ENCORE CAPITAL GROUP INC - FORM 10-Q - May 10, 2016

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________________________________ 
FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
COMMISSION FILE NUMBER: 000-26489
ENCORE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
48-1090909
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
3111 Camino Del Rio North, Suite 103
San Diego, California
92108
(Address of principal executive offices)
(Zip code)
(877) 445 - 4581
(Registrant’s telephone number, including area code)

(Not Applicable)
(Former name, former address and former fiscal year, if changed since last report)
_______________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x        Accelerated filer   ¨        Non-accelerated filer  ¨        Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at May 3, 2016
Common Stock, $0.01 par value
 
25,518,443 shares



ENCORE CAPITAL GROUP, INC.
INDEX TO FORM 10-Q
 


PART I – FINANCIAL INFORMATION
Item 1—Condensed Consolidated Financial Statements (Unaudited)
ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
(Unaudited)
 
March 31,
2016
 
December 31,
2015
Assets
 
 
 
Cash and cash equivalents
$
144,613

 
$
123,993

Investment in receivable portfolios, net
2,486,978

 
2,440,669

Property and equipment, net
68,162

 
72,546

Deferred court costs, net
75,829

 
75,239

Other assets
157,533

 
148,762

Goodwill
890,504

 
924,847

Assets associated with discontinued operations
—

 
388,763

Total assets
$
3,823,619

 
$
4,174,819

Liabilities and equity
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
238,203

 
$
290,608

Debt
2,893,434

 
2,944,063

Other liabilities
27,975

 
59,226

Liabilities associated with discontinued operations
—

 
232,434

Total liabilities
3,159,612

 
3,526,331

Commitments and contingencies


 


Redeemable noncontrolling interest
39,948

 
38,624

Redeemable equity component of convertible senior notes
5,359

 
6,126

Equity:
 
 
 
Convertible preferred stock, $.01 par value, 5,000 shares authorized, no shares issued and outstanding
—

 
—

Common stock, $.01 par value, 50,000 shares authorized, 25,508 shares and 25,288 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
255

 
253

Additional paid-in capital
109,228

 
110,533

Accumulated earnings
569,183

 
543,489

Accumulated other comprehensive loss
(68,360
)
 
(57,822
)
Total Encore Capital Group, Inc. stockholders’ equity
610,306

 
596,453

Noncontrolling interest
8,394

 
7,285

Total equity
618,700

 
603,738

Total liabilities, redeemable equity and equity
$
3,823,619

 
$
4,174,819

The following table includes assets that can only be used to settle the liabilities of the Company’s consolidated variable interest entities (“VIEs”) and the creditors of the VIEs have no recourse to the Company. These assets and liabilities are included in the consolidated statements of financial condition above. See Note 11, “Variable Interest Entities” for additional information on the Company’s VIEs.
 
March 31,
2016
 
December 31,
2015
Assets
 
 
 
Cash and cash equivalents
$
62,539

 
$
50,483

Investment in receivable portfolios, net
1,217,625

 
1,197,513

Property and equipment, net
18,145

 
19,767

Deferred court costs, net
35,782

 
33,296

Other assets
46,804

 
31,679

Goodwill
680,727

 
706,812

Assets associated with discontinued operations
—

 
92,985

Liabilities
 
 
 
Accounts payable and accrued liabilities
$
99,010

 
$
142,375

Debt
1,739,579

 
1,665,009

Other liabilities
687

 
839

Liabilities associated with discontinued operations
—

 
58,923

See accompanying notes to condensed consolidated financial statements

3

ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended 
 March 31,
 
2016
 
2015
Revenues
 
 
 
Revenue from receivable portfolios, net
$
270,094

 
$
264,110

Other revenues
18,923

 
13,672

Total revenues
289,017

 
277,782

Operating expenses
 
 
 
Salaries and employee benefits
69,642

 
65,552

Cost of legal collections
54,308

 
54,998

Other operating expenses
26,343

 
24,326

Collection agency commissions
10,120

 
10,685

General and administrative expenses
35,239

 
31,197

Depreciation and amortization
9,861

 
8,137

Total operating expenses
205,513

 
194,895

Income from operations
83,504

 
82,887

Other (expense) income
 
 
 
Interest expense
(50,691
)
 
(42,303
)
Other income
7,124

 
2,117

Total other expense
(43,567
)
 
(40,186
)
Income before income taxes
39,937

 
42,701

Provision for income taxes
(10,148
)
 
(14,614
)
Income from continuing operations
29,789

 
28,087

(Loss) income from discontinued operations, net of tax
(3,182
)
 
1,880

Net income
26,607

 
29,967

Net income attributable to noncontrolling interest
(913
)
 
(542
)
Net income attributable to Encore Capital Group, Inc. stockholders
$
25,694

 
$
29,425

Amounts attributable to Encore Capital Group, Inc.:
 
 
 
Income from continuing operations
$
28,876

 
$
27,545

(Loss) income from discontinued operations, net of tax
(3,182
)
 
1,880

Net income
$
25,694

 
$
29,425

 
 
 
 
Earnings (loss) per share attributable to Encore Capital Group, Inc.:
 
 
 
Basic earnings (loss) per share from:
 
 
 
Continuing operations
$
1.13

 
$
1.06

Discontinued operations
$
(0.12
)
 
$
0.07

Net basic earnings per share
$
1.01

 
$
1.13

Diluted earnings (loss) per share from:
 
 
 
Continuing operations
$
1.12

 
$
1.01

Discontinued operations
$
(0.13
)
 
$
0.07

Net diluted earnings per share
$
0.99

 
$
1.08

 
 
 
 
Weighted average shares outstanding:
 
 
 
Basic
25,550

 
26,072

Diluted
25,868

 
27,315

See accompanying notes to condensed consolidated financial statements

4

ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, In Thousands)
 
Three Months Ended 
 March 31,
 
2016
 
2015
Net income
$
26,607

 
$
29,967

Other comprehensive income, net of tax:
 
 
 
Change in unrealized gains/losses on derivative instruments:
 
 
 
Unrealized gain on derivative instruments
66

 
860

Income tax effect
(26
)
 
(347
)
Unrealized gain on derivative instruments, net of tax
40

 
513

Change in foreign currency translation:
 
 
 
Unrealized loss on foreign currency translation
(11,899
)
 
(21,032
)
Income tax effect
1,321

 
(1,617
)
Unrealized loss on foreign currency translation, net of tax
(10,578
)
 
(22,649
)
Other comprehensive loss, net of tax
(10,538
)
 
(22,136
)
Comprehensive income
16,069

 
7,831

Comprehensive (income) loss attributable to noncontrolling interest:
 
 
 
Net income
(913
)
 
(542
)
Unrealized loss on foreign currency translation
338

 
1,582

Comprehensive (income) loss attributable to noncontrolling interest
(575
)
 
1,040

Comprehensive income attributable to Encore Capital Group, Inc. stockholders
$
15,494

 
$
8,871

See accompanying notes to condensed consolidated financial statements

5

ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 
Three Months Ended 
 March 31,
 
2016
 
2015
Operating activities:
 
 
 
Net income
$
26,607

 
$
29,967

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Loss (income) from discontinued operations, net of income taxes
1,352

 
(1,880
)
Depreciation and amortization
9,861

 
8,137

Non-cash interest expense, net
9,533

 
7,805

Stock-based compensation expense
3,718

 
5,905

Gain on derivative instruments
(5,399
)
 
—

Deferred income taxes
(21,588
)
 
(4,276
)
Excess tax benefit from stock-based payment arrangements
—

 
(637
)
Loss on sale of discontinued operations, net of tax
1,830

 
—

Reversal of allowances on receivable portfolios, net
(2,191
)
 
(2,859
)
Changes in operating assets and liabilities
 
 
 
Deferred court costs and other assets
1,233

 
(11,873
)
Prepaid income tax and income taxes payable
18,824

 
4,847

Accounts payable, accrued liabilities and other liabilities
(14,023
)
 
(15,081
)
Net cash provided by operating activities from continuing operations
29,757

 
20,055

Net cash provided by (used in) operating activities from discontinued operations
2,096

 
(665
)
Net cash provided by operating activities
31,853

 
19,390

Investing activities:
 
 
 
Cash paid for acquisitions, net of cash acquired
(675
)
 
—

Proceeds from divestiture of business, net of cash divested
106,041

 
—

Purchases of receivable portfolios, net of put-backs
(280,990
)
 
(143,239
)
Collections applied to investment in receivable portfolios, net
180,796

 
164,217

Purchases of property and equipment
(2,252
)
 
(4,271
)
Other, net
1,191

 
(251
)
Net cash provided by investing activities from continuing operations
4,111

 
16,456

Net cash provided by (used in) used in investing activities from discontinued operations
14,685

 
(11,965
)
Net cash provided by investing activities
18,796

 
4,491

Financing activities:
 
 
 
Payment of loan costs
(1,395
)
 
(4,279
)
Proceeds from credit facilities
185,883

 
134,285

Repayment of credit facilities
(235,151
)
 
(124,395
)
Repayment of senior secured notes
(3,750
)
 
(3,750
)
Repayment of securitized notes
(935
)
 
(6,625
)
Taxes paid related to net share settlement of equity awards
(3,354
)
 
(4,554
)
Excess tax benefit from stock-based payment arrangements
—

 
637

Other, net
(2,785
)
 
(3,592
)
Net cash used in financing activities
(61,487
)
 
(12,273
)
Net (decrease) increase in cash and cash equivalents
(10,838
)
 
11,608

Effect of exchange rate changes on cash and cash equivalents
1,858

 
438

Cash and cash equivalents, beginning of period
153,593

 
124,163

Cash and cash equivalents, end of period
144,613

 
136,209

Cash and cash equivalents of discontinued operations, end of period
—

 
24,183

Cash and cash equivalents of continuing operations, end of period
$
144,613

 
$
112,026

See accompanying notes to condensed consolidated financial statements

6

ENCORE CAPITAL GROUP, INC.
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 for consumers and property owners across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings.
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, 2015. 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 11, “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.
Recent Accounting Pronouncements
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

7

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. The Company is currently assessing the impact that adopting this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016-05”) and ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (“ASU 2016-06”). ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-06 clarifies the steps required to determine bifurcation of an embedded derivative. ASU 2016-05 and ASU 2016-06 are effective for fiscal years beginning after 15 December 2016, and interim periods within those years. Early adoption is permitted. The Company is currently assessing the impact that adopting this guidance will have on its consolidated financial statements.
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. ASU 2016-02 is effective for the Company in its first quarter of fiscal 2019 on a modified retrospective basis and earlier adoption is permitted. The Company is currently assessing the impact that adopting this guidance will have on its consolidated financial statements.
Change in Accounting Principle
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU is effective beginning January 1, 2016, with early adoption permitted. The update requires retrospective application and represents a change in accounting principle. The Company adopted this ASU in the first quarter of 2016 and the retrospective application of this change in accounting principle on the consolidated balance sheet as of December 31, 2015 reclassified debt issuance costs of $41.7 million, which were previously presented as other assets, as a reduction to the carrying value of the debt by the same amount. The adoption did not have an impact on the Company's condensed consolidated statements of operations or statements of cash flows in any period.
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.
During the three months ended March 31, 2016, the Company recognized a loss of $3.0 million related to the sale of Propel. 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.

8

The following table presents the results of the discontinued operations during the periods presented (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2015
Revenue
$
4,950

 
$
7,881

Salaries and employee benefits
(2,860
)
 
(2,196
)
Other operating expenses
(1,473
)
 
(908
)
General and administrative expenses
(1,551
)
 
(1,415
)
Depreciation and amortization
(127
)
 
(213
)
(Loss) income from discontinued operations, before income taxes
(1,061
)
 
3,149

Loss on sale of discontinued operations, before income taxes
(3,000
)
 
—

Total (loss) income on discontinued operations, before income taxes
(4,061
)
 
3,149

Income tax benefit (provision)
879

 
(1,269
)
Total (loss) income from discontinued operations, net of tax
$
(3,182
)
 
$
1,880

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.
A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2015
Weighted average common shares outstanding—basic
25,550

 
26,072

Dilutive effect of stock-based awards
318

 
369

Dilutive effect of convertible senior notes
—

 
874

Weighted average common shares outstanding—diluted
25,868

 
27,315

Anti-dilutive employee stock options outstanding were negligible during the three months ended March 31, 2016. There were no anti-dilutive employee stock options outstanding during the three months ended March 31, 2015.
Note 4: Business Combinations
dlc Acquisition
On June 1, 2015, Encore’s U.K.-based subsidiary Cabot Credit Management Limited and its subsidiaries (collectively, “Cabot”) acquired Hillesden Securities Ltd and its subsidiaries (“dlc”), a U.K.-based acquirer and collector of non-performing unsecured consumer debt for approximately £180.6 million (approximately $274.7 million), (the “dlc Acquisition”).
The dlc Acquisition was accounted for using the acquisition method of accounting and, accordingly, the tangible and intangible assets acquired and liabilities assumed were recorded at their estimated fair values as of the date of the acquisition. Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the respective assets and liabilities.

9

The components of the purchase price allocation for the dlc Acquisition were as follows (in thousands):
Purchase price:
 
Cash paid at acquisition
$
268,391

Deferred consideration
6,306

Total purchase price
$
274,697

 
 
Allocation of purchase price:
 
Cash
$
30,518

Investment in receivable portfolios
215,988

Deferred court costs
760

Property and equipment
1,327

Other assets
2,384

Liabilities assumed
(46,435
)
Identifiable intangible assets
3,669

Goodwill
66,486

Total net assets acquired
$
274,697

The goodwill recognized is primarily attributable to synergies that are expected to be achieved by combining dlc and Cabot's existing contingent collections operations. The entire goodwill of $66.5 million related to the dlc Acquisition is not deductible for income tax purposes.
Other Acquisitions
In addition to the dlc Acquisition discussed above, the Company, through its subsidiaries, completed certain other acquisitions in 2016 and 2015. These acquisitions were immaterial to the Company’s financial statements individually and in the aggregate.
Refer to Note 2, “Business Combinations” as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, for a complete description of the Company’s acquisition activities in 2015.
Note 5: 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.

