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EX-32.1 - EXHIBIT 32.1 - ENCORE CAPITAL GROUP INCecpg-2017630ex321.htm
EX-31.2 - EXHIBIT 31.2 - ENCORE CAPITAL GROUP INCecpg-2017630ex312.htm
EX-31.1 - EXHIBIT 31.1 - ENCORE CAPITAL GROUP INCecpg-2017630ex311.htm
EX-10.9 - EXHIBIT 10.9 - ENCORE CAPITAL GROUP INCecpg-2017630ex109x109encor.htm
EX-10.1 - EXHIBIT 10.1 - ENCORE CAPITAL GROUP INCecpg-2017630ex101xencoream.htm

 
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 June 30, 2017
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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x Accelerated filer   ¨ Non-accelerated filer  ¨ Smaller reporting company  ¨ Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  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 July 27, 2017
Common Stock, $0.01 par value
 
25,740,950 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)
 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Cash and cash equivalents
$
146,647

 
$
149,765

Investment in receivable portfolios, net
2,555,925

 
2,382,809

Property and equipment, net
71,135

 
72,257

Deferred court costs, net
74,316

 
65,187

Other assets
239,218

 
215,447

Goodwill
831,556

 
785,032

Total assets
$
3,918,797

 
$
3,670,497

Liabilities and equity
 
 
 
Liabilities:
 
 
 
Accounts payable and accrued liabilities
$
256,982

 
$
234,398

Debt
2,963,929

 
2,805,983

Other liabilities
29,776

 
29,601

Total liabilities
3,250,687

 
3,069,982

Commitments and contingencies


 


Redeemable noncontrolling interest
126,215

 
45,755

Redeemable equity component of convertible senior notes
192

 
2,995

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, 25,741 shares and 25,593 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
257

 
256

Additional paid-in capital
43,076

 
103,392

Accumulated earnings
593,290

 
560,567

Accumulated other comprehensive loss
(83,110
)
 
(104,911
)
Total Encore Capital Group, Inc. stockholders’ equity
553,513

 
559,304

Noncontrolling interest
(11,810
)
 
(7,539
)
Total equity
541,703

 
551,765

Total liabilities, redeemable equity and equity
$
3,918,797

 
$
3,670,497

The following table includes assets that can only be used to settle the liabilities of the Company’s consolidated variable interest entities (“VIEs”) and the creditors of the VIEs have no recourse to the Company. These assets and liabilities are included in the consolidated statements of financial condition above. See Note 10, “Variable Interest Entities” for additional information on the Company’s VIEs.
 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Cash and cash equivalents
$
43,077

 
$
55,823

Investment in receivable portfolios, net
1,103,135

 
972,841

Property and equipment, net
19,843

 
19,284

Deferred court costs, net
25,049

 
22,760

Other assets
91,179

 
79,767

Goodwill
628,849

 
584,868

Liabilities
 
 
 
Accounts payable and accrued liabilities
$
117,645

 
$
99,689

Debt
1,666,962

 
1,514,799

Other liabilities
618

 
1,921

See accompanying notes to condensed consolidated financial statements

3


ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Revenue from receivable portfolios, net
$
272,236

 
$
267,452

 
$
524,206

 
$
537,546

Other revenues
18,681

 
21,990

 
38,652

 
40,913

Total revenues
290,917

 
289,442

 
562,858

 
578,459

Operating expenses
 
 
 
 
 
 
 
Salaries and employee benefits
75,786

 
75,499

 
144,064

 
145,141

Cost of legal collections
53,409

 
46,807

 
101,366

 
101,115

Other operating expenses
24,030

 
24,946

 
50,390

 
51,289

Collection agency commissions
11,494

 
9,274

 
23,056

 
19,394

General and administrative expenses
36,932

 
32,934

 
70,250

 
68,173

Depreciation and amortization
8,672

 
8,235

 
17,297

 
18,096

Total operating expenses
210,323

 
197,695

 
406,423

 
403,208

Income from operations
80,594

 
91,747

 
156,435

 
175,251

Other (expense) income
 
 
 
 
 
 
 
Interest expense
(50,516
)
 
(50,597
)
 
(99,714
)
 
(101,288
)
Other income
2,529

 
3,134

 
3,131

 
10,258

Total other expense
(47,987
)
 
(47,463
)
 
(96,583
)
 
(91,030
)
Income from continuing operations before income taxes
32,607

 
44,284

 
59,852

 
84,221

Provision for income taxes
(13,531
)
 
(13,451
)
 
(25,598
)
 
(23,599
)
Income from continuing operations
19,076

 
30,833

 
34,254

 
60,622

Loss from discontinued operations, net of tax

 

 
(199
)
 
(3,182
)
Net income
19,076

 
30,833

 
34,055

 
57,440

Net loss (income) attributable to noncontrolling interest
1,179

 
(1,245
)
 
8,298

 
(2,158
)
Net income attributable to Encore Capital Group, Inc. stockholders
$
20,255

 
$
29,588

 
$
42,353

 
$
55,282

Amounts attributable to Encore Capital Group, Inc.:
 
 
 
 
 
 
 
Income from continuing operations
$
20,255

 
$
29,588

 
$
42,552

 
$
58,464

Loss from discontinued operations, net of tax

 

 
(199
)
 
(3,182
)
Net income
$
20,255

 
$
29,588

 
$
42,353

 
$
55,282

 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Encore Capital Group, Inc.:
 
 
 
 
 
 
 
Basic earnings (loss) per share from:
 
 
 
 
 
 
 
Continuing operations
$
0.78

 
$
1.15

 
$
1.64

 
$
2.28

Discontinued operations
$

 
$

 
$
(0.01
)
 
$
(0.12
)
Net basic earnings per share
$
0.78

 
$
1.15

 
$
1.63

 
$
2.16

Diluted earnings (loss) per share from:
 
 
 
 
 
 
 
Continuing operations
$
0.77

 
$
1.14

 
$
1.62

 
$
2.26

Discontinued operations
$

 
$

 
$
(0.01
)
 
$
(0.12
)
Net diluted earnings per share
$
0.77

 
$
1.14

 
$
1.61

 
$
2.14

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
25,983

 
25,742

 
25,930

 
25,646

Diluted
26,391

 
25,874

 
26,240

 
25,871

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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
19,076

 
$
30,833

 
$
34,055

 
$
57,440

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized gains/losses on derivative instruments:
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative instruments
963

 
(562
)
 
1,434

 
(496
)
Income tax effect
35

 
220

 
(512
)
 
194

Unrealized gain (loss) on derivative instruments, net of tax
998

 
(342
)
 
922

 
(302
)
Change in foreign currency translation:
 
 
 
 
 
 
 
Unrealized gain (loss) on foreign currency translation
7,824

 
(25,126
)
 
22,288

 
(36,687
)
Income tax effect

 
32

 

