|
76
|
|
|
95
|
|
|
Other (expense)
income
|
|
—
|
|
|
—
|
|
Interest rate swap agreements
|
|
29
|
|
|
—
|
|
|
Interest expense
|
|
110
|
|
|
—
|
|
|
Other (expense)
income
|
|
—
|
|
|
—
|
|
Derivatives Not Designated as Hedging Instruments
In 2016, Encore and its Cabot subsidiary 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 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. The Company’s Cabot subsidiary also holds interest rate cap contracts with an aggregate notional amount of
£260.0 million
(approximately
$348.3 million
) that are used to manage its risk related to interest rate fluctuations. The Company does not apply hedge accounting on the interest rate cap contracts.
The following table summarizes the effects of derivatives in cash flow hedging relationships not designated as hedging instruments on the Company’s condensed consolidated statements of operations for the
three and nine months ended
September 30, 2017
and
2016
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments
|
|
Location of Gain or (Loss) Recognized in income on Derivative
|
|
Amount of Gain or (Loss) Recognized in Income on Derivative
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Foreign currency exchange contracts
|
|
Other income (expense)
|
|
$
|
(833
|
)
|
|
$
|
3,330
|
|
|
$
|
1,790
|
|
|
$
|
10,706
|
|
Interest rate cap contracts
|
|
Interest expense
|
|
919
|
|
|
—
|
|
|
919
|
|
|
—
|
|
Interest rate swap agreements
|
|
Interest expense
|
|
—
|
|
|
39
|
|
|
110
|
|
|
83
|
|
Note
6
: 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 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 operations 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 utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. During the quarter ended September 30, 2016, the Company revised the forecasting methodology it uses to value and calculate IRRs on certain portfolios in Europe by extending the collection forecast from
120
months to
180
months. This change was made as a result of (1) the Company having observed that older portfolios in Europe have consistently experienced cash collections beyond
120
months, (2) an expectation that regulatory changes in the United Kingdom resulting in a reduction in the number of highly discounted near term one-time settlements, an increase in the number of payment plans, and an increase in the length of existing payment plans will cause a lengthening of the collections curve, (3) an expectation that, as a result of a higher percentage of semi-performing account purchases in the United Kingdom in recent years, newer vintages will have a larger percentage of collections after
120
months and (4) the Company’s increased confidence in its ability to forecast future cash collections to
180
months. The increase in the collection forecast from
120
months to
180
months was applied effective July 1, 2016 to certain portfolios in Europe for which the Company could accurately forecast through such term. These changes in forecasted future cash flows resulted in an increase in the aggregate total estimated remaining collections for the receivable portfolios of approximately
$296.5 million
as of September 30, 2016. In addition, during the three months ended September 30, 2016, the Company recorded allowance charges of approximately
$94.0 million
resulting from delays or shortfalls in near term collections against the forecasts for certain pools in Europe. Subsequent to the recording of the allowance charges for certain pools in Europe, the Company has experienced sustained improvements in collections resulting primarily from its liquidation improvement initiatives. As a result, during the three and nine months ended September 30, 2017, the Company reversed
approximately
$28.0 million
and
$35.8 million
, respectively of the previously recorded allowance charges for certain pool groups in Europe and raised IRRs for certain other pool groups in Europe.
Additionally, during the three months ended September 30, 2017, the Company recorded an allowance charge of
$10.2 million
on two pool groups in the United States that were heavily concentrated in Puerto Rico for which collections have been impacted as a result of hurricanes.
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)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable
Yield
|
|
Estimate of
Zero Basis
Cash Flows
|
|
Total
|
Balance at December 31, 2016
|
$
|
3,092,004
|
|
|
$
|
365,504
|
|
|
$
|
3,457,508
|
|
Revenue recognized, net
|
(211,718
|
)
|
|
(40,252
|
)
|
|
(251,970
|
)
|
(Reductions) additions on existing portfolios, net
|
(90,138
|
)
|
|
57,446
|
|
|
(32,692
|
)
|
Additions for current purchases, net
|
200,728
|
|
|
—
|
|
|
200,728
|
|
Effect of foreign currency translation
|
38,712
|
|
|
467
|
|
|
39,179
|
|
Balance at March 31, 2017
|
3,029,588
|
|
|
383,165
|
|
|
3,412,753
|
|
Revenue recognized, net
|
(231,431
|
)
|
|
(40,805
|
)
|
|
(272,236
|
)
|
Net additions on existing portfolios
|
225,021
|
|
|
9,888
|
|
|
234,909
|
|
Additions for current purchases, net
|
258,687
|
|
|
—
|
|
|
258,687
|
|
Effect of foreign currency translation
|
66,927
|
|
|
(753
|
)
|
|
66,174
|
|
Balance at June 30, 2017
|
3,348,792
|
|
|
351,495
|
|
|
3,700,287
|
|
Revenue recognized, net
|
(248,220
|
)
|
|
(35,368
|
)
|
|
(283,588
|
)
|
Net additions on existing portfolios
|
27,162
|
|
|
1,539
|
|
|
28,701
|
|
Additions for current purchases, net
|
336,725
|
|
|
—
|
|
|
336,725
|
|
Effect of foreign currency translation
|
56,971
|
|
|
375
|
|
|
57,346
|
|
Balance at September 30, 2017
|
$
|
3,521,430
|
|
|
$
|
318,041
|
|
|
$
|
3,839,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretable
Yield
|
|
Estimate of
Zero Basis
Cash Flows
|
|
Total
|
Balance at December 31, 2015
|
$
|
3,047,640
|
|
|
$
|
223,031
|
|
|
$
|
3,270,671
|
|
Revenue recognized, net
|
(238,547
|
)
|
|
(31,547
|
)
|
|
(270,094
|
)
|
Net additions on existing portfolios
|
39,538
|
|
|
8,071
|
|
|
47,609
|
|
Additions for current purchases, net
|
193,654
|
|
|
—
|
|
|
193,654
|
|
Effect of foreign currency translation
|
(64,330
|
)
|
|
470
|
|
|
(63,860
|
)
|
Balance at March 31, 2016
|
2,977,955
|
|
|
200,025
|
|
|
3,177,980
|
|
Revenue recognized, net
|
(233,714
|
)
|
|
(33,738
|
)
|
|
(267,452
|
)
|
Net additions on existing portfolios
|
59,459
|
|
|
95,135
|
|
|
154,594
|
|
Additions for current purchases, net
|
183,217
|
|
|
—
|
|
|
183,217
|
|
Effect of foreign currency translation
|
(181,223
|
)
|
|
245
|
|
|
(180,978
|
)
|
Balance at June 30, 2016
|
2,805,694
|
|
|
261,667
|
|
|
3,067,361
|
|
Revenue recognized, net
|
(119,543
|
)
|
|
(39,991
|
)
|
|
(159,534
|
)
|
Net additions on existing portfolios
|
299,212
|
|
|
22,862
|
|
|
322,074
|
|
Additions for current purchases, net
|
180,079
|
|
|
—
|
|
|
180,079
|
|
Effect of foreign currency translation
|
(75,402
|
)
|
|
135
|
|
|
(75,267
|
)
|
Balance at September 30, 2016
|
$
|
3,090,040
|
|
|
$
|
244,673
|
|
|
$
|
3,334,713
|
|
During the three months ended
September 30, 2017
, the Company purchased receivable portfolios with a face value of
$3.0 billion
for
$292.3 million
, or a purchase cost of
9.7%
of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended
September 30, 2017
amounted to
$630.6 million
. During the three months ended
September 30, 2016
, the Company purchased receivable portfolios with a face value of
$1.5 billion
for
$206.4 million
, or a purchase cost of
14.0%
of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended
September 30, 2016
amounted to
$386.5 million
.