10

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
March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
—

 
$
4,436

 
$
—

 
$
4,436

Liabilities
 
 
 
 
 
 
 
Foreign currency exchange contracts
—

 
(342
)
 
—

 
(342
)
Interest rate swap agreements
—

 
(307
)
 
—

 
(307
)
Temporary Equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests
—

 
—

 
(39,948
)
 
(39,948
)
 
Fair Value Measurements as of
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
—

 
$
718

 
$
—

 
$
718

Liabilities
 
 
 
 
 
 
 
Foreign currency exchange contracts
—

 
(601
)
 
—

 
(601
)
Interest rate swap agreements
—

 
(352
)
 
—

 
(352
)
Temporary Equity
 
 
 
 
 
 
 
Redeemable noncontrolling interests
—

 
—

 
(38,624
)
 
(38,624
)
Derivative Contracts:
The Company uses derivative instruments to minimize its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Redeemable Noncontrolling Interests:
Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value and, in some cases, to force a sale of the subsidiary if the Company chooses not to purchase their interests at fair value. The noncontrolling interests subject to these arrangements are included in temporary equity as redeemable noncontrolling interests, and are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not affect the calculation of earnings per share.

11

The components of the change in the redeemable noncontrolling interests for the periods ended March 31, 2016 and December 31, 2015 are presented in the following table (in thousands):
 
Amount
Balance at December 31, 2014
$
28,885

Initial redeemable noncontrolling interest related to business combinations
9,409

Net income attributable to redeemable noncontrolling interests
1,371

Adjustment of the redeemable noncontrolling interests to fair value
2,349

Effect of foreign currency translation attributable to redeemable noncontrolling interests
(3,390
)
Balance at December 31, 2015
38,624

Net income attributable to redeemable noncontrolling interests
578

Adjustment of the redeemable noncontrolling interests to fair value
408

Effect of foreign currency translation attributable to redeemable noncontrolling interests
338

Balance at March 31, 2016
$
39,948

Financial Instruments Not Required To Be Carried At Fair Value
Investment in Receivable Portfolios:
The Company records its investment in receivable portfolios at cost, which represents a significant discount from the contractual receivable balances due. The Company computes the fair value of its investment in receivable portfolios using Level 3 inputs by discounting the estimated future cash flows generated by its proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. In accordance with authoritative guidance related to fair value measurements, the Company estimates the average cost to collect and discount rates based on its estimate of what a market participant might use in valuing these portfolios. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.
In the Company’s current analysis, the estimated blended market participant cost to collect and discount rate is approximately 50.3% and 10.5%, respectively, for U.S. portfolios, approximately 30.0% and 12.3%, respectively, for Europe portfolios and approximately 32.4% and 11.0%, respectively for other geographies. Using this method, the fair value of investment in receivable portfolios approximates the carrying value as of March 31, 2016 and December 31, 2015. A 100 basis point fluctuation in the cost to collect and discount rate used would result in an increase or decrease in the fair value of United States and Europe portfolios by approximately $40.6 million and $54.2 million, respectively, as of March 31, 2016. This fair value calculation does not represent, and should not be construed to represent, the underlying value of the Company or the amount which could be realized if its investment in receivable portfolios were sold. The carrying value of the investment in receivable portfolios was $2.5 billion and $2.4 billion as of March 31, 2016 and December 31, 2015, respectively.
Deferred Court Costs:
The Company capitalizes deferred court costs and provides a reserve for those costs that it believes will ultimately be uncollectible. The carrying value of net deferred court costs approximates fair value.
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 revolving credit facility, and other borrowing under revolving credit facilities at certain of the Company’s subsidiaries.
Encore’s convertible senior notes are carried at historical cost, adjusted for the debt discount. The carrying value of the convertible senior notes was $409.1 million and $406.6 million as of March 31, 2016 and December 31, 2015, respectively. The fair value estimate for these convertible senior notes, which incorporates quoted market prices using Level 2 inputs, was approximately $361.2 million and $372.2 million as of March 31, 2016 and December 31, 2015, 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 $1,391.2 million and $1,410.3 million, as of March 31, 2016 and December 31,

12

2015, respectively. The fair value estimate for these senior notes, which incorporates quoted market prices using Level 2 inputs, was $1,363.0 million and $1,403.5 million as of March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015.
Note 6: Derivatives and Hedging Instruments
The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging.
Foreign Currency Exchange Contracts
The Company has operations in foreign countries, which exposes the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company enters into derivative financial instruments, principally 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 March 31, 2016, the total notional amount of the forward contracts that are designated as cash flow hedging instruments was $35.0 million. All of these outstanding contracts qualified for hedge accounting treatment. The Company estimates that approximately $0.5 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 three months ended March 31, 2016 and 2015.
In January 2016, the Company’s Cabot subsidiary began entering into currency exchange forward contracts to reduce the short-term effects of currency exchange rate fluctuations between British Pounds and Euro resulting from the net asset or liability positions within its Euro functional currency entities. These derivative contracts generally mature within one to three months and are not designated as hedge instruments. Cabot continues to monitor the level of exposure of the foreign currency exchange risk and enters into these short-term forward contracts on an ongoing basis. The gains or losses on these foreign currency exchange contracts are recognized in other income or other expense based on the changes in fair value. During the three months ended March 31, 2016, the total gain recognized in the Company’s condensed consolidated statements of operations was $5.4 million.
The Company does not enter into derivative instruments for trading or speculative purposes.

13

The following table summarizes the fair value of derivative instruments as recorded in the Company’s condensed consolidated statements of financial condition (in thousands):
 
March 31, 2016
 
December 31, 2015
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other assets
 
$
526

 
Other assets
 
$
718

Foreign currency exchange contracts
Other liabilities
 
(342
)
 
Other liabilities
 
(601
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other assets
 
3,910

 
Other assets
 
—

Interest rate swap agreements
Other liabilities
 
(307
)
 
Other liabilities
 
(352
)
The following table summarizes the effects of derivatives in cash flow hedging relationships on the Company’s condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015 (in thousands):
 
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 
 March 31,
 
 
 
Three Months Ended 
 March 31,
 
 
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
 
 
2016
 
2015
 
 
 
2016
 
2015
Foreign currency exchange contracts
$
502

 
$
472

 
Salaries and
employee
benefits
 
$
258

 
$
(151
)
 
Other (expense)
income
 
$
—

 
$
—

Foreign currency exchange contracts
(154
)
 
220

 
General and
administrative
expenses
 
23

 
(16
)
 
Other (expense)
income
 
—

 
—

Note 7: 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 and telecom, purchased consumer bankruptcy, and mortgage portfolios. We further group these static pools by geographic region or location. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.
In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an 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.
The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. For purposes of calculating IRRs, the collection forecast of each pool is estimated to be up to 120 months.

14

The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios, and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and portfolio allowance reversals and decreased by gross collections and portfolio allowances.
If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the purchase price of a Cost Recovery Portfolio has been fully recovered.
Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows.
The following table summarizes the Company’s accretable yield and an estimate of zero basis future cash flows at the beginning and end of the period presented (in thousands):
 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total
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

 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total
Balance at December 31, 2014
$
2,993,321

 
$
66,392

 
$
3,059,713

Revenue recognized, net
(248,539
)
 
(15,571
)
 
(264,110
)
Net additions on existing portfolios
228,560

 
39,661

 
268,221

Additions for current purchases, net
85,907

 
—

 
85,907

Effect of foreign currency translation
(108,046
)
 
(54
)
 
(108,100
)
Balance at March 31, 2015
$
2,951,203

 
$
90,428

 
$
3,041,631

During the three months ended March 31, 2016, the Company purchased receivable portfolios with a face value of $3.5 billion for $256.8 million, or a purchase cost of 7.2% of face value. The estimated future collections at acquisition for all portfolios purchased during the quarter amounted to $458.6 million. During the three months ended March 31, 2015, the Company purchased receivable portfolios with a face value of $1.0 billion for $125.2 million, or a purchase cost of 12.0% of face value. The estimated future collections at acquisition for all portfolios purchased during the quarter amounted to $197.5 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 March 31, 2016 and 2015, Zero Basis Revenue was approximately $31.5 million and $15.6 million, respectively.

15

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 March 31, 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
256,753

 
—

 
—

 
256,753

Gross collections(1)
(415,727
)
 
(633
)
 
(31,445
)
 
(447,805
)
Put-backs and Recalls(2)
(12,885
)
 
(6
)
 
(102
)
 
(12,993
)
Foreign currency adjustments
(19,887
)
 
147

 
—

 
(19,740
)
Revenue recognized
238,078

 
—

 
29,825

 
267,903

Portfolio allowance reversals, net
469

 
—

 
1,722

 
2,191

Balance, end of period
$
2,482,855

 
$
4,123

 
$
—

 
$
2,486,978

Revenue as a percentage of collections(3)
57.3
%
 
0.0
%
 
94.8
%
 
59.8
%
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2015
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
2,131,084

 
$
12,476

 
$
—

 
$
2,143,560

Purchases of receivable portfolios
125,154

 
—

 
—

 
125,154

Gross collections(1)
(407,556
)
 
(1,972
)
 
(15,543
)
 
(425,071
)
Put-backs and Recalls(2)
(2,517
)
 
(18
)
 
(28
)
 
(2,563
)
Foreign currency adjustments
(65,369
)
 
(1,414
)
 
—

 
(66,783
)
Revenue recognized
248,539

 
—

 
12,712

 
261,251

Portfolio allowance reversals, net
—

 
—

 
2,859

 
2,859

Balance, end of period
$
2,029,335

 
$
9,072

 
$
—

 
$
2,038,407

Revenue as a percentage of collections(3)
61.0
%
 
0.0
%
 
81.8
%
 
61.5
%
________________________
(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 March 31,
 
2016
 
2015
Balance at beginning of period
$
60,588

 
$
75,673

Reversal of prior allowances
(2,191
)
 
(2,859
)
Balance at end of period
$
58,397

 
$
72,814

Note 8: 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 which are recoverable from the consumer (“Deferred Court Costs”).

16

The Company capitalizes Deferred Court Costs in its consolidated financial statements and provides a reserve for those costs that it believes will ultimately be uncollectible. The Company determines the reserve based on its analysis of court costs that have been advanced and those that have been recovered. The Company writes off any Deferred Court Cost not recovered within five years of placement. Collections received from debtors are first applied against related court costs with the balance applied to the debtors’ account balance.
Deferred Court Costs for the five-year deferral period consist of the following as of the dates presented (in thousands):
 
March 31,
2016
 
December 31,
2015
Court costs advanced
$
648,723

 
$
636,922

Court costs recovered
(248,869
)
 
(242,899
)
Court costs reserve
(324,025
)
 
(318,784
)
Deferred court costs
$
75,829

 
$
75,239

A roll forward of the Company’s court cost reserve is as follows (in thousands):
 
Court Cost Reserve
 
Three Months Ended 
 March 31,
 
2016
 
2015
Balance at beginning of period
$
(318,784
)
 
$
(279,572
)
Provision for court costs
(18,898
)
 
(19,179
)
Net down of reserve after 60 months
12,978

 
7,925

Effect of foreign currency translation
679

 
443

Balance at end of period
$
(324,025
)
 
$
(290,383
)
Note 9: Other Assets
Other assets consist of the following (in thousands):
 
March 31,
2016
 
December 31,
2015
Identifiable intangible assets, net
$
35,691

 
$
15,712

Prepaid expenses
21,768

 
21,872

Deferred tax assets
15,334

 
12,695

Other financial receivables
15,076

 
11,275

Service fee receivables
13,634

 
13,708

Prepaid income taxes
7,544

 
25,839

Receivable from seller
5,388

 
8,605

Derivative instruments
4,436

 
718

Security deposits
2,537

 
2,368

Other
36,125

 
35,970

Total
$
157,533

 
$
148,762


17

Note 10: Debt
The Company is in compliance with all covenants under its financing arrangements. The components of the Company’s consolidated debt and capital lease obligations were as follows (in thousands):
 
March 31,
2016
 
December 31,
2015
Encore revolving credit facility
$
497,000

 
$
627,000

Encore term loan facility
140,063

 
143,078

Encore senior secured notes
25,000

 
28,750

Encore convertible notes
448,500

 
448,500

Less: Debt discount
(39,440
)
 
(41,867
)
Cabot senior secured notes
1,345,014

 
1,360,000

Add: Debt premium
49,220

 
53,440

Less: Debt discount
(3,045
)
 
(3,184
)
Cabot senior revolving credit facility
144,499

 
54,089

Preferred equity certificates
221,283

 
221,516

Capital lease obligations
8,374

 
11,054

Other
95,346

 
83,342

 
2,931,814

 
2,985,718

Less: debt issuance costs, net of amortization
(38,380
)
 
(41,655
)
Total
$
2,893,434

 
$
2,944,063

Encore Revolving Credit Facility and Term Loan Facility
On March 24, 2016, the Company amended its revolving credit facility and term loan facility pursuant to Amendment No. 3 to the Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). The Restated Credit Agreement includes a revolving credit facility of $742.6 million (the “Revolving Credit Facility”), a term loan facility of $158.8 million (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”), and an accordion feature that allows the Company to increase the Senior Secured Credit Facilities by an additional $250.0 million ($55.0 million of which was exercised in November 2015). Including the accordion feature, the maximum amount that can be borrowed under the Restated Credit Agreement is $1.1 billion. The Restated Credit Agreement expires in February 2019, except with respect to two subtranches of the Term Loan Facility of $60.0 million and $6.3 million, maturing in February 2017 and November 2017, respectively.
Provisions of the Restated Credit Agreement include, but are not limited to:
•
The Revolving Credit Facility of $742.6 million that expires in February 2019, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300 basis points depending on the 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. “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 or (iv) zero;
•
A $92.5 million term loan maturing on February 25, 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. Principal amortizes $6.9 million in 2016, $9.3 million in 2017, and $9.3 million in 2018 with the remaining principal due at the end of the term;
•
A $60.0 million term loan maturing on February 25, 2017, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 200 to 250 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges

18

from 100 to 150 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. Principal amortizes $4.5 million in 2016 with the remaining principal due at the end of the term;
•
A $6.3 million term loan maturing on November 3, 2017, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the 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 $0.6 million in 2016 and $0.5 million in 2017 with the remaining principal due at the end of the term;
•
A borrowing base equal to (1) the lesser of (i) 30%-35% (depending on the trailing 12-month cost per dollar collected of Encore and its restricted subsidiaries) of all eligible non-bankruptcy estimated remaining collections, currently 33%, plus 55% of eligible estimated remaining collections for consumer receivables subject to bankruptcy, and (ii) the product of the net book value of all receivable portfolios acquired on or after January 1, 2005 multiplied by 95%, minus (2) the sum of the aggregate principal amount outstanding of Encore’s Senior Secured Notes (as defined below) plus the aggregate principal amount outstanding under the term loans;
•
a maximum cash flow leverage ratio permitted of 2.50:1.00;
•
a maximum cash flow secured leverage ratio of 2.00:1.00;
•
The allowance of additional unsecured or subordinated indebtedness not to exceed $1.1 billion;
•
Restrictions and covenants, which limit the payment of dividends and the incurrence of additional indebtedness and liens, among other limitations;
•
Repurchases of up to $150.0 million of Encore’s common stock after July 9, 2015, subject to compliance with certain covenants and available borrowing capacity;
•
A change of control definition that excludes acquisitions of stock by Red Mountain Capital Partners LLC, JCF FPK I, LP and their respective affiliates of up to 50% of the outstanding shares of Encore’s voting stock;
•
Events of default which, upon occurrence, may permit the lenders to terminate the facility and declare all amounts outstanding to be immediately due and payable;
•
A pre-approved acquisition limit of $225.0 million per fiscal year;
•
A basket to allow for investments not to exceed the greater of (1) 200% of the consolidated net worth of 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;
•
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 March 31, 2016, the outstanding balance under the Restated Credit Agreement was $637.1 million, which bore a weighted average interest rate of 3.49% and 2.95% for the three months ended March 31, 2016 and 2015, respectively. Available capacity under the Restated Credit Agreement, subject to borrowing base and applicable debt covenants, was $228.2 million as of March 31, 2016, not including the $195.0 million additional capacity provided by the facility’s remaining accordion feature.
Encore Senior Secured Notes
In 2010 and 2011 Encore entered into an aggregate of $75.0 million in senior secured notes with certain affiliates of Prudential Capital Group (the “Senior Secured Notes”). $25.0 million of the Senior Secured Notes bear an annual interest rate of 7.375%, mature in 2018 and require quarterly principal payments of $1.25 million. Prior to May 2013, these notes required quarterly payments of interest only. The remaining $50.0 million of Senior Secured Notes bear an annual interest rate of 7.75%, mature in 2017 and require quarterly principal payments of $2.5 million. Prior to December 2012 these notes required quarterly interest only payments. As of March 31, 2016, $10.0 million of the 7.375% Senior Secured Notes and $15.0 million of the 7.75% Senior Secured Notes, for an aggregate of $25.0 million, remained outstanding.
The Senior Secured Notes are guaranteed in full by certain of Encore’s subsidiaries. Similar to, and pari passu with, the Senior Secured Credit Facilities, the Senior Secured Notes are collateralized by the same collateral as our Revolving Credit Facility. The Senior Secured Notes may be accelerated and become automatically and immediately due and payable upon certain events of default, including certain events related to insolvency, bankruptcy, or liquidation. Additionally, the Senior Secured Notes may be accelerated at the election of the holder or holders of a majority in principal amount of the Senior Secured Notes upon certain events of default by Encore, including the breach of affirmative covenants regarding guarantors,

19

collateral, most favored lender treatment, minimum revolving credit facility commitment or the breach of any negative covenant. If Encore prepays the Senior Secured Notes at any time for any reason, payment will be at the higher of par or the present value of the remaining scheduled payments of principal and interest on the portion being prepaid. The discount rate used to determine the present value is 50 basis points over the then current Treasury Rate corresponding to the remaining average life of the senior secured notes. The covenants are substantially similar to those in the Restated Credit Agreement. Prudential Capital Group and the administrative agent for the lenders of the Restated Credit Agreement have an intercreditor agreement related to their pro rata rights to the collateral, actionable default, powers and duties and remedies, among other topics. The terms of the Senior Secured Notes were amended in connection with the Restated Credit Agreement in order to properly align certain provisions between the two agreements.
Encore Convertible Notes
In November and December 2012, Encore sold $115.0 million aggregate principal amount of 3.0% 2017 Convertible Notes that mature on November 27, 2017 in private placement transactions. In June and July 2013, Encore sold $172.5 million aggregate principal amount of 3.0% 2020 Convertible Notes that mature on July 1, 2020 in private placement transactions. In March 2014, Encore sold $161.0 million aggregate principal amount of 2.875% 2021 Convertible Notes that mature on March 15, 2021 in private placement transactions. The interest on these unsecured convertible senior notes (collectively, the “Convertible Notes”), is payable semi-annually.
Prior to the close of business on the business day immediately preceding their respective conversion date (listed below), holders may convert their Convertible Notes under certain circumstances set forth in the applicable Convertible Notes indentures. On or after their respective conversion dates until the close of business on the scheduled trading day immediately preceding their respective maturity date, holders may convert their Convertible Notes at any time. Certain key terms related to the convertible features for each of the Convertible Notes as of March 31, 2016 are listed below.
 
2017 Convertible Notes
 
2020 Convertible Notes
 
2021 Convertible Notes
Initial conversion price
$
31.56

 
$
45.72

 
$
59.39

Closing stock price at date of issuance
$
25.66

 
$
33.35

 
$
47.51

Closing stock price date
November 27, 2012

 
June 24, 2013

 
March 5, 2014

Conversion rate (shares per $1,000 principal amount)
31.6832

 
21.8718

 
16.8386

Conversion date(1)
May 27, 2017

 
January 1, 2020

 
September 15, 2020

_______________________
(1)
The 2017 Convertible Notes became convertible on January 2, 2014, as certain early conversion events were satisfied. Refer to “Conversion and Earnings Per Share Impact” section below for further details.
In the event of conversion, the 2017 Convertible Notes are convertible into cash up to the aggregate principal amount of the notes. The excess conversion premium may be settled in cash or shares of the Company’s common stock at the discretion of the Company. In the event of conversion, holders of the Company’s 2020 and 2021 Convertible Notes will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company’s current intent is to settle conversions through combination settlement (i.e., convertible into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion prices listed in the above table.
Authoritative guidance related to debt with conversion and other options requires that issuers of convertible debt instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively.

20

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
 
2020 Convertible Notes
 
2021 Convertible Notes
Debt component
$
100,298

 
$
140,247

 
$
143,645

Equity component
$
14,702

 
$
32,253

 
$
17,355

Equity issuance cost
$
788

 
$
1,106

 
$
581

Stated interest rate
3.000
%
 
3.000
%
 
2.875
%
Effective interest rate
6.000
%
 
6.350
%
 
4.700
%
The balances of the liability and equity components of all of the Convertible Notes outstanding were as follows (in thousands):
 
March 31,
2016
 
December 31,
2015
Liability component—principal amount
$
448,500

 
$
448,500

Unamortized debt discount
(39,440
)
 
(41,867
)
Liability component—net carrying amount
$
409,060

 
$
406,633

Equity component
$
58,950

 
$
58,184

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 
 March 31,
 
2016
 
2015
Interest expense—stated coupon rate
$
3,311

 
$
3,292

Interest expense—amortization of debt discount
2,427

 
2,278

Total interest expense—convertible notes
$
5,738

 
$
5,570

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 price of the Convertible Notes, the Company maintains a hedge program that increases the effective conversion price for each of the Convertible Notes. All of the hedge instruments related to the Convertible Notes have been determined to be indexed to the Company’s own stock and meet the criteria for equity classification. In accordance with authoritative guidance, the Company recorded the cost of the hedge instruments as a reduction in additional paid-in capital, and will not recognize subsequent changes in fair value of these financial instruments in its consolidated financial statements.
The 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

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

21

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 $115.1 million as of March 31, 2016. 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. Upon conversion, the holders of the 2017 Convertible Notes will be paid in cash for the principal amount, the excess conversion premium may be settled in cash or shares of the Company’s common stock at the discretion of the Company. As a result, the Company reclassified $5.4 million of the equity component to temporary equity as of March 31, 2016. 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 August 2, 2013, Cabot Financial issued £100 million (approximately $151.7 million) in aggregate principal amount of 8.375% Senior Secured Notes due 2020 (the “Cabot 2020 Notes”). Interest on the Cabot 2020 Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year.
On March 27, 2014, Cabot Financial issued £175.0 million (approximately $291.8 million) in aggregate principal amount of 6.500% Senior Secured Notes due 2021 (the “Cabot 2021 Notes” and, together with the Cabot 2019 Notes and the Cabot 2020 Notes, the “Cabot Notes”). Interest on the Cabot 2021 Notes is payable semi-annually, in arrears, on April 1 and October 1 of each year, beginning on October 1, 2014.
The Cabot Notes are fully and unconditionally guaranteed on a senior secured basis by the following indirect subsidiaries of the Company: Cabot Credit Management Limited (“CCM”), Cabot Financial Limited, and all material subsidiaries of Cabot Financial Limited (other than Cabot Financial and Marlin Intermediate Holdings plc). The Cabot Notes are secured by a first ranking security interest in all the outstanding shares of Cabot Financial and the guarantors (other than CCM and Marlin Midway Limited) and substantially all the assets of Cabot Financial and the guarantors (other than CCM). The guarantees provided in respect of the Cabot Notes are pari passu with each such guarantee given in respect of the Cabot Floating Rate Notes, Marlin Bonds and the Cabot Credit Facility described below.
On November 11, 2015, Cabot Financial (Luxembourg) II S.A. (“Cabot Financial II”), an indirect subsidiary of Encore, issued €310.0 million (approximately $332.2 million) in aggregate principal amount of Senior Secured Floating Rate Notes due 2021 (the “Cabot Floating Rate Notes”). The Cabot Floating Rate Notes were issued at a 1%, or €3.1 million (approximately $3.4 million), original issue discount, which is being amortized over the life of the notes and included as interest expense in the Company’s consolidated statements of 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-

22

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”), an indirect 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.
The Marlin Bonds are fully and unconditionally guaranteed on a senior secured basis by Cabot Financial Limited and each of Cabot Financial Limited’s material subsidiaries other than Marlin Intermediate Holdings plc, each of which is an indirect subsidiary of the Company. The guarantees provided in respect of the Marlin Bonds are pari passu with each such guarantee given in respect of the Cabot Notes, the Cabot Floating Rate Notes and the Cabot Credit Facility.
Interest expense related to the Cabot Notes, Cabot Floating Rate Notes and Marlin Bonds was as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2015
Interest expense—stated coupon rate
$
27,643

 
$
23,850

Interest income—accretion of debt premium
(2,618
)
 
(2,547
)
Interest expense—amortization of debt discount
127

 
—

Total interest expense—Cabot senior secured notes
$
25,152

 
$
21,303

At March 31, 2016, the outstanding balance on the Cabot Notes, Cabot Floating Rate Notes and Marlin Bonds was $1.3 billion.
Cabot Senior Revolving Credit Facility
On September 20, 2012, Cabot Financial UK entered into an agreement for a senior committed revolving credit facility of £50.0 million (approximately $82.7 million) (the “Cabot Credit Agreement”). Since such date there have been a number of amendments made, including, but not limited to, increases in the lenders’ total commitments thereunder. On November 11, 2015, Cabot Financial UK amended and restated its existing senior secured revolving credit facility agreement to, among other things, increase the total committed amount of the facility to £200.0 million (approximately $304.0 million) and extend the termination date to September 24, 2018 (as amended and restated, the “Cabot Credit Facility”). The Cabot Credit Facility also includes an uncommitted accordion provision which will allow the facility to be increased by an additional £50.0 million, subject to obtaining the requisite commitments and compliance with the terms of Cabot Financial UK’s other indebtedness, among other conditions precedent.
The Cabot Credit Facility has a six-year term expiring in September 2018, and includes the following key provisions:
•
Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 3.5%;
•
A restrictive covenant that limits the loan to value ratio to 0.75;
•
A restrictive covenant that limits the super senior loan (i.e. the Cabot Credit Facility and any super priority hedging liabilities) to value ratio to 0.25;
•
Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens; and
•
Events of default which, upon occurrence, may permit the lenders to terminate the Cabot Credit Facility and declare all amounts outstanding to be immediately due and payable.
The Cabot Credit Facility is unconditionally guaranteed by the following indirect subsidiaries of the Company: CCM, Cabot Financial Limited, and all material subsidiaries of Cabot Financial Limited. The Cabot Credit Facility is secured by first ranking security interests in all the outstanding shares of Cabot Financial UK and the guarantors (other than CCM) and substantially all the assets of Cabot Financial UK and the guarantors (other than CCM). Pursuant to the terms of intercreditor agreements entered into with respect to the relative positions of the Cabot Notes, the Cabot Floating Rate Notes, the Marlin Bonds and the Cabot Credit Facility, any liabilities in respect of obligations under the Cabot Credit Facility that are secured by

23

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 March 31, 2016, the outstanding borrowings under the Cabot Credit Facility were approximately $144.5 million. The weighted average interest rate was 4.01% and 3.94% for the three months ended March 31, 2016 and 2015, respectively.
Preferred Equity Certificates
On July 1, 2013, the Company, through its wholly owned subsidiary Encore Europe Holdings, S.a.r.l. (“Encore Europe”), completed the acquisition of Cabot (the “Cabot Acquisition”) by acquiring 50.1% of the equity interest in Janus Holdings S.a.r.l. (“Janus Holdings”). Encore Europe purchased from J.C. Flowers: (i) E Bridge preferred equity certificates issued by Janus Holdings, with a face value of £10,218,574 (approximately $15.5 million) (and any accrued interest thereof) (the “E Bridge PECs”), (ii) E preferred equity certificates issued by Janus Holdings with a face value of £96,729,661 (approximately $147.1 million) (and any accrued interest thereof) (the “E PECs”), (iii) 3,498,563 E shares of Janus Holdings (the “E Shares”), and (iv) 100 A shares of Cabot Holdings S.a.r.l. (“Cabot Holdings”), the direct subsidiary of Janus Holdings, for an aggregate purchase price of approximately £115.1 million (approximately $175.0 million). The E Bridge PECs, E PECs, and E Shares represent 50.1% of all of the issued and outstanding equity and debt securities of Janus Holdings. The remaining 49.9% of Janus Holdings’ equity and debt securities are owned by J.C. Flowers and include: (a) J Bridge PECs with a face value of £10,177,781 (approximately $15.5 million), (b) J preferred equity certificates with a face value of £96,343,515 (approximately $146.5 million) (the “J PECs”), (c) 3,484,597 J shares of Janus Holdings (the “J Shares”), and (d) 100 A shares of Cabot Holdings.
All of the PECs accrue interest at 12% per annum. Since PECs are legal form debt, the J Bridge PECs, J PECs and any accrued interests thereof are classified as liabilities and are included in debt in the Company’s accompanying 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 interests of J.C. Flowers and management.
On June 20, 2014, Encore Europe converted all of its E Bridge PECs into E Shares and E PECs, and J.C. Flowers converted all of its J Bridge PECs into J Shares and J PECs in proportion to the number of E Shares and E PECs, or J Shares and J PECs, as applicable, outstanding on the closing date of the Cabot Acquisition.
As of March 31, 2016, the outstanding balance of the PECs, including accrued interest, was approximately $221.3 million.
Capital Lease Obligations
The Company has capital lease obligations primarily for computer equipment. As of March 31, 2016, the Company’s combined obligations for capital leases were approximately $8.4 million. These capital lease obligations require monthly, quarterly or annual payments through 2020 and have implicit interest rates that range from zero to approximately 5.9%.
Note 11: 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.
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 immediate parent company of Cabot. The Company has determined that Janus Holdings is a VIE and the Company is the primary beneficiary of the VIE. The key activities that affect Cabot’s economic performance include,