 
1,353

Unrealized gain (loss) on foreign currency translation, net of tax
7,824

 
(25,094
)
 
22,288

 
(35,334
)
Other comprehensive income (loss), net of tax
8,822

 
(25,436
)
 
23,210

 
(35,636
)
Comprehensive income
27,898

 
5,397

 
57,265

 
21,804

Comprehensive loss (income) attributable to noncontrolling interest:
 
 
 
 
 
 
 
Net loss (income)
1,179

 
(1,245
)
 
8,298

 
(2,158
)
Unrealized loss (gain) on foreign currency translation
1,841

 
1,260

 
(1,409
)
 
922

Comprehensive loss (income) attributable to noncontrolling interest
3,020

 
15

 
6,889

 
(1,236
)
Comprehensive income attributable to Encore Capital Group, Inc. stockholders
$
30,918

 
$
5,412

 
$
64,154

 
$
20,568

See accompanying notes to condensed consolidated financial statements

5


ENCORE CAPITAL GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 
Six Months Ended 
 June 30,
 
2017
 
2016
Operating activities:
 
 
 
Net income
$
34,055

 
$
57,440

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Loss from discontinued operations, net of income taxes
199

 
3,182

Depreciation and amortization
17,297

 
18,096

Other non-cash expense, net
21,309

 
19,242

Stock-based compensation expense
3,510

 
8,869

Gain on derivative instruments, net
(2,623
)
 
(7,531
)
Deferred income taxes
(3,164
)
 
(25,002
)
Reversal of allowances on receivable portfolios, net
(10,961
)
 
(4,670
)
Changes in operating assets and liabilities
 
 
 
Deferred court costs and other assets
(5,951
)
 
(666
)
Prepaid income tax and income taxes payable
20,389

 
5,260

Accounts payable, accrued liabilities and other liabilities
(2,770
)
 
(27,236
)
Net cash provided by operating activities from continuing operations
71,290

 
46,984

Net cash provided by operating activities from discontinued operations

 
2,096

Net cash provided by operating activities
71,290

 
49,080

Investing activities:
 
 
 
Cash paid for acquisitions, net of cash acquired
(5,623
)
 
(675
)
Proceeds from divestiture of business, net of cash divested

 
106,041

Purchases of receivable portfolios, net of put-backs
(464,507
)
 
(517,665
)
Collections applied to investment in receivable portfolios, net
371,285

 
351,219

Purchases of property and equipment
(11,984
)
 
(10,094
)
Payments to acquire interest in affiliates
(8,805
)
 

Other, net
4,559

 
3,502

Net cash used in investing activities from continuing operations
(115,075
)
 
(67,672
)
Net cash provided by investing activities from discontinued operations

 
14,685

Net cash used in investing activities
(115,075
)
 
(52,987
)
Financing activities:
 
 
 
Payment of loan costs
(3,415
)
 
(2,934
)
Proceeds from credit facilities
331,020

 
288,750

Repayment of credit facilities
(373,345
)
 
(307,946
)
Repayment of senior secured notes
(6,174
)
 
(11,256
)
Proceeds from issuance of convertible senior notes
150,000

 

Repayment of convertible senior notes
(60,406
)
 

Proceeds from convertible hedge instruments
5,580

 

Taxes paid related to net share settlement of equity awards
(2,457
)
 
(4,068
)
Proceeds from other debt

 
34,946

Other, net
(4,954
)
 
(8,714
)
Net cash provided by (used in) financing activities
35,849

 
(11,222
)
Net decrease in cash and cash equivalents
(7,936
)
 
(15,129
)
Effect of exchange rate changes on cash and cash equivalents
4,818

 
545

Cash and cash equivalents, beginning of period
149,765

 
153,593

Cash and cash equivalents, end of period
$
146,647

 
$
139,009


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 and other related services for consumers across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings.
Financial Statement Preparation and Presentation
The accompanying interim condensed consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position, results of operations, and cash flows. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. Actual results could materially differ from those estimates.
Basis of Consolidation
The condensed consolidated financial statements have been prepared in conformity with GAAP, and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates VIEs, for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (b) either the obligation to absorb losses or the right to receive benefits. Refer to Note 10, “Variable Interest Entities,” for further details. All intercompany transactions and balances have been eliminated in consolidation.
Translation of Foreign Currencies
The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments and recorded within other comprehensive income or loss. Transaction gains and losses are included in other income or expense.
Reclassifications
Certain immaterial reclassifications have been made to the condensed consolidated financial statements to conform to the current year’s presentation. For the three and six months ended June 30, 2016, the Company revised its statements of comprehensive income. The comprehensive loss attributable to Encore increased by $1.3 million and $0.9 million for the three and six months ended June 30, 2016. This revision was not material. There were no revisions to the statements of financial condition, income or cash flows.

7


Change in Accounting Principle
In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. Upon adoption of this standard, excess tax benefits and tax deficiencies will be recognized as income tax expense, and the tax effects of exercised or vested awards will be treated as discrete items in the period in which they occur. As such, implementation of this standard could create volatility in an entity’s effective income tax rate on a quarter by quarter basis. The volatility in the effective income tax rate is due primarily to fluctuations in the stock price and the timing of stock option exercises and vesting of restricted share grants. The standard also requires excess tax benefits to be presented as an operating activity on the statement of cash flows rather than as a financing activity. An entity may elect to apply the change in presentation in the statement of cash flows either prospectively or retrospectively to all periods presented. Further, the amendments allow an entity to make an accounting policy election to either estimate forfeitures or recognize forfeitures as they occur. If an election is made, the change to recognize forfeitures as they occur must be adopted using a modified retrospective approach with a cumulative effect adjustment recorded to opening retained earnings.
ASU 2016-09 became effective for the Company on January 1, 2017. The Company applied the change in presentation to the statement of cash flows retrospectively for all periods presented after adoption date. The Company believes that the new standard may cause volatility in its effective tax rates and earnings per share due to the tax effects related to share-based payments being recorded to the income statement. The volatility in future periods will depend on the Company’s stock price at the awards’ vest dates and the number of awards that vest in each period. The Company will not elect an accounting policy change to record forfeitures as they occur and will continue to estimate forfeitures at each period.
Recent Accounting Pronouncements
Other than the adoption of ASU 2016-09 as discussed in the “Change in Accounting Principle” section above, there have been no new accounting pronouncements made effective during the six months ended June 30, 2017 that have significance, or potential significance, to the Company’s consolidated financial statements.
Recent Accounting Pronouncements Not Yet Effective
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718) (“ASU 2017-09”). ASU 2017-09 provides clarity in order to reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company does not anticipate that the adoption of ASU 2017-09 will have a material impact on its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairments tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is evaluating the impact of adopting this guidance on its consolidated financial statements as well as whether to adopt the new guidance early.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805); Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is evaluating the impact of adopting this guidance on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The FASB issued ASU 2016-15 to decrease the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this update provide guidance on eight specific cash flow issues. ASU 2016-15 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, provided that all of the amendments are adopted in the same period. The