During the
nine months ended
September 30, 2017
, the Company purchased receivable portfolios with a face value of
$7.1 billion
for
$757.5 million
, or a purchase cost of
10.6%
of face value. The estimated future collections at acquisition for all portfolios purchased during the
nine months ended
September 30, 2017
amounted to
$1,555.0 million
. During the
nine months ended
September 30, 2016
, the Company purchased receivable portfolios with a face value of
$7.9 billion
for
$696.2 million
, or a purchase cost of
8.9%
of face value. The estimated future collections at acquisition for all portfolios purchased during the
nine months ended
September 30, 2016
amounted to
$1,262.0 million
.
All collections realized after the net book value of a portfolio has been fully recovered (“Zero Basis Portfolios”) are recorded as revenue (“Zero Basis Revenue”). During the three months ended
September 30, 2017
and
2016
, Zero Basis Revenue was approximately
$35.4 million
and
$40.0 million
, respectively.
During the
nine months ended
September 30, 2017
and
2016
, Zero Basis Revenue was approximately
$116.4 million
and
$105.3 million
, respectively.
The following tables summarize the changes in the balance of the investment in receivable portfolios during the following periods (
in thousands, except percentages
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Accrual Basis
Portfolios
|
|
Cost Recovery
Portfolios
|
|
Zero Basis
Portfolios
|
|
Total
|
Balance, beginning of period
|
$
|
2,541,590
|
|
|
$
|
14,335
|
|
|
$
|
—
|
|
|
$
|
2,555,925
|
|
Purchases of receivable portfolios
|
292,332
|
|
|
—
|
|
|
—
|
|
|
292,332
|
|
Disposals or transfers to held for sale
|
(3,536
|
)
|
|
(265
|
)
|
|
—
|
|
|
(3,801
|
)
|
Gross collections
(1)
|
(407,435
|
)
|
|
(435
|
)
|
|
(35,126
|
)
|
|
(442,996
|
)
|
Put-backs and Recalls
(2)
|
(407
|
)
|
|
—
|
|
|
(242
|
)
|
|
(649
|
)
|
Foreign currency adjustments
|
44,366
|
|
|
46
|
|
|
—
|
|
|
44,412
|
|
Revenue recognized
|
230,403
|
|
|
—
|
|
|
33,621
|
|
|
264,024
|
|
Portfolio allowance reversals, net
|
17,817
|
|
|
—
|
|
|
1,747
|
|
|
19,564
|
|
Balance, end of period
|
$
|
2,715,130
|
|
|
$
|
13,681
|
|
|
$
|
—
|
|
|
$
|
2,728,811
|
|
Revenue as a percentage of collections
(3)
|
56.5
|
%
|
|
0.0
|
%
|
|
95.7
|
%
|
|
59.6
|
%
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Accrual Basis
Portfolios
|
|
Cost Recovery
Portfolios
|
|
Zero Basis
Portfolios
|
|
Total
|
Balance, beginning of period
|
$
|
2,465,967
|
|
|
$
|
3,626
|
|
|
$
|
—
|
|
|
$
|
2,469,593
|
|
Purchases of receivable portfolios
|
206,359
|
|
|
—
|
|
|
—
|
|
|
206,359
|
|
Gross collections
(1)
|
(366,321
|
)
|
|
(706
|
)
|
|
(39,934
|
)
|
|
(406,961
|
)
|
Put-backs and Recalls
(2)
|
(3,103
|
)
|
|
—
|
|
|
(57
|
)
|
|
(3,160
|
)
|
Foreign currency adjustments
|
(27,361
|
)
|
|
(173
|
)
|
|
—
|
|
|
(27,534
|
)
|
Revenue recognized
|
212,664
|
|
|
—
|
|
|
38,317
|
|
|
250,981
|
|
Portfolio (allowance) reversals, net
|
(93,121
|
)
|
|
—
|
|
|
1,674
|
|
|
(91,447
|
)
|
Balance, end of period
|
$
|
2,395,084
|
|
|
$
|
2,747
|
|
|
$
|
—
|
|
|
$
|
2,397,831
|
|
Revenue as a percentage of collections
(3)
|
58.1
|
%
|
|
0.0
|
%
|
|
96.0
|
%
|
|
61.7
|
%
|
________________________
|
|
(1)
|
Does not include amounts collected on behalf of others.
|
|
|
(2)
|
Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).