24

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 the VIE 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 the VIE 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 VIE on an ongoing basis to ensure that it continues to be the primary beneficiary.
Note 12: Income Taxes
Income tax provisions for income from continuing operations were $10.1 million and $14.6 million during the three months ended March 31, 2016 and 2015, respectively.
The effective tax rates for the respective periods are shown below:
 
Three Months Ended 
 March 31,
 
2016
 
2015
Federal provision
35.0
 %
 
35.0
 %
State provision
6.2
 %
 
8.2
 %
State benefit
(2.2
)%
 
(2.9
)%
Tax reserves
0.0
 %
 
0.1
 %
International benefit(1)
(9.8
)%
 
(6.0
)%
Permanent items(2)
0.8
 %
 
0.2
 %
Other(3)
(4.6
)%
 
0.0
 %
Effective rate
25.4
 %
 
34.6
 %
________________________
(1)
Relates primarily to lower tax rates on income attributable to international operations.
(2)
Represents a provision for nondeductible items.
(3)
Includes the effect of discrete items and an IRS audit settlement.
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 months ended March 31, 2016 and 2015, was immaterial.
The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $24.2 million and $58.5 million at March 31, 2016 and December 31, 2015, respectively. These unrecognized tax benefits, if recognized, would result in a net tax benefit of $10.6 million and $14.9 million as of March 31, 2016 and December 31, 2015, respectively. The reduction in gross unrecognized tax benefits was due to an IRS audit settlement.
During the three months ended March 31, 2016, 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 during the three months ended March 31, 2016, was approximately $17.1 million.

25

Note 13: Commitments and Contingencies
Litigation and Regulatory
The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act (“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome.
At March 31, 2016, there have been 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, 2015.
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 March 31, 2016, other than reserves for the Consumer Finance Protection Bureau (“CFPB”) and ancillary state regulatory matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, 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 March 31, 2016, the Company has entered into agreements to purchase receivable portfolios with a face value of approximately $1.4 billion for a purchase price of approximately $212.1 million. Most purchase commitments do not extend past one year.
Note 14: Segment Information
The Company conducts business through several operating segments that meet the aggregation criteria under authoritative guidance related to segment reporting. The Company’s management relies on internal management reporting processes that provide segment revenue, segment operating income, and segment asset information in order to make financial decisions and allocate resources. Prior to the first quarter 2016 the Company had determined that it had two reportable segments: portfolio purchasing and recovery and tax lien business. 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 and comprehensive income. Beginning in the first quarter 2016, the Company has one reportable segment, portfolio purchasing and recovery.

26

The following table presents information about geographic areas in which the Company operates (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2015
Revenues(1):
 
 
 
United States
$
170,731

 
$
182,631

Europe
97,360

 
86,724

Other geographies
20,926

 
8,427

Total
$
289,017

 
$
277,782

________________________
(1)
Revenues are attributed to countries based on location of customer.
Note 15: 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 indicators of impairment exist or if a decision is made to sell or exit a business. 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. 
In connection with the divestiture of Propel as discussed in Note 2, “Discontinued Operations,” the Company wrote-down the entire goodwill balance of $49.3 million carried at Propel that represented the entire tax lien business reporting unit as of December 31, 2015. 
As of March 31, 2016, the Company has five reporting units for goodwill impairment testing purposes. The annual goodwill testing date for the five reporting units that are included in the portfolio purchasing and recovery reportable segment is October 1st. There have been no events or circumstances during the three months ended March 31, 2016 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. Further adverse changes in the Company’s actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future.
The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment as of March 31, 2016 and December 31, 2015. A summary of changes in the carrying amounts of goodwill were as follows (in thousands):
 
Total
Balance, December 31, 2015
$
924,847

Goodwill acquired
623

Goodwill adjustments(1)
(15,662
)
Effect of foreign currency translation
(19,304
)
Balance, March 31, 2016
$
890,504

________________________
(1)
Represent adjustments made to preliminary purchase price allocations as a result of obtaining fair value of intangible assets acquired associated with prior year business combinations.

27

The Company’s acquired intangible assets are summarized as follows (in thousands):
 
As of March 31, 2016
 
As of December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer relationships
$
24,779

 
$
(1,881
)
 
$
22,898

 
$
5,356

 
$
(903
)
 
$
4,453

Developed technologies
8,522

 
(3,106
)
 
5,416

 
8,141

 
(3,793
)
 
4,348

Trade name and other
11,120

 
(3,743
)
 
7,377

 
10,324

 
(3,413
)
 
6,911

Total intangible assets
$
44,421

 
$
(8,730
)
 
$
35,691

 
$
23,821

 
$
(8,109
)
 
$
15,712


28

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” relating to Encore Capital Group, Inc. (“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our” or “us”) within the meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,” “may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services and financing needs or plans, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings, or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors, including but not limited to those set forth in our Annual Report on Form 10-K under “Part I, Item 1A. Risk Factors,” could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties.
Our Business and Operating Segments
We are an international specialty finance company providing debt recovery solutions for consumers and property owners across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings. Through certain subsidiaries, we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico. Our subsidiary, Janus Holdings Luxembourg S.a.r.l. (“Janus Holdings”), through its indirectly held U.K.-based subsidiary Cabot Credit Management Limited and its subsidiaries (collectively, “Cabot”), is a market leader in credit management services in the United Kingdom, historically specializing in portfolios consisting of higher balance, semi-performing accounts (i.e., debt portfolios in which over 50% of the accounts have received a payment in three of the last four months immediately prior to the portfolio purchase). Cabot expanded in the United Kingdom with its consolidating acquisition of Hillesden Securities Ltd and its subsidiaries (“dlc”) in June 2015. Our majority-owned subsidiary, Grove Holdings (“Grove”), is a U.K.-based leading specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, individual voluntary arrangements, or “IVAs”) in the United Kingdom and bank and non-bank receivables in Spain. Our majority-owned subsidiary, Refinancia S.A. (“Refinancia”), through its subsidiaries, is a market leader in debt collection and management in Colombia and Peru. In October 2015, we completed the acquisition of a controlling stake in Baycorp Holdings Pty Limited (“Baycorp”), one of Australasia's leading debt resolution specialists.
On March 31, 2016, we completed the divestiture of our membership interests in Propel Acquisition LLC (“Propel”). Propel represented our entire tax lien business reportable segment prior to the divestiture. Propel’s operations are presented as discontinued operations in our condensed consolidated statements of operations and comprehensive income. Beginning in the first quarter 2016, we conduct business through one reportable segment, portfolio purchasing and recovery.
Our long-term growth strategy involves continuing to invest in our core portfolio purchasing and recovery business, expanding into new geographies, and leveraging our core competencies to explore expansion into adjacent asset classes.

29

Government Regulation
As discussed in more detail under “Part I - Item1 - Business - Government Regulation” in our Annual Report on Form 10-K, our U.S. debt purchasing business and collection activities are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices. In addition, our international operations are affected by foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations, ordinances, guidelines and procedures are modified from time to time by the relevant authorities charged with their administration, which could affect the way we conduct our business.
For example, the Consumer Finance Protection Bureau (“CFPB”) may adopt new regulations that may affect our industry and our business. Additionally, the CFPB has supervisory, examination and enforcement authority over our business and is currently examining the collection practices of participants in the consumer debt buying industry. The CFPB has recently engaged in enforcement activity in sectors adjacent to our industry, impacting credit originators, collection firms, and payment processors, among others. The CFPB’s enforcement activity in these sectors, especially in the absence of clear rules or regulatory expectations, can be disruptive as industry participants attempt to define appropriate business practices. As a result of the current regulatory environment, certain current practices or commercial relationships we maintain may be disrupted or impacted by changes in our or third-parties’ business practices or perceptions of elevated risk.
Portfolio Purchasing and Recovery
United States
We purchase receivables based on robust, account-level valuation methods and employ proprietary statistical and behavioral models across our U.S. operations. These methods and models allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or goals and align the accounts we purchase with our business channels to maximize future collections. As a result, we have been able to realize significant returns from the receivables we acquire. We maintain strong relationships with many of the largest financial service providers in the United States.
While seasonality does not have a material impact on our portfolio purchasing and recovery business, collections are generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the other quarters, as our fixed costs are relatively constant and applied against a larger collection base. The seasonal impact on our business may also be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies.
Collection seasonality can also affect revenue as a percentage of collections, also referred to as our revenue recognition rate. Generally, revenue for each pool group declines steadily over time, whereas collections can fluctuate from quarter to quarter based on seasonality, as described above. In quarters with lower collections (e.g., the fourth calendar quarter), the revenue recognition rate can be higher than in quarters with higher collections (e.g., the first calendar quarter).
In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger collections, total costs are higher as a result of the additional efforts required to generate those collections. Since revenue for each pool group declines steadily over time, in quarters with higher collections and higher costs (e.g., the first calendar quarter), all else being equal, earnings could be lower than in quarters with lower collections and lower costs (e.g., the fourth calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites.
Europe
Cabot: Through Cabot, we purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows Cabot to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future collections. As a result, Cabot has been able to realize significant returns from the assets it has acquired. Cabot maintains strong relationships with many of the largest financial services providers in the United Kingdom and continues to expand in the United Kingdom and the rest of Europe with its acquisitions of other credit management services providers.
While seasonality does not have a material impact on Cabot’s operations, collections are generally strongest in the second and third calendar quarters and slower in the first and fourth quarters, largely driven by the impact of the December holiday season and the New Year holiday, and the related impact on its customers’ ability to repay their balances. This drives a higher

30

level of plan defaults over this period, which are typically repaired across the first quarter of the following year. The August vacation season in the United Kingdom also has an unfavorable effect on the level of collections, but this is traditionally compensated for by higher collections in July and September.
Grove: On April 1, 2014, we completed the acquisition of a controlling equity ownership interest in Grove. Grove, through its subsidiaries and affiliates, is a leading specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, IVAs) in the United Kingdom and bank and non-bank receivables in Spain. Grove purchases portfolio receivables using a proprietary pricing model. This model allows Grove to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future collections.
Latin America
In December 2013, we acquired a majority ownership interest in Refinancia, a market leader in debt collection and management in Colombia and Peru. In addition to purchasing defaulted receivables, Refinancia offers portfolio management services to banks for non-performing loans. Refinancia also specializes in non-traditional niches in the geographic areas in which it operates, including providing financial solutions to individuals who have previously defaulted on their credit obligations. In addition to operations in Colombia and Peru, we evaluate and purchase non-performing loans in other countries in Latin America, including Mexico and Brazil. We also invest in non-performing secured residential mortgages in Latin America.
Asia Pacific
Through our acquisition of a majority ownership interest in Baycorp in October 2015 (the “Baycorp Acquisition”), we are one of Australia’s leading debt resolution specialists. Baycorp specializes in the management of non-performing loans in Australia and New Zealand. In addition to purchasing defaulted receivables, Baycorp offers portfolio management services to banks for non-performing loans.
Purchases and Collections
Portfolio Pricing, Supply and Demand
United States
Prices for portfolios offered for sale directly from credit issuers continued to remain elevated during the first quarter of 2016, especially for fresh portfolios. Fresh portfolios are portfolios that are generally transacted within six months of the consumer’s account being charged-off by the financial institution. We believe this elevated pricing is due to a reduction in the supply of charged-off accounts and continued demand in the marketplace. We believe that the reduction in supply is partially due to shifts in underwriting standards by financial institutions, which have resulted in lower volumes of charged-off accounts. We believe that this reduction in supply is also the result of certain financial institutions temporarily halting their sales of charged-off accounts. Although we have seen moderation in certain instances, we expect pricing will remain at elevated levels for some period of time.
We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace, resulting in consolidation within the portfolio purchasing and recovery industry. We believe this favors larger participants in this market, such as Encore, because the larger market participants are better able to adapt to these pressures. Furthermore, as smaller competitors limit their participation in or exit the market, it may provide additional opportunities for Encore to purchase portfolios from competitors or to acquire competitors directly.
Europe
The U.K. market for charged-off portfolios has grown significantly in recent years driven by a consolidation of sellers and a material backlog of portfolio coming to market from credit issuers who are selling an increasing proportion of their non-performing loans. Prices for portfolios offered for sale directly from credit issuers remain at levels higher than historical averages. We expect that as a result of an increase in available funding to industry participants, and lower return requirements for certain debt purchasers, pricing will remain elevated.
The U.K. insolvency market saw historically low sales volumes from banks in the prior year. We expect there will be increased purchasing opportunities once large retail banks start to sell their insolvency portfolios.
The Spanish consumer and small and medium enterprise non-performing loan market remains significant, with most of the major banks selling portfolios. Competition remains strong in large banking trades, but there remains an opportunity for

31

incumbent buyers. Recently there have been multiple complex sales from consolidated regional banks trading at more favorable returns, as portfolio sale sizes and asset nuances reduce competition.
Although pricing has been elevated, we believe that as our U.K. businesses increase in scale and expand to other European markets, and with anticipated improvements in liquidation and improved efficiencies in collections, our margins will remain competitive. Additionally, Cabot’s continuing investment in its liquidation channel through litigation has enabled them to collect from consumers who have the ability to pay, but have so far been unwilling to do so.
Purchases by Type and Geographic Location
The following table summarizes the types and geographic locations of consumer receivable portfolios we purchased during the periods presented (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2015
United States:
 
 
 
Credit card
$
131,395

 
$
98,987

Consumer bankruptcy receivables
11,075

 
—

Subtotal
142,470

 
98,987

Europe:
 
 
 
Credit card
93,400

 
19,995

IVA
99

 
1,637

Subtotal
93,499

 
21,632

Other geographies:
 
 
 
Credit card
20,784

 
4,535

Total purchases
$
256,753

 
$
125,154

During the three months ended March 31, 2016, we invested $256.8 million to acquire portfolios of charged-off credit card portfolios and consumer bankruptcy receivables, with face values aggregating $3.5 billion, for an average purchase price of 7.2% of face value. This is a $131.6 million, or 105.1%, increase in the amount invested, compared with the $125.2 million invested during the three months ended March 31, 2015, to acquire portfolios of charged-off credit card with face values aggregating $1.0 billion, for an average purchase price of 12.0% of face value. In the United States, our capital deployment increased during the three months ended March 31, 2016 as compared to the prior period partially as the result of entering into several forward flow commitments at the turn of the year, which established a strong base for our first quarter capital deployment. In Europe, the increase in capital deployment was primarily driven by Cabot’s continued investment in Spain and France as part of its European expansion strategy.
The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios.

