What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-02-26 · 340 added, 358 removed, 612 unchanged (53% of the section changed)

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Through Cabot, we are one of the largest credit management services providers in Europe and a market leader in the United Kingdom and Ireland.

Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a range of debt servicing offerings such as early stage collections, business process outsourcing (“BPO”), contingent collections, trace services and litigation activities.

Cabot strengthened its debt servicing offerings with the acquisition of Wescot Credit Services Limited, a leading U.K.

contingency debt collection and BPO services company in November 2017.

Previously we controlled CCM via our majority ownership interest in an indirect holding company of CCM.

In July 2018, we completed the purchase of all of the outstanding equity of CCM not owned by us (the “Cabot Transaction”).

As a result, CCM became a wholly owned subsidiary of Encore.

Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a range of debt servicing offerings such as early stage collections, business process outsourcing (“BPO”), and contingent collections, including through Wescot Credit Services Limited (“Wescot”), a leading U.K.

contingency debt collection and BPO services company.

LAAP (Latin America and Asia-Pacific)

We have purchased non-performing loans in Colombia, Peru, Mexico and Brazil.

Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India, which has completed initial immaterial purchases.

In December 2018, we completed the sale of all our interests in Refinancia S.A.

and its subsidiaries (collectively, “Refinancia”) to the existing minority shareholders of Refinancia, and as a result, we no longer consolidate Refinancia.

Refinancia remains the servicer for the non-performing loans we own in Colombia and Peru.

In August 2019, we completed the sale of Baycorp, which specialized in the management of non-performing loans in Australia and New Zealand and was previously a component of our LAAP business unit (the “Baycorp Transaction”).

We have purchased non-performing loans in Colombia, Peru, Mexico and Brazil (which was sold in April 2020).

Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India.

To date, operating results from LAAP have not been significant to our total consolidated operating results.

Our long-term growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business in the United States and United Kingdom and strengthening and developing our business in the rest of Europe.

Recent Developments

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and

restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns (including court closures in certain jurisdictions).

While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations for an indefinite period of time.

Through a combination of work-from-home and social distancing, we remain fully operational in all the markets we serve.

As a result of the COVID-19 pandemic and the resulting containment measures, we have observed, among other things:

a decrease in supply of receivable portfolios in the U.S.

driven mainly by a decrease in charge-off rates;

a decrease in supply of receivable portfolios in Europe, which we believe is driven by both a decrease in charge-off rates and decreased sales as the banks focus on their customers’ needs;

and impacts to the legal collections process, which negatively affected legal collections beginning in late March 2020 and could continue to affect legal collections and related costs depending on the duration and severity of the COVID-19 pandemic and the resulting containment measures.

Government Regulation

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In Europe, our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan accounts.

We also purchase certain secured mortgage portfolios and portfolios that are in insolvency status, in particular, individual voluntary arrangements.

We also purchase:

(1) portfolios that are in insolvency status, in particular, individual voluntary arrangements;

and (2) non-performing secured mortgage portfolios and real estate assets previously securing mortgage portfolios.

When we take possession of the underlying real estate assets or purchase real estate assets, we refer to those as real estate-owned assets, or REO assets.

We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data.

This model allows us to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future collections.

This model allows us to value portfolios accurately and quantify portfolio performance in order to maximize future collections.

As a result, we have been able to realize significant returns from the assets we have acquired.

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MCM (United States)

Industry delinquency and charge-off rates have continued to increase, creating higher volumes of charged-off accounts that are sold.

In addition, issuers have continued to sell predominantly fresh portfolios.

Issuers have continued to sell predominantly fresh portfolios.

Fresh portfolios are portfolios that are generally sold within six months of the consumer’s account being charged-off by the financial institution.

Meanwhile pricing remains favorable.

In addition to selling a higher volume of charged-off accounts, issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year.

Pricing in the fourth quarter remained favorable.

Issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year.

We are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply.

We have observed a decrease in supply as a result of the COVID-19 pandemic, but expect supply to ultimately increase.

We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace.

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Cabot (Europe)

market for charged-off portfolios continues to provide a consistent pipeline of opportunities, despite an ongoing historic low level of charge-off rates, as creditors have embedded debt sales as an integral part of their business models.

The record levels of consumer indebtedness suggest that charged-off debt will increase over time and, together with recent commitments by major debt purchasers to deliver a deleveraging profile, resulted in an improvement in pricing pressure in 2019.

In order to capture the increasingly attractive purchasing opportunities while maintaining a deleveraging profile, in the fourth quarter of 2019, we entered into co-investment framework agreements with certain third-party investors that enable us to share the investment with co-investors while providing credit management solutions as the lead servicer for the portfolios.

Co-investment reduces risk related to large portfolio purchases and allows us to build and maintain scale in our operation, which helps provide cost advantages.

Co-investment also allows us to service the demands of our issuer clients.

market for charged-off portfolios has generally provided a relatively consistent pipeline of opportunities over the past few years, despite an ongoing historic low level of charge-off rates, as creditors have embedded debt sales as an integral part of their business models and consumer indebtedness has continued to grow since the financial crisis.

The Spanish debt market continues to be one of the largest in Europe with a significant amount of debt to be sold and serviced.

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Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should further increase debt purchasing opportunities in Spain.

Although pricing has been elevated, we believe that as our European businesses increase in scale and continue to improve liquidation and collection efficiencies, our margins will remain competitive.

Additionally, our continuing investment in our litigation liquidation channel has enabled us to collect from consumers who have the ability to pay but have so far been unwilling to do so.

This also enables us to mitigate some of the impact of elevated pricing.

Across all of our European markets, we are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply of portfolios to purchase.

Due to the COVID-19 pandemic, banks have decreased portfolio sales in order to focus on customers’ needs.

As a result, we expect a lower level of supply available for purchase in the near-term.

Purchases by Geographic Location

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(1) Amounts exclude receivable portfolios purchased and immediately sold to our co-investors under our co-investment framework.

In the United States, capital deployment increased for the year ended December 31, 2019, as compared to 2018.

In the fourth quarter of 2019, we entered into co-investment framework agreements with certain third-party investors that enabled us to share the investment with co-investors while providing credit management solutions as the lead servicer for the portfolios.

In the United States, capital deployment decreased during the year ended December 31, 2020, as compared to 2019.

The majority of our deployments in the U.S.

are in forward flow agreements, and the timing, contract duration, and volumes for each contract can fluctuate leading to variation when comparing to prior periods.

The increase in capital deployment in the United States for the year ended December 31, 2019, as compared to 2018, and for the year ended December 31, 2018, as compared to 2017, was primarily driven by continued growth in the supply of fresh portfolios.

In Europe, capital deployment decreased for the year ended December 31, 2019, as compared to 2018.

The decrease was primarily the result of a more selective purchasing process in conjunction with a plan to reduce European debt leverage over time and the strengthening of the U.S.

The decrease in purchases in the U.S.

resulted from a decrease in supply and our cautious approach to purchasing at the beginning of the COVID-19 pandemic when the potential impacts were relatively unknown.

Capital deployment increased for the year ended December 31, 2019, as compared to 2018, primarily due to higher supply of fresh portfolios in 2019.

In Europe, capital deployment decreased during the year ended December 31, 2020, as compared to 2019.

The decrease was primarily the result of a relatively limited supply of portfolios during the year ended December 31, 2020 and a heightened return expectation as a result of greater uncertainty relating to the future impact of the COVID-19 pandemic.

European capital deployment also decreased for the year ended December 31, 2019, as compared to 2018.

The decrease was primarily the result

of a more selective purchasing process in conjunction with a plan to reduce European debt leverage over time and the strengthening of the U.S.

dollar against the British Pound.

The decrease in capital deployment in Europe for the year ended December 31, 2018, as compared to 2017, was primarily the result of our significant capital deployment during the third quarter of 2017 in response to an unusually large volume of portfolios offered for sale in the U.K.

market at that time.

The decrease was partially offset by the weakening of the U.S.

dollar against the British Pound in 2018 as compared to 2017.

The average purchase price as a percentage of face value was 11.3%, 8.6%, and 13.3% for the years ended December 31, 2020, 2019, and 2018, respectively.

The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the type and quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios.

For example, the average purchase price as a percentage of face value is higher for fresh portfolios as compared to more seasoned portfolios because fresh paper generally has higher returns.

For example, the average purchase price as a percentage of face value is higher for fresh portfolios as compared to more seasoned portfolios because we generally expect higher collections from fresh paper.

Further, paying portfolios tend to have a higher purchase price relative to face value than non-paying accounts due to the higher expectations for collections, as well as lower anticipated collection costs.

As a result, in periods that we purchase a higher percentage of fresh paper or paying portfolios, we expect that our purchase price as a percentage of face value would be higher than would be in periods where a higher ratio of seasoned paper or non-paying portfolios were purchased.

The average purchase price, as a percentage of face value decreased significantly during the year ended December 31, 2019 as compared to 2018, primarily due

to capital deployment on certain asset classes in Europe that were deeply discounted during the third quarter of 2019 and a higher concentration of fresh portfolio purchases during the year ended December 31, 2018.