|
|
|
(3)
|
Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 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
|
756,305
|
|
|
1,169
|
|
|
—
|
|
|
757,474
|
|
Disposals or transfers to held for sale
|
(11,004
|
)
|
|
(265
|
)
|
|
—
|
|
|
(11,269
|
)
|
Gross collections
(1)
|
(1,212,357
|
)
|
|
(1,534
|
)
|
|
(116,150
|
)
|
|
(1,330,041
|
)
|
Put-backs and Recalls
(2)
|
(5,401
|
)
|
|
—
|
|
|
(275
|
)
|
|
(5,676
|
)
|
Foreign currency adjustments
|
127,852
|
|
|
(132
|
)
|
|
—
|
|
|
127,720
|
|
Revenue recognized
|
665,818
|
|
|
—
|
|
|
111,451
|
|
|
777,269
|
|
Portfolio allowance reversals, net
|
25,551
|
|
|
—
|
|
|
4,974
|
|
|
30,525
|
|
Balance, end of period
|
$
|
2,715,130
|
|
|
$
|
13,681
|
|
|
$
|
—
|
|
|
$
|
2,728,811
|
|
Revenue as a percentage of collections
(3)
|
54.9
|
%
|
|
0.0
|
%
|
|
96.0
|
%
|
|
58.4
|
%
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Accrual Basis
Portfolios
|
|
Cost Recovery
Portfolios
|
|
Zero Basis
Portfolios
|
|
Total
|
Balance, beginning of period
|
$
|
2,436,054
|
|
|
$
|
4,615
|
|
|
$
|
—
|
|
|
$
|
2,440,669
|
|
Purchases of receivable portfolios
|
696,228
|
|
|
—
|
|
|
—
|
|
|
696,228
|
|
Transfer of portfolios
|
(96
|
)
|
|
96
|
|
|
—
|
|
|
—
|
|
Gross collections
(1)
|
(1,181,546
|
)
|
|
(2,063
|
)
|
|
(105,257
|
)
|
|
(1,288,866
|
)
|
Put-backs and Recalls
(2)
|
(19,680
|
)
|
|
(11
|
)
|
|
(19
|
)
|
|
(19,710
|
)
|
Foreign currency adjustments
|
(127,680
|
)
|
|
110
|
|
|
—
|
|
|
(127,570
|
)
|
Revenue recognized
|
683,752
|
|
|
—
|
|
|
100,105
|
|
|
783,857
|
|
Portfolio (allowance) reversals, net
|
(91,948
|
)
|
|
—
|
|
|
5,171
|
|
|
(86,777
|
)
|
Balance, end of period
|
$
|
2,395,084
|
|
|
$
|
2,747
|
|
|
$
|
—
|
|
|
$
|
2,397,831
|
|
Revenue as a percentage of collections
(3)
|
57.9
|
%
|
|
0.0
|
%
|
|
95.1
|
%
|
|
60.8
|
%
|
________________________
|
|
(1)
|
Does not include amounts collected on behalf of others.
|
|
|
(2)
|
Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).
|
|
|
(3)
|
Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.
|
The following table summarizes the change in the valuation allowance for investment in receivable portfolios during the periods presented
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
130,675
|
|
|
$
|
55,918
|
|
|
$
|
137,037
|
|
|
$
|
60,588
|
|
Provision for portfolio allowances
|
10,181
|
|
|
94,011
|
|
|
10,863
|
|
|
94,011
|
|
Reversal of prior allowances
|
(29,745
|
)
|
|
(2,564
|
)
|
|
(41,388
|
)
|
|
(7,234
|
)
|
Effect of foreign currency translation
|
1,759
|
|
|
(2,890
|
)
|
|
6,358
|
|
|
(2,890
|
)
|
Balance at end of period
|
$
|
112,870
|
|
|
$
|
144,475
|
|
|
$
|
112,870
|
|
|
$
|
144,475
|
|
Note
7
: Deferred Court Costs, Net
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)
:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Court costs advanced
|
$
|
724,625
|
|
|
$
|
654,356
|
|
Court costs recovered
|
(292,454
|
)
|
|
(261,243
|
)
|
Court costs reserve
|
(354,810
|
)
|
|
(327,926
|
)
|
Deferred court costs
|
$
|
77,361
|
|
|
$
|
65,187
|
|
A roll forward of the Company’s court cost reserve is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Court Cost Reserve
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Balance at beginning of period
|
$
|
(345,971
|
)
|
|
$
|
(319,651
|
)
|
|
$
|
(327,926
|
)
|
|
$
|
(318,784
|
)
|
Provision for court costs
|
(19,767
|
)
|
|
(25,599
|
)
|
|
(60,031
|
)
|
|
(55,976
|
)
|
Net down of reserve after deferral period
|
12,419
|
|
|
12,955
|
|
|
36,992
|
|
|
40,028
|
|
Effect of foreign currency translation
|
(1,491
|
)
|
|
560
|
|
|
(3,845
|
)
|
|
2,997
|
|
Balance at end of period
|
$
|
(354,810
|
)
|
|
$
|
(331,735
|
)
|
|
$
|
(354,810
|
)
|
|
$
|
(331,735
|
)
|
Note
8
: Other Assets
Other assets consist of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Deferred tax assets
|
$
|
57,891
|
|
|
$
|
51,077
|
|
Identifiable intangible assets, net
|
29,267
|
|
|
28,243
|
|
Assets held for sale
|
27,575
|
|
|
21,147
|
|
Service fee receivables
|
26,144
|
|
|
15,156
|
|
Prepaid expenses
|
19,966
|
|
|
18,036
|
|
Other financial receivables
|
19,212
|
|
|
18,732
|
|
Derivative instruments
|
4,821
|
|
|
1,122
|
|
Security deposits
|
3,132
|
|
|
2,781
|
|
Receivable from seller
|
756
|
|
|
5,388
|
|
Other
|
66,229
|
|
|
53,765
|
|
Total
|
$
|
254,993
|
|
|
$
|
215,447
|
|
Note
9
: Debt
The Company is in compliance with all covenants under its financing arrangements as of
September 30, 2017
. The components of the Company’s consolidated debt and capital lease obligations were as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Encore revolving credit facility
|
$
|
149,563
|
|
|
$
|
578,000
|
|
Encore term loan facility
|
188,688
|
|
|
164,615
|
|
Encore senior secured notes
|
327,058
|
|
|
11,320
|
|
Encore convertible notes
|
548,500
|
|
|
448,500
|
|
Less: debt discount
|
(35,217
|
)
|
|
(31,968
|
)
|
Cabot senior secured notes
|
1,202,803
|
|
|
1,280,241
|
|
Add: debt premium
|
—
|
|
|
17,686
|
|
Less: debt discount
|
(2,033
|
)
|
|
(2,200
|
)
|
Cabot senior revolving credit facility
|
75,693
|
|
|
33,218
|
|
Cabot securitisation senior facility
|
349,288
|
|
|
—
|
|
Preferred equity certificates
|
244,422
|
|
|
205,975
|
|
Other credit facilities
|
68,854
|
|
|
74,551
|
|
Other
|
72,622
|
|
|
62,608
|
|
Capital lease obligations
|
3,148
|
|
|
5,091
|
|
|
3,193,389
|
|
|
2,847,637
|
|
Less: debt issuance costs, net of amortization
|
(44,892
|
)
|
|
(41,654
|
)
|
Total
|
$
|
3,148,497
|
|
|
$
|
2,805,983
|
|
Encore Revolving Credit Facility and Term Loan Facility
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”). The Restated Credit Agreement includes a revolving credit facility of
$826.7 million
(the “Revolving Credit Facility”), a term loan facility of
$191.5 million
(the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”), and an accordion feature that allows the Company to increase the Senior Secured Credit Facilities by an additional
$250.0 million
(approximately
$125.3 million
of which has been exercised).