32

Collections by Channel and Geographic Location
We currently utilize various business channels for the collection of our receivables. The following table summarizes the total collections by collection channel and geographic areas (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2015
United States:
 
 
 
Legal collections
$
154,050

 
$
158,959

Collection sites
128,390

 
135,929

Collection agencies(1)
14,673

 
18,101

Subtotal
297,113

 
312,989

Europe:
 
 
 
Collection sites
58,831

 
46,398

Collection agencies
36,825

 
40,124

Legal collections
31,478

 
18,103

Subtotal
127,134

 
104,625

Other geographies:
 
 
 
Collection sites
17,629

 
7,444

Legal collections
2,418

 
—

Collection agencies
3,511

 
13

Subtotal
23,558

 
7,457

Total collections
$
447,805

 
$
425,071

________________________
(1)
Collections through our collection agency channel in the United States include accounts subject to bankruptcy filings collected by others. Additionally, collection agency collections often include accounts purchased from a competitor where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection channels.
Gross collections increased $22.7 million, or 5.3%, to $447.8 million during the three months ended March 31, 2016, from $425.1 million during the three months ended March 31, 2015, primarily due to increased collections in Europe and other geographies, offset by a slight decrease of collections in the United States.

33

Results of Operations
Results of operations, in dollars and as a percentage of total revenue, were as follows (in thousands, except percentages):
 
Three Months Ended March 31,
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Revenue from receivable portfolios, net
$
270,094

 
93.5
 %
 
$
264,110

 
95.1
 %
Other revenues
18,923

 
6.5
 %
 
13,672

 
4.9
 %
Total revenues
289,017

 
100.0
 %
 
277,782

 
100.0
 %
Operating expenses
 
 
 
 
 
 
 
Salaries and employee benefits
69,642

 
24.1
 %
 
65,552

 
23.6
 %
Cost of legal collections
54,308

 
18.8
 %
 
54,998

 
19.8
 %
Other operating expenses
26,343

 
9.1
 %
 
24,326

 
8.9
 %
Collection agency commissions
10,120

 
3.5
 %
 
10,685

 
3.8
 %
General and administrative expenses
35,239

 
12.2
 %
 
31,197

 
11.2
 %
Depreciation and amortization
9,861

 
3.4
 %
 
8,137

 
2.9
 %
Total operating expenses
205,513

 
71.1
 %
 
194,895

 
70.2
 %
Income from operations
83,504

 
28.9
 %
 
82,887

 
29.8
 %
Other (expense) income
 
 
 
 
 
 
 
Interest expense
(50,691
)
 
(17.5
)%
 
(42,303
)
 
(15.1
)%
Other income
7,124

 
2.4
 %
 
2,117

 
0.7
 %
Total other expense
(43,567
)
 
(15.1
)%
 
(40,186
)
 
(14.4
)%
Income before income taxes
39,937

 
13.8
 %
 
42,701

 
15.4
 %
Provision for income taxes
(10,148
)
 
(3.5
)%
 
(14,614
)
 
(5.3
)%
Income from continuing operations
29,789

 
10.3
 %
 
28,087

 
10.1
 %
(Loss) income from discontinued operations, net of tax
(3,182
)
 
(1.1
)%
 
1,880

 
0.7
 %
Net income
26,607

 
9.2
 %
 
29,967

 
10.8
 %
Net income attributable to noncontrolling interest
(913
)
 
(0.3
)%
 
(542
)
 
(0.2
)%
Net income attributable to Encore Capital Group, Inc. stockholders
$
25,694

 
8.9
 %
 
$
29,425

 
10.6
 %


34

Results of Operations—Cabot
The following table summarizes the operating results contributed by Cabot during the periods presented (in thousands):
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
 
Janus Holdings
 
Encore Europe(1)
 
Consolidated
 
Janus Holdings
 
Encore Europe(1)
 
Consolidated
Total revenues
$
89,533

 
$
—

 
$
89,533

 
$
79,777

 
$
—

 
$
79,777

Total operating expenses
(50,830
)
 
—

 
(50,830
)
 
(40,782
)
 
—

 
(40,782
)
Income from operations
38,703

 
—

 
38,703

 
38,995

 
—

 
38,995

Interest expense-non-PEC
(28,272
)
 
—

 
(28,272
)
 
(23,297
)
 
—

 
(23,297
)
PEC interest (expense) income
(12,411
)
 
6,082

 
(6,329
)
 
(11,731
)
 
5,749

 
(5,982
)
Other expense
5,966

 
—

 
5,966

 
758

 
—

 
758

Income before income taxes
3,986

 
6,082

 
10,068

 
4,725

 
5,749

 
10,474

Provision for income taxes
(1,687
)
 
—

 
(1,687
)
 
(2,121
)
 
—

 
(2,121
)
Net income
2,299

 
6,082

 
8,381

 
2,604

 
5,749

 
8,353

Net income attributable to noncontrolling interest
(322
)
 
(987
)
 
(1,309
)
 
(365
)
 
(1,117
)
 
(1,482
)
Net income attributable to Encore Capital Group, Inc. stockholders
$
1,977

 
$
5,095

 
$
7,072

 
$
2,239

 
$
4,632

 
$
6,871

________________________
(1)
Includes only the results of operations related to Janus Holdings and therefore does not represent the complete financial performance of Encore Europe.
For all periods presented, Janus Holdings recognized all interest expense related to the outstanding preferred equity certificates (“PECs”) owed to Encore and other minority shareholders, while the interest income from PECs owed to Encore was recognized at Janus Holdings’ parent company, Encore Europe Holdings, S.a.r.l. (“Encore Europe”), which is a wholly-owned subsidiary of Encore.
Non-GAAP Disclosure
In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.
Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.
Adjusted Income From Continuing Operations Per Share. Management uses non-GAAP adjusted income from continuing operations attributable to Encore and adjusted income from continuing operations per share (which we also refer to from time to time as adjusted earnings per share), to assess operating performance, in order to highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. Adjusted income from continuing operations attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible notes, one-time charges, acquisition, integration and restructuring related expenses, and settlement fees and related administrative expenses, all net of tax. The following table provides a reconciliation between income from continuing operations and diluted income from continuing operations per share attributable to Encore calculated in accordance with GAAP to adjusted income from continuing operations and adjusted income from continuing operations per share attributable to Encore, respectively. GAAP diluted earnings per share for the three months ended March 31, 2015, includes the effect of approximately 0.9 million common shares that are issuable upon conversion of certain convertible senior notes because the average stock price during the period exceeded the conversion price of these notes. However, as described in Note 10, “Debt—Encore Convertible Notes,” in the notes to our condensed consolidated financial statements, we have certain hedging transactions in place that have the effect of increasing the effective conversion price of these notes. Accordingly, while these

35

common shares are included in our diluted earnings per share, the hedge transactions will offset the impact of this dilution and no shares will be issued unless our stock price exceeds the effective conversion price, thereby creating a discrepancy between the accounting effect of those notes under GAAP and their economic impact. We have presented the following metrics both including and excluding the dilutive effect of these convertible senior notes to better illustrate the economic impact of those notes and the related hedging transactions to shareholders, with the GAAP item under the “Per Diluted Share-Accounting” and “Per Diluted Share-Economic” (non-GAAP) columns, respectively (in thousands, except per share data):
 
Three Months Ended March 31,
 
2016
 
2015
 
$
 
Per Diluted
Share—
Accounting
 
Per Diluted
Share—
Economic
 
$
 
Per Diluted
Share—
Accounting
 
Per Diluted
Share—
Economic
GAAP net income from continuing operations attributable to Encore, as reported
$
28,876

 
$
1.12

 
$
1.12

 
$
27,545

 
$
1.01

 
$
1.04

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
Convertible notes non-cash interest and issuance cost amortization, net of tax
1,804

 
0.07

 
0.07

 
1,666

 
0.06

 
0.07

Acquisition, integration and restructuring related expenses, net of tax
1,329

 
0.05

 
0.05

 
1,348

 
0.05

 
0.05

Settlement fees and related administrative expenses, net of tax
1,853

 
0.07

 
0.07

 
—

 
—

 
—

Adjusted income from continuing operations attributable to Encore
$
33,862

 
$
1.31

 
$
1.31

 
$
30,559

 
$
1.12

 
$
1.16

Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before interest, taxes, depreciation and amortization, stock-based compensation expenses, portfolio amortization, one-time charges, acquisition, integration and restructuring related expenses, and settlement fees and related administrative expenses), which is materially similar to a financial measure contained in covenants used in the Encore revolving credit and term loan facility, in the evaluation of our operations and believes that this measure is a useful indicator of our ability to generate cash collections in excess of operating expenses through the liquidation of our receivable portfolios. Adjusted EBITDA for the periods presented is as follows (in thousands):
 
Three Months Ended 
 March 31,
2016
 
2015
GAAP net income, as reported
$
26,607

 
$
29,967

Adjustments:
 
 
 
Loss (income) from discontinued operations, net of tax
3,182

 
(1,880
)
Interest expense
50,691

 
42,303

Provision for income taxes
10,148

 
14,614

Depreciation and amortization
9,861

 
8,137

Amount applied to principal on receivable portfolios
177,711

 
160,961

Stock-based compensation expense
3,718

 
5,905

Acquisition, integration and restructuring related expenses
2,141

 
2,766

Settlement fees and related administrative expenses
2,988

 
—

Adjusted EBITDA
$
287,047

 
$
262,773

Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of approximate cash costs to cash collections for our portfolio purchasing and recovery business. Adjusted operating expenses for our portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out stock-based compensation expense, operating expenses related to non-portfolio purchasing and recovery business, one-time charges, acquisition, integration and restructuring related operating expenses, and settlement fees and related administrative expenses. Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily engage in fee-based business, as well as corporate overhead not related to our portfolio purchasing and recovery business. Adjusted operating expenses related to our portfolio purchasing and recovery business for the periods presented are as follows (in thousands):

36

 
Three Months Ended 
 March 31,
2016
 
2015
GAAP total operating expenses, as reported
$
205,513

 
$
194,895

Adjustments:
 
 
 
Stock-based compensation expense
(3,718
)
 
(5,905
)
Operating expenses related to non-portfolio purchasing and recovery business
(26,885
)
 
(21,623
)
Acquisition, integration and restructuring related expenses
(3,059
)
 
(2,766
)
Settlement fees and related administrative expenses
(2,988
)
 
—

Adjusted operating expenses related to portfolio purchasing and recovery business
$
168,863

 
$
164,601

Comparison of Results of Operations
Revenues
Our revenues consist primarily of portfolio revenue and contingent fee income.
Portfolio revenue consists of accretion revenue and Zero Basis Revenue. Accretion revenue represents revenue derived from pools (quarterly groupings of purchased receivable portfolios) with a cost basis that has not been fully amortized. Revenue from pools with a remaining unamortized cost basis is accrued based on each pool’s effective interest rate applied to each pool’s remaining unamortized cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances. The effective interest rate is the internal rate of return (“IRR”) derived from the timing and amounts of actual cash received and anticipated future cash flow projections for each pool. All collections realized after the net book value of a portfolio has been fully recovered, or Zero Basis Portfolios (“ZBA”), are recorded as revenue, or Zero Basis Revenue. We account for our investment in receivable portfolios utilizing the interest method in accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality. We incur allowance charges when actual cash flows from our receivable portfolios underperform compared to our expectations. Factors that may contribute to underperformance and to the recording of valuation allowances may include both internal as well as external factors. Internal factors that may have an impact on our collections include operational activities, such as the productivity of our collection staff. External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and the overall condition of the economy. We record allowance reversals on pool groups which have historic allowance reserves when actual cash flows from these receivable portfolios outperform our expectations. Allowance reversals are included in portfolio revenue.
Total revenues were $289.0 million during the three months ended March 31, 2016, an increase of $11.2 million, or 4.0%, compared to total revenues of $277.8 million during the three months ended March 31, 2015.