8


guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements as well as whether to adopt the new guidance early.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 applies a current expected credit loss model which is a new impairment model based on expected losses rather than incurred losses. Under this model, an entity would recognize an impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from financial assets measured at amortized cost. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected. ASU 2016-13 eliminates the current accounting model for loans and debt securities acquired with deteriorated credit quality under Accounting Standards Codification (“ASC”) 310-30, which provides authoritative guidance for the accounting of the Company’s investment in receivable portfolios. Under this new standard, entities will gross up the initial amortized cost for the purchased financial assets with credit deterioration (“PCD assets”), the initial amortized cost will be the sum of (1) the purchase price and (2) the estimate of credit losses as of the date of acquisition. After initial recognition of PCD assets and the related allowance, any change in estimated cash flows (favorable or unfavorable) will be immediately recognized in the income statement because the yield on PCD assets would be locked. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 with early adoption permitted for reporting periods beginning after December 15, 2018. The guidance will be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which ASU 2016-13 is adopted. However, the FASB has determined that financial assets for which the guidance in Subtopic 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality, has previously been applied should prospectively apply the guidance in ASU 2016-13 for PCD assets. A prospective transition approach should be used for PCD assets where upon adoption, the amortized cost basis should be adjusted to reflect the addition of the allowance for credit losses. This transition relief will avoid the need for a reporting entity to reassess its purchased financial assets that exist as of the date of adoption to determine whether they would have met at acquisition the new criteria of more-than insignificant credit deterioration since origination. The transition relief also will allow an entity to accrete the remaining noncredit discount (based on the revised amortized cost basis) into interest income at the effective interest rate at the adoption date of ASU 2016-13. The same transition requirements should be applied to beneficial interests that previously applied Subtopic 310-30 or have a significant difference between contractual cash flows and expected cash flows. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements as well as whether to adopt the new guidance early.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 changes accounting for leases and requires lessees to recognize the assets and liabilities arising from all leases, including those classified as operating leases under previous accounting guidance, on the balance sheet and requires disclosure of key information about leasing arrangements to increase transparency and comparability among organizations. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company starting in the first quarter of fiscal year 2019. Early adoption is permitted. The Company is in the process of determining the effects the adoption will have on its consolidated financial statements as well as whether to adopt the new guidance early.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The objective of ASU 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying ASU 2014-09, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s ASC. ASU 2014-09 is effective for annual reporting periods (including interim periods within that reporting period) beginning after December 15, 2016 and shall be applied using either a full retrospective or modified retrospective approach. Early application is not permitted. In August 2015, FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all public companies for all annual periods beginning after December 15, 2017 with early adoption permitted only as of annual reporting periods beginning after December 31, 2016, including interim periods within the reporting period. In March 2016, the FASB issued ASU 2016-08 as an amendment to ASU 2014-09, which clarifies how to identify the unit of accounting for the principal versus agent evaluation, how to apply the control principle to certain types of arrangements, such as service transactions, and reframed the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent. The Company is evaluating its implementation approach and the potential impacts of Topic 606 on its existing revenue recognition policies and procedures. The Company does not expect the adoption of this standard will have a material impact on its consolidated financial statements.

9


With the exception of the updated standards discussed above, there have been no new accounting pronouncements not yet effective that have significance, or potential significance, to the Company’s consolidated financial statements.
Note 2: Discontinued Operations
On March 31, 2016, the Company completed its previously announced divestiture of its membership interests in Propel Acquisition LLC (“Propel”) pursuant to the Securities Purchase Agreement (the “Purchase Agreement”), dated February 19, 2016, among the Company and certain funds affiliated with Prophet Capital Asset Management LP. Pursuant to the Purchase Agreement, the application of the purchase price formula resulted in cash consideration paid to the Company at closing of $144.4 million (net proceeds were $106.0 million after divestiture of $38.4 million in cash), subject to customary post-closing adjustments. The purchase price was finalized in the first quarter of 2017.
During the three months ended March 31, 2016, the Company recognized a loss of $3.0 million related to the sale of Propel, this loss was reduced to $2.0 million based on the adjustments recorded in the fourth quarter of 2016 and the first quarter of 2017. Propel represented the Company’s entire tax lien business reportable segment. Propel’s operations are presented as discontinued operations in the Company’s condensed consolidated statements of income. Certain immaterial costs that may be eliminated as a result of the sale remained in continuing operations.
The following table presents the results of the discontinued operations during the periods presented (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$

 
$

 
$

 
$
4,950

Salaries and employee benefits

 

 

 
(2,860
)
Other operating expenses

 

 

 
(1,473
)
General and administrative expenses

 

 

 
(1,551
)
Depreciation and amortization

 

 

 
(127
)
Loss from discontinued operations, before income taxes

 

 

 
(1,061
)
Loss on sale of discontinued operations, before income taxes

 

 
(322
)
 
(3,000
)
Total loss on discontinued operations, before income taxes

 

 
(322
)
 
(4,061
)
Income tax benefit

 

 
123

 
879

Total loss from discontinued operations, net of tax
$

 
$

 
$
(199
)
 
$
(3,182
)
Note 3: Earnings Per Share
Basic earnings or loss per share is calculated by dividing net earnings or loss attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock, and the dilutive effect of the convertible senior notes.
A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Weighted average common shares outstanding—basic
25,983

 
25,742

 
25,930

 
25,646

Dilutive effect of stock-based awards
160

 
132

 
186

 
225

Dilutive effect of convertible senior notes
248

 

 
124

 

Weighted average common shares outstanding—diluted
26,391

 
25,874

 
26,240

 
25,871

Anti-dilutive employee stock options outstanding were approximately 317,000 and 200,000 during the three and six months ended June 30, 2017. Anti-dilutive employee stock options outstanding were zero or negligible during the three and six months ended June 30, 2016.