Provisions of the Restated Credit Agreement include, but are not limited to:
|
|
•
|
Revolving Credit Facility commitments of (1)
$626.0 million
that expire in December 2021, (2)
$168.6 million
that expire in February 2019 and (3)
$32.1 million
that expire in November 2017, 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; 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
$170.1 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. As of September 26, 2017, the date of the last amendment to the Restated Credit Agreement, principal amortizes
$4.3 million
in 2017,
$8.6 million
in 2018, and
$12.9 million
in each of 2019, 2020 and 2021 with the remaining principal due at the end of the term;
|
|
|
•
|
A
$17.0 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. As of September 26, 2017, the date of the last amendment to the Restated Credit Agreement, principal amortizes
$1.1 million
in 2017 and
$2.2 million
in 2018 with the remaining principal due at the end of the term;
|
|
|
•
|
A
$4.5 million
term loan maturing in November 2017, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from
250
to
300
basis points, depending on the 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
$0.5 million
in 2017 with the remaining principal due at the end of the term;
|
|
|
•
|
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;
|
|
|
•
|
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
September 30, 2017
, the outstanding balance under the Revolving Credit Facility was
$149.6 million
, which bore a weighted average interest rate of
4.32%
and
3.58%
for the three months ended
September 30, 2017
and
2016
, respectively, and
3.99%
and
3.52%
for the
nine months ended
September 30, 2017
and
2016
, respectively. Available capacity under the Revolving Credit Facility, subject to borrowing base and applicable debt covenants, was
$382.0 million
as of
September 30, 2017
, not including the
$124.7 million
additional capacity provided by the facility’s remaining accordion feature. At
September 30, 2017
, the outstanding balance under the Term Loan Facility was
$188.7 million
.
Encore Senior Secured Notes
In 2010 and 2011 Encore entered into an aggregate of
$75.0 million
in senior secured notes with certain affiliates of Prudential Capital Group.
$25.0 million
of these senior secured notes bear an annual interest rate of
7.375%
(the “7.375% Senior Secured Notes”), mature in 2018 and require quarterly principal payments of
$1.25 million
. Prior to May 2013, these notes required quarterly payments of interest only.
$50.0 million
of the senior secured notes bear an annual interest rate of
7.75%
(the “7.75% Senior Secured Notes”), mature in 2017 and require quarterly principal payments of
$2.5 million
. Prior to December 2012 these notes required quarterly interest only payments. As of
September 30, 2017
,
$2.1 million
of the
7.375%
Senior Secured Notes remained outstanding and
none
of the
7.75%
Senior Secured Notes remained outstanding.
In August 2017, Encore entered into an additional
$325.0 million
in senior secured notes with a group of insurance companies (the “5.625% Senior Secured Notes,” and together with the
7.375%
Senior Secured Notes and the
7.75%
Senior Secured Notes, the “Senior Secured Notes”). The
5.625%
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
September 30, 2017
,
$325.0 million
of the
5.625%
Senior Secured Notes remained outstanding. As of
September 30, 2017
, in aggregate,
$327.1 million
of 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 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 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
In November and December 2012, Encore sold
$115.0 million
aggregate principal amount of
3.0%
2017 Convertible Notes that mature on November 27, 2017 in private placement transactions (the “2017 Convertible Notes”). In June and July 2013, Encore sold
$172.5 million
aggregate principal amount of
3.0%
2020 Convertible Notes that mature on July 1, 2020 in private placement transactions (the “2020 Convertible Notes”). In March 2014, Encore sold
$161.0 million
aggregate principal amount of
2.875%
2021 Convertible Notes that mature on March 15, 2021 in private placement transactions (the “2021 Convertible Notes”). In March 2017, Encore sold
$150.0 million
aggregate principal amount of
3.25%
2022 Convertible Senior Notes that mature on March 15, 2022 in private placement transactions (the “2022 Convertible Notes” and together with the 2017 Convertible Notes, the 2020 Convertible Notes and the 2021 Convertible Notes, the “Convertible Notes”). The interest on these unsecured convertible senior notes is payable semi-annually.
The net proceeds from the sale of the
$150.0 million
aggregate principal amount of the 2022 Convertible Notes were approximately
$145.3 million
, after deducting the initial purchasers’ discounts and the estimated offering expenses payable by the Company. The Company used approximately
$60.4 million
of the net proceeds from the offering to repurchase, in separate transactions,
$50.0 million
aggregate principal amount of its 2017 Convertible Notes. In accordance with authoritative guidance, the total consideration allocated to the extinguishment of the liability component was approximately
$49.7 million
and the total consideration allocated to the re-acquisition of the equity component was approximately
$10.7 million
. Because the net carrying value of the repurchased portion of the 2017 Convertible Notes was
$48.9 million
, the Company recognized a loss of approximately
$0.8 million
on the repurchase transaction.
Prior to the close of business on the business day immediately preceding their respective conversion date (listed below), holders may convert their Convertible Notes under certain circumstances set forth in the applicable Convertible Notes indentures. On or after their respective conversion dates until the close of business on the scheduled trading day immediately preceding their respective maturity date, holders may convert their Convertible Notes at any time. Certain key terms related to the convertible features for each of the Convertible Notes as of
September 30, 2017
are listed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Convertible Notes
|
|
2020 Convertible Notes
|
|
2021 Convertible Notes
|
|
2022 Convertible Notes
|
Initial conversion price
|
$
|
31.56
|
|
|
$
|
45.72
|
|
|
$
|
59.39
|
|
|
$
|
45.57
|
|
Closing stock price at date of issuance
|
$
|
25.66
|
|
|
$
|
33.35
|
|
|
$
|
47.51
|
|
|
$
|
35.05
|
|
Closing stock price date
|
November 27,
2012
|
|
|
June 24,
2013
|
|
|
March 5,
2014
|
|
|
February 27,
2017
|
|
Conversion rate (shares per $1,000 principal amount)
|
31.6832
|
|
|
21.8718
|
|
|
16.8386
|
|
|
21.9467
|
|
Conversion date
(1)
|
May 27,
2017
|
|
|
January 1,
2020
|
|
|
September 15,
2020
|
|
|
September 15,
2021
|
|
_______________________
|
|
(1)
|
The 2017 Convertible Notes became convertible on demand on January 2, 2014, as certain early conversion events were satisfied. Refer to “Conversion and Earnings Per Share Impact” section below for further details.
|
The Company’s 2017 Convertible Notes will mature on November 27, 2017 and are convertible into cash up to the aggregate principal amount of the notes. The Company will settle the excess conversion premium in shares of the Company’s common stock upon conversion.