During the years ended December 31, 2020, 2019 and 2018, we also invested $1.5 million, $30.9 million, and $8.0 million in REO assets, respectively.

Collections from Purchased Receivables by Channel and Geographic Location

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The collection agencies channel also includes collections on accounts purchased where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection channels.

The following table summarizes the total collections by collection channel and geographic area ( in thousands ):

The following table summarizes the total collections by collection channel and geographic area during the periods presented ( in thousands ):

Year Ended December 31,

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(1) Certain reclassifications have been made for prior periods.

(1) In December 2018, we completed the sale of all our interest in Refinancia S.A.

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As such, subsequent to December 2018, collections for these non-performing loans are classified as collection agency collections instead of call center and digital collections.

In August 2019, we completed the sale of our wholly-owned subsidiary Baycorp.

Gross collections from purchased receivables increased by $84.9 million, or 4.2%, to $2,111.8 million during the year ended December 31, 2020, from $2,026.9 million during the year ended December 31, 2019.

The increase of collections in the United States was primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection capacity, and our continued effort in improving liquidation.

European collection improvement was partially offset by the unfavorable impact of foreign currency translation, primarily from the strengthening of the U.S.

dollar against the British Pound during the year ended December 31, 2019 as compared to 2018.

Our consumer centric collection approach and our capacity buildup are driving a higher proportion of call center and digital collections compared to legal collections in the United

European collection decreased primarily due to the impacts of the COVID-19 pandemic.

We anticipate a material portion of the reduced collections in 2020 will be recovered in future years.

Gross collections from purchased receivables increased $59.3 million, or 3.0%, to $2,026.9 million during the year ended December 31, 2019, from $1,967.6 million during the year ended December 31, 2018.

The increase of collections in the United States was primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection capacity and our continued effort in improving liquidation.

Our consumer centric collection approach and our capacity buildup are driving a higher proportion of call center collections compared to legal collections in the United States.

The increase in collections in Europe was primarily the result of implementing certain liquidation improvement initiatives and the favorable impact of foreign currency translation, which was primarily driven by the weakening of the U.S.

dollar against the British Pound.

European collection improvement was partially offset by the unfavorable impact of foreign currency translation, primarily from the strengthening of the U.S.

dollar against the British Pound during the year ended December 31, 2019 as compared to 2018.

Results of Operations

Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows (in thousands, except percentages) :

Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows for the periods presented (in thousands, except percentages) :

Year Ended December 31,

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Revenue from receivable portfolios $ 1,374,717 91.5 % $ 1,269,288 90.8 % $ 1,167,132 85.7 %

Changes in expected current and future recoveries 7,246 0.5 % — — % — — %

Servicing revenue 115,118 7.7 % 126,527 9.1 % 148,044 10.9 %

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Income from operations 533,562 35.6 % 446,345 31.9 % 405,300 29.8 %

Other (expense) income

Other expense

Interest expense (209,356) (14.0) % (217,771) (15.6) % (237,355) (17.4) %

Other (expense) income (18,343) (1.3) % (8,764) (0.7) % 10,847 1.0 %

Loss on extinguishment of debt (40,951) (2.7) % (8,989) (0.6) % (2,693) (0.2) %

Other expense (357) 0.0 % (18,343) (1.3) % (8,764) (0.7) %

Total other expense (250,664) (16.7) % (245,103) (17.5) % (248,812) (18.3) %

Income from continuing operations before income taxes 201,242 14.4 % 156,488 11.5 % 131,226 11.1 %

Provision for income taxes (32,333) (2.3) % (46,752) (3.4) % (52,049) (4.5) %

Income from continuing operations 168,909 12.1 % 109,736 8.1 % 79,177 6.6 %

Loss from discontinued operations, net of tax — — % — — % (199) 0.0 %

Net income 168,909 12.1 % 109,736 8.1 % 78,978 6.6 %

Net (income) loss attributable to noncontrolling interest (1,040) (0.1) % 6,150 0.4 % 4,250 0.4 %

Net income attributable to Encore Capital Group, Inc.

stockholders $ 167,869 12.0 % $ 115,886 8.5 % $ 83,228 7.0 %

Results of Operations—Cabot Credit Management Limited

The following table summarizes the operating results contributed by CCM (which does not consolidate the results of its European affiliate Grove Europe S.á r.l.) during the periods presented (in thousands) :

Year Ended December 31,

2019 2018 2017

Total revenues, adjusted by net allowances $ 505,136 $ 522,885 $ 399,875

Total operating expenses (287,122) (278,676) (230,401)

Income from operations 218,014 244,209 169,474

Interest expense-non-PEC (123,203) (128,087) (105,634)

PEC interest expense — (17,307) (25,899)

Other (expense) income (2,963) 1,383 7,373

Income before income taxes 282,898 18.9 % 201,242 14.4 % 156,488 11.5 %

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Net income 212,524 14.2 % 168,909 12.1 % 109,736 8.1 %

Net income attributable to noncontrolling interest (1,040) (5,143) (1,923)

Net (income) loss attributable to noncontrolling interest (676) (0.1) % (1,040) (0.1) % 6,150 0.4 %

Net income attributable to Encore Capital Group, Inc.

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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Our revenues consist of revenue from receivable portfolios, servicing revenue, and other revenues.

Revenue from receivable portfolios consists of accretion revenue and zero basis revenue.

Accretion revenue represents revenue derived from pools (quarterly groupings of purchased receivable portfolios) with a cost basis that has not been fully amortized.

Revenue from pools with a remaining unamortized cost basis is accrued based on each pool’s effective interest rate applied to each pool’s remaining unamortized cost basis.

The cost basis of each pool is increased by revenue earned and decreased by gross collections from purchased receivables and portfolio allowances.

The effective interest rate is the internal rate of return (“IRR”) derived from the timing and amounts of actual cash received and anticipated future cash flow projections for each pool.

All collections realized after the net book value of a portfolio has been fully recovered, or Zero Basis Portfolios (“ZBA”), are recorded as revenue, or ZBA revenue.

We account for our investment in receivable portfolios utilizing the interest method in accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality.

Our revenues primarily include revenue recognized from engaging in debt purchasing and recovery activities.

Effective January 1, 2020, we adopted the CECL accounting standard.

Under CECL, we apply our charge-off policy and fully write-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables we acquire immediately after purchasing the portfolio.

We then record a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as “Investment in receivable portfolios, net” in our consolidated statements of financial condition.

The discount rate is an effective interest rate (or “purchase EIR”) established based on the purchase price of the portfolio and the expected future cash flows at the time of purchase.

Revenue generated by such activities primarily includes two components:

(1) the accretion of the discount on the negative allowance due to the passage of time, which is included in “Revenue from receivable portfolios” and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries, and is presented in our consolidated statements of operations as “Changes in expected current and future recoveries.”

Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to our adoption of CECL.

We did not establish a negative allowance for these pools as we elected the Transition Resource Group for Credit Losses’ practical expedient to retain the integrity of these legacy pools.

Similar to how we treated ZBA collections prior to the adoption of CECL, all subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in our consolidated statements of operations.

Servicing revenue consists primarily of fee-based income earned on accounts collected on behalf of others, primarily credit originators.

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Other revenues also include gains recognized on transfers of financial assets.

We may incur allowance charges when actual cash flows from our receivable portfolios underperform compared to our expectations or when there is a change in the timing of cash flows.

Factors that may contribute to underperformance and to the recording of valuation allowances may include both internal as well as external factors.

Internal factors that may have an impact on our collections include operational activities, such as capacity and the productivity of our collection staff.

External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and the overall condition of the economy.

We record allowance reversals on pool groups that have historic allowance reserves when actual cash flows from these receivable portfolios outperform our expectations.

We have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance.

The following table summarizes revenues during the periods presented ( in thousands, except percentages) :

Year Ended December 31,

2020 2019 $ Change % Change

Revenue recognized from portfolio basis $ 1,318,306 $ 1,185,681 $ 132,625 11.2 %

ZBA revenue 56,411 83,607 (27,196) (32.5) %

Revenue from receivable portfolios 1,374,717 1,269,288 105,429 8.3 %

Changes in expected current period recoveries 228,075

Changes in expected future period recoveries (220,829)

Changes in expected current and future recoveries 7,246

Servicing revenue 115,118 126,527 (11,409) (9.0) %

Other revenues 4,319 9,974 (5,655) (56.7) %

Total revenues $ 1,501,400 $ 1,405,789 $ 95,611 6.8 %

Allowance reversals on receivable portfolios, net (1)

Total revenues, adjusted by net allowances $ 1,397,681

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(1) Amount includes $8.6 million of allowance reversals for zero-basis portfolios.

Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S.

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dollar relative to other foreign currencies has a favorable impact on our international revenues.

Our international revenues were unfavorably impacted by foreign currency translation, primarily from the strengthening of the U.S.

dollar, which increased, based on average exchange rates, against the British Pound by approximately 4.6%, during the year ended December 31, 2019 as compared to the year ended December 31, 2018.