37

The following tables summarize collections, revenue, end of period receivable balance and other related supplemental data, by year of purchase (in thousands, except percentages):
 
Three Months Ended March 31, 2016
 
As of
March 31, 2016
 
Collections(1)
 
Gross
Revenue(2)
 
Revenue
Recognition
Rate(3)
 
Net
Portfolio
Allowance Reversal
 
Revenue
% of Total
Revenue
 
Unamortized
Balances
 
Monthly
IRR
United States:
 
 
 
 
 
 
 
 
 
 
 
 
 
ZBA(4)
$
29,774

 
$
28,148

 
94.5
%
 
$
1,722

 
10.5
%
 
$
—

 
—

2007
576

 
220

 
38.2
%
 
147

 
0.1
%
 
1,389

 
4.6
%
2008
2,854

 
1,710

 
59.9
%
 
322

 
0.6
%
 
4,976

 
9.3
%
2009(5)
—

 
—

 
—

 
—

 
—

 
—

 
—

2010
2,984

 
2,312

 
77.5
%
 
—

 
0.9
%
 
3,048

 
21.2
%
2011
22,241

 
15,076

 
67.8
%
 
—

 
5.6
%
 
20,076

 
18.7
%
2012
34,625

 
22,008

 
63.6
%
 
—

 
8.2
%
 
67,190

 
9.6
%
2013
61,293

 
37,252

 
60.8
%
 
—

 
13.9
%
 
137,457

 
8.0
%
2014
66,726

 
31,845

 
47.7
%
 
—

 
11.9
%
 
256,377

 
3.8
%
2015
70,225

 
27,490

 
39.1
%
 
—

 
10.3
%
 
401,376

 
1.9
%
2016
5,815

 
2,470

 
42.5
%
 
—

 
0.9
%
 
139,300

 
1.8
%
Subtotal
297,113

 
168,531

 
56.7
%
 
2,191

 
62.9
%
 
1,031,189

 
4.2
%
Europe:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
45,543

 
38,508

 
84.6
%
 
—

 
14.4
%
 
419,359

 
3.1
%
2014
43,145

 
26,386

 
61.2
%
 
—

 
9.8
%
 
419,870

 
2.1
%
2015
33,546

 
17,326

 
51.6
%
 
—

 
6.5
%
 
353,628

 
1.7
%
2016
4,900

 
2,496

 
50.9
%
 
—

 
0.9
%
 
94,300

 
1.5
%
Subtotal
127,134

 
84,716

 
66.6
%
 
—

 
31.6
%
 
1,287,157

 
2.2
%
Other geographies:
 
 
 
 
 
 
 
 
 
 
 
 
 
ZBA(4)
1,671

 
1,677

 
100.4
%
 
—

 
0.7
%
 
—

 
—

2013
371

 
—

 
0.0
%
 
—

 
0.0
%
 
2,163

 
0.0
%
2014
4,397

 
4,565

 
103.8
%
 
—

 
1.7
%
 
67,601

 
2.4
%
2015
15,084

 
7,541

 
50.0
%
 
—

 
2.8
%
 
78,709

 
3.2
%
2016
2,035

 
873

 
42.9
%
 
—

 
0.3
%
 
20,159

 
2.4
%
Subtotal
23,558

 
14,656

 
62.2
%
 
—

 
5.5
%
 
168,632

 
2.7
%
Total
$
447,805

 
$
267,903

 
59.8
%
 
$
2,191

 
100.0
%
 
$
2,486,978

 
3.1
%

38

 
Three Months Ended March 31, 2015
 
As of
March 31, 2015
 
Collections(1)
 
Gross
Revenue(2)
 
Revenue
Recognition
Rate(3)
 
Net
Portfolio
Allowance Reversal
 
Revenue
% of Total
Revenue
 
Unamortized
Balances
 
Monthly
IRR
United States:
 
 
 
 
 
 
 
 
 
 
 
 
 
ZBA(4)
$
15,378

 
$
12,547

 
81.6
%
 
$
2,859

 
4.8
%
 
$
—

 
—

2007
985

 
333

 
33.8
%
 
—

 
0.1
%
 
1,952

 
4.6
%
2008
3,518

 
2,460

 
69.9
%
 
—

 
0.9
%
 
7,338

 
10.4
%
2009
7,535

 
5,626

 
74.7
%
 
—

 
2.2
%
 
5,970

 
25.1
%
2010
21,435

 
13,056

 
60.9
%
 
—

 
5.0
%
 
12,746

 
21.9
%
2011
32,760

 
24,973

 
76.2
%
 
—

 
9.6
%
 
48,126

 
15.4
%
2012
53,171

 
32,812

 
61.7
%
 
—

 
12.6
%
 
130,345

 
7.5
%
2013
87,440

 
47,630

 
54.5
%
 
—

 
18.2
%
 
244,911

 
5.7
%
2014
86,045

 
39,171

 
45.5
%
 
—

 
15.0
%
 
410,226

 
2.8
%
2015
4,721

 
1,194

 
25.3
%
 
—

 
0.4
%
 
95,332

 
2.0
%
Subtotal
312,988

 
179,802

 
57.4
%
 
2,859

 
68.8
%
 
956,946

 
5.3
%
Europe:
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
55,063

 
43,707

 
79.4
%
 
—

 
16.7
%
 
468,814

 
3.0
%
2014
49,399

 
32,065

 
64.9
%
 
—

 
12.3
%
 
500,812

 
2.0
%
2015
163

 
294

 
180.4
%
 
—

 
0.1
%
 
21,413

 
1.5
%
Subtotal
104,625

 
76,066

 
72.7
%
 
—

 
29.1
%
 
991,039

 
2.5
%
Other geographies:
 
 
 
 
 
 
 
 
 
 
 
 
 
ZBA(4)
165

 
165

 
100.0
%
 
—

 
0.1
%
 
—

 
—

2012
387

 
—

 
0.0
%
 
—

 
0.0
%
 
78

 
0.0
%
2013
2,715

 
214

 
7.9
%
 
—

 
0.1
%
 
6,869

 
60.0
%
2014
3,675

 
4,894

 
133.2
%
 
—

 
1.9
%
 
78,915

 
2.0
%
2015
516

 
110

 
21.3
%
 
—

 
0.0
%
 
4,560

 
3.1
%
Subtotal
7,458

 
5,383

 
72.2
%
 
—

 
2.1
%
 
90,422

 
1.9
%
Total
$
425,071

 
$
261,251

 
61.5
%
 
$
2,859

 
100.0
%
 
$
2,038,407

 
3.8
%
________________________
(1)
Does not include amounts collected on behalf of others.
(2)
Gross revenue excludes the effects of net portfolio allowance or net portfolio allowance reversals.
(3)
Revenue recognition rate excludes the effects of net portfolio allowance or net portfolio allowance reversals.
(4)
ZBA revenue typically has a 100% revenue recognition rate. However, collections on ZBA pool groups where a valuation allowance remains must first be recorded as an allowance reversal until the allowance for that pool group is zero. Once the entire valuation allowance is reversed, the revenue recognition rate will become 100%. ZBA gross revenue includes an immaterial amount of accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”).
(5)
Total collections realized exceed the net book value of the portfolio and have been converted to ZBA.
Portfolio revenue was $270.1 million during the three months ended March 31, 2016, an increase of $6.0 million, or 2.3%, compared to revenue of $264.1 million during the three months ended March 31, 2015. The increase in portfolio revenue during the three months ended March 31, 2016 compared to 2015 was due to additional accretion revenue associated with a higher portfolio balance, primarily associated with portfolios acquired through our merger and acquisition related activities, and increases in yields on certain pool groups due to over-performance, offset by lower yields on recently formed pool groups.
During the three months ended March 31, 2016, we recorded a net portfolio allowance reversal of $2.2 million, compared to a net portfolio allowance reversal of $2.9 million during the three months ended March 31, 2015. We expect portfolio allowance reversals for certain ZBA pool groups with remaining allowance reserves to decrease over time as the related collections on those ZBA pool groups decrease.
Other revenues were $18.9 million and $13.7 million for the three months ended March 31, 2016 and 2015, respectively. Other revenues primarily represent contingent fee income earned on accounts collected on behalf of others, primarily credit

39

originators. The increase in other revenues was primarily attributable to contingent fee income earned at our recently acquired subsidiaries.
Operating Expenses
Total operating expenses were $205.5 million during the three months ended March 31, 2016, an increase of $10.6 million, or 5.4%, compared to total operating expenses of $194.9 million during the three months ended March 31, 2015.
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
Salaries and employee benefits increased $4.0 million, or 6.2%, to $69.6 million during the three months ended March 31, 2016, from $65.6 million during the three months ended March 31, 2015. The increase was primarily the result of increases in headcount and related compensation expense of $9.1 million in our international subsidiaries as a result of our growing global expansion, offset by a decrease in stock-based compensation expense of $2.2 million and decreases in salaries and employee benefits at our domestic sites.
Stock-based compensation decreased $2.2 million, or 37.0% to $3.7 million during the three months ended March 31, 2016, from $5.9 million during the three months ended March 31, 2015. The decrease was primarily attributable to lower fair value of equity awards granted in recent periods and expense reversals resulting from adjustments to estimated vesting of certain performance-based awards.
Cost of Legal Collections
The cost of legal collections decreased $0.7 million, or 1.3%, to $54.3 million during the three months ended March 31, 2016, as compared to $55.0 million during the three months ended March 31, 2015. These costs represent contingent fees paid to our network of attorneys and the cost of litigation. Gross legal collections were $187.9 million during the three months ended March 31, 2016, up from $177.1 million collected during the three months ended March 31, 2015. The cost of legal collections as a percentage of gross collections through this channel was 28.9% during the three months ended March 31, 2016, a decrease from 31.1% during corresponding period in 2015. The cost of legal collections as a percentage of gross collections through this channel in the United States was 29.7% and 31.3% during the three months ended March 31, 2016 and 2015, respectively. The decrease in the cost of legal collections was due to a reduction in upfront court costs spent as a result of fewer accounts placed in this channel as compared to the prior period. The cost of legal collections as a percentage of gross collections through this channel in Europe was 26.0% and 29.3% during the three months ended March 31, 2016 and 2015, respectively. During 2015, Cabot expanded the number of accounts placed into the legal collection channel, which resulted in increased cost of legal collections and cost to collect in this channel. We expect collections to increase as a result of our investment in this liquidation channel, which we anticipate will result in a lower cost of legal collections as compared to the prior periods. However, we expect that the cost of legal collections in Europe will remain elevated as we continue our investment in the legal collection channel.
Other Operating Expenses
Other operating expenses increased $2.0 million, or 8.3%, to $26.3 million during the three months ended March 31, 2016, from $24.3 million during the three months ended March 31, 2015. The increase in other operating expenses for the three months ended March 31, 2016, as compared to the prior period, was primarily due to increased costs relating to various operation support activities, including skip tracing, media requests and bank charges.
Collection Agency Commissions
During the three months ended March 31, 2016, we incurred $10.1 million in commissions to third-party collection agencies, or 18.4% of the related gross collections of $55.0 million. During the period, the commission rate as a percentage of related gross collections was 12.7% and 21.3% for our collection outsourcing channels in the United States and Europe, respectively. During the three months ended March 31, 2015, we incurred $10.7 million in commissions, or 18.3%, of the related gross collections of $58.2 million. During the period, the commission rate as a percentage of related gross collections was 15.8% and 19.5% for our collection outsourcing channels in the United States and Europe, respectively.
Collections through this channel vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally. Commissions, as a percentage of collections in this channel also vary from period to period depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time. Additionally,

40

commission rates are lower in the United Kingdom where most of the receivables in this channel are semi-performing loans and IVAs, while the commission rates are higher in other European countries where most of the receivables in this channel are non-performing loans.
General and Administrative Expenses
General and administrative expenses increased $4.0 million, or 13.0%, to $35.2 million during the three months ended March 31, 2016, from $31.2 million during the three months ended March 31, 2015. Excluding acquisition, integration and restructuring related expenses and settlement fees and related administrative expenses of $4.9 million and $1.6 million during the three months ended March 31, 2016 and 2015, respectively, general and administrative expenses increased $0.8 million, or 2.8%, to $30.4 million during the three months ended March 31, 2016, from $29.6 million during the three months ended March 31, 2015. The increase was primarily due to increased regulatory and legislative costs, and general increases in expenses to support our growth.
Depreciation and Amortization
Depreciation and amortization expense increased $1.8 million, or 21.2%, to $9.9 million during the three months ended March 31, 2016, from $8.1 million during the three months ended March 31, 2015. The increase was primarily attributable to additional depreciation and amortization expenses resulting from fixed assets and intangible assets acquired through our recent acquisitions.
Cost per Dollar Collected
We utilize adjusted operating expenses in order to facilitate a comparison of approximate cash costs to cash collections for our portfolio purchasing and recovery business. The calculation of adjusted operating expenses is illustrated in detail in the “Non-GAAP Disclosure” section. The following table summarizes our overall cost per dollar collected by geographic location during the periods presented:
 
Three Months Ended 
 March 31,
 
2016
 
2015
United States
39.2
%
 
40.9
%
Europe
33.7
%
 
33.2
%
Other geographies
40.0
%
 
29.0
%
Overall cost per dollar collected
37.7
%
 
38.8
%
Our overall cost per dollar collected (or “cost-to-collect”) for the three months ended March 31, 2016 was 37.7%, down 110 basis points from 38.8% during the prior period, primarily due to improved cost-to-collect in the United States. To counter higher prices in the U.S. market, we implemented innovative consumer-centric programs aimed at increasing liquidations. These programs were initiated in the beginning of 2014 and have become increasingly successful. Although Cabot’s cost-to-collect increased 50 basis points as compared to the prior period, it continues to trend lower than our overall cost-to-collect because its portfolio includes many consumers who are already on payment plans and historically involves little litigation. As more of Cabot’s accounts are serviced through its legal channel, we expect to see incremental net collections and a higher overall cost-to-collect. As we continue to grow our presence in the Latin American market, we expect to incur upfront cost in building our collection channels. As a result, cost-to-collect in this region may become elevated in the near term and may fluctuate over time.
Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, acquisitions, the cost of investments in new operating initiatives, and the changing regulatory and legislative environment.
Interest Expense
Interest expense increased $8.4 million to $50.7 million during the three months ended March 31, 2016, from $42.3 million during the three months ended March 31, 2015.
The following table summarizes our interest expense (in thousands, except percentages):

41

 
Three Months Ended March 31,
 
2016
 
2015
 
$ Change
 
% Change
Stated interest on debt obligations
$
41,386

 
$
34,519

 
$
6,867

 
19.9
%
Interest expense on preferred equity certificates
6,329

 
5,982

 
347

 
5.8
%
Amortization of loan fees and other loan costs
3,040

 
2,071

 
969

 
46.8
%
Amortization of debt discount
2,554

 
2,278

 
276

 
12.1
%
Accretion of debt premium
(2,618
)
 
(2,547
)
 
(71
)
 
2.8
%
Total interest expense
$
50,691

 
$
42,303

 
$
8,388

 
19.8
%
The payment of the accumulated interest on the preferred equity certificates issued in connection with the acquisition of a controlling interest in Cabot will only be satisfied in connection with the disposition of the noncontrolling interests of J.C. Flowers & Co. LLC and management.
The increase in interest expense was primarily attributable to increased debt levels in Europe related to additional borrowings to finance recent acquisitions and portfolio purchases.
Other Income
Other income or expense consists primarily of foreign currency exchange gains or losses and interest income. Other income was $7.1 million during the three months ended March 31, 2016, up from $2.1 million during the three months ended March 31, 2015. The increase was primarily due to a gain of $5.4 million on foreign currency exchange forward contracts recognized by Cabot during the three months ended March 31, 2016. In January 2016, Cabot began entering into currency exchange forward contracts to reduce the short-term effects of currency exchange rate fluctuations between British Pounds and Euro resulting from the net asset or liability positions within its Euro functional currency entities. These contracts generally mature within one to three months and serve as economic hedges. The primary risk managed by using forward contracts is the currency exchange rate risk. The gains or losses on these currency exchange contracts are recognized as other income or other expense based on the changes in fair value.
Provision for Income Taxes
We recorded income tax provisions for income from continuing operations of $10.1 million and $14.6 million, during the three months ended March 31, 2016 and 2015, respectively.
The effective tax rates for the respective periods are shown below:
 
Three Months Ended 
 March 31,
 
2016
 
2015
Federal provision
35.0
 %
 
35.0
 %
State provision
6.2
 %
 
8.2
 %
State benefit
(2.2
)%
 
(2.9
)%
Tax reserves
0.0
 %
 
0.1
 %
International benefit(1)
(9.8
)%
 
(6.0
)%
Permanent items(2)
0.8
 %
 
0.2
 %
Other(3)
(4.6
)%
 
0.0
 %
Effective rate
25.4
 %
 
34.6
 %
________________________
(1)
Relates primarily to lower tax rates on income attributable to international operations.
(2)
Represents a provision for nondeductible items.
(3)
Includes the effect of discrete items and an IRS audit settlement.
The effective tax rate decreased during the three months ended March 31, 2016, as compared to the three months ended March 31, 2015, as a result of earnings realized in countries with lower statutory tax rates than the U.S. federal tax rate and as a result of a favorable IRS audit settlement. Our effective tax rate could fluctuate significantly on a quarterly basis and could be

42

adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory tax rates and higher than anticipated in countries that have higher statutory tax rates.
Our 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 months ended March 31, 2016 and 2015 was immaterial.
Supplemental Performance Data
We utilize proprietary forecasting models to continuously evaluate the economic life of each pool. For purposes of calculating IRRs, the collection forecast of each pool is estimated to be up to 120 months.