In the event of conversion, holders of the Company’s 2020 Convertible Notes, 2021 Convertible Notes, and 2022 Convertible Notes will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company’s current intent is to settle conversions through combination settlement (
i.e.,
convertible into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion prices listed in the above table.
Authoritative guidance related to debt with conversion and other options requires that issuers of convertible debt instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively.
The debt and equity components, the issuance costs related to the equity component, the stated interest rate, and the effective interest rate for each of the Convertible Notes are listed below
(in thousands, except percentages)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Convertible Notes
(1)
|
|
2020 Convertible Notes
|
|
2021 Convertible Notes
|
|
2022 Convertible Notes
|
Debt component
|
$
|
64,646
|
|
|
$
|
140,247
|
|
|
$
|
143,645
|
|
|
$
|
137,266
|
|
Equity component
|
$
|
354
|
|
|
$
|
32,253
|
|
|
$
|
17,355
|
|
|
$
|
12,734
|
|
Equity issuance cost
|
$
|
788
|
|
|
$
|
1,106
|
|
|
$
|
581
|
|
|
$
|
398
|
|
Stated interest rate
|
3.000
|
%
|
|
3.000
|
%
|
|
2.875
|
%
|
|
3.250
|
%
|
Effective interest rate
|
3.750
|
%
|
|
6.350
|
%
|
|
4.700
|
%
|
|
5.200
|
%
|
________________________
|
|
(1)
|
As discussed above, in February 2017, the Company repurchased
$50.0 million
aggregate principal amount of its 2017 Convertible Notes. This transaction is treated as debt extinguishment and the effective interest rate has been updated from
6.000%
to
3.750%
, which represents the effective interest rate for the remaining 2017 Convertible Notes at the time of repurchase.
|
The balances of the liability and equity components of all of the Convertible Notes outstanding were as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Liability component—principal amount
|
$
|
548,500
|
|
|
$
|
448,500
|
|
Unamortized debt discount
|
(35,217
|
)
|
|
(31,968
|
)
|
Liability component—net carrying amount
|
$
|
513,283
|
|
|
$
|
416,532
|
|
Equity component
|
$
|
62,619
|
|
|
$
|
61,314
|
|
The debt discount is being amortized into interest expense over the remaining life of the convertible notes using the effective interest rates. Interest expense related to the convertible notes was as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest expense—stated coupon rate
|
$
|
4,117
|
|
|
$
|
3,317
|
|
|
$
|
11,705
|
|
|
$
|
9,925
|
|
Interest expense—amortization of debt discount
|
2,473
|
|
|
2,501
|
|
|
7,374
|
|
|
7,366
|
|
Total interest expense—convertible notes
|
$
|
6,590
|
|
|
$
|
5,818
|
|
|
$
|
19,079
|
|
|
$
|
17,291
|
|
Convertible Notes Hedge Transactions
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 prices of the Convertible Notes, the Company maintains a hedge program that increases the effective conversion price for each of the 2017 Convertible Notes, 2020 Convertible Notes, and 2021 Convertible Notes. The Company did not hedge the 2022 Convertible Notes. All of the hedge instruments related to the Convertible Notes have been determined to be indexed to the Company’s own stock and meet the criteria for equity classification. In accordance with authoritative guidance, the Company recorded the cost of the hedge instruments as a reduction in additional paid-in capital, and will not recognize subsequent changes in fair value of these financial instruments in its consolidated financial statements.
The details of the hedge program for each of the Convertible Notes are listed below
(in thousands, except conversion price)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Convertible Notes
|
|
2020 Convertible Notes
|
|
2021 Convertible Notes
|
Cost of the hedge transaction(s)
|
$
|
50,595
|
|
|
$
|
18,113
|
|
|
$
|
19,545
|
|
Initial conversion price
|
$
|
31.56
|
|
|
$
|
45.72
|
|
|
$
|
59.39
|
|
Effective conversion price
|
$
|
60.00
|
|
|
$
|
61.55
|
|
|
$
|
83.14
|
|
In connection with the partial repurchase of the 2017 Convertible Notes as described above, the Company terminated a portion of its convertible note hedge transactions in a notional amount corresponding to the amount of the 2017 Convertible Notes repurchased. The Company received approximately
$5.6 million
of proceeds in connection with the unwinding of the hedge transactions and recorded these proceeds as increase in additional paid-in capital.
Conversion and Earnings Per Share Impact
During the quarter ending December 31, 2013, the closing price of the Company’s common stock exceeded
130%
of the conversion price of the 2017 Convertible Notes for more than
20
trading days during a
30
consecutive trading day period, thereby satisfying one of the early conversion events. As a result, the 2017 Convertible Notes became convertible on demand effective January 2, 2014, and the holders were notified that they could elect to submit their 2017 Convertible Notes for conversion. The carrying value of the 2017 Convertible Notes continues to be reported as debt as the Company intends to draw on the Revolving Credit Facility or use cash on hand to settle the principal amount of any such conversions in cash. No gain or loss was recognized when the debt became convertible. The estimated fair value of the 2017 Convertible Notes was approximately
$90.5 million
as of
September 30, 2017
. In addition, upon becoming convertible, a portion of the equity component that was recorded at the time of the issuance of the 2017 Convertible Notes was considered redeemable and that portion of the equity was reclassified to temporary equity in the Company’s condensed consolidated statements of financial condition. Such amount was determined based on the cash consideration to be paid upon conversion and the carrying amount of the debt. As a result, the Company reclassified less than
$0.1 million
of the equity component to temporary equity as of
September 30, 2017
. If a conversion event takes place, this temporary equity balance will be recalculated based on the
difference between the 2017 Convertible Notes principal and the debt carrying value. If the 2017 Convertible Notes are settled, an amount equal to the fair value of the liability component, immediately prior to the settlement, will be deducted from the fair value of the total settlement consideration transferred and allocated to the liability component. Any difference between the amount allocated to the liability and the net carrying amount of the 2017 Convertible Notes (including any unamortized debt issue costs and discount) will be recognized in earnings as a gain or loss on debt extinguishment. Any remaining consideration is allocated to the reacquisition of the equity component and will be recognized as a reduction in stockholders’ equity.