Our international revenues were favorably impacted by foreign currency translation, primarily from the weakening of the U.S.

dollar, which decreased, based on average exchange rates, against the British Pound by approximately 0.5%, during the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The increase in revenue recognized from portfolio basis during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to higher expected total future cash flows resulting from a change in the expected economic life of static pool groups based on a lifetime expected recovery model upon the adoption of CECL which led to increased EIR, and increased expected total future cash flows resulting from a change in our accounting policy for court costs.

Under our new accounting policy, all future expected cash flows, including the expected total recoveries in our legal channel, are included in the initial curve in the establishment of negative allowance, which in turn, increased the EIR.

As discussed above, ZBA revenue represents collections from our legacy ZBA pools.

We expect our ZBA revenue to continue to decline as we collect on these legacy pools.

We do not expect to have new ZBA pools in the future.

Under CECL, changes in expected current period recoveries represent over and under-performance in the reporting period.

Collections during the year ended December 31, 2020 significantly outperformed the projected cash flows by approximately $228.1 million.

We believe the collection over-performance was largely driven by the reduced near-term expected recoveries as a result of adjustments made to our projected cash flow forecast during the first quarter of 2020 associated with the COVID-19 pandemic.

The over-performance was also a result of our sustained improvements in portfolio collections driven by liquidation improvement initiatives.

While we now have additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic and related actions taken by governments.

When reassessing the future forecasts of expected lifetime recoveries during the year ended December 31, 2020, management considered historical and current collection performance, uncertainty in economic forecasts in the geographies in which we operate, and believes that the operational disruption as a result of the COVID-19 pandemic has, for the near term, been resolved through a combination of social distancing in the workplace and working remotely.

However, the macroeconomic driven consumer distress is still present and will likely continue to impact our collections performance in the near future.

As a result, we have updated our forecast, resulting in a reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a provision for credit loss adjustment of approximately $220.8 million during the year ended December 31, 2020.

The circumstances around this pandemic are evolving rapidly and will continue to impact our business and our estimation of expected recoveries in future periods.

We will continue to closely monitor the COVID-19 situation and update our assumptions accordingly.

The following tables summarize collections from purchased receivables, revenue, end of period receivable balance and other related supplemental data, by year of purchase ( in thousands, except percentages ):

Year Ended December 31, 2020 As of December 31, 2020

Collections (1)

Allowance) Revenue

Revenue Unamortized

Balances Monthly

Collections Revenue from Receivable Portfolios Changes in Expected Current and Future Recoveries Investment in Receivable Portfolios Monthly EIR

United States:

ZBA $ 51,730 $ 51,865 $ — $ — — %

2011 25,497 22,389 2,173 1,741 88.6 %

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Subtotal 1,528,942 926,648 65,172 1,571,478 4.4 %

ZBA 184 183 — — — %

2013 93,203 86,148 (8,540) 230,333 3.2 %

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Other geographies:

ZBA 4,362 4,363 — — — %

3,837 1,703 359 47,909 102.5 %

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(1) Does not include amounts collected on behalf of others.

(2) Gross revenue and the revenue recognition rate exclude the effects of net portfolio allowances or net portfolio allowance reversals.

(3) Monthly IRR relates to accretion portfolios and does not include portfolios on cost recovery.

(4) ZBA revenue typically has a 100% revenue recognition rate.

However, collections on ZBA pool groups where a valuation allowance remains must first be recorded as an allowance reversal until the allowance for that pool group is zero.

Once the entire valuation allowance is reversed, the revenue recognition rate will become 100%.

(1) Portfolio balance includes non-accrual pool groups.

The EIR presented is only for pool groups that accrete portfolio revenue.

Year Ended December 31, 2019 As of December 31, 2019

Collections (1)

Allowance) Revenue

Revenue Unamortized

Balances Monthly

Collections Revenue from Receivable Portfolios Net Reversal (Portfolio Allowance) Unamortized Balances Monthly EIR

United States:

$ 121,216 $ 112,347 92.7 % $ 9,044 9.6 % $ — — %

ZBA $ 83,217 $ 74,614 $ 8,626 $ — — %

2011 21,684 21,158 304 2,546 85.5 %

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Subtotal 1,316,109 803,138 14,402 1,539,944 4.1 %

ZBA Adjustment (5)

— 798 — % — 0.1 % — — %

ZBA 324 326 — — — %

2013 113,224 88,244 4,991 238,033 3.1 %

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Other geographies:

11,855 11,855 100.0 % — 1.0 % — — %

ZBA 8,647 8,667 — — — %

2014 4,663 6,548 — 60,479 103.0 %

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Total $ 2,026,928 $ 1,269,288 $ (8,108) $ 3,283,984 3.1 %

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(1) Does not include amounts collected on behalf of others.

(2) Gross revenue and the revenue recognition rate exclude the effects of net portfolio allowances or net portfolio allowance reversals.

(3) Monthly IRR relates to accretion portfolios and does not include portfolios on cost recovery.

(4) ZBA revenue typically has a 100% revenue recognition rate.

However, collections on ZBA pool groups where a valuation allowance remains must first be recorded as an allowance reversal until the allowance for that pool group is zero.

Once the entire valuation allowance is reversed, the revenue recognition rate will become 100%.

All 2009 and 2010 vintages have been converted to ZBA.

(5) Adjustment resulting from certain ZBA revenue that was classified as collections in cost recovery portfolios in prior periods.

The increase in revenue from receivable portfolios was primarily due to increased IRRs resulting from sustained improvements in portfolio collections driven by liquidation improvement initiatives.

Servicing revenue primarily consists of fee-based income earned in Europe for debt servicing and other portfolio management services for credit originators for non-performing loans.

The decrease in fee income was primarily attributable to

the unfavorable impact of foreign currency translation, which was primarily the result of the strengthening of the U.S.

dollar against the British Pound, and the sale of Baycorp in August 2019 as well as the sale of Refinancia in December 2018.

Subsequent to the sales, we no longer earn servicing revenue from Baycorp or Refinancia.

Other revenues included a gain of approximately $9.3 million recognized on the sale of certain portfolios in Europe during the year ended December 31, 2019.

Refer to “Note 1:

Ownership, Description of Business, and Summary of Significant Accounting Policies” of the notes to our consolidated financial statements for our accounting policy on transfers of financial assets.

Net receivable portfolio allowances were $8.1 million for the year ended December 31, 2019 and were primarily attributable to underperformance of certain European portfolios.

Net receivable portfolio allowance reversals were $41.5 million for the year ended December 31, 2018.

Allowance reversals were primarily a result of sustained improvements in portfolio collections on certain portfolios on which we had previously recorded portfolio allowances in the past.

These improvements in portfolio collections were driven by liquidation improvement initiatives.

The decrease in servicing revenues during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily attributable to the sale of Baycorp in August 2019.

Through Baycorp, we earned servicing revenues through August 2019.

The decrease was also driven by the COVID-19 pandemic.

The decrease during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was partially offset by the favorable impact of foreign currency translation, which was primarily the result of the weakening of the U.S.

dollar against the British Pound.

Operating Expenses

The following table summarizes operating expenses during the periods presented ( in thousands, except percentages ):

Year Ended December 31,

2020 2019 $ Change $ Change

Salaries and employee benefits $ 378,176 $ 376,365 $ 1,811 0.5 %

Cost of legal collections 239,071 202,670 36,401 18.0 %

General and administrative expenses 149,113 148,256 857 0.6 %

Other operating expenses 108,944 108,433 511 0.5 %

Collection agency commissions 49,754 63,865 (14,111) (22.1) %

Depreciation and amortization 42,780 41,029 1,751 4.3 %

Goodwill impairment — 10,718 (10,718) (100.0) %

Total operating expenses $ 967,838 $ 951,336 $ 16,502 1.7 %

Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S.

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dollar relative to other foreign currencies has an unfavorable impact on our international operating expenses.

Our operating expenses were favorably impacted by foreign currency translation, primarily by the strengthening of the U.S.

Our operating expenses were unfavorably impacted by foreign currency translation, primarily by the weakening of the U.S.

dollar against the British Pound by approximately 0.5% for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

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Salaries and Employee Benefits

Salaries and employee benefits increased as a result of an increase in salaries and employee benefits at our domestic sites as part of our initiative to increase collections capacity.

The increase was partially offset by a decrease in headcount at our international subsidiaries and the favorable impact of foreign currency translation, primarily from the strengthening of the U.S.

dollar against the British Pound.

Stock-based compensation decreased $0.4 million, or 3.3%, to $12.6 million during the year ended December 31, 2019, from $13.0 million during the year ended December 31, 2018.

The slight decrease was primarily attributable to larger expense reversals during the current year as compared to the corresponding periods in the prior year resulting from adjustments to estimated vesting of certain performance-based awards.

The decrease was partially offset by additional expenses recognized due to the continued vesting of equity awards for the Cabot Transaction.

The increase in salaries and employee benefits during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons:

• Increase in stock-based compensation for the year ended December 31, 2020 due to adjustments to estimated vesting of certain performance-based awards;

• Increased employee headcount, see “Supplemental Performance Data - Headcount by Function by Geographic Location” for details;

• The unfavorable impact of foreign currency translation, primarily by the weakening of the U.S.

dollar against the British Pound during the year ended December 31, 2020 compared to the year ended December 31, 2019;

• Partially offset by reduced salaries and employee benefits due to the sale of Baycorp in August 2019.