10


Note 4: Fair Value Measurements
The authoritative guidance for fair value measurements defines fair value as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The guidance utilizes a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 
Fair Value Measurements as of
June 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
3,748

 
$

 
$
3,748

Liabilities
 
 
 
 
 
 
 
Interest rate swap agreements

 
(56
)
 

 
(56
)
Contingent consideration

 

 
(10,885
)
 
(10,885
)
Temporary Equity
 
 
 
 
 
 
 
Redeemable noncontrolling interest

 

 
(126,215
)
 
(126,215
)
 
Fair Value Measurements as of
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Foreign currency exchange contracts
$

 
$
1,122

 
$

 
$
1,122

Liabilities
 
 
 
 
 
 
 
Foreign currency exchange contracts

 
(1,360
)
 

 
(1,360
)
Interest rate swap agreements

 
(131
)
 

 
(131
)
Contingent consideration

 

 
(2,531
)
 
(2,531
)
Temporary Equity
 
 
 
 
 
 
 
Redeemable noncontrolling interest

 

 
(45,755
)
 
(45,755
)
Derivative Contracts:
The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Contingent Consideration:
The Company carries certain contingent liabilities resulting from its mergers and acquisition activities. Certain sellers of the Company’s acquired entities could earn additional earn-out payments in cash based on the entities’ subsequent operating performance. The Company recorded the acquisition date fair values of these contingent liabilities, based on the likelihood of contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to fair value at each reporting date. During the three months ended June 30, 2017, the Company recorded additional contingent consideration of approximately $10.5 million resulting from Cabot’s acquisition of a debt solution service provider in the United Kingdom. Additionally, the Company reviewed the earn-out analysis for one of its previously acquired entities and

11


determined that, based on actual and forecasted operating performance, there would be no future earn-out payment to the sellers, as a result, the entire liability for the contingent consideration of $2.8 million relating to the acquisition of that entity was reversed and recorded as a reduction of general and administrative expenses in the Company’s consolidated statements of income for the three months ended June 30, 2017. As of June 30, 2017, the aggregated fair value of the contingent consideration was approximately $10.9 million.
The following table provides a roll forward of the fair value of contingent consideration for the periods ended June 30, 2017 and December 31, 2016 (in thousands):
 
Amount
Balance at December 31, 2015
$
10,403

Change in fair value of contingent consideration
(7,602
)
Effect of foreign currency translation
(270
)
Balance at December 31, 2016
2,531

Issuance of contingent consideration in connection with acquisition
10,544

Change in fair value of contingent consideration
(2,398
)
Effect of foreign currency translation
208

Balance at June 30, 2017
$
10,885

Redeemable Noncontrolling Interest:
Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value and, in some cases, to force a sale of the subsidiary if the Company chooses not to purchase their interests at fair value. The noncontrolling interest subject to these arrangements is included in temporary equity as redeemable noncontrolling interest, and is adjusted to its estimated redemption amount each reporting period. Future reductions in the carrying amount are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interest at the time it was originally recorded. The recorded value of the redeemable noncontrolling interest cannot go below the floor level. Adjustments to the carrying amount of redeemable noncontrolling interest are charged to retained earnings (or to additional paid-in capital if there are no retained earnings) and do not affect net income or comprehensive income in the consolidated financial statements.
The components of the change in the redeemable noncontrolling interest for the periods ended June 30, 2017 and December 31, 2016 are presented in the following table (in thousands):
 
Amount
Balance at December 31, 2015
$
38,624

Addition to redeemable noncontrolling interest
826

Redemption of redeemable noncontrolling interest
(3,562
)
Net loss attributable to redeemable noncontrolling interest
(47,831
)
Adjustment of the redeemable noncontrolling interest to fair value
74,194

Effect of foreign currency translation attributable to redeemable noncontrolling interest
(16,496
)
Balance at December 31, 2016
45,755

Addition to redeemable noncontrolling interest
277

Net loss attributable to redeemable noncontrolling interest
(6,928
)
Adjustment of the redeemable noncontrolling interest to fair value
85,139

Effect of foreign currency translation attributable to redeemable noncontrolling interest
1,972

Balance at June 30, 2017
$
126,215

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

12


include the estimated future gross cash flow, average cost to collect, and discount rate. In accordance with authoritative guidance related to fair value measurements, the Company estimates the average cost to collect and discount rates based on its estimate of what a market participant might use in valuing these portfolios. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.
In the Company’s current analysis, the fair value of investment in receivable portfolios was approximately $2,453.5 million and $2,446.6 million as of June 30, 2017 and December 31, 2016, respectively, as compared to the carrying value of $2,555.9 million and $2,382.8 million as of June 30, 2017 and December 31, 2016, respectively. A 100 basis point fluctuation in the cost to collect and discount rate used would result in an increase or decrease in the fair value of U.S. and European portfolios by approximately $48.5 million and $60.5 million, respectively, as of June 30, 2017. This fair value calculation does not represent, and should not be construed to represent, the underlying value of the Company or the amount that could be realized if its investment in receivable portfolios were sold.
Deferred Court Costs:
The Company capitalizes deferred court costs and provides a reserve for those costs that it believes will ultimately be uncollectible. The carrying value of net deferred court costs approximates fair value.
Debt:
The majority of Encore and its subsidiaries’ borrowings are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value. These borrowings include Encore’s senior secured notes and borrowings under its revolving credit and term loan facilities, Cabot’s senior secured notes and borrowings under its revolving credit facility, and other borrowing under term and revolving credit facilities at certain of the Company’s subsidiaries.
Encore’s convertible senior notes are carried at historical cost, adjusted for the debt discount. The carrying value of the convertible senior notes was $510.8 million and $416.5 million as of June 30, 2017 and December 31, 2016, respectively. The fair value estimate for these convertible senior notes, which incorporates quoted market prices using Level 2 inputs, was approximately $583.7 million and $431.7 million as of June 30, 2017 and December 31, 2016, respectively.
Cabot’s senior secured notes are carried at historical cost, adjusted for debt discount and debt premium. The carrying value of Cabot’s senior secured notes was $1.4 billion and $1.3 billion, as of June 30, 2017 and December 31, 2016, respectively. The fair value estimate for these senior notes, which incorporates quoted market prices using Level 2 inputs, was $1.4 billion and $1.3 billion as of June 30, 2017 and December 31, 2016, respectively.
The Company’s preferred equity certificates are legal obligations to the noncontrolling shareholders of certain subsidiaries. They are carried at the face amount, plus any accrued interest. The Company determined that the carrying value of these preferred equity certificates approximated fair value as of June 30, 2017 and December 31, 2016.
Note 5: Derivatives and Hedging Instruments
The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging.

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):
 
June 30, 2017
 
December 31, 2016
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other assets
 
$
2,117

 
Other assets
 
$
707

Foreign currency exchange contracts
Other liabilities
 

 
Other liabilities
 
(51
)
Interest rate swap agreements
Other liabilities
 
(56
)
 
Other liabilities
 
(131
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency exchange contracts
Other assets
 
1,631

 
Other assets
 
415

Foreign currency exchange contracts
Other liabilities
 

 
Other liabilities
 
(1,309
)
Derivatives Designated as Hedging Instruments
The Company has operations in foreign countries, which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company enters into derivative financial instruments, principally foreign currency forward contracts with financial counterparties. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis.
Certain of the foreign currency forward contracts are designated as cash flow hedging instruments and qualify for hedge accounting treatment. Gains and losses arising from the effective portion of such contracts are recorded as a component of accumulated other comprehensive income (“OCI”) as gains and losses on derivative instruments, net of income taxes. The hedging gains and losses in OCI are subsequently reclassified into earnings in the same period in which the underlying transactions affect the Company’s earnings. If all or a portion of the forecasted transaction is cancelled, this would render all or a portion of the cash flow hedge ineffective and the Company would reclassify the ineffective portion of the hedge into earnings. The Company generally does not experience ineffectiveness of the hedge relationship and the accompanying consolidated financial statements do not include any such gains or losses.
As of June 30, 2017, the total notional amount of the forward contracts that are designated as cash flow hedging instruments was $21.0 million. All of these outstanding contracts qualified for hedge accounting treatment. The Company estimates that approximately $1.7 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 six months ended June 30, 2017 and 2016.
The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. As of June 30, 2017, Baycorp had two interest rate swap agreements outstanding with a total notional amount of $30.0 million Australian dollars (approximately $23.1 million U.S. dollars). These interest rate swap instruments are designated as cash flow hedges and accounted for using hedge accounting.