None
of the 2017 Convertible Notes have been converted since they became convertible.
In accordance with authoritative guidance related to derivatives and hedging and earnings per share calculation, only the conversion spread of the Convertible Notes is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company’s common stock during any quarter exceeds the respective conversion price of each of the Convertible Notes.
Cabot Senior Secured Notes
On September 20, 2012, Cabot Financial (Luxembourg) S.A. (“Cabot Financial”), an indirect subsidiary of Encore, issued
£265.0 million
(approximately
$438.4 million
) in aggregate principal amount of
10.375%
Senior Secured Notes due
2019
(the “Cabot 2019 Notes”). Interest on the Cabot 2019 Notes is payable semi-annually, in arrears, on April 1 and October 1 of each year. On October 6, 2016, the Cabot 2019 Notes were redeemed in full using the proceeds from the issuance of Senior Secured Notes due 2023 (the “Cabot 2023 Notes”) as discussed below. A call premium of
£13.7 million
(approximately
$17.4 million
) was paid in connection with the redemption of the Cabot 2019 Notes. Since the Cabot 2019 Notes carried a premium of approximately
£15.2 million
(approximately
$19.2 million
) at the time of redemption, Cabot recognized a gain of approximately
£1.4 million
(approximately
$1.8 million
) on this transaction. The gain is included in other income in the Company’s consolidated statements of operations for the year ended December 31, 2016.
On August 2, 2013, Cabot Financial issued
£100.0 million
(approximately
$151.7 million
) in aggregate principal amount of
8.375%
Senior Secured Notes due 2020 (the “Cabot 2020 Notes”). Interest on the Cabot 2020 Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year.
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 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,” and together with the Cabot 2019 Notes, the Cabot 2020 Notes and the Cabot 2021 Notes, the “Cabot 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. The proceeds from the offering were used to (1) redeem in full the Cabot 2019 Notes plus a call premium of
£13.7 million
(approximately
$17.4 million
), (2) partially repay amounts outstanding under Cabot’s revolving credit facility, (3) pay accrued interest on the Cabot 2019 Notes, and (4) pay fees and expenses in relation to the offering of the Cabot 2023 Notes.
The Cabot Notes are fully and unconditionally guaranteed on a senior secured basis by the following indirect subsidiaries of the Company: Cabot Credit Management Limited (“CCM”), Cabot Financial Limited, and all material subsidiaries of Cabot Financial Limited (other than Cabot Financial and Marlin Intermediate Holdings plc). The Cabot Notes are secured by a first ranking security interest in all the outstanding shares of Cabot Financial and the guarantors (other than CCM and Marlin Midway Limited) and substantially all the assets of Cabot Financial and the guarantors (other than CCM). 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, beginning on February 15, 2016. 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 (other than Cabot Financial II and Marlin Intermediate Holdings plc). The Cabot Floating Rate Notes are secured by a first-ranking security interest in all the outstanding shares of Cabot Financial II and the guarantors (other than CCM and Marlin Midway Limited) and substantially all the assets of Cabot Financial II and the guarantors (other than CCM).
On July 25, 2013, Marlin Intermediate Holdings plc (“Marlin”), a subsidiary of Cabot, issued
£150.0 million
(approximately
$246.5 million
) in aggregate principal amount of
10.5%
Senior Secured Notes due 2020 (the “Marlin Bonds”). Interest on the Marlin Bonds is payable semi-annually, in arrears, on February 1 and August 1 of each year. Cabot assumed the Marlin Bonds as a result of the acquisition of Marlin. The carrying value of the Marlin Bonds was adjusted to approximately
$284.2 million
to reflect the fair value of the Marlin Bonds at the time of acquisition. In September 2017, the Marlin Bonds were redeemed in full using a portion of the proceeds from a senior facility of Cabot Securitisation UK Limited (“Cabot Securitisation”) as discussed below. A call premium of
£7.9 million
(approximately
$10.5 million
) was paid in connection with the redemption of the Marlin Bonds. Since the Marlin Bonds carried a premium of approximately
£12.1 million
(approximately
$16.2 million
) at the time of redemption, Cabot recognized a gain of approximately
£4.3 million
(approximately
$5.7 million
) on this transaction. The gain is included in other income in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2017.
Interest expense related to the Cabot Notes, Cabot Floating Rate Notes and Marlin Bonds was as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest expense—stated coupon rate
|
$
|
24,285
|
|
|
$
|
25,870
|
|
|
$
|
73,278
|
|
|
$
|
81,359
|
|
Interest income—accretion of debt premium
|
(758
|
)
|
|
(2,542
|
)
|
|
(2,855
|
)
|
|
(7,854
|
)
|
Interest expense—amortization of debt discount
|
119
|
|
|
119
|
|
|
345
|
|
|
503
|
|
Total interest expense—Cabot senior secured notes
|
$
|
23,646
|
|
|
$
|
23,447
|
|
|
$
|
70,768
|
|
|
$
|
74,008
|
|
At
September 30, 2017
, the outstanding balance on the Cabot Notes, Cabot Floating Rate Notes and Marlin Bonds was
$1.2 billion
.
Cabot Senior Revolving Credit Facility
On September 20, 2012, Cabot Financial (UK) Limited (“Cabot Financial UK”) entered into an agreement for a senior committed revolving credit facility of
£50.0 million
(approximately
$82.7 million
) (the “Cabot Credit Agreement”). Since such date there have been a number of amendments made, including, but not limited to, increases in the lenders’ total commitments thereunder to
£250.0 million
(approximately
$316.2 million
). On March 31, 2017, Cabot Financial UK amended and restated its existing senior secured revolving credit facility agreement effective as of April 3, 2017 to, among other things, extend the termination date for a
£50.0 million
tranche of commitments to March 2022 (as amended and restated, the “Cabot Credit Facility”). The Cabot Credit Facility also includes an uncommitted accordion provision which will allow the facility to be increased by an additional
£50.0 million
, subject to obtaining the requisite commitments and compliance with the terms of Cabot Financial UK’s other indebtedness, among other conditions precedent.