Cost of Legal Collections

Cost of legal collections primarily includes contingent fees paid to our network of attorneys and the cost of litigation.

Cost of legal collections primarily includes contingent fees paid to our external network of attorneys and the cost of litigation.

We pursue legal collections using a network of attorneys that specialize in collection matters and through our internal legal channel.

Under the agreements with our contracted attorneys, we advance certain out-of-pocket court costs, or Deferred Court Costs.

We capitalize these costs in the consolidated financial statements and provide a reserve for those costs that we believe will ultimately be uncollectible.

We determine the reserve based on our analysis of historical court costs recovery data.

The cost of legal collections in the United States increased by $2.7 million, or 1.6%, to $174.4 million during the year ended December 31, 2019 compared to $171.7 million during the year ended December 31, 2018.

The cost of legal collections in Europe decreased by $4.4 million, or 14.0%, to $27.4 million during the year ended December 31, 2019 compared to $31.8 million during the year ended December 31, 2018.

The decrease in Europe was primarily due to the shift of account placements towards non-legal collection channels.

Under the agreements with our contracted attorneys, we advance certain out-of-pocket court costs.

Effective January 1, 2020, we no longer capitalize upfront court costs and recognize a portion of court costs as expense based on a loss-rate methodology, but rather, we expense all court costs as incurred.

Cost of legal collections does not include internal legal channel employee costs, which are included in salaries and employee benefits in our consolidated statements of operations.

The following table summarizes our cost of legal collections during the periods presented ( in thousands, except percentages ):

Year Ended December 31,

2020 2019 $ Change % Change

Court costs $ 148,596 $ 94,165 $ 54,431 57.8 %

Legal collection fees 90,475 108,505 (18,030) (16.6) %

Total cost of legal collections $ 239,071 $ 202,670 $ 36,401 18.0 %

The increase in cost of legal collections during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons:

• No longer capitalizing upfront court costs but rather expensing all court costs as incurred;

• Partially offset by lower court cost spending due to court closures in certain jurisdictions as a result of the COVID-19 pandemic.

General and Administrative Expenses

Excluding the indirect costs relating to the Cabot Transaction of approximately $8.6 million in 2018, general and administrative expenses decreased $1.5 million, or 1.0% during the year ended December 31, 2019 as compared to the prior year.

The decrease was primarily due to (1) higher merger and acquisition costs incurred in prior periods, (2) the favorable impact of the strengthening of the U.S.

dollar relative to other foreign currencies and (3) higher infrastructure costs incurred at our domestic sites in prior periods.

The increase in general and administrative expenses during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons:

• A charge of $15.0 million relating to our settlement with the CFPB;

• Certain third-party costs of approximately $6.9 million incurred relating to various financing transactions completed in September 2020;

• Partially offset by reduced travel and facilities expenses, and consulting fees and lower general and administrative expenses due to the sale of Baycorp in August 2019.

Other Operating Expenses

The decrease in other operating expenses was primarily due to a large expense incurred in our previously owned subsidiary Refinancia during the prior periods, in addition to reduced expenditures for temporary services and the favorable impact of the strengthening of the U.S.

dollar relative to other foreign currencies.

The increase in other operating expenses during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons:

• Increased postage and printing expenses primarily at our domestic operations;

• Partially offset by lower collection expenses primarily due to the sale of Baycorp in August 2019.

Collection Agency Commissions

During the year ended December 31, 2019, we incurred $63.9 million in commissions to third-party collection agencies, or 27.0% of the related gross collections of $236.2 million.

During the period, the commission rate as a percentage of related gross collections was 18.5% and 22.7% for our collection outsourcing channels in the United States and Europe, respectively.

During the year ended December 31, 2018, we incurred $47.9 million in commissions, or 22.5%, of the related gross collections of $213.6 million.

During 2018, the commission rate as a percentage of related gross collections was 15.0% and 22.7% for our collection outsourcing channels in the United States and Europe, respectively.

The increase in collection agency commissions during the year ended December 31, 2019 as compared with the year ended December 31, 2018 was primarily driven by the change in our LAAP operations.

As discussed in the “Collections from Purchased Receivables by Channel and Geographic Location” section above, in December 2018, we completed the sale of all our interest in Refinancia, which remains the servicer for the non-performing loans we own in Colombia and Peru.

Subsequent to December 2018, collections for these non-performing loans are classified as collection agency collections instead of call center and digital collections.

As a result, costs associated with these collections are included in collection agency commissions.

Collections through the collection agencies channel are predominately in Europe and Latin America and vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally.

Commissions as a percentage of collections in this channel also vary from period to period depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables.

Collection agency commissions are commissions paid to third-party collection agencies.

Collections through the collections agencies channel are predominately in Europe and Latin America and vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally.

Commission rates vary depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables.

Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time, and commission rates for purchased bankruptcy portfolios are lower than the commission rates for charged-off credit card accounts.

The United States collection agency commission rate is generally lower than the European rate due to a higher concentration of lower commission rate bankruptcy portfolios collected through the collection agency channel in the United States.

The decrease in collections agency commissions during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the decrease in agency collections in Europe and other geographies.

Depreciation and Amortization

The increase in depreciation and amortization expense during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons:

• Increased depreciation expense primarily incurred at our U.S.

• Partially offset by the decrease due to the sale of Baycorp in August 2019.

Goodwill Impairment

In August 2019, we completed the sale of Baycorp.

The transaction resulted in a goodwill impairment charge of $10.7 million and an additional loss on sale of $12.5 million during the year ended December 31, 2019.

Interest Expense

The following table summarizes our interest expense ( in thousands, except percentages ):

The following table summarizes our interest expense during the periods presented ( in thousands, except percentages ):

Year Ended December 31,

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Stated interest on debt obligations $ 181,536 $ 193,003 $ (11,467) (5.9) %

Interest expense on preferred equity certificates — 17,307 (17,307) (100.0) %

Amortization of loan fees and other loan costs 16,343 11,455 4,888 42.7 %

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Total interest expense $ 209,356 $ 217,771 $ (8,415) (3.9) %

The decrease in interest expense during the year ended December 31, 2019 as compared to the year ended December 31, 2018 was primarily attributable to the decrease in preferred equity certificates (“PECs”) interest expense.

On July 24, 2018, in connection with the Cabot Transaction, we purchased all outstanding PECs including accrued interest that were held by Cabot’s minority shareholders.

As a result, no PEC interest expense was incurred subsequent to the Cabot Transaction.

The decrease in interest expense was also attributable to higher expenses incurred during the year ended December 31, 2018 relating to finance charges associated with our refinancing activities.

During the year ended December 31, 2018, interest expense included approximately $9.2 million in fees relating to the refinancing of the Cabot senior secured notes and approximately $2.5 million of fees for a bridge loan commitment related to the Cabot Transaction.

The decrease in interest expense during the year ended December 31, 2019 was also attributable to the favorable impact of the strengthening of the U.S.

dollar relative to other foreign currencies.

The decrease in interest expense was partially offset by (1) increases in LIBOR, which resulted in increased interest expense for the Encore Revolving Credit Facility and the Cabot Securitisation Senior Facility and (2) higher balances on the Encore Revolving Credit Facility, Cabot Securitisation Senior Facility, and Cabot Credit Facilities.

In addition, the decrease was partially offset by $9.0 million of refinancing costs incurred during the year ended December 31, 2019 associated with the issuance of the 2024 Cabot Floating Rate Notes.

Other Expense or Income

In September 2020, we entered into various transactions, agreements and amendments related to our borrowings and completed the implementation of our new global funding structure.

In November and December 2020, we completed two offerings of senior secured notes, partially redeemed our Cabot senior secured notes due in 2023 and fully redeemed our Cabot floating rate notes due 2024.

These refinancing transactions successfully reduced the interest rates on our outstanding borrowings.

The decrease in interest expense during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons:

• Lower average debt balances;

• A decrease in LIBOR which resulted in decreased interest expense for the revolving credit facilities that reference LIBOR;

• Decreased interest rates as a result of various refinancing transactions;

• Partially offset by increased amortization of loan fees and other loan costs as a result of higher capitalized debt issuance costs.

Loss on Extinguishment of Debt

We presented certain refinancing charges such as make-whole provisions, call premiums, and write-offs of unamortized debt issuance costs and debt discount as interest expense in prior periods.

During the three months ended December 31, 2020, we reclassed such costs as loss on extinguishment of debt as a single line item in our consolidated statements of operations.

Loss on extinguishment of debt was $41.0 million and $9.0 million during the years ended December 31, 2020 and 2019, respectively.

Refer to “Note 7:

Borrowings” in the notes to our consolidated financial statements for details of our financing activities.

Other Expense

Other expense or income consists primarily of foreign currency exchange gains or losses, interest income and gains or losses recognized on certain transactions outside of our normal course of business.