43

Cumulative Collections to Purchase Price Multiple
The following table summarizes our purchases and related gross collections by year of purchase (in thousands, except multiples):
Year of
Purchase
 
Purchase
Price(1)
 
Cumulative Collections through March 31, 2016
<2007
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
 
Total(2)
 
CCM(3)
Purchased consumer receivables:
United States:
<2007
 
$
719,081

 
$
1,377,276

 
$
286,676

 
$
183,982

 
$
114,648

 
$
73,397

 
$
52,137

 
$
36,955

 
$
28,242

 
$
22,012

 
$
18,835

 
$
4,097

 
$
2,198,257

 
3.1

2007
 
204,064

 
—

 
68,048

 
145,272

 
111,117

 
70,572

 
44,035

 
29,619

 
20,812

 
14,431

 
12,002

 
2,384

 
518,292

 
2.5

2008
 
227,755

 
—

 
—

 
69,049

 
165,164

 
127,799

 
87,850

 
59,507

 
41,773

 
29,776

 
23,247

 
4,839

 
609,004

 
2.7

2009
 
253,004

 
—

 
—

 
—

 
96,529

 
206,773

 
164,605

 
111,569

 
80,443

 
58,345

 
42,960

 
8,468

 
769,692

 
3.0

2010
 
345,423

 
—

 
—

 
—

 
—

 
125,465

 
284,541

 
215,088

 
150,558

 
106,079

 
80,051

 
16,065

 
977,847

 
2.8

2011
 
383,656

 
—

 
—

 
—

 
—

 
—

 
122,224

 
300,536

 
225,451

 
154,847

 
112,659

 
22,241

 
937,958

 
2.4

2012
 
466,608

 
—

 
—

 
—

 
—

 
—

 
—

 
186,472

 
319,114

 
233,045

 
155,647

 
30,465

 
924,743

 
2.0

2013
 
513,293

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
217,245

 
372,967

 
276,552

 
56,929

 
923,693

 
1.8

2014
 
519,429

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
144,178

 
307,814

 
66,726

 
518,718

 
1.0

2015
 
479,091

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
105,588

 
69,839

 
175,427

 
0.4

2016
 
131,286

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
5,806

 
5,806

 
—

Subtotal
 
4,242,690

 
1,377,276

 
354,724

 
398,303

 
487,458

 
604,006

 
755,392

 
939,746

 
1,083,638

 
1,135,680

 
1,135,355

 
287,859

 
8,559,437

 
2.0

Europe:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
619,079

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
134,259

 
249,307

 
212,129

 
45,543

 
641,238

 
1.0

2014
 
630,347

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
135,549

 
198,127

 
43,145

 
376,821

 
0.6

2015
 
423,451

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
65,870

 
33,546

 
99,416

 
0.2

2016
 
93,499

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4,900

 
4,900

 
0.1

Subtotal
 
1,766,376

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
134,259

 
384,856

 
476,126

 
127,134

 
1,122,375

 
0.6

Other geographies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
6,569

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
3,848

 
2,561

 
1,208

 
208

 
7,825

 
1.2

2013
 
29,568

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
6,617

 
17,615

 
10,334

 
1,072

 
35,638

 
1.2

2014
 
88,227

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9,652

 
16,062

 
4,397

 
30,111

 
0.3

2015
 
91,290

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
15,061

 
15,084

 
30,145

 
0.3

2016
 
20,784

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
2,797

 
2,797

 
0.1

Subtotal
 
236,438

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
10,465

 
29,828

 
42,665

 
23,558

 
106,516

 
0.5

Purchased U.S. bankruptcy receivables:
2010
 
11,971

 
—

 
—

 
—

 
—

 
388

 
4,247

 
5,598

 
6,248

 
5,914

 
3,527

 
270

 
26,192

 
2.2

2011
 
1,642

 
—

 
—

 
—

 
—

 
—

 
1,372

 
1,413

 
1,070

 
333

 
247

 
65

 
4,500

 
2.7

2012
 
83,159

 
—

 
—

 
—

 
—

 
—

 
—

 
1,249

 
31,020

 
26,207

 
21,267

 
4,160

 
83,903

 
1.0

2013
 
39,833

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
12,806

 
24,679

 
21,516

 
4,364

 
63,365

 
1.6

2014
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

2015
 
24,372

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
22

 
386

 
408

 
—

2016
 
11,075

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
9

 
9

 
—

Subtotal
 
172,052

 
—

 
—

 
—

 
—

 
388

 
5,619

 
8,260

 
51,144

 
57,133

 
46,579

 
9,254

 
178,377

 
1.0

Total
 
$
6,417,556

 
$
1,377,276

 
$
354,724

 
$
398,303

 
$
487,458

 
$
604,394

 
$
761,011

 
$
948,006

 
$
1,279,506

 
$
1,607,497

 
$
1,700,725

 
$
447,805

 
$
9,966,705

 
1.6

________________________
(1)
Adjusted for Put-Backs and Recalls. Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).
(2)
Cumulative collections from inception through March 31, 2016, excluding collections on behalf of others.
(3)
Cumulative Collections Multiple (“CCM”) through March 31, 2016 refers to collections as a multiple of purchase price.

44

Total Estimated Collections to Purchase Price Multiple
The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross collections, by year of purchase (in thousands, except multiples):
 
Purchase  Price(1)
 
Historical
Collections(2)
 
Estimated
Remaining
Collections (3)
 
Total Estimated
Gross Collections
 
Total Estimated Gross
Collections to
Purchase Price
Purchased consumer receivables:
 
 
 
 
 
 
United States:
 
 
 
 
 
 
 
 
 
<2006
$
578,055

 
$
1,867,745

 
$
8,019

 
$
1,875,764

 
3.2

2006
141,026

 
330,512

 
6,395

 
336,907

 
2.4

2007
204,064

 
518,292

 
15,762

 
534,054

 
2.6

2008
227,755

 
609,004

 
31,813

 
640,817

 
2.8

2009
253,004

 
769,692

 
57,696

 
827,388

 
3.3

2010
345,423

 
977,847

 
109,355

 
1,087,202

 
3.1

2011
383,656

 
937,958

 
110,752

 
1,048,710

 
2.7

2012
466,608

 
924,743

 
221,917

 
1,146,660

 
2.5

2013
513,293

 
923,693

 
485,088

 
1,408,781

 
2.7

2014
519,429

 
518,718

 
573,526

 
1,092,244

 
2.1

2015
479,091

 
175,427

 
660,424

 
835,851

 
1.7

2016
131,286

 
5,806

 
218,731

 
224,537

 
1.7

Subtotal
4,242,690

 
8,559,437

 
2,499,478

 
11,058,915

 
2.6

Europe:
 
 
 
 
 
 
 
 
 
2013
619,079

 
641,238

 
1,058,486

 
1,699,724

 
2.7

2014
630,347

 
376,821

 
852,806

 
1,229,627

 
2.0

2015
423,451

 
99,416

 
666,972

 
766,388

 
1.8

2016
93,499

 
4,900

 
166,134

 
171,034

 
1.8

Subtotal
1,766,376

 
1,122,375

 
2,744,398

 
3,866,773

 
2.2

Other geographies:
 
 
 
 
 
 
 
 
2012
6,569

 
7,825

 
2,243

 
10,068

 
1.5

2013
29,568

 
35,638

 
7,676

 
43,314

 
1.5

2014
88,227

 
30,111

 
134,849

 
164,960

 
1.9

2015
91,290

 
30,145

 
163,837

 
193,982

 
2.1

2016
20,784

 
2,797

 
50,006

 
52,803

 
2.5

Subtotal
236,438

 
106,516

 
358,611

 
465,127

 
2.0

Purchased U.S. bankruptcy receivables:
 
 
 
 
 
 
2010
11,971

 
26,192

 
233

 
26,425

 
2.2

2011
1,642

 
4,500

 
52

 
4,552

 
2.8

2012
83,159

 
83,903

 
15,217

 
99,120

 
1.2

2013
39,833

 
63,365

 
6,175

 
69,540

 
1.7

2014
—

 
—

 
—

 
—

 
—

2015
24,372

 
408

 
27,904

 
28,312

 
1.2

2016
11,075

 
9

 
12,890

 
12,899

 
1.2

Subtotal
172,052

 
178,377

 
62,471

 
240,848

 
1.4

Total
$
6,417,556

 
$
9,966,705

 
$
5,664,958

 
$
15,631,663

 
2.4

________________________
(1)
Adjusted for Put-Backs and Recalls.
(2)
Cumulative collections from inception through March 31, 2016, excluding collections on behalf of others.
(3)
Estimated remaining collections (“ERC”) for purchased consumer receivables includes $116.3 million related to accounts that converted to bankruptcy after purchase.


45

Estimated Remaining Gross Collections by Year of Purchase
The following table summarizes our estimated remaining gross collections by year of purchase (in thousands):
 
Estimated Remaining Gross Collections by Year of Purchase(1), (2)
 
2016(3)
 
2017
 
2018
 
2019
 
2020
 
2021
 
2022
 
2023
 
2024
 
>2024
 
Total
Purchased consumer receivables:
United States:
<2006
$
3,004

 
$
2,607

 
$
1,439

 
$
772

 
$
197

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
8,019

2006
2,425

 
1,881

 
1,041

 
585

 
332

 
131

 
—

 
—

 
—

 
—

 
6,395

2007
5,271

 
4,388

 
2,655

 
1,627

 
998

 
613

 
210

 
—

 
—

 
—

 
15,762

2008
9,555

 
8,903

 
5,274

 
3,405

 
2,129

 
1,332

 
848

 
367

 
—

 
—

 
31,813

2009
19,760

 
15,193

 
9,240

 
5,691

 
3,285

 
2,066

 
1,317

 
838

 
306

 
—

 
57,696

2010
36,199

 
29,393

 
15,862

 
10,335

 
6,794

 
4,416

 
2,871

 
1,866

 
1,213

 
406

 
109,355

2011
35,719

 
34,763

 
13,926

 
8,454

 
5,486

 
4,575

 
3,199

 
2,079

 
1,351

 
1,200

 
110,752

2012
65,027

 
65,719

 
33,870

 
21,142

 
13,594

 
8,854

 
5,694

 
3,302

 
2,146

 
2,569

 
221,917

2013
116,951

 
124,329

 
83,613

 
55,738

 
37,589

 
25,160

 
16,475

 
10,477

 
6,063

 
8,693

 
485,088

2014
131,451

 
151,470

 
101,293

 
64,504

 
42,357

 
27,251

 
19,371

 
13,699

 
9,279

 
12,851

 
573,526

2015
137,208

 
178,074

 
125,971

 
82,650

 
52,600

 
30,595

 
19,851

 
14,123

 
9,823

 
9,529

 
660,424

2016
30,988

 
67,611

 
46,570

 
28,581

 
17,806

 
10,446

 
6,418

 
4,513

 
3,213

 
2,585

 
218,731

Subtotal
593,558

 
684,331

 
440,754

 
283,484

 
183,167

 
115,439

 
76,254

 
51,264

 
33,394

 
37,833

 
2,499,478

Europe:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013
140,576

 
183,879

 
166,474

 
146,809

 
130,739

 
116,054

 
103,812

 
70,143

 
—

 
—

 
1,058,486

2014
106,890

 
146,080

 
131,663

 
115,285

 
101,071

 
87,950

 
76,616

 
67,963

 
19,288

 
—

 
852,806

2015
74,186

 
103,802

 
103,942

 
87,343

 
72,443

 
61,561

 
54,108

 
47,701

 
41,795

 
20,091

 
666,972

2016
19,167

 
29,973

 
25,561

 
21,248

 
17,579

 
14,316

 
11,799

 
9,976

 
8,593

 
7,922

 
166,134

Subtotal
340,819

 
463,734

 
427,640

 
370,685

 
321,832

 
279,881

 
246,335

 
195,783

 
69,676

 
28,013

 
2,744,398

Other geographies:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012
498

 
533

 
400

 
290

 
222

 
187

 
113

 
—

 
—

 
—

 
2,243

2013
2,267

 
2,280

 
1,575

 
766

 
457

 
199

 
114

 
18

 
—

 
—

 
7,676

2014
11,375

 
16,811

 
46,085

 
40,291

 
13,485

 
2,156

 
1,600

 
1,591

 
1,455

 
—

 
134,849

2015
35,931

 
40,142

 
30,870

 
22,503

 
16,506

 
9,968

 
4,364

 
1,528

 
1,095

 
930

 
163,837

2016
6,936

 
11,597

 
12,047

 
8,781

 
6,176

 
3,228

 
569

 
294

 
211

 
167

 
50,006

Subtotal
57,007

 
71,363

 
90,977

 
72,631

 
36,846

 
15,738

 
6,760

 
3,431

 
2,761

 
1,097

 
358,611

Purchased U.S. bankruptcy receivables:
2010
233

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
233

2011
50

 
2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
52

2012
7,719

 
5,756

 
1,742

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
15,217

2013
4,306

 
1,869

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
6,175

2014
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

2015
1,058

 
5,781

 
7,250

 
6,947

 
5,498

 
848

 
223

 
145

 
99

 
55

 
27,904

2016
170

 
2,134

 
3,130

 
3,281

 
2,910

 
968

 
130

 
76

 
51

 
40

 
12,890

Subtotal
13,536

 
15,542

 
12,122

 
10,228

 
8,408

 
1,816

 
353

 
221

 
150

 
95

 
62,471

Total
$
1,004,920

 
$
1,234,970

 
$
971,493

 
$
737,028

 
$
550,253

 
$
412,874

 
$
329,702

 
$
250,699

 
$
105,981

 
$
67,038

 
$
5,664,958

________________________
(1)
ERC for Zero Basis Portfolios can extend beyond our collection forecasts.
(2)
ERC for purchased consumer receivables includes $116.3 million related to accounts that converted to bankruptcy after purchase. The collection forecast of each pool is generally estimated up to 120 months based on the expected collection period of each pool in the United States and in Europe. Expected collections beyond the 120 month collection forecast in the United States are included in ERC but are not included in the calculation of IRRs.
(3)
2016 amount consists of nine months data from April 1, 2016 to December 31, 2016.