The Cabot Credit Facility consists of a
£200.0 million
tranche that expires in September 2019 and a
£50.0 million
tranche that expires in March 2022, and includes the following key provisions:
|
|
•
|
Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus
3.25%
;
|
|
|
•
|
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
0.25
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, the Marlin Bonds and the Cabot Credit Facility, any liabilities in respect of obligations under the Cabot Credit Facility that are secured by assets that also secure the Cabot Notes, the Cabot Floating Rate Notes and the Marlin Bonds will receive priority with respect to any proceeds received upon any enforcement action over any such assets.
At
September 30, 2017
, the outstanding borrowings under the Cabot Credit Facility were approximately
$75.7 million
. The weighted average interest rate was
3.50%
and
3.89%
for the three months ended
September 30, 2017
and
2016
, respectively, and
3.51%
and
3.97%
for the
nine months ended
September 30, 2017
and
2016
, respectively.
Cabot Securitisation Senior Facility
On August 23, 2017, Cabot Securitisation entered into a senior facility agreement (the “Senior Facility Agreement”) for an initial committed amount of
£260.0 million
(approximately
$332.9 million
) with an accordion feature of
£90.0 million
(approximately
$115.2 million
) (the “Cabot Securitisation Senior Facility”). The Senior Facility Agreement has an initial availability period ending in September 2020 and an initial repayment date in September 2022. 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
£267.2 million
(approximately
$357.9 million
) as of September 30, 2017. Funds drawn under the Senior Facility Agreement will bear interest at a rate per annum equal to LIBOR plus a margin of
2.85%
. A portion of the proceeds from the Senior Facility Agreement were used to redeem the Marlin Bonds in full.
At September 30, 2017, the outstanding borrowings under the Cabot Securitisation Senior Facility were approximately
$349.3 million
. The weighted average interest rate was
3.10%
for the three months ended September 30, 2017.
Preferred Equity Certificates
On July 1, 2013, the Company, through its wholly owned subsidiary Encore Europe Holdings, S.a r.l. (“Encore Europe”), completed the acquisition of Cabot (the “Cabot Acquisition”) by acquiring
50.1%
of the equity interest in Janus Holdings S.a r.l. (“Janus Holdings”). Encore Europe purchased from J.C. Flowers & Co. LLC (“JC Flowers”): (i) E Bridge preferred equity certificates issued by Janus Holdings, with a face value of
£10,218,574
(approximately
$15.5 million
) (and any accrued interest thereof) (the “E Bridge PECs”), (ii) E preferred equity certificates issued by Janus Holdings with a face value of
£96,729,661
(approximately
$147.1 million
) (and any accrued interest thereof) (the “E PECs”), (iii)
3,498,563
E shares of Janus Holdings (the “E Shares”), and (iv)
100
A shares of Cabot Holdings S.a.r.l. (“Cabot Holdings”), the direct subsidiary of Janus Holdings, for an aggregate purchase price of approximately
£115.1 million
(approximately
$175.0 million
). The E Bridge PECs, E PECs, and E Shares represent
50.1%
of all of the issued and outstanding equity and debt securities of Janus Holdings. The remaining
49.9%
of Janus Holdings’ equity and debt securities are owned by J.C. Flowers and include: (a) J Bridge PECs with a face value of
£10,177,781
(approximately
$15.5 million
), (b) J preferred equity certificates with a face value of
£96,343,515
(approximately
$146.5 million
) (the “J PECs”), (c)
3,484,597
J shares of Janus Holdings (the “J Shares”), and (d)
100
A shares of Cabot Holdings.
All of the PECs accrue interest at
12%
per annum. Since PECs are legal form debt, the J Bridge PECs, J PECs and any accrued interests thereof are classified as liabilities and are included in debt in the Company’s accompanying condensed consolidated statements of financial condition. In addition, certain other minority owners hold PECs at the Cabot Holdings level (the “Management PECs”). These PECs are also included in debt in the Company’s accompanying condensed consolidated statements of financial condition. The E Bridge PECs and E PECs held by the Company, and their related interest eliminate in consolidation and therefore are not included in debt in the Company’s condensed consolidated statements of financial condition. The J Bridge PECs, J PECs, and the Management PECs do not require the payment of cash interest expense as they have characteristics similar to equity with a preferred return. The ultimate payment of the accumulated interest would be satisfied only in connection with the disposition of the noncontrolling interest of J.C. Flowers and management.
On June 20, 2014, Encore Europe converted all of its E Bridge PECs into E Shares and E PECs, and J.C. Flowers converted all of its J Bridge PECs into J Shares and J PECs in proportion to the number of E Shares and E PECs, or J Shares and J PECs, as applicable, outstanding on the closing date of the Cabot Acquisition.
As of
September 30, 2017
, the outstanding balance of the PECs, including accrued interest, was approximately
$244.4 million
.
Capital Lease Obligations
The Company has capital lease obligations primarily for computer equipment. As of
September 30, 2017
, the Company’s combined obligations for capital leases were approximately
$3.1 million
. These capital lease obligations require monthly, quarterly or annual payments through 2021 and have implicit interest rates that range from
zero
to approximately
6.0%
.
Note
10
: Variable Interest Entities
A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb losses, or the right to receive the expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE.
The Company’s VIEs include its subsidiary, Janus Holdings, and other immaterial special purpose entities that were created to purchase receivable portfolios in certain geographies.
Prior to March 31, 2016, the Company’s VIEs included its subsidiary Janus Holdings and its special purpose entity used for the Propel securitization. On March 31, 2016, the Company completed the divestiture of
100%
of its membership interests in Propel. Since Propel is the primary beneficiary of the VIE used for securitization, subsequent to the sale of Propel, the Company no longer consolidates this VIE.
Janus Holdings is the indirect parent company of Cabot. The Company has determined that Janus Holdings is a VIE and the Company is the primary beneficiary of the VIE. The key activities that affect Cabot’s economic performance include, but are not limited to, operational budgets and purchasing decisions. Through its control of the board of directors of Janus Holdings, the Company controls the key operating activities at Cabot.
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.
The Company evaluates its relationships with its VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary.
Note
11
: Income Taxes
Income tax expense for income from continuing operations was
$17.8 million
and income tax benefit was
$13.8 million
during the three months ended
September 30, 2017
and
2016
, respectively.
Income tax expense for income from continuing operations was
$43.4 million
and
$9.8 million
during the
nine months ended
September 30, 2017
and
2016
, respectively.