Other expense was $18.3 million during the year ended December 31, 2019 and primarily included the loss recognized on the Baycorp Transaction of $12.5 million.

Other expense was $8.8 million during the year ended December 31, 2018 and was primarily the result of a loss on a derivative contract of $9.3 million.

On May 8, 2018, in anticipation of the completion of the Cabot Transaction, we entered into a foreign exchange forward contract with a notional amount of £176.0 million, which was approximately the anticipated cash consideration for the Cabot Transaction.

On August 3, 2018, we settled this contract in cash and recognized a total loss of $9.3 million.

This loss was substantially offset by the decrease of final cash consideration in U.S.

dollars for the Cabot Transaction.

Other expense was $0.4 million during the year ended December 31, 2020, which included a loss of $4.8 million as a result of the divestiture of our investment in Brazil.

This loss was partially offset by other income from fair value changes for currency exchange forward contracts that were not designated as hedge instruments for accounting purposes.

Other expense was $18.3 million during the year ended December 31, 2019 and was primarily the result of a loss recognized on the sale of Baycorp of approximately $12.5 million.

Provision for Income Taxes

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(0.5) % (2.2) %

Transaction costs (2)

Permanent items (3)

Change in valuation allowance 0.9 % (0.5) %

(0.5) % 17.7 %

IRS settlement (2)

Tax effect of CFPB settlement fees (3)

Other (0.8) % — %

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(1) Relates primarily to the lower tax rates on the income or loss attributable to international operations.

(2) In 2018, relates primarily to transaction costs incurred in connection with the Cabot Transaction.

(3) Represents a provision for nondeductible items.

(4) Net decrease in valuation allowance during 2019 is attributable to disposition of certain foreign subsidiaries with cumulative operating losses for tax purposes.

In 2018, valuation allowance net increase recorded as a result of certain foreign subsidiaries’ cumulative operating losses for tax purposes.

(2) In 2019, includes tax benefit resulting from tax accounting method change.

The effective tax rate for the year ended December 31, 2019 decreased to 16.1% as compared to 29.9% for the year ended December 31, 2018.

The decrease was primarily related to the disposition of certain foreign entities with cumulative operating losses for tax purposes during the period ended December 31, 2019.

(3) Non-deductible expense for tax purposes.

Refer to “Note 12:

Commitments and Contingencies” in the notes to our consolidated financial statements for details of the CFPB settlement.

The effective tax rate for the year ended December 31, 2020 increased to 24.9% as compared to 16.1% for the year ended December 31, 2019.

The lower tax rate in 2019 was primarily related to benefits resulting from tax accounting method change and exam resolutions with certain state taxing authorities.

Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory tax rates and higher than anticipated in countries that have higher statutory tax rates.

Cost per Dollar Collected

We utilize cost per dollar collected (or “cost-to-collect”) in order to facilitate a comparison of approximate costs to cash collections from purchased receivables for our portfolio purchasing and recovery business.

Cost-to-collect is calculated by dividing adjusted operating expenses by collections from purchased receivables.

The calculation of adjusted operating expenses is illustrated in detail in the “Non-GAAP Disclosure” section.

The following table summarizes our overall cost per dollar collected by geographic location during the periods presented:

Year Ended December 31,

United States 40.3 % 42.4 %

Europe 28.2 % 27.7 %

Other geographies 54.3 % 47.0 %

Overall cost per dollar collected 37.0 % 37.9 %

Cost-to-collect decreased 90 basis points to 37.0% for the year ended December 31, 2019 from 37.9% during the prior year.

The decrease in overall cost-to-collect was driven by improved cost-to-collect in the United States, which was due to a combination of (1) continued improvement in operational efficiencies in the collection process, (2) collection mix shifting towards non-legal collection, which has lower cost-to-collect, (3) higher total collections that blended down fixed cost and reduced overall cost-to-collect, and (4) reduced cost-to-collect in the legal channel that was driven by improved court cost recovery rates.

Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, product mix of purchases, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the changing regulatory and legislative environment.

As discussed in the “Recent Accounting Pronouncements Not Yet Effective” section in “Note 1:

Ownership, Description of Business, and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements, effective for our financial statements for reporting periods subsequent to January 1, 2020, we will no longer capitalize our upfront court costs, instead we will expense all court costs as incurred, which will adversely impact the cost-to-collect metric but will have no impact on the amount of court cost payments incurred.

Non-GAAP Disclosure

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This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.

Adjusted Income From Continuing Operations Per Share.

Management uses non-GAAP adjusted income from continuing operations attributable to Encore and adjusted income from continuing operations per share (which we also refer to from time to time as adjusted earnings per share), to assess operating performance, in order to highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP.

Adjusted income from continuing operations attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible and exchangeable notes, acquisition, integration and restructuring related expenses, settlement fees and related administrative expenses, amortization of certain acquired intangible assets and other charges or gains that are not indicative of ongoing operations.

The following table provides a reconciliation between income from continuing operations and diluted income from continuing operations per share attributable to Encore calculated in accordance with GAAP to adjusted income from continuing operations and adjusted income from continuing operations per share attributable to Encore, respectively.

GAAP diluted earnings per share for the year ended December 31, 2017, includes the effect of approximately 0.2 million common shares that were issuable upon conversion of certain convertible senior notes because the average stock price during the period exceeded the conversion price of these notes.

However, as described in “Note 8:

Borrowings—Encore Convertible Notes and Exchangeable Notes” in the notes to our consolidated financial statements, we have certain hedging transactions in place that have the effect of increasing the effective conversion and exchange price of some of these notes.

Accordingly, while these common shares are included in our diluted earnings per share, the hedge transactions will offset the impact of this dilution and no shares will be issued unless our stock price exceeds the effective conversion price, thereby creating a discrepancy between the accounting effect of those notes under GAAP and their economic impact.

There was no dilutive effect relating to our convertible or exchangeable notes during the year ended December 31, 2019 or during the year ended December 31, 2018.

We have presented the following metrics both including and excluding the dilutive effect of these convertible and exchangeable notes to better illustrate the economic impact of those notes and the related hedging transactions to shareholders (in thousands, except per share data):

Adjusted Earnings Per Share.

Management uses non-GAAP adjusted net income and adjusted earnings per share, to assess operating performance, in order to highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP.

Adjusted net income attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible and exchangeable notes, acquisition, integration and restructuring related expenses, settlement fees and related administrative expenses, amortization of certain acquired intangible assets and other charges or gains that are not indicative of ongoing operations.

The following table provides a reconciliation between net income and diluted earnings per share attributable to Encore calculated in accordance with GAAP, to adjusted net income and adjusted earnings per share attributable to Encore, respectively ( in thousands, except per share data ):

Year Ended December 31,

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$ Per Diluted

Economic $ Per Diluted

Accounting Per Diluted

GAAP net income from continuing operations attributable to Encore, as reported

Share $ Per Diluted

GAAP net income attributable to Encore, as reported $ 211,848 $ 6.68 $ 167,869 $ 5.33 $ 115,886 $ 4.06

CFPB settlement fees (1)

15,009 0.47 — — — —

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7,010 0.22 7,017 0.22 8,337 0.29

Net gain on fair value adjustments to contingent considerations (3)

(2,300) (0.07) (5,664) (0.20) (2,822) (0.11) (0.11)

Expenses related to withdrawn Cabot IPO (4)

— — 2,984 0.10 15,339 0.58 0.58

Loss on derivatives in connection with the Cabot Transaction (5)

Loss on sale of Baycorp (4)

— — 12,489 0.40 — —

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— — 10,718 0.34 — —

Loss on Baycorp Transaction (6)

Net gain on fair value adjustments to contingent considerations (5)

— — (2,300) (0.07) (5,664) (0.20)

Income tax effect of the adjustments (7)

Change in tax accounting method (6)

— — (7,825) (0.25) — —

Impact from tax reform (8)

Expenses related to withdrawn Cabot IPO (7)

— — — — 2,984 0.10

Change in tax accounting method (9)

Loss on derivatives in connection with the Cabot Transaction (8)

— — — — 9,315 0.33

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— — — — (5,022) (0.18)

Adjusted income from continuing operations attributable to Encore

Income tax effect of the adjustments (10)

(7,478) (0.24) (23,230) (0.74) (9,079) (0.32)

Adjusted net income attributable to Encore $ 245,795 $ 7.75 $ 187,288 $ 5.95 $ 142,159 $ 4.98

________________________

(1) Amount represents acquisition, integration and restructuring related expenses, which for the year ended December 31, 2019 includes approximately $1.3 million of transaction costs incurred associated with the Baycorp Transaction.

(1) Amount represents a charge resulting from the Stipulated Judgment with the CFPB.

We have adjusted for this amount because we believe it is not indicative of ongoing operations;

therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(2) Amount represents acquisition, integration and restructuring related expenses.

We adjust for this amount because we believe these expenses are not indicative of ongoing operations;

therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(2) As we acquire debt solution service providers around the world, we also acquire intangible assets, such as trade names and customer relationships.

(3) We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers.

These intangible assets are valued at the time of the acquisition and amortized over their estimated lives.

