February 22, 2017
Via EDGAR
Division of Corporation Finance
U.S. Securities & Exchange Commission
100 F Street, NE
Washington, D.C. 20549
U.S. Securities & Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Attention: | Michael Volley |
Staff Accountant
Office of Financial Services
Re: | Encore Capital Group, Inc. |
Form 10-K for the Fiscal Year Ended December 31, 2015
Response dated August 30, 2016
File No. 000-26489
Dear Mr. Volley:
We refer to your letter dated January 19, 2017, which sets forth the comments of the staff of the Securities and Exchange Commission (the “Staff”) regarding the Form 10-K for the fiscal year ended December 31, 2015 of Encore Capital Group, Inc. (the “Company” or the “Registrant”). We provided initial responses to the Staff’s comments on February 2, 2017. Please find supplemental responses to the Staff’s comments below. For your convenience, we have copied the relevant comment in your letter immediately preceding our response thereto.
Form 10-K for the Fiscal Year Ended December 31, 2015
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Non-GAAP Disclosure, page 42
1. | We note your response to comment 2 and your enhanced disclosure on page 54 of your September 30, 2016 Form 10-Q describing the adjustment amount applied to principal on receivables portfolios in arriving at your non-GAAP performance measure, Adjusted EBITDA. Please tell us how you considered Question 100.04 of the Compliance & Disclosure Interpretations on non-GAAP measures updated on May 17, 2016 in determining that the adjustment amount applied to principal on receivables, which increases earnings for the principal portion of cash received related to the receivables portfolio, does not represent an individually tailored revenue recognition method. Alternatively, please remove this adjustment in your calculation of Adjusted EBITDA used as a performance measure in future filings. |
Response:
We acknowledge the Staff’s comment and based on (1) a conference call between the Staff and the Company and Company counsel on February 14, 2017 and (2) Question 100.04 of the Compliance & Disclosure Interpretations on non-GAAP measures updated on May 17, 2016, we
3111 Camino Del Rio North, Suite 103, San Diego, CA 92108 ■T 877.445.4581 ■ F 858.309.1546 ■ W encorecapital.com
will remove the adjustment amount applied to principal on receivable portfolios from our calculation of Adjusted EBITDA in future filings.
In future filings we expect our disclosure for Adjusted EBITDA will be in a format similar to the following (noting that the transition language included at the end of footnote 5 would only be included in our next filing):
Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before discontinued operations, interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, settlement fees and related administrative expenses and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows (in thousands):
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
GAAP net income, as reported | $xxxx | $ | 47,384 | $ | 98,278 | ||||
Adjustments: | |||||||||
Loss (income) from discontinued operations, net of tax | xxxx | 23,387 | (5,205 | ) | |||||
Interest expense | xxxx | 186,556 | 166,942 | ||||||
Interest income(1) | (xxxx) | (1,664 | ) | (962 | ) | ||||
Provision for income taxes | xxxx | 27,162 | 48,569 | ||||||
Depreciation and amortization | xxxx | 33,160 | 27,101 | ||||||
Stock-based compensation expense | xxxx | 22,008 | 17,181 | ||||||
Acquisition, integration and restructuring related expenses(2) | xxxx | 15,528 | 18,771 | ||||||
Gain on reversal of contingent consideration(3) | (xxxx) | — | — | ||||||
Settlement fees and related administrative expenses(4) | xxxx | 63,019 | — | ||||||
Adjusted EBITDA | $xxxx | $ | 416,540 | $ | 370,675 | ||||
Collections applied to principal balance(5) | $xxxx | $ | 628,289 | $ | 614,665 | ||||
(1) | In the fourth quarter of 2016, we made a change to our presentation of adjusted EBITDA to adjust for interest income. In previous years we did not include interest income as an adjustment because it was immaterial. We have updated prior periods for comparability. |
(2) | Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. |
(3) | Amount represents a gain recognized as a result of reversing a liability for contingent consideration that was established in October 2015 when we acquired a debt solution service provider in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to Note 4 “Fair Value Measurement - Contingent Consideration” in the notes to our consolidated financial statements for further details. |
(4) | Amount represents litigation and government settlement fees and related administrative expenses. For the year ended December 31, 2016, amount consists of settlement and administrative fees related to certain TCPA settlements. For the year ended December 31, 2015, amount relates to the consent order with the CFPB that we entered into in September 2015. We believe these fees and expenses are not indicative of ongoing operations; therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. |
(5) | In our previous filings, amount was referred to as “Amount applied to principal on receivable portfolios.” Amount represents (a) gross collections from receivable portfolios less (b) revenue from receivable portfolios, net. Historically, we included this amount in our calculation of adjusted EBITDA. For transition purposes only, if we had included “collections applied to principal balance” in Adjusted EBITDA amounts would have been reported as: |
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Adjusted EBITDA (as reported above and as will be reported in future filings) | $xxxx | $ | 416,540 | $ | 370,675 | ||||
Collections applied to principal balance | xxxx | 628,289 | 614,665 | ||||||
Adjusted EBITDA (using historical methods) | $xxxx | $ | 1,044,829 | $ | 985,340 | ||||
3111 Camino Del Rio North, Suite 103, San Diego, CA 92108 ■T 877.445.4581 ■ F 858.309.1546 ■ W encorecapital.com
In addition, in our future earnings presentations we may include a Total Debt / (Adjusted EBITDA + Collections applied to principal balance) ratio. If we include such a ratio, we expect to disclose it as follows:
***
Sincerely,
/s/ Jonathan Clark
Jonathan Clark
Executive Vice President
Chief Financial Officer
3111 Camino Del Rio North, Suite 103, San Diego, CA 92108 ■T 877.445.4581 ■ F 858.309.1546 ■ W encorecapital.com