14


The following table summarizes the effects of derivatives in cash flow hedging relationships designated as hedging instruments on the Company’s condensed consolidated statements of income for the three and six months ended June 30, 2017 and 2016 (in thousands):
Derivatives Designated as Hedging Instruments
 
Gain or (Loss)
Recognized in OCI-
Effective Portion
 
Location of Gain
or (Loss)
Reclassified from
OCI into
Income - Effective
Portion
 
Gain or (Loss)
Reclassified
from OCI into
Income - Effective
Portion
 
Location of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
 
Amount of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
 
Three Months Ended 
 June 30,
 
 
 
Three Months Ended 
 June 30,
 
 
 
Three Months Ended 
 June 30,
 
2017
 
2016
 
 
 
2017
 
2016
 
 
 
2017
 
2016
Foreign currency exchange contracts
 
$
1,146

 
$
(207
)
 
Salaries and
employee
benefits
 
$
297

 
$
274

 
Other (expense)
income
 
$

 
$

Foreign currency exchange contracts
 
160

 
(36
)
 
General and
administrative
expenses
 
27

 
46

 
Other (expense)
income
 

 

Interest rate swap agreements
 
14

 

 
Interest expense
 
33

 

 
Other (expense)
income
 

 

Derivatives Designated as Hedging Instruments
 
Gain or (Loss)
Recognized in OCI-
Effective Portion
 
Location of Gain
or (Loss)
Reclassified from
OCI into
Income - Effective
Portion
 
Gain or (Loss)
Reclassified
from OCI into
Income - Effective
Portion
 
Location of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
 
Amount of
Gain or (Loss)
Recognized -
Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing
 
Six Months Ended 
 June 30,
 
 
 
Six Months Ended 
 June 30,
 
 
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
 
 
2017
 
2016
 
 
 
2017
 
2016
Foreign currency exchange contracts
 
$
1,735

 
$
295

 
Salaries and
employee
benefits
 
$
472

 
$
532

 
Other (expense)
income
 
$

 
$

Foreign currency exchange contracts
 
240

 
(190
)
 
General and
administrative
expenses
 
41

 
69

 
Other (expense)
income
 

 

Interest rate swap agreements
 
19

 

 
Interest expense
 
110

 

 
Other (expense)
income
 

 

Derivatives Not Designated as Hedging Instruments
In 2016, Encore and its Cabot subsidiary collectively began entering into currency exchange forward contracts to reduce the effects of currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature within one to three months and are not designated as hedge instruments for accounting purposes. The Company continues to monitor the level of exposure of the foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis. The gains or losses on these derivative contracts are recognized in other income or expense based on the changes in fair value.

15


The following table summarizes the effects of derivatives in cash flow hedging relationships not designated as hedging instruments on the Company’s condensed consolidated statements of income for the three and six months ended June 30, 2017 and 2016 (in thousands):
Derivatives Not Designated as Hedging Instruments
 
Location of Gain or (Loss) Recognized in income on Derivative
 
Amount of Gain or (Loss) Recognized in Income on Derivative
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
 
2017
 
2016
 
2017
 
2016
Foreign currency exchange contracts (1)
 
Other income (expense)
 
$
2,875

 
$
1,990

 
$
2,623

 
$
7,376

Interest rate swap agreements
 
Interest expense
 
33

 
35

 
110

 
44

________________________
(1)
After the effect of income tax and noncontrolling interest, the net impact of the derivative contracts to consolidated net income from continuing operations attributable to Encore was a gain of $1.0 million and $0.9 million during the three and six months ended June 30, 2017, respectively, compared to a loss of $0.2 million and a gain of $1.6 million during the three and six months ended June 30, 2016, respectively.
Note 6: Investment in Receivable Portfolios, Net
In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during the same fiscal quarter are aggregated into pools based on common risk characteristics. Common risk characteristics include risk ratings (e.g., FICO or similar scores), financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic region or location. Portfolios acquired in business combinations are also grouped into these pools. During any fiscal quarter in which the Company has an acquisition of an entity that has portfolio, the entire historical portfolio of the acquired company is aggregated into the pool groups for that quarter, based on common characteristics, resulting in pools for that quarter that may consist of several different vintages of portfolio. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.
In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an internal rate of return (“IRR”) to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows. Subsequent increases in expected cash flows are recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of operations as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition. With gross collections being discounted at monthly IRRs, when collections are lower in the near term, even if substantially higher collections are expected later in the collection curve, an allowance charge could result.
The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. During the quarter ended September 30, 2016, the Company revised the forecasting methodology it uses to value and calculate IRRs on certain portfolios in Europe by extending the collection forecast from 120 months to 180 months. This change was made as a result of (1) the Company having observed that older portfolios in Europe have consistently experienced cash collections beyond 120 months, (2) an expectation that regulatory changes in the United Kingdom resulting in a reduction in the number of highly discounted near term one-time settlements, an increase in the number of payment plans, and an increase in the length of existing payment plans will cause a lengthening of the collections curve, (3) an expectation that, as a result of a higher percentage of semi-performing account purchases in the United Kingdom in recent years, newer vintages will have a larger percentage of collections after 120 months and (4) the Company’s increased confidence in its ability to forecast future cash collections to 180 months. The increase in the collection forecast from 120 months to 180 months was applied effective July 1, 2016 to certain portfolios in Europe for which the Company could accurately forecast through such term. These changes in forecasted future cash flows resulted in an increase in the aggregate total estimated remaining collections for the receivable portfolios of approximately $296.5 million as of September 30, 2016. In addition, during the three months ended September 30, 2016, the Company recorded allowance charges of approximately $94.0 million resulting from delays or shortfalls in near term collections against the forecasts for certain pools in Europe. Subsequent to the recording of the allowance charges for certain