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In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by operations during any reporting period.

As a result, the amortization of certain acquired intangible assets is excluded from our adjusted income from continuing operations attributable to Encore and adjusted income from continuing operations per share.

As a result, the amortization of certain acquired intangible assets is excluded from our adjusted income attributable to Encore and adjusted income per share.

(4) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million and a loss on sale of $12.5 million during the year ended December 31, 2019.

We believe the goodwill impairment charge and the loss on sale are not indicative of ongoing operations, therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(5) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe.

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Fair Value Measurements” in the notes to our consolidated financial statements for further details.

(4) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM.

(6) Amount represents the benefit from the tax accounting method change related to revenue reporting.

We adjust for certain discrete tax items that are not indicative of our ongoing operations.

(7) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot.

We adjust for this amount because we believe these expenses are not indicative of ongoing operations;

therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(5) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction.

(8) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the purchase of all of the outstanding equity of CCM not owned by Encore (the “Cabot Transaction”).

We adjust for this amount because we believe the loss is not indicative of ongoing operations;

therefore, adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(6) The Baycorp Transaction resulted in a goodwill impairment charge of $10.7 million and a loss on sale of $12.5 million during the year ended December 31, 2019.

(7) Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred.

Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing operations.

We recognized approximately $17.5 million, or $0.55 per diluted share, in tax benefit as a result of the Baycorp Transaction, which is included in this income tax adjustment during the year ended December 31, 2019.

(8) As a result of the Tax Reform Act, we incurred a net additional tax expense of approximately $1.2 million during the year ended December 31, 2017.

We believe the Tax Reform Act related expenses are not indicative of our ongoing operations, therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(9) Amount represents the benefit from the tax accounting method change related to revenue reporting.

We adjust for certain discrete tax items that are not indicative of our ongoing operations.

(9) Certain of the above pre-tax adjustments include expenses recognized by our partially-owned subsidiaries.

This adjustment represents the portion of the non-GAAP adjustments that are attributable to noncontrolling interest.

(10) Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred.

Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing operations.

We recognized approximately $17.5 million, or $0.55 per diluted share, in tax benefit as a result of the sale of Baycorp, which is included in this income tax adjustment during the year ended December 31, 2019.

Adjusted EBITDA.

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GAAP net income, as reported $ 212,524 $ 168,909 $ 109,736

Loss from discontinued operations, net of tax — — 199

Interest expense 209,356 217,771 237,355

Loss on extinguishment of debt 40,951 8,989 2,693

Interest income (2,397) (3,693) (3,345)

Provision for income taxes 70,374 32,333 46,752

Depreciation and amortization 42,780 41,029 41,228

CFPB settlement fees (1)

Stock-based compensation expense 16,560 12,557 12,980

Loss on derivative in connection with the Cabot Transaction (1)

Acquisition, integration and restructuring related expenses (2)

4,962 7,049 7,523

Loss on sale of Baycorp (3)

Goodwill impairment (3)

Net gain on fair value adjustments to contingent considerations (4)

— (2,300) (5,664)

Loss on derivative in connection with the Cabot Transaction (5)

Expenses related to withdrawn Cabot IPO (6)

— 2,984 15,339

Goodwill impairment (5)

Loss on Baycorp Transaction (5)

Interest income (3,693) (3,345) (3,635)

Adjusted EBITDA $ 610,119 $ 505,851 $ 461,557

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________________________

(1) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction.

We adjust for this amount because we believe the loss is not indicative of ongoing operations;

therefore, adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(2) Amount represents acquisition, integration and restructuring related expenses, which includes approximately $1.3 million of transaction costs incurred associated with the Baycorp Transaction during the year ended December 31, 2019.

(1) Amount represents a charge resulting from the Stipulated Judgment with the CFPB.

We have adjusted for this amount because we believe it is not indicative of ongoing operations;

therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(2) Amount represents acquisition, integration and restructuring related expenses.

We adjust for this amount because we believe these expenses are not indicative of ongoing operations;

therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(3) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million and a loss on sale of $12.5 million during the year ended December 31, 2019.

(4) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe.

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Fair Value Measurements” in the notes to our consolidated financial statements for further details.

(4) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM.

(5) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction.

We adjust for this amount because we believe the loss is not indicative of ongoing operations;

therefore, adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(6) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot.

We adjust for this amount because we believe these expenses are not indicative of ongoing operations;

therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(5) The Baycorp Transaction resulted in a goodwill impairment charge of $10.7 million and a loss on sale of $12.5 million during the year ended December 31, 2019.

(6) Amount represents (a) gross collections from receivable portfolios less (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios.

(7) For periods prior to January 1, 2020, amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios.

For periods subsequent to January 1, 2020 amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) changes in expected recoveries.

For consistency with the Company debt covenant reporting, for periods subsequent to June 30, 2020, the collections applied to principal balance also includes proceeds applied to basis from sales of REO assets and related activities;

prior period amounts have not been adjusted to reflect this change as such amounts were immaterial.

Adjusted Operating Expenses.

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(182,930) (173,190) (193,715)

CFPB settlement fees (2)

Stock-based compensation expense (16,560) (12,557) (12,980)

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(154) (7,049) (7,523)

Expenses related to withdrawn Cabot IPO (3)

— (2,984) (15,339)

Goodwill impairment (4)

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— 2,300 5,664

Expenses related to withdrawn Cabot IPO (6)

Adjusted operating expenses related to portfolio purchasing and recovery business

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(1) Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily engage in fee-based business, as well as corporate overhead not related to our portfolio purchasing and recovery business.

(2) Amount represents acquisition, integration and restructuring related operating expenses (including approximately $1.3 million of transaction costs incurred associated with the Baycorp Transaction during the year ended December 31, 2019 and excluding amounts already included in stock-based compensation expense).

We adjust for this amount because we believe these expenses are not indicative of ongoing operations;

therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(3) Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM.

(2) Amount represents a charge resulting from the Stipulated Judgment with the CFPB.

We have adjusted for this amount because we believe it is not indicative of ongoing operations;

therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(3) Amount represents acquisition, integration and restructuring related operating 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.

(4) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million that is included in operating expenses during the year ended December 31, 2019.

We believe the goodwill impairment charge is not indicative of ongoing operations, therefore, adjusting for the expense enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

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Fair Value Measurements” in the notes to our consolidated financial statements for further details.

(6) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot.

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.

Cost per Dollar Collected

Cost-to-collect is calculated by dividing adjusted operating expenses by collections from purchased receivables.

The calculation of adjusted operating expenses is illustrated in detail above.

The following table summarizes our overall cost per dollar collected by geographic location during the periods presented:

Year Ended December 31,

United States 37.4 % 40.3 %

Europe 29.9 % 28.2 %

Other geographies 55.9 % 54.3 %

Overall cost per dollar collected 35.7 % 37.0 %

As discussed in the “Change in Accounting Principle” section in “Note 1:

Ownership, Description of Business, and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements, effective January 1, 2020, we expense all court costs as incurred and no longer capitalize such costs as Deferred Court Costs based on a loss-rate methodology.

This change in accounting principle increased the cost-to-collect metric as compared to prior periods because the court costs expense recognized in prior periods only represented costs we did not expect to recover.

The change in accounting principle has no impact on the amount of court cost payments incurred.

Despite the increase in expense due to the change in accounting principle discussed above, cost-to-collect decreased 130 basis points to 35.7% for the year ended December 31, 2020 from 37.0% during the prior year.

The decrease in overall cost-to-collect was driven by improved cost-to-collect in the United States, which was due to a combination of (1) continued improvement in operational efficiencies in the collection process, (2) a large reduction in legal channel spending due to court closures in certain jurisdictions as a result of the COVID-19 pandemic, the legal channel spending has gradually increased in the third and fourth quarters as compared to the previous quarters but is still lower than historical levels and (3) collection mix shifting towards non-legal collection, which has a lower cost-to-collect.

Collections from other geographies continue to decline as we continue to focus on the U.S.

and European markets.

Cost-to-collect in LAAP is expected to stay at an elevated level and will continue to fluctuate over time.

Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, product mix, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the changing regulatory and legislative environment.

Supplemental Performance Data

The tables included in this supplemental performance data section include detail for purchases, collections and ERC by year of purchase.

During any fiscal quarter in which we acquire an entity that has portfolio, the entire historical portfolio of the acquired company is aggregated into static pools for the quarter of acquisition based on common characteristics, resulting in pools for that quarter that may consist of several different vintages of portfolio.

These quarterly pools are included in the tables in this section by year of purchase.

For example, with the acquisition of Cabot in July 2013, all of Cabot’s historical portfolio to the date of the acquisition (which included several years of historical purchases at various stages of maturity) is included in 2013 for Europe.

Our collection expectations are based on account characteristics and economic variables.