The effective tax rates for the respective periods are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Federal provision
|
35.0
|
%
|
|
(35.0
|
)%
|
|
35.0
|
%
|
|
35.0
|
%
|
State provision (benefit)
|
3.3
|
%
|
|
(2.2
|
)%
|
|
3.3
|
%
|
|
2.2
|
%
|
International (benefit) provision
(1)
|
(7.9
|
)%
|
|
16.0
|
%
|
|
(2.2
|
)%
|
|
19.3
|
%
|
Permanent items
|
(0.7
|
)%
|
|
0.3
|
%
|
|
0.2
|
%
|
|
3.3
|
%
|
Other
(2)
|
0.0
|
%
|
|
(0.1
|
)%
|
|
0.0
|
%
|
|
(6.7
|
)%
|
Effective rate
|
29.7
|
%
|
|
(21.0
|
)%
|
|
36.3
|
%
|
|
53.1
|
%
|
________________________
|
|
(1)
|
Relates primarily to lower tax rates on income or loss attributable to international operations. Effective January 1, 2017, there was a change to U.K. tax law that resulted in an unfavorable deductibility on interest expenses as compared to the prior period.
|
|
|
(2)
|
Includes the effect of discrete items.
|
The effective tax rates fluctuated significantly during the periods presented due to the following factors.
In accordance with the authoritative guidance for income taxes, each interim period is considered an integral part of the annual period and tax expense or benefit is measured using an estimated annual effective income tax rate. The estimated annual effective income tax rate for the full year is applied to the respective interim period, taking into account year-to-date amounts and projected amounts for the year. Since the Company operates in foreign countries with varying tax rates that are much lower than the tax rate in the United States, the magnitude of the impact of the results from the international operations have on the Company’s quarterly effective tax rate is dependent on the level of income or loss from the international operations in the period.
The Company’s subsidiary in Costa Rica is operating under a
100%
tax holiday through December 31, 2018 and a
50%
tax holiday for the subsequent
four
years. The impact of the tax holiday in Costa Rica for the
three and nine months ended
September 30, 2017
and 2016, was immaterial.
The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of
$21.2 million
at
September 30, 2017
. These unrecognized tax benefits, if recognized, would result in a net tax benefit of
$7.1 million
as of
September 30, 2017
. The gross unrecognized tax benefits did not change from December 31, 2016.
During the
three and nine months ended
September 30, 2017
, the Company did not provide for U.S. income taxes or foreign withholding taxes on the quarterly undistributed earnings from operations of its subsidiaries operating outside of the United States. Undistributed pre-tax income of these subsidiaries was approximately
$46.0 million
and
$57.5 million
during the
three and nine months ended
September 30, 2017
, respectively.
Note
12
: Commitments and Contingencies
Litigation and Regulatory
The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act (“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome.
At
September 30, 2017
, there were no material developments in any of the legal proceedings disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
In certain legal proceedings, the Company may have recourse to insurance or third party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. In accordance with authoritative guidance, the Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. The Company continuously assesses the potential liability related to its pending litigation and regulatory matters and revises its estimates when additional information becomes available. As of
September 30, 2017
, other than the reserves for the Consumer Finance Protection Bureau (“CFPB”) and ancillary state regulatory matters, and the TCPA settlement fund discussed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
, the Company has
no
material reserves for legal matters. Additionally, based on the current status of litigation and regulatory matters, either the estimate of exposure is immaterial to the Company’s financial statements or an estimate cannot yet be determined. The Company’s legal costs are recorded to expense as incurred.
Purchase Commitments
In the normal course of business, the Company enters into forward flow purchase agreements and other purchase commitment agreements. As of
September 30, 2017
, the Company has entered into agreements to purchase receivable portfolios with a face value of approximately
$2.1 billion
for a purchase price of approximately
$335.3 million
. The majority of purchase commitments do not extend past one year.
Note
13
: 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. As discussed in Note
2
, “Discontinued Operations,” 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 condensed consolidated statements of operations. Beginning in the first quarter 2016, the Company has
one
reportable segment, portfolio purchasing and recovery.
The following table presents information about geographic areas in which the Company operates
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues
(1)
:
|
|
|
|
|
|
|
|
United States
|
$
|
154,815
|
|
|
$
|
165,933
|
|
|
$
|
498,744
|
|
|
$
|
502,776
|
|
International
|
|
|
|
|
|
|
|
Europe
(2)
|
127,687
|
|
|
(9,540
|
)
|
|
300,379
|
|
|
188,223
|
|
Other foreign countries
|
24,197
|
|
|
23,022
|
|
|
70,434
|
|
|
66,875
|
|
|
151,884
|
|
|
13,482
|
|
|
370,813
|
|
|
255,098
|
|
Total
|
$
|
306,699
|
|
|
$
|
179,415
|
|
|
$
|
869,557
|
|
|
$
|
757,874
|
|
________________________
|
|
(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.
|
Note
14
: Goodwill and Identifiable Intangible Assets
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 annual goodwill testing date for the reporting units that are included in the portfolio purchasing and recovery reportable segment is October 1st. There have been no events or circumstances during the
nine
months ended
September 30, 2017
that have required the Company to perform an interim assessment of goodwill carried at these reporting units. Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and long-lived assets. 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
(in thousands):
|
|
|
|
|
|
Total
|
Balance, December 31, 2016
|
$
|
785,032
|
|
Goodwill acquired
|
11,142
|
|
Effect of foreign currency translation
|
56,988
|
|
Balance, September 30, 2017
|
$
|
853,162
|
|
The Company’s acquired intangible assets are summarized as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017
|
|
As of December 31, 2016
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
$
|
26,176
|
|
|
$
|
(5,562
|
)
|
|
$
|
20,614
|
|
|
$
|
21,200
|
|
|
$
|
(3,220
|
)
|
|
$
|
17,980
|
|
Developed technologies
|
7,049
|
|
|
(5,214
|
)
|
|
1,835
|
|
|
6,497
|
|
|
(3,891
|
)
|
|
2,606
|
|
Trade name and other
|
13,616
|
|
|
(6,798
|
)
|
|
6,818
|
|
|
12,566
|
|
|
(4,909
|
)
|
|
7,657
|
|
Total intangible assets
|
$
|
46,841
|
|
|
$
|
(17,574
|
)
|
|
$
|
29,267
|
|
|
$
|
40,263
|
|
|
$
|
(12,020
|
)
|
|
$
|
28,243
|
|