16


pools in Europe, the Company has experienced sustained improvements in collections resulting primarily from its liquidation improvement initiatives. As a result, during the three months ended June 30, 2017, the Company reversed approximately $7.8 million of the previously recorded allowance charges for certain pools in Europe and raised IRRs for certain other pool groups in Europe.
The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios, and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and portfolio allowance reversals and decreased by gross collections and portfolio allowances.
If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the carrying value of a Cost Recovery Portfolio has been fully recovered.
Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows.
The following table summarizes the Company’s accretable yield and an estimate of zero basis future cash flows at the beginning and end of the period presented (in thousands):
 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total
Balance at December 31, 2016
$
3,092,004

 
$
365,504

 
$
3,457,508

Revenue recognized, net
(211,718
)
 
(40,252
)
 
(251,970
)
(Reductions) additions on existing portfolios, net
(90,138
)
 
57,446

 
(32,692
)
Additions for current purchases, net
200,728

 

 
200,728

Effect of foreign currency translation
38,712

 
467

 
39,179

Balance at March 31, 2017
3,029,588

 
383,165

 
3,412,753

Revenue recognized, net
(231,431
)
 
(40,805
)
 
(272,236
)
Net additions on existing portfolios
225,021

 
9,888

 
234,909

Additions for current purchases, net
258,687

 

 
258,687

Effect of foreign currency translation
66,927

 
(753
)
 
66,174

Balance at June 30, 2017
$
3,348,792

 
$
351,495

 
$
3,700,287


17


 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total
Balance at December 31, 2015
$
3,047,640

 
$
223,031

 
$
3,270,671

Revenue recognized, net
(238,547
)
 
(31,547
)
 
(270,094
)
Net additions on existing portfolios
39,538

 
8,071

 
47,609

Additions for current purchases, net
193,654

 

 
193,654

Effect of foreign currency translation
(64,330
)
 
470

 
(63,860
)
Balance at March 31, 2016
2,977,955

 
200,025

 
3,177,980

Revenue recognized, net
(233,714
)
 
(33,738
)
 
(267,452
)
Net additions on existing portfolios
59,459

 
95,135

 
154,594

Additions for current purchases, net
183,217

 

 
183,217

Effect of foreign currency translation
(181,223
)
 
245

 
(180,978
)
Balance at June 30, 2016
$
2,805,694

 
$
261,667

 
$
3,067,361

During the three months ended June 30, 2017, the Company purchased receivable portfolios with a face value of $2.4 billion for $246.4 million, or a purchase cost of 10.1% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended June 30, 2017 amounted to $505.0 million. During the three months ended June 30, 2016, the Company purchased receivable portfolios with a face value of $2.8 billion for $233.1 million, or a purchase cost of 8.2% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended June 30, 2016 amounted to $416.9 million.
During the six months ended June 30, 2017, the Company purchased receivable portfolios with a face value of $4.1 billion for $465.1 million, or a purchase cost of 11.3% of face value. The estimated future collections at acquisition for all portfolios purchased during the six months ended June 30, 2017 amounted to $924.4 million. During the six months ended June 30, 2016, the Company purchased receivable portfolios with a face value of $6.4 billion for $489.9 million, or a purchase cost of 7.7% of face value. The estimated future collections at acquisition for all portfolios purchased during the six months ended June 30, 2016 amounted to $875.5 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 June 30, 2017 and 2016, Zero Basis Revenue was approximately $40.8 million and $33.7 million, respectively. During the six months ended June 30, 2017 and 2016, Zero Basis Revenue was approximately $81.1 million and $65.3 million, respectively.

18


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 June 30, 2017
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
2,422,299

 
$
13,719

 
$

 
$
2,436,018

Purchases of receivable portfolios
245,246

 
1,169

 

 
246,415

Disposals or transfers to held for sale
(2,697
)
 

 

 
(2,697
)
Gross collections(1)
(404,918
)
 
(459
)
 
(40,805
)
 
(446,182
)
Put-backs and Recalls(2)
(3,237
)
 

 

 
(3,237
)
Foreign currency adjustments
53,466

 
(94
)
 

 
53,372

Revenue recognized
224,310

 

 
39,097

 
263,407

Portfolio allowance reversals, net
7,121

 

 
1,708

 
8,829

Balance, end of period
$
2,541,590

 
$
14,335

 
$

 
$
2,555,925

Revenue as a percentage of collections(3)
55.4
%
 
0.0
%
 
95.8
%
 
59.0
%
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
2,482,855

 
$
4,123

 
$

 
$
2,486,978

Purchases of receivable portfolios
233,116

 

 

 
233,116

Transfer of portfolios
(96
)
 
96

 

 

Disposals or transfers to held for sale

 

 

 

Gross collections(1)
(399,498
)
 
(724
)
 
(33,878
)
 
(434,100
)
Put-backs and Recalls(2)
(3,692
)
 
(5
)
 
140

 
(3,557
)
Foreign currency adjustments
(80,432
)
 
136

 

 
(80,296
)
Revenue recognized
233,010

 

 
31,963

 
264,973

Portfolio allowance reversals, net
704

 

 
1,775

 
2,479

Balance, end of period
$
2,465,967

 
$
3,626

 
$

 
$
2,469,593

Revenue as a percentage of collections(3)
58.3
%
 
0.0
%
 
94.3
%
 
61.0
%
________________________
(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.


19


 
Six Months Ended June 30, 2017
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
2,368,366

 
$
14,443

 
$

 
$
2,382,809

Purchases of receivable portfolios
463,973

 
1,169

 

 
465,142

Disposals or transfers to held for sale
(7,468
)
 

 

 
(7,468
)
Gross collections(1)
(804,922
)
 
(1,099
)
 
(81,024
)
 
(887,045
)
Put-backs and Recalls(2)
(4,994
)
 

 
(33
)
 
(5,027
)
Foreign currency adjustments
83,486

 
(178
)
 

 
83,308

Revenue recognized
435,415

 

 
77,830

 
513,245

Portfolio allowance reversals, net
7,734

 

 
3,227

 
10,961

Balance, end of period
$
2,541,590

 
$
14,335

 
$

 
$
2,555,925

Revenue as a percentage of collections(3)
54.1
%
 
0.0
%
 
96.1
%
 
57.9
%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
2,436,054

 
$
4,615

 
$

 
$
2,440,669

Purchases of receivable portfolios
489,869

 

 

 
489,869

Gross collections(1)
(815,225
)
 
(1,357
)
 
(65,323
)
 
(881,905
)
Put-backs and Recalls(2)
(16,577
)
 
(11
)
 
38

 
(16,550
)
Foreign currency adjustments
(100,319
)
 
283

 

 
(100,036
)
Revenue recognized
471,088

 

 
61,788

 
532,876

Portfolio allowance reversals, net
1,173

 

 
3,497

 
4,670

Balance, end of period
$
2,465,967

 
$
3,626

 
$

 
$
2,469,593

Revenue as a percentage of collections(3)
57.8
%
 
0.0
%
 
94.6
%
 
60.4
%
________________________
(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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
136,325

 
$
58,397

 
$
137,037

 
$
60,588

Provision for portfolio allowances
682

 

 
682

 

Reversal of prior allowances
(9,511
)
 
(2,479
)
 
(11,643
)
 
(4,670
)
Effect of foreign currency translation
3,179

 

 
4,599

 

Balance at end of period
$
130,675

 
$
55,918

 
$
130,675

 
$
55,918

Note 7: Deferred Court Costs, Net
The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections the Company is required to pay certain upfront costs to the applicable courts that are recoverable from the consumer (“Deferred Court Costs”).

20


The Company capitalizes Deferred Court Costs in its consolidated financial statements and provides a reserve for those costs that it believes will ultimately be uncollectible. The Company determines the reserve based on an estimated court cost recovery rate established based on its analysis of historical court costs recovery data. The Company estimates deferral periods for Deferred Court Costs based on jurisdiction and nature of litigation and writes off any Deferred Court Costs not recovered within the respective deferral period. Collections received from debtors are first applied against related court costs with the balance applied to the debtors’ account balance.
Deferred Court Costs for the deferral period consist of the following as of the dates presented (in thousands):
 
June 30,
2017
 
December 31,
2016
Court costs advanced
$
704,409

 
$
654,356

Court costs recovered
(284,122
)
 
(261,243
)
Court costs reserve
(345,971
)
 
(327,926
)
Deferred court costs
$
74,316

 
$
65,187

A roll forward of the Company’s court cost reserve is as follows (in thousands):
 
Court Cost Reserve
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
(334,639
)
 
$
(324,025
)
 
$
(327,926
)
 
$
(318,784
)
Provision for court costs
(22,197
)
 
(11,479
)
 
(40,202
)
 
(30,376
)
Net down of reserve after deferral period
12,488

 
14,096

 
24,511

 
27,073

Effect of foreign currency translation
(1,623
)
 
1,757

 
(2,354
)
 
2,436

Balance at end of period
$
(345,971
)
 
$
(319,651
)
 
$
(345,971
)
 
$
(319,651
)
Note 8: Other Assets
Other assets consist of the following (in thousands):
 
June 30,
2017
 
December 31,
2016
Deferred tax assets
$
54,804

 
$
51,077

Identifiable intangible assets, net
29,702

 
28,243

Assets held for sale
26,977

 
21,147

Service fee receivables
22,241

 
15,156

Prepaid expenses
20,480

 
18,036

Other financial receivables
18,367

 
18,732

Derivative instruments
3,748

 
1,122

Security deposits
3,180

 
2,781

Receivable from seller
5,388

 
5,388

Other
54,331

 
53,765

Total
$
239,218

 
$
215,447


21


Note 9: Debt
The Company is in compliance with all covenants under its financing arrangements as of June 30, 2017. The components of the Company’s consolidated debt and capital lease obligations were as follows (in thousands):
 
June 30,
2017
 
December 31,
2016
Encore revolving credit facility
$
539,000

 
$
578,000

Encore term loan facility
116,740

 
164,615

Encore senior secured notes
5,145

 
11,320

Encore convertible notes
548,500

 
448,500

Less: debt discount
(37,690
)
 
(31,968
)
Cabot senior secured notes
1,360,489

 
1,280,241

Add: debt premium
16,511

 
17,686

Less: debt discount
(2,090
)
 
(2,200
)
Cabot senior revolving credit facility
81,188

 
33,218

Preferred equity certificates
230,418

 
205,975

Other credit facilities
78,104

 
74,551

Other
63,381

 
62,608

Capital lease obligations
4,109

 
5,091

 
3,003,805

 
2,847,637

Less: debt issuance costs, net of amortization
(39,876
)
 
(41,654
)
Total
$
2,963,929

 
$
2,805,983

Encore Revolving Credit Facility and Term Loan Facility
The Company has a revolving credit facility and term loan facility pursuant to a Third Amended and Restated Credit Agreement dated December 20, 2016 (as amended, the “Restated Credit Agreement”). The Restated Credit Agreement includes a revolving credit facility of $801.7 million (the “Revolving Credit Facility”), a term loan facility of $120.4 million (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”), and an accordion feature that allows the Company to increase the Senior Secured Credit Facilities by an additional $250.0 million (approximately $25.3 million of which has been exercised). The Senior Secured Credit Facilities have a five year maturity expiring in December 2021, except with respect to (1) revolving commitments under the Revolving Credit Facility of $32.1 million and $168.6 million expiring in November 2017 and February 2019, respectively, and (2) two subtranches of the Term Loan Facility of $4.8 million and $18.0 million, expiring in November 2017 and February 2019, respectively.
Provisions of the Restated Credit Agreement include, but are not limited to:
Revolving Credit Facility commitments of (1) $601.0 million that expire in December 2021, (2) $168.6 million that expire in February 2019 and (3) $32.1 million that expire in November 2017, in each case with interest at a floating rate equal to, at the Company’s option, either: (a) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300 basis points depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (b) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. “Alternate base rate,” as defined in the Restated Credit Agreement, means the highest of (i) the per annum rate which the administrative agent publicly announces from time to time as its prime lending rate, (ii) the federal funds effective rate from time to time, plus 0.5% per annum, (iii) reserved adjusted LIBOR determined on a daily basis for a one month interest period, plus 1.0% per annum and (iv) zero;
A $97.6 million term loan maturing in December 2021, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. Principal amortizes $4.9 million in each of 2017 and 2018, $7.3 million in each of 2019 and 2020, and $7.3 million in 2021 with the remaining principal due at the end of the term;