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2019 273,354 — — — — — — — — — 44,118 80,502 124,620 0.5

2020 116,899 — — — — — — — — — — 22,721 22,721 0.2

Subtotal 3,205,493 — — — 134,259 384,856 476,126 494,000 554,320 635,177 635,218 553,946 3,867,902 1.2

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2019 2,668 — — — — — — — — — 3,198 245 3,443 1.3

2020 — — — — — — — — — — — — — —

Subtotal 349,635 — — — 10,465 29,828 42,665 109,884 112,383 108,480 75,601 28,960 518,266 1.5

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2019 273,354 124,620 530,179 654,799 2.4

2020 116,899 22,721 312,508 335,229 2.9

Subtotal 3,205,493 3,867,902 4,431,614 8,299,516 2.6

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2019 2,668 3,443 421 3,864 1.4

2020 — — — — —

Subtotal 349,635 518,266 120,296 638,562 1.8

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2019 83,648 77,209 65,517 55,199 45,684 37,710 31,496 26,896 22,616 84,204 530,179

2020 43,738 46,970 42,865 34,312 27,479 24,542 19,572 16,263 13,420 43,347 312,508

Subtotal 601,514 569,734 505,696 443,908 385,465 329,586 283,935 246,465 215,314 849,997 4,431,614

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2019 179 106 72 54 10 — — — — — 421

2020 — — — — — — — — — — —

Subtotal 29,670 21,458 16,969 12,050 8,957 5,811 3,580 3,081 2,876 15,844 120,296

Portfolio ERC 1,854,522 1,501,737 1,096,326 830,336 648,824 510,046 409,564 335,103 277,773 981,153 8,445,384

27,115 26,403 17,203 7,791 1,866 64 6 78 74 — 80,600

Total $ 1,881,637 $ 1,528,140 $ 1,113,529 $ 838,127 $ 650,690 $ 510,110 $ 409,570 $ 335,181 $ 277,847 $ 981,153 $ 8,525,984

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ERC also includes approximately $84.0 million from cost recovery portfolios, primarily in other geographies.

(2) The collection forecast of each pool in the calculation of accretion revenue is generally estimated up to 120 months in the United States and up to 180 months in Europe.

Expected collections beyond the 120-month collection forecast in the United States are included in the presentation of ERC but are not included in the calculation of IRRs.

(2) Represents the expected remaining gross cash collections on purchased portfolios over a 180-month period.

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Other geographies 98,495 107,248

Total 6,782,888 7,491,408

(4) Includes portfolios acquired in connection with certain business combinations.

Unamortized Balances of Portfolios

The following table summarizes the remaining unamortized balances of our purchased receivable portfolios by year of purchase (in thousands, except percentages ):

Unamortized Balance as of December 31, 2019 Purchase

Percentage of

Purchase Price Unamortized

United States:

2011 $ 2,546 $ 383,805 0.7 % 0.1 %

2012 5,916 548,818 1.1 % 0.2 %

14,697 551,922 2.7 % 0.4 %

50,097 517,800 9.7 % 1.5 %

2015 82,187 499,429 16.5 % 2.5 %

2016 149,159 553,648 26.9 % 4.5 %

2017 198,714 528,779 37.6 % 6.1 %

2018 409,717 631,453 64.9 % 12.5 %

2019 626,911 679,875 92.2 % 19.1 %

Subtotal 1,539,944 4,895,529 31.5 % 46.9 %

238,033 619,079 38.4 % 7.2 %

206,895 630,342 32.8 % 6.3 %

160,113 423,297 37.8 % 4.9 %

2016 140,663 258,841 54.3 % 4.3 %

2017 290,071 464,110 62.5 % 8.8 %

2018 347,399 455,549 76.3 % 10.6 %

2019 264,903 296,937 89.2 % 8.1 %

Subtotal 1,648,077 3,148,155 52.4 % 50.2 %

Other geographies:

2014 60,479 86,989 69.5 % 1.8 %

2015 6,240 83,198 7.5 % 0.2 %

2016 4,680 64,450 7.3 % 0.1 %

2017 15,894 49,670 32.0 % 0.5 %

2018 8,330 26,371 31.6 % 0.3 %

2019 340 2,668 12.7 % 0.0 %

Subtotal 95,963 313,346 30.6 % 2.9 %

Total $ 3,283,984 $ 8,357,030 39.3 % 100.0 %

________________________

(1) Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments.

Portfolio ERC $ 6,851,355 $ 7,695,895

REO ERC $ 80,448 $ 80,600

Total ERC $ 6,931,803 $ 7,776,495

(3) Includes portfolios acquired in connection with certain business combinations.

Estimated Future Amortization of Portfolios

(4) Real estate-owned assets ERC includes approximately $78.7 million and $1.9 million of estimated future cash flows for Europe and Other Geographies, respectively.

Estimated Future Collections Applied to Principal

As of December 31, 2020, we had $3.3 billion in investment in receivable portfolios.

This balance will be amortized based upon current projections of cash collections in excess of revenue applied to the principal balance.

The estimated amortization of the investment in receivable portfolios balance is as follows (in thousands):

The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands):

Years Ending December 31,

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2035 3,249 88,833 — 92,082

Thereafter — — 4,885 4,885

2036 — 5,803 — 5,803

Total $ 1,571,478 $ 1,651,401 $ 69,039 $ 3,291,918

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2020 2019 2018

Domestic International Domestic International (1)

Domestic International (2)

United States:

General & Administrative 1,167 1,106 1,060

Account Manager 389 418 504

Subtotal 1,556 1,524 1,564

General & Administrative 997 998 1,036

Account Manager 2,483 2,085 2,037

Subtotal 3,480 3,083 3,073

Other Geographies (1) :

General & Administrative 1,227 1,173 1,345

Account Manager 1,462 1,475 1,884

Subtotal 2,689 2,648 3,229

Total 7,725 7,255 7,866

________________________

(1) Headcount for other geographies includes employees in India and Costa Rica that service accounts originated in the United States.

Headcount as of December 31, 2018 includes 191 general and administrative and 361 account manager Baycorp employees.

(2) Headcount as of December 31, 2017 includes 262 general and administrative and 509 account manager Refinancia employees and 191 general and administrative and 379 account manager Baycorp employees.

Purchases by Quarter

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Liquidity and Capital Resources

The following table summarizes our cash flow activity, including the cash flows from discontinued operations, for the periods presented (in thousands) :

The following table summarizes our cash flow activity during the periods presented (in thousands) :

Year Ended December 31,

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Net cash provided by operating activities $ 312,864 $ 244,733 $ 186,791

Net cash used in investing activities (202,333) (397,516) (452,131)

Net cash provided by (used in) investing activities 82,826 (202,333) (397,516)

Net cash (used in) provided by financing activities (403,200) (19,770) 166,377

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Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities.

Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, allowance charges and stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.

Net cash provided by operating activities was $312.9 million, $244.7 million, and $186.8 million during the years ended December 31, 2020, 2019, and 2018, respectively.

Cash provided by operating activities is affected by net income, various non-cash add backs in operating activities, including portfolio allowance reversals, and changes in operating assets and liabilities.

The primary drivers of the changes in operating cash flow included cash collections recognized as revenue from receivable portfolios, income tax payments, and interest payments.

Cash collections recognized as revenue from receivable portfolios were $1,269.3 million, $1,167.1 million, and $1,053.4 million during the years ended December 31, 2019, 2018, and 2017, respectively.

Cash paid for income taxes, net of income tax refunds, was $44.0 million, $5.7 million, and $42.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.

Interest payments were $178.9 million, $198.8 million, and $162.5 million during the years ended December 31, 2019, 2018, and 2017, respectively.

Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in expected recoveries, allowance charges, stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.

Investing Cash Flows

Net cash used in investing activities was $202.3 million, $397.5 million and $452.1 million during the years ended December 31, 2019, 2018 and 2017, respectively.

Cash used in investing activities is primarily affected by receivable portfolio purchases offset by collection proceeds applied to the principal of our receivable portfolios.

Net cash provided by investing activities was $82.8 million during year ended December 31, 2010, net cash used in investing activities was $202.3 million and $397.5 million during the years ended December 31, 2019 and 2018, respectively.

Cash provided by or used in investing activities is primarily affected by receivable portfolio purchases offset by collection proceeds applied to the principal of our receivable portfolios.

Receivable portfolio purchases were $644.0 million, $1,035.1 million, and $1,131.1 million during the years ended December 31, 2020, 2019, and 2018, respectively.

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Financing Cash Flows

Net cash used in financing activities was $19.8 million for the year ended December 31, 2019, and cash provided by financing activities was $166.4 million and $378.2 million for the years ended December 31, 2018 and 2017, respectively.

Cash provided by financing activities is primarily affected by borrowings under our credit facilities and proceeds from the issuance of convertible and exchangeable notes offset by repayments of amounts outstanding under our credit facilities, repayments of senior secured notes, and repayments of Encore’s convertible and exchangeable notes.

Net cash used in financing activities was $403.2 million and $19.8 million during the years ended December 2020 and 2019, respectively, net cash provided by financing activities was $166.4 million during the year ended December 31, 2018.

Financing cash flows are generally affected by borrowings under our credit facilities and proceeds from various debt offerings, offset by repayments of amounts outstanding under our credit facilities and repayments of various notes.

Borrowings under our credit facilities were $1,820.6 million, $603.6 million and $942.2 million during the years ended December 31, 2020, 2019, and 2018, respectively.