46

Unamortized Balances of Portfolios
The following table summarizes the remaining unamortized balances of our purchased receivable portfolios by year of purchase (in thousands, except percentages):
 
Unamortized
Balance as of
March 31, 2016
 
Purchase
Price(1)
 
Unamortized
Balance as a
Percentage of
Purchase Price
 
Unamortized
Balance as a
Percentage
of Total
Purchased consumer receivables:
 
 
 
 
 
 
 
United States:
 
 
 
 
 
 
 
2007
$
1,389

 
$
204,064

 
0.7
%
 
0.1
%
2008
4,976

 
227,755

 
2.2
%
 
0.5
%
2009
—

 
253,004

 
0.0
%
 
0.0
%
2010
3,048

 
345,423

 
0.9
%
 
0.3
%
2011
20,076

 
383,656

 
5.2
%
 
2.1
%
2012
53,367

 
466,608

 
11.4
%
 
5.5
%
2013
134,373

 
513,293

 
26.2
%
 
13.7
%
2014
256,377

 
519,429

 
49.4
%
 
26.2
%
2015
376,926

 
479,091

 
78.7
%
 
38.5
%
2016
128,191

 
131,286

 
97.6
%
 
13.1
%
Subtotal
978,723

 
3,523,609

 
27.8
%
 
100.0
%
Europe:
 
 
 
 
 
 
 
2013
419,359

 
619,079

 
67.7
%
 
32.6
%
2014
419,870

 
630,347

 
66.6
%
 
32.6
%
2015
353,628

 
423,451

 
83.5
%
 
27.5
%
2016
94,300

 
93,499

 
100.9
%
 
7.3
%
Subtotal
1,287,157

 
1,766,376

 
72.9
%
 
100.0
%
Other geographies:
 
 
 
 
 
 
 
2013
2,163

 
29,568

 
7.3
%
 
1.3
%
2014
67,601

 
88,227

 
76.6
%
 
40.1
%
2015
78,709

 
91,290

 
86.2
%
 
46.7
%
2016
20,159

 
20,784

 
97.0
%
 
11.9
%
Subtotal
168,632

 
229,869

 
73.4
%
 
100.0
%
Purchased U.S. bankruptcy receivables:
 
 
 
 
 
 
 
2012
13,823

 
83,159

 
16.6
%
 
26.3
%
2013
3,084

 
39,833

 
7.7
%
 
5.9
%
2014
—

 
—

 
0.0
%
 
0.0
%
2015
24,450

 
24,372

 
100.3
%
 
46.6
%
2016
11,109

 
11,075

 
100.3
%
 
21.2
%
Subtotal
52,466

 
158,439

 
33.1
%
 
100.0
%
Total
$
2,486,978

 
$
5,678,293

 
43.8
%
 
100.0
%
________________________
(1)
Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-Backs, Recalls, and other adjustments.


47

Estimated Future Amortization of Portfolios
As of March 31, 2016, we had $2.5 billion in investment in receivable portfolios. This balance will be amortized based upon current projections of cash collections in excess of revenue applied to the principal balance. The estimated amortization of the investment in receivable portfolios balance is as follows (in thousands):
Years Ending December 31,
Purchased
Consumer
Receivables
United States
 
Purchased
Consumer
Receivables
Europe
 
Purchased
Consumer
Receivables
Other Geographies
 
Purchased U.S.
Bankruptcy
Receivables
 
Total
Amortization
2016(1)
$
162,892

 
$
91,830

 
$
12,137

 
$
8,739

 
$
275,598

2017
277,234

 
163,296

 
17,152

 
12,756

 
470,438

2018
194,856

 
172,781

 
48,651

 
10,875

 
427,163

2019
124,772

 
158,796

 
47,975

 
9,481

 
341,024

2020
82,776

 
150,962

 
25,115

 
8,093

 
266,946

2021
52,204

 
149,850

 
8,506

 
1,750

 
212,310

2022
36,689

 
159,827

 
5,545

 
324

 
202,385

2023
26,202

 
157,699

 
2,021

 
269

 
186,191

2024
15,193

 
56,246

 
794

 
179

 
72,412

2025
5,552

 
24,996

 
632

 
—

 
31,180

2026
353

 
874

 
104

 
—

 
1,331

Total
$
978,723

 
$
1,287,157

 
$
168,632

 
$
52,466

 
$
2,486,978

________________________
(1)
2016 amount consists of nine months data from April 1, 2016 to December 31, 2016.
Headcount by Function by Geographic Location
The following table summarizes our headcount by function by geographic location:
 
Headcount as of March 31,
 
2016
 
2015
 
Domestic
 
International
 
Domestic(1)
 
International
General & Administrative
937

 
2,167

 
980

 
1,601

Internal Legal Account Manager
26

 
172

 
40

 
89

Account Manager
231

 
3,131

 
301

 
2,391

 
1,194

 
5,470

 
1,321

 
4,081

________________________
(1)
Headcount as of March 31, 2015 includes 84 Propel employees.

48

Purchases by Quarter
The following table summarizes the consumer receivable portfolios and bankruptcy receivables we purchased by quarter, and the respective purchase prices (in thousands):
Quarter
# of
Accounts
 
Face Value
 
Purchase 
Price
Q1 2014(1)
1,104

 
$
4,288,159

 
$
467,565

Q2 2014
1,210

 
3,075,343

 
225,762

Q3 2014(1)
2,203

 
3,970,145

 
299,509

Q4 2014
859

 
2,422,128

 
258,524

Q1 2015
734

 
1,041,011

 
125,154

Q2 2015(1)
2,970

 
5,544,885

 
418,780

Q3 2015
1,267

 
2,085,381

 
187,180

Q4 2015(1)
2,363

 
4,068,252

 
292,608

Q1 2016
1,450

 
3,544,338

 
256,753

________________________
(1)
Includes portfolios acquired in connection with certain business combinations.
Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activity, including the cash flows from discontinued operations, for the periods presented (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
 
 
 
 
(Unaudited)
Net cash provided by operating activities
$
31,853

 
$
19,390

Net cash provided by investing activities
18,796

 
4,491

Net cash used in financing activities
(61,487
)
 
(12,273
)
Operating Cash Flows
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting net income for non-cash operating items such as depreciation and amortization, allowance charges and stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.
Net cash provided by operating activities was $31.9 million and $19.4 million during the three months ended March 31, 2016 and 2015, respectively. Cash provided by operating activities during the three months ended March 31, 2016 was primarily related to net income of $26.6 million, adjustments for discontinued operations, various non-cash add backs in operating activities, and changes in operating assets and liabilities. Cash provided by operating activities during the three months ended March 31, 2015 was primarily related to net income of $30.0 million, adjustments for discontinued operations, various non-cash add backs in operating activities, and changes in operating assets and liabilities.
Investing Cash Flows
Net cash provided by investing activities was $18.8 million and $4.5 million during the three months ended March 31, 2016 and 2015, respectively.
The cash flows provided by investing activities during the three months ended March 31, 2016 were primarily related to collection proceeds applied to the principal of our receivable portfolios in the amount of $180.8 million, offset by receivable portfolio purchases of $281.0 million. The cash flows provided by investing activities during the three months ended March 31, 2015 were primarily related to collection proceeds applied to the principal of our receivable portfolios in the amount of $164.2 million, offset by receivable portfolio purchases of $143.2 million.

49

Capital expenditures for fixed assets acquired with internal cash flows were $2.3 million and $4.3 million for three months ended March 31, 2016 and 2015, respectively.
Financing Cash Flows
Net cash used in financing activities was $61.5 million and $12.3 million during the three months ended March 31, 2016 and 2015, respectively. Net cash used in financing activities from discontinued operations was $15.5 million and $0.2 million, during the three months ended March 31, 2016 and 2015, respectively.
The cash used in financing activities during the three months ended March 31, 2016 primarily reflects $235.2 million in repayments, offset by $185.9 million in borrowings under our credit facilities. The cash used in financing activities during the three months ended March 31, 2015 primarily reflects $124.4 million in repayments of amounts outstanding under our credit facilities and $10.4 million in repayments of notes, offset by $134.3 million in borrowings under our credit facilities.
Capital Resources
Historically, we have met our cash requirements by utilizing our cash flows from operations, bank borrowings, convertible debt offerings, and equity offerings. From time to time, depending on the capital markets, we consider additional financings to fund our operations and acquisitions. Our primary cash requirements have included the purchase of receivable portfolios, the acquisition of U.S. and international entities, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes.
On March 24, 2016, we amended our revolving credit facility and term loan facility pursuant to Amendment No. 3 to the Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). The Restated Credit Agreement includes a revolving credit facility of $742.6 million (the “Revolving Credit Facility”), a term loan facility of $158.8 million (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”), and an accordion feature that allows us to increase the Revolving Credit Facility by an additional $250.0 million ($55.0 million of which was exercised in November 2015). The Senior Secured Credit Facilities have a five-year maturity, expiring in February 2019, except with respect to two subtranches of the Term Loan Facility of $60.0 million and $6.3 million, expiring in February 2017 and November 2017, respectively. As of March 31, 2016, we had $637.1 million outstanding and $228.2 million of availability under the Senior Secured Credit Facilities, excluding the $195.0 million available under the accordion.
Through Cabot Financial (UK) Limited (“Cabot Financial UK”), an indirect subsidiary, we have a revolving credit facility of £200.0 million (the “Cabot Credit Facility”). The Cabot Credit Facility includes an uncommitted accordion facility which will allow the facility to be increased by an additional £50.0 million, subject to obtaining the requisite commitments and compliance with the terms of Cabot Financial UK’s other indebtedness. As of March 31, 2016, we had £100.5 million (approximately $144.5 million) outstanding and £99.5 million (approximately $143.1 million) of availability under the Cabot Credit Facility.
Currently, all of our portfolio purchases are funded with cash from operations and borrowings under our Senior Secured Credit Facilities and our Cabot Credit Facility.
We are in compliance with all covenants under our financing arrangements. See Note 10, “Debt” to our condensed consolidated financial statements for a further discussion of our debt.
Our cash and cash equivalents at March 31, 2016 consisted of $27.2 million held by U.S.-based entities and $117.4 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that our U.S. sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.
We believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and businesses. The divestiture of Propel provided liquidity to deleverage our company and paid down our debt. Additionally, it is expected to improve our overall corporate return on invested capital and provide us additional liquidity for increased investment capital flexibility.

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Rates. At March 31, 2016, there had not been a material change in any of the foreign currency risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Interest Rates. At March 31, 2016, there had not been a material change in the interest rate risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Item 4 – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and accordingly, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on their most recent evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are effective.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Information with respect to this item may be found in Note 13, “Commitments and Contingencies,” to the condensed consolidated financial statements.
Item 1A – Risk Factors
There is no material change in the information reported under “Part I—Item 1A—Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

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Item 6 – Exhibits
2.1
 
Securities Purchase Agreement, dated February 19, 2016, by and among Encore Capital Group, Inc. and certain funds affiliated with Prophet Capital Asset Management LP (incorporated by reference to Exhibit 2.4 to the Company’s Annual Report on Form 10-K filed on February 24, 2016)
 
 
 
2.2
 
Letter Agreement Amendment, dated March 23, 2016, related to the Securities Purchase Agreement, dated February 19, 2016, by and among Encore Capital Group, Inc. and certain funds affiliated with Prophet Capital Asset Management LP (filed herewith)
 
 
 
3.1
 
Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1/A filed on June 14, 1999, File No. 333-77483)
 
 
 
3.2
 
Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 4, 2002)
 
 
 
3.3
 
Bylaws, as amended through February 8, 2011 (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed on February 14, 2011)
 
 
 
10.1+
 
Form of Performance Stock Grant Notice and Agreement (TSR) under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (filed herewith)
 
 
 
10.2+
 
Form of Restricted Stock Award Grant Notice and Agreement (Executive - Umbrella) under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (filed herewith)
 
 
 
10.3+
 
Form of Performance Stock Grant Notice and Agreement under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan (filed herewith)
 
 
 
10.4
 
Amendment No. 3 to Second Amended and Restated Credit Agreement, dated March 24, 2016, by and among Encore Capital Group, Inc., the several banks and other financial institutions and lenders from time to time party thereto and listed on the signature pages thereof, and SunTrust Bank, as administrative agent and collateral agent (filed herewith)
 
 
 
10.5
 
Amendment No. 5, dated March 24, 2016, to Second Amended and Restated Senior Secured Note Purchase Agreement, dated May 9, 2013, by and between Encore Capital Group, Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company, Prudential Retirement Insurance and Annuity Company and Prudential Annuities Life Assurance Corporations (filed herewith)
 
 
 
31.1
 
Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
31.2
 
Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
32.1
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
 
 
101.INS
 
XBRL Instance Document (filed herewith)
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document (filed herewith)
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
+
Management contract or compensation plan or arrangement.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
ENCORE CAPITAL GROUP, INC.
 
 
 
 
By:
 
/s/ Jonathan C. Clark
 
 
 
Jonathan C. Clark
 
 
 
Executive Vice President,
 
 
 
Chief Financial Officer and Treasurer
Date: May 10, 2016


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ENCORE CAPITAL GROUP INC Reports