22


An $18.0 million term loan maturing in February 2019, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. Principal amortizes $1.8 million in each of 2017 and 2018 with the remaining principal due at the end of the term;
A $4.8 million term loan maturing in November 2017, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. Principal amortizes $0.5 million in 2017 with the remaining principal due at the end of the term;
A borrowing base under the Revolving Credit Facility equal to 35% of all eligible non-bankruptcy estimated remaining collections plus 55% of eligible estimated remaining collections for consumer receivables subject to bankruptcy;
A maximum cash flow leverage ratio permitted of 3.00:1.00;
A maximum cash flow first-lien leverage ratio of 2.00:1.00;
A minimum interest coverage ratio of 1.75:1.00;
The allowance of indebtedness in the form of senior secured notes not to exceed $350.0 million;
The allowance of additional unsecured or subordinated indebtedness not to exceed $1.1 billion, including junior lien indebtedness not to exceed $400.0 million;
Restrictions and covenants, which limit the payment of dividends and the incurrence of additional indebtedness and liens, among other limitations;
Repurchases of up to $150.0 million of Encore’s common stock after July 9, 2015, subject to compliance with certain covenants and available borrowing capacity;
A change of control definition, that excludes acquisitions of stock by Red Mountain Capital Partners LLC, JCF FPK I, LP and their respective affiliates of up to 50% of the outstanding shares of Encore’s voting stock;
Events of default which, upon occurrence, may permit the lenders to terminate the facility and declare all amounts outstanding to be immediately due and payable;
A pre-approved acquisition limit of $225.0 million per fiscal year;
A basket to allow for investments not to exceed the greater of (1) 200% of the consolidated net worth of Encore and its restricted subsidiaries; and (2) an unlimited amount such that after giving effect to the making of any investment, the cash flow leverage ratio is less than 1.25:1:00;
A basket to allow for investments in persons organized under the laws of Canada in the amount of $50.0 million;
A requirement that Encore and its restricted subsidiaries, for the four-month period ending February 2019, have sufficient cash or availability under the Revolving Credit Facility (excluding availability under revolving commitments expiring in February 2019) to satisfy any amounts due under the revolving commitments that expire in February 2019 and the sub-tranche of the Term Loan Facility that expires in February 2019;
Collateralization by all assets of the Company, other than the assets of certain foreign subsidiaries and all unrestricted subsidiaries as defined in the Restated Credit Agreement.
At June 30, 2017, the outstanding balance under the Revolving Credit Facility was $539.0 million, which bore a weighted average interest rate of 4.06% and 3.50% for the three months ended June 30, 2017 and 2016, respectively, and 3.90% and 3.49% for the six months ended June 30, 2017 and 2016, respectively. Available capacity under the Revolving Credit Facility, subject to borrowing base and applicable debt covenants, was $262.7 million as of June 30, 2017, not including the $224.7 million additional capacity provided by the facility’s remaining accordion feature. At June 30, 2017, the outstanding balance under the Term Loan Facility was $116.7 million.

23


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 June 30, 2017, $3.1 million of the 7.375% Senior Secured Notes and $2.0 million of the 7.75% Senior Secured Notes, for an aggregate of $5.1 million, remained outstanding.
The Senior Secured Notes are guaranteed in full by certain of Encore’s subsidiaries. The Senior Secured Notes are pari passu with, and are collateralized by the same collateral as, the Senior Secured Credit Facilities. The Senior Secured Notes may be accelerated and become automatically and immediately due and payable upon certain events of default, including certain events related to insolvency, bankruptcy, or liquidation. Additionally, the Senior Secured Notes may be accelerated at the election of the holder or holders of a majority in principal amount of the Senior Secured Notes upon certain events of default by Encore, including the breach of affirmative covenants regarding guarantors, collateral, most favored lender treatment, minimum revolving credit facility commitment or the breach of any negative 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 purchase agreement for the Senior Secured Notes have been amended in connection with amendments to the Restated Credit Agreement in order to 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 (the “2017 Convertible Notes”). In June and July 2013, Encore sold $172.5 million aggregate principal amount of 3.0% 2020 Convertible Notes that mature on July 1, 2020 in private placement transactions (the “2020 Convertible Notes”). In March 2014, Encore sold $161.0 million aggregate principal amount of 2.875% 2021 Convertible Notes that mature on March 15, 2021 in private placement transactions (the “2021 Convertible Notes”). In March 2017, Encore sold $150.0 million aggregate principal amount of 3.25% 2022 Convertible Senior Notes that mature on March 15, 2022 in private placement transactions (the “2022 Convertible Notes” and together with the 2017 Convertible Notes, the 2020 Convertible Notes and the 2021 Convertible Notes, the “Convertible Notes”). The interest on these unsecured convertible senior notes is payable semi-annually.
The net proceeds from the sale of the $150.0 million aggregate principal amount of the 2022 Convertible Notes were approximately $145.3 million, after deducting the initial purchasers’ discounts and the estimated offering expenses payable by the Company. The Company used approximately $60.4 million of the net proceeds from the offering to repurchase, in separate transactions, $50.0 million aggregate principal amount of its 2017 Convertible Notes. In accordance with authoritative guidance, the total consideration allocated to the extinguishment of the liability component was approximately $49.7 million and the total consideration allocated to the re-acquisition of the equity component was approximately $10.7 million. Because the net carrying value of the repurchased portion of the 2017 Convertible Notes was $48.9 million, the Company recognized a loss of approximately $0.8 million on the repurchase transaction.
Prior to the close of business on the business day immediately preceding their respective conversion date (listed below), holders may convert their Convertible Notes under certain circumstances set forth in the applicable Convertible Notes indentures. On or after their respective conversion dates until the close of business on the scheduled trading day immediately preceding their respective maturity date, holders may convert their Convertible Notes at any time. Certain key terms related to the convertible features for each of the Convertible Notes as of June 30, 2017 are listed below.

24


 
2017 Convertible Notes
 
2020 Convertible Notes
 
2021 Convertible Notes
 
2022 Convertible Notes
Initial conversion price
$
31.56

 
$
45.72

 
$
59.39

 
$
45.57

Closing stock price at date of issuance
$
25.66

 
$
33.35

 
$
47.51

 
$
35.05

Closing stock price date
November 27,
2012

 
June 24,
2013

 
March 5,
2014

 
February 27,
2017

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

 
21.8718

 
16.8386

 
21.9467

Conversion date(1)
May 27,
2017

 
January 1,
2020

 
September 15,
2020

 
September 15,
2021

_______________________
(1)
The 2017 Convertible Notes became convertible on 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 Convertible Notes, 2021 Convertible Notes, and 2022 Convertible Notes will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company’s current intent is to settle conversions through combination settlement (i.e., convertible into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion prices listed in the above table.
Authoritative guidance related to debt with conversion and other options requires that issuers of convertible debt instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively.
The debt and equity components, the issuance costs related to the equity component, the stated interest rate, and the effective interest rate for each of the Convertible Notes are listed below (in thousands, except percentages):
 
2017 Convertible Notes (1)
 
2020 Convertible Notes
 
2021 Convertible Notes
 
2022 Convertible Notes
Debt component
$
64,646

 
$
140,247

 
$
143,645

 
$
137,266

Equity component
$
354

 
$
32,253

 
$
17,355

 
$
12,734

Equity issuance cost
$
788

 
$
1,106

 
$
581

 
$
398

Stated interest rate
3.000
%
 
3.000
%
 
2.875
%
 
3.250
%
Effective interest rate
3.750
%
 
6.350
%
 
4.700
%
 
5.200
%
________________________
(1)
As discussed above, in February 2017, the Company repurchased $50.0 million aggregate principal amount of its 2017 Convertible Notes. This transaction is treated as debt extinguishment and the effective interest rate has been updated from 6.000% to 3.750%, which represents the effective interest rate for the remaining 2017 Convertible Notes at the time of repurchase.

The balances of the liability and equity components of all of the Convertible Notes outstanding were as follows (in thousands):
 
June 30,
2017
 
December 31,
2016
Liability component—principal amount
$
548,500

 
$
448,500

Unamortized debt discount
(37,690
)
 
(31,968
)
Liability component—net carrying amount
$
510,810

 
$
416,532

Equity component
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