Proceeds from the issuance of convertible and exchangeable notes were $100.0 million, $172.5 million and $150.0 million during the years ended December 31, 2019, 2018 and 2017.

Repayments of amounts outstanding under our credit facilities were $586.4 million, $571.1 million and $1,168.1 million and repayments of senior secured notes were $470.8 million, $91.6 million and $204.2 million during the years ended December 31, 2019, 2018, and 2017, respectively.

Repayments of amounts outstanding under our credit facilities were $2,290.8 million, $586.4 million and $571.1 million during the years ended December 31, 2020, 2019, and 2018, respectively.

Proceeds from the issuance of senior secured notes were $1,313.4 million and $454.6 million during the years ended December 31, 2020 and 2019, respectively.

Repayments of senior secured notes were $1,033.8 million, $470.8 million and $91.6 million during the years ended December 31, 2020, 2019, and 2018, respectively.

Capital Resources

Historically, we have met our cash requirements by utilizing our cash flows from operations, bank borrowings, debt offerings, and equity offerings.

From time to time, depending on the capital markets, we consider additional financings to fund our operations and acquisitions.

From time to time, we may repurchase outstanding debt or equity and/or restructure or refinance current debt obligations.

Historically, we have met our cash requirements by utilizing our cash flows from operations, cash collections from our investment in receivable portfolios, bank borrowings, debt offerings, and equity offerings.

Depending on the capital markets, we consider additional financings to fund our operations and acquisitions.

From time to time, we may repurchase outstanding debt or equity and/or restructure or refinance debt obligations.

Our primary cash requirements have included the purchase of receivable portfolios, entity acquisitions, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes.

We have a revolving credit facility (the “Revolving Credit Facility”) and term loan facility (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”) pursuant to a Third Amended and Restated Credit Agreement dated December 20, 2016 (as amended, the “Restated Credit Agreement”).

The Senior Secured Credit Facilities have a five-year maturity, expiring in December 2021.

As of December 31, 2019, we had $492.0 million outstanding and $272.3 million of availability under the Revolving Credit Facility and $171.7 million outstanding under the Term Loan Facility.

Through Cabot, we have a revolving credit facility of £375.0 million (approximately $497.2 million) (the “Cabot Credit Facility”).

As of December 31, 2019, we had £215.5 million (approximately $285.7 million) outstanding and £159.5 million (approximately $211.5 million) of availability under the Cabot Credit Facility.

Currently, all of our portfolio purchases are funded with cash from operations, cash collections from our investment in receivable portfolios, and our bank borrowings.

We are in material compliance with all covenants under our financing arrangements.

Borrowings” in the notes to our consolidated financial statements for a further discussion of our debt.

In August 2018, we established an at-the-market equity offering program (the “ATM Program”) pursuant to which we may issue and sell shares of Encore’s common stock having an aggregate offering price of $50.0 million.

During the year ended December 31, 2020, we did not issue any shares under our ATM Program.

We have issued a total of 13,600 shares under our ATM Program, generating proceeds of approximately $0.54 million, net of commissions of approximately $5,000.

We have issued a total of 13,600 shares under our ATM Program, generating proceeds of approximately $0.54 million.

We have no obligation to sell any of such shares under our ATM Program.

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We intend to use the net proceeds from the offering of such shares, if any, for general corporate purposes, which could include repayments of our credit facilities from time to time.

Currently, all of our portfolio purchases are funded with cash from operations and borrowings under our Senior Secured Credit Facilities and our Cabot Credit Facility.

We are in material compliance with all covenants under our financing arrangements.

Borrowings” to our consolidated financial statements for a further discussion of our debt.

Our cash and cash equivalents at December 31, 2019 consisted of $51.5 million held by U.S.-based entities and $140.8 million held by foreign entities.

Our cash and cash equivalents as of December 31, 2020 consisted of $39.4 million held by U.S.-based entities and $149.8 million held by foreign entities.

Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated.

However, we believe that our U.S.

sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.

We believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities.

However, we believe that our sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.

Included in cash and cash equivalents is cash that was collected on behalf of, and remains payable to, third-party clients.

The balance of cash held for clients was $20.3 million and $25.0 million as of December 31, 2020 and 2019, respectively.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from our consumers, and other risks detailed in our Risk Factors.

However, we believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, cash collections from our investment in receivable portfolios, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities.

Our future cash needs will depend on our acquisitions of portfolios and businesses.

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(1) Estimated interest payments are calculated based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of December 31, 2020 for variable rate debt, timing of scheduled payments and the term of the debt obligations.

(2) We had approximately $8.2 million of liabilities and accrued interests related to uncertain tax positions at December 31, 2019.

(2) We had approximately $6.9 million of liabilities and accrued interests related to uncertain tax positions as of December 31, 2020.

We are unable to reasonably estimate the timing of the cash settlement with the tax authorities due to uncertainties related to these tax matters and, as a result, these obligations are not included in the table.

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Investment in Receivable Portfolios and Related Revenue .

Static pools are established on a quarterly basis with accounts purchased during the quarter that have common risk characteristics.

Discrete receivable portfolio purchases during a quarter are aggregated into pools based on these common risk characteristics.

Once a static pool is established, the portfolios are permanently assigned to the pool.

The discount ( i.e ., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because we expect to collect a relatively small percentage of each static pool’s contractual receivable balance.

As a result, receivable portfolios are recorded at cost at the time of acquisition.

The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.

We account for our investments in consumer receivable portfolios using either the interest method or the cost recovery method.

The interest method applies an IRR to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows.

Subsequent increases in expected cash flows are generally recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life.

Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of operations as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition.

We account for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios and for provision for loss or allowance.

Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis.

The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances.

If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, we account for that pool using the cost recovery method.

The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios.

Under the cost recovery method of accounting, no revenue is recognized until the carrying value of a cost recovery portfolio has been fully recovered.

Effective January 1, 2020, our investment in receivable portfolios is accounted for under CECL.

Deferred Court Costs.

We pursue legal collection using a network of attorneys that specialize in collection matters and through our internal legal channel.

We generally pursue collections through legal means only when we believe a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay.

In connection with our agreements with our contracted attorneys, we advance certain out-of-pocket court costs, or Deferred Court Costs.

We capitalize these costs in the consolidated financial statements and provide a reserve for those costs that we believe will ultimately be uncollectible.

We determine the reserve based on our analysis of historical court costs recovery data.

We estimate deferral periods for Deferred Court Costs based on jurisdiction and nature of litigation and write off any Deferred Court Costs not recovered within the respective deferral period.

Collections received through litigation are first applied against related court costs with the balance applied to the debtors’ account.

Effective January 1, 2020, in connection with the adoption of CECL, we expense all upfront court costs in our statements of operations and include all future projected recoveries of these upfront court costs in the measurement of our investment in receivable portfolios, at a discounted value.

Receivable portfolio purchases are aggregated into pools based on similar risk characteristics.

Examples of risk characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location.

Our static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios.

We further group these static pools by geographic location.

Once a pool is established, the portfolios will remain in the designated pool unless the underlying risk characteristics change.

The purchase EIR of a pool will not change over the life of the pool even if expected future cash flows change.

Revenue is recognized for each static pool over the economic life of the pool.

We make significant assumptions in determining the economic life of a pool, including the reasonable and supportable economic forecast period based on asset type and geography, which considers the availability of forward-looking scenarios and their respective time horizons.

In general, we forecast recoveries over one or two years prior to reverting to historical averages at an estimate-level over the remaining life using various methodologies depending on the asset type and geography.

The speed at which forecasts revert varies based on the spread between the forecast period and historical data.

In addition, estimated recoveries include a qualitative component, which generally reflects management’s assessment of macroeconomic environment and business initiatives.

We continue to evaluate the reasonable economic life of a pool and reversion method annually.

Revenue primarily includes two components:

(1) accretion of the discount on the negative allowance due to the passage of time, and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries.

We measure expected future recoveries based on historical experience, current conditions, and reasonable and supportable forecasts.

Factors that may change the expected future recoveries may include both internal as well as external factors.

Internal factors include operational performance, such as capacity and the productivity of our collection staff.

External factors that may have an impact on our collections include macroeconomic conditions, new laws or regulations, and new interpretations of existing laws or regulations.

Investment in Receivable Portfolios, Net” for further discussion of investment in receivable portfolios.

Valuation of Goodwill and Other Intangible Assets.

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Income Taxes.

We use the liability method of accounting for income taxes.

We use the asset and liability method of accounting for income taxes.

When we prepare the consolidated financial statements, we estimate our income taxes based on the various jurisdictions where we conduct business.

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We then assess the likelihood that our deferred tax assets will be realized.

Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

In completing this evaluation, we consider all available positive and negative evidence.

Such evidence includes historical earnings, taxable income in prior carryback year(s) if permitted under the tax law, projections of future pretax book income, the time period over which our temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies.

Deferred tax assets are reduced

by a valuation allowance if, based on the weight of this evidence, it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized in future periods.

When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding tax expense in our statement of operations.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis