What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-24 · 191 added, 255 removed, 697 unchanged (39% of the section changed)

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to help investors understand our business, financial condition, results of operations, liquidity and capital resources.

You should read this discussion together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

This Annual Report on Form 10-K contains “forward-looking statements” relating to Encore Capital Group, Inc.

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Defaulted receivables may also include receivables subject to bankruptcy proceedings.

We also provide debt servicing and other portfolio management services to credit originators for non-performing loans.

We also provide debt servicing and other portfolio management services to credit originators for non-performing loans in Europe.

Encore Capital Group, Inc.

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Cabot (Europe)

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

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

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.

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LAAP (Latin America and Asia-Pacific)

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

We have purchased non-performing loans in Mexico.

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

We previously owned non-performing loans in Colombia and Peru (sold in August 2021) and Brazil (sold in April 2020).

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.

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Recent Developments

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

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.

As a result of the COVID-19 pandemic and the resulting containment measures, we have observed, among other things, a decrease in market supply in both US and Europe driven mainly by a decrease in charge off rates.

Government Regulation

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In the United States, the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt portfolios.

A small percentage of our capital deployment in the United States comprises of receivable portfolios subject to Chapter 13 and Chapter 7 bankruptcy proceedings.

A small percentage of our capital deployment in the United States is comprised of receivable portfolios subject to Chapter 13 and Chapter 7 bankruptcy proceedings.

We purchase receivables based on robust, account-level valuation methods and employ proprietary statistical and behavioral models across our U.S.

These methods and models allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or strategies and align the accounts we purchase with our business channels to maximize future collections.

These methods and models allow us to value portfolios accurately (limiting the risk of overpaying), avoid buying portfolios that are incompatible with our methods or strategies and align the accounts we purchase with our business channels to maximize future collections.

As a result, we have been able to realize significant returns from the receivables we acquire.

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

We maintain strong relationships with many of the largest financial services providers in the United Kingdom and continue to expand in the United Kingdom and the rest of Europe with our acquisitions of portfolios and other credit management services providers.

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Purchases and Collections

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

Pricing in the fourth quarter remained favorable.

Pricing in the fourth quarter was somewhat higher than in previous periods.

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

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.

We believe this favors larger participants, such as us, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements.

We believe this favors larger participants, like MCM, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements.

Cabot (Europe)

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.

In particular, we anticipate strong debt purchasing and servicing opportunities in the secured and small and medium enterprise asset classes given the backlog of non-performing debt that has accumulated in these sectors.

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.

market for charged-off portfolios has generally provided a relatively consistent pipeline of opportunities over the past few years, despite historically low 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 significant debt sales activity, and an expectation of a significant amount of debt to be sold and serviced in the future.

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

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.

Due to the COVID-19 pandemic, banks decreased portfolio sales during 2020 in order to focus on customers’ needs.

While we have seen a resumption of sales activity across many of our European markets in 2021, underlying default rates are generally low by historic levels, and sales levels are expected to fluctuate from quarter to quarter as banks seek to re-establish a more stable debt sales strategy.

In general, supply remains below pre-pandemic levels while portfolio pricing has become more competitive across our European footprint.

Purchases by Geographic Location

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2021 2020 2019

United States $ 542,973 $ 681,777 $ 637,881

116,899 306,504 455,444

MCM (United States) $ 408,741 $ 542,973 $ 681,777

Cabot (Europe) 255,788 116,899 306,504

Other geographies — — 11,577

Total purchases $ 659,872 $ 999,858 $ 1,131,898

__________________

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

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.

Total purchases of receivable portfolios $ 664,529 $ 659,872 $ 999,858

In the United States, capital deployment decreased during the year ended December 31, 2021, as compared to 2020.

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.

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

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.

is a result of a decrease in supply, which we believe is temporary.

Capital deployment also decreased for the year ended December 31, 2020, as compared to 2019, primarily due to 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.

In Europe, capital deployment increased during the year ended December 31, 2021, as compared to 2020.

The increase was primarily the result of significantly lower capital deployment during the prior year driven by limited supply of portfolios and a continuation of our selective purchasing process.

European capital deployment decreased for 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.

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The average purchase price as a percentage of face value was 11.5%, 11.3%, and 8.6% for the years ended December 31, 2021, 2020, and 2019, respectively.

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2021 2020 2019

United States:

MCM (United States):

Call center and digital collections $ 971,459 $ 941,682 $ 742,272

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Subtotal 1,641,698 1,528,942 1,316,109

Cabot (Europe):

Call center and digital collections 259,666 245,762 257,317

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Total collections from purchased receivables $ 2,307,359 $ 2,111,848 $ 2,026,928

__________________

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

(“Refinancia”), which remains the servicer for the non-performing loans we own in Colombia and Peru.

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 $195.5 million, or 9.3%, to $2,307.4 million during the year ended December 31, 2021, from $2,111.8 million during the year ended December 31, 2020.

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 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.

The increase of collections in the United States was primarily driven by changes in consumer behavior during the COVID-19 pandemic, an increase in legal channel collections and our continued effort in improving liquidation.

We are frequently being called upon by our consumers to assist them with their financial recovery through inbound calls and online digital interaction.

The large volume of consumer contact resulted in a significant increase in collections and improved our operating efficiency.

The increase in collections from purchased receivables in Europe was primarily due to reduced collections in the prior year resulting from the impacts of the COVID-19 pandemic and the favorable impact from foreign currency translation, primarily by the weakening of the U.S.

dollar against the British Pound.

Gross collections from purchased receivables increased $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.

The increase of collections in the United

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

Results of Operations

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Revenue from receivable portfolios $ 1,287,730 79.8 % $ 1,374,717 91.5 % $ 1,269,288 90.8 %

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

Changes in recoveries 199,136 12.3 % 7,246 0.5 % — — %

Total debt purchasing revenue 1,486,866 92.1 % 1,381,963 92.0 % 1,269,288 90.8 %

Servicing revenue 120,778 7.5 % 115,118 7.7 % 126,527 9.1 %

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Total revenues 1,614,499 100.0 % 1,501,400 100.0 % 1,405,789 100.6 %

(Allowances) allowance reversals on receivable portfolios, net (8,108) (0.6) % 41,473 3.0 %

Allowances on receivable portfolios, net (8,108) (0.6) %

Total revenues, adjusted by net allowances 1,397,681 100.0 %

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Net income 351,201 21.8 % 212,524 14.2 % 168,909 12.1 %

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

Net income attributable to noncontrolling interest (419) (0.1) % (676) (0.1) % (1,040) (0.1) %

Net income attributable to Encore Capital Group, Inc.

stockholders $ 350,782 21.7 % $ 211,848 14.1 % $ 167,869 12.0 %

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Comparison of Results of Operations

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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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

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

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.

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.”

Debt purchasing revenue includes two components:

(1) Revenue from receivable portfolios , which is the accretion of the discount on the negative allowance due to the passage of time (generally the portfolio balance multiplied by the EIR), and

(2) C hanges in recoveries , which includes

(a) Recoveries above (below) forecast, which is the difference between (i) actual cash collected/recovered during the current period and (ii) expected cash recoveries for the current period, which generally represents over or under performance for the period;

(b) Changes in expected future recoveries, which is the present value change of expected future recoveries, where such change generally results from (i) collections “pulled forward from” or “pushed out to” future periods (i.e.

amounts either collected early or expected to be collected later) and (ii) magnitude and timing changes to estimates of expected future collections (which can be increases or decreases).

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.

We earn fee-based income by providing debt servicing (such as early stage collections, BPO, contingent collections, trace services and litigation activities) to credit originators for non-performing loans.

Other revenues primarily include revenues recognized from the sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios in Europe and LAAP.

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

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

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

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Revenue from receivable portfolios 1,287,730 1,374,717 (86,987) (6.3) %

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

Recoveries above forecast 326,006 228,075 97,931 42.9 %

Changes in expected future recoveries (126,870) (220,829) 93,959 (42.5) %

Changes in recoveries 199,136 7,246 191,890 2648.2 %

Debt purchasing revenue 1,486,866 1,381,963 104,903 7.6 %

Servicing revenue 120,778 115,118 5,660 4.9 %

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Total revenues $ 1,614,499 $ 1,501,400 $ 113,099 7.5 %

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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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.

dollar, which weakened, based on average exchange rates, against the British Pound by approximately 6.8%, during the year ended December 31, 2021 as compared to the year ended December 31, 2020.

The decrease in revenue recognized from portfolio basis during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to lower portfolio basis driven by the negative changes in expected future period recoveries and a lower volume of purchases in recent quarters.

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

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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.

Recoveries above or below forecast represent over and under-performance in the reporting period.

Collections during the year ended December 31, 2021 significantly outperformed the projected cash flows by approximately $326.0 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.

We believe the collection over-performance was a result of our improvements in collections operations and changed consumer behavior during the COVID-19 pandemic.

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.

When reassessing the future forecasts of expected lifetime recoveries during the year ended December 31, 2021, management considered historical and current collection performance, and believes that for certain static pools collections over-performance resulted in increased total expected recoveries.

Although management believes that the relevant macroeconomic conditions have improved and therefore no longer materially impact our collections performance, uncertainty still remains in the geographies in which we operate.

As a result of a combination of the above, we have updated our forecast, resulting in a net reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a negative change in expected future period recoveries of approximately $126.9 million during the year ended December 31, 2021.

During the year ended December 31, 2020, we recorded approximately $220.8 million in negative change in expected future period recoveries.

The circumstances around this pandemic continue to rapidly evolve, 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.

Tabl e of Contents

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, 2021 As of December 31, 2021

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

Collections Revenue from Receivable Portfolios Changes in Recoveries Investment in Receivable Portfolios Monthly EIR

United States:

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2020 430,514 194,623 101,747 360,847 3.7 %

2021 120,354 81,490 13,528 381,590 3.9 %

Subtotal 1,641,698 834,149 280,248 1,447,182 4.4 %

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2020 59,803 33,962 22,121 118,991 2.3 %

2021 43,082 28,161 9,347 240,890 1.9 %

Subtotal 644,979 445,039 (84,810) 1,577,291 2.2 %

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2019 145 60 21 — — %

2020 — — — — — %

Subtotal 20,682 8,542 3,698 41,080 — %

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

(2) All portfolios are on non-accrual basis subsequent to the sale of our investments in Colombia and Peru in August 2021.

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

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

Collections Revenue from Receivable Portfolios Changes in Recoveries Investment in Receivable Portfolios Monthly EIR

United States:

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2019 416,315 262,751 (10,325) 469,130 3.8%

2020 213,450 118,448 51,072 496,275 3.7%

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

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2019 80,502 54,377 (4,804) 245,191 1.8%

2020 22,721 15,908 11,141 125,959 2.3%

Subtotal 553,946 430,574 (59,577) 1,651,401 2.3%

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Total $ 2,111,848 $ 1,374,717 $ 7,246 $ 3,291,918 3.3%

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.

_______________________

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

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

The increase in servicing revenues during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily attributable to increased fee-based income driven 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.

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Operating Expenses

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Depreciation and amortization 50,079 42,780 7,299 17.1 %

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

Total operating expenses $ 981,227 $ 967,838 $ 13,389 1.4 %

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The increase in salaries and employee benefits during the year ended December 31, 2021 compared to the year ended December 31, 2020 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;

• Additional salaries and benefits incurred in connection with our strategic initiatives;

• 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.

dollar against the British Pound.

Cost of Legal Collections

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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.

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 income.

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

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Total cost of legal collections $ 254,280 $ 239,071 $ 15,209 6.4 %

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.

The increase in cost of legal collections during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to increased legal channel collections.

Beginning in late March of 2020, our legal collection channel spending reduced substantially due to court closures in certain jurisdictions as a result of the COVID-19 pandemic, the legal collection channel spending has gradually increased as courts reopened and is now back to historical levels.

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General and Administrative Expenses

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;

The decrease in general and administrative expenses during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to the following reasons:

• A charge of $15.0 million relating to our settlement with the CFPB recognized in 2020;

• 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.

• The decrease was partially offset by increased information technology related expense and the unfavorable impact of foreign currency translation, primarily by the weakening of the U.S.

dollar against the British Pound.

Other Operating Expenses

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.

The decrease in other operating expenses during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to reduced expenditures for temporary services and direct collection expenses.

The decrease was partially offset by the unfavorable impact of foreign currency translation, primarily by the weakening of the U.S.

dollar against the British Pound.

Collection Agency Commissions

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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 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, 2021 compared to the year ended December 31, 2020 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.

• Increased depreciation expense due to accelerated depreciation of certain computer software and equipment;

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

dollar against the British Pound.

Interest Expense

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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.

In June 2021, we completed an offering of senior secured notes due 2028 and fully redeemed the remaining outstanding portion of our Cabot senior secured notes due 2023.

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

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• 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.

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• Effective January 1, 2021, we adopted a new accounting standard for our convertible and exchangeable notes and now recognize interest expense at the stated coupon rate of interest, rather than the higher effective interest rate;

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

dollar against the British Pound.

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.

Loss on extinguishment of debt associated with various financing transactions relating to our senior secured notes was $9.3 million and $41.0 million during the years ended December 31, 2021 and 2020, respectively.

Refer to “Note 6:

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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 $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.

Other expense was $17.8 million and $0.4 million during the years ended December 31, 2021 and 2020, respectively.

Other expense recognized during the year ended December 31, 2021 primarily included the loss on the sale of our investment in Colombia and Peru of $17.4 million.

Provision for Income Taxes

During the years ended December 31, 2020 and 2019, we recorded income tax provisions for income from continuing operations of $70.4 million and $32.3 million, respectively.

During the years ended December 31, 2021 and 2020, we recorded income tax provisions of $85.3 million and $70.4 million, respectively.

The effective tax rates for the respective periods are shown below:

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(1.0) % (0.5) %

Change in tax rate (2)

(1.3) % (0.9) %

Change in valuation allowance (3)

IRS settlement (2)

(2.3) % 0.9 %

Tax effect of CFPB settlement fees (4)

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________________________

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

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

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

(2) Includes impact of U.K.

tax rate increases.

(3) In 2021, valuation allowance net decrease resulted from the release of valuation allowances in certain foreign subsidiaries.

(4) 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.

The effective tax rate for the year ended December 31, 2021 decreased to 19.5% as compared to 24.9% for the year ended December 31, 2020.

The decrease in tax rate was primarily related to the release of valuation allowances in certain foreign subsidiaries during the year.

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.

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Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.

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Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future.

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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 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,

2020 2019 2018

$ Per Diluted

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 — — — —

Convertible and exchangeable notes non-cash interest and issuance cost amortization

14,444 0.46 15,501 0.50 13,896 0.50

Acquisition, integration and restructuring related expenses (2)

4,962 0.16 7,049 0.22 11,506 0.40

Amortization of certain acquired intangible assets (3)

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

Loss on sale of Baycorp (4)

— — 12,489 0.40 — —

Goodwill impairment (4)

— — 10,718 0.34 — —

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

— — (2,300) (0.07) (5,664) (0.20)

Change in tax accounting method (6)

— — (7,825) (0.25) — —

Expenses related to withdrawn Cabot IPO (7)

— — — — 2,984 0.10

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

— — — — 9,315 0.33

Adjustments attributable to noncontrolling interest (9)

— — — — (5,022) (0.18)

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 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) 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.

We believe that amortization of acquisition-related intangible assets, especially the amortization of an acquired company’s trade names and customer relationships, is the result of pre-acquisition activities.

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 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.

We have adjusted for this amount because we do not believe this is indicative of ongoing operations.

Refer to the Contingent Consideration section of “Note 2:

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

(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.

(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.

(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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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)

Adjusted EBITDA $ 702,718 $ 610,119 $ 505,851

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

(3) In August 2019, we completed the sale of Baycorp, which represented our investments and operations in Australia and New Zealand.

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.

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

(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) 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;

For periods subsequent to January 1, 2020, collections applied to principal balance is calculated in the table below.

For consistency with our 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.

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Year Ended December 31,

Collections applied to investment in receivable portfolios, net $ 1,019,629 $ 737,131

Changes in recoveries (199,136) (7,246)

REO proceeds applied to basis 22,594 10,465

Collections applied to principal balance $ 843,087 $ 740,350

Adjusted Operating Expenses.

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

— 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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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.

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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 above.

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

We utilize adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections from purchased receivables for our portfolio purchasing and recovery business.

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

and European markets.

The following table summarizes our cost per dollar collected (defined as adjusted operating expenses as a percentage of collections from purchased receivables) for the U.S.

and Europe during the periods presented:

Year Ended December 31,

2021 2020 2019

United States 35.2 % 37.4 % 40.3 %

Europe 30.7 % 29.9 % 28.2 %

Other geographies 55.9 % 54.3 %

Overall cost per dollar collected 34.1 % 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.

The decrease in overall cost-to-collect during the year ended December 31, 2021 as compared to the prior year was driven by improved cost-to-collect in the United States, which was due to continued improvement in operational efficiencies in the collection process, scale effects, and changed consumer behavior during the COVID-19 pandemic.

The decrease was partially offset by increased cost-to-collect in Europe due to increased spend in the legal collection channel.

Our European legal collection channel spending reduced substantially in 2020 as a result of the COVID-19 pandemic.

Legal collection channel spending in Europe has increased as courts reopened in the latter half of the year, driving an increase in cost-to-collect for 2021 compared to 2020.

Effective January 1, 2020, in connection with our change in accounting principle relating to our investment in receivable portfolios, we began to 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.

Despite the increase in expense due to the change in accounting principle discussed above, cost-to-collect decreased during the year ended December 31, 2020 as compared to the year ended December 31, 2019.

The decrease 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.

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.

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We utilize proprietary forecasting models to continuously evaluate the economic life of each pool.

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Cumulative Collections from Purchased Receivables to Purchase Price Multiple

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2020 116,899 — — — — — — — — — 22,721 59,803 82,524 0.7

2021 255,788 — — — — — — — — — — 43,082 43,082 0.2

Subtotal 3,461,281 — — 134,259 384,856 476,126 494,000 554,320 635,177 635,218 553,946 644,979 4,512,881 1.3

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2019 2,468 — — — — — — — — 3,198 245 145 3,588 1.5

2020 — — — — — — — — — — — — — —

Subtotal 340,283 — — 10,465 29,828 42,665 109,884 112,383 108,480 75,601 28,960 20,682 538,948 1.6

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(2) Cumulative collections from inception through December 31, 2021, excluding collections on behalf of others.

(3) Cumulative Collections Multiple (“Multiple”) through December 31, 2020 refers to collections as a multiple of purchase price.

(3) Cumulative Collections Money Multiple (“CCMM”) through December 31, 2021 refers to cumulative collections as a multiple of purchase price.

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Total Estimated Collections from Purchased Receivables to Purchase Price Multiple

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2020 116,899 82,524 270,655 353,179 3.0

2021 255,788 43,082 530,822 573,904 2.2

Subtotal 3,461,281 4,512,881 4,043,048 8,555,929 2.5

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2019 2,468 3,588 — 3,588 1.5

2020 — — — — —

Subtotal 340,283 538,948 59,383 598,331 1.8

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

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Estimated Remaining Gross Collections from Purchased Receivables by Year of Purchase

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2020 48,735 42,559 35,679 30,293 24,951 18,123 13,638 11,883 9,291 35,503 270,655

2021 80,464 78,072 65,223 54,765 46,747 39,853 34,273 29,051 23,630 78,744 530,822

Subtotal 596,287 534,887 460,379 397,772 343,727 291,897 251,495 218,794 189,360 758,450 4,043,048

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2017 2,637 2,399 2,114 1,906 1,437 827 750 750 750 4,345 17,915

2014 10,548 8,488 7,630 6,531 4,934 2,899 1,649 1,502 1,502 8,952 54,635

2015 3,500 2,991 2,763 1,942 1,284 949 831 719 601 2,284 17,864

2016 3,189 1,615 573 258 169 95 — — — — 5,899

2017 7,820 5,502 4,061 2,302 2,042 1,530 878 773 773 4,608 30,289

2018 3,766 2,350 1,676 963 518 338 222 87 — — 9,920

2019 179 106 72 54 10 — — — — — 421

2020 — — — — — — — — — — —

Subtotal 9,701 8,941 7,963 6,693 4,249 2,428 2,207 2,207 2,207 12,787 59,383

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(4) Real estate-owned assets ERC includes approximately $69.4 million and $1.6 million of estimated future cash flows for Europe and Other Geographies, respectively.

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Estimated Future Collections Applied to Principal

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2036 3,985 79,530 — 83,515

2036 — 5,803 — 5,803

Total $ 1,447,182 $ 1,577,291 $ 41,080 $ 3,065,553

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(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.

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Purchases by Quarter

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Q4 2021 861 1,888,198 183,435

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Liquidity and Capital Resources

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Net cash provided by (used in) investing activities 339,896 82,826 (202,333)

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

Net cash used in by financing activities (655,692) (403,200) (19,770)

Operating Cash Flows

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Net cash provided by operating activities was $303.1 million, $312.9 million, and $244.7 million during the years ended December 31, 2021, 2020, and 2019, 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.

Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in recoveries, 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 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.

Net cash provided by investing activities was $339.9 million and $82.8 million during the years ended December 31, 2021 and 2020, respectively.

Net cash used in investing activities was $202.3 million during the year ended December 31, 2019.

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.

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Financing Cash Flows

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.

Net cash used in financing activities was $655.7 million, $403.2 million, and $19.8 million during the years ended December 31, 2021, 2020, and 2019, respectively.

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.

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Repayments of amounts outstanding under our credit facilities were $896.4 million, $2,290.8 million and $586.4 million during the years ended December 31, 2021, 2020, and 2019, 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.

Proceeds from the issuance of senior secured notes were $353.7 million, $1,313.4 million, and $454.6 million during the years ended December 31, 2021, 2020, and 2019, respectively.

Repayments of senior secured notes were $359.2 million, $1,033.8 million and $470.8 million during the years ended December 31, 2021, 2020, and 2019, respectively.

We repaid $161.0 million, $89.4 million, and $84.6 million of convertible senior notes using cash on hand during the years ended December 31, 2021, 2020, and 2019, respectively.

Capital Resources

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

Our primary capital resources are cash collections from our investment in receivable portfolios and bank borrowings.

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

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

Tabl e of Contents

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.

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

Actual sales will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of our common stock, our determination of the appropriate sources of funding for the Company, and potential uses of funding available to us.

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.

Available capacity under our Global Senior Facility was $643.4 million as of December 31, 2021.

On August 12, 2015, our Board of Directors approved a $50.0 million share repurchase program.

On May 5, 2021, we announced that the Board of Directors had approved an increase in the size of the repurchase program from $50.0 million to $300.0 million (an increase of $250.0 million).

Repurchases under this program are expected to be made from cash on hand and/or a drawing from our Global Senior Facility, and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by our management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements.

The program does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at our discretion.

During the year ended December 31, 2021, we repurchased 2,598,034 shares of our common stock for approximately $121.2 million under the share repurchase program.

Our practice is to retire the shares repurchased.

On November 4, 2021, we commenced a modified “Dutch Auction” tender offer to purchase up to $300.0 million of shares of our common stock with a price range between $52.00 and $60.00 per share.

On December 9, 2021, we announced the final results of the tender offer.

Through the tender offer, we purchased 4,471,995 shares of common stock at a price of $60.00 per share, for a total cost of $268.3 million, excluding fees and expenses.

The shares purchased through the tender offer were immediately retired.

In May 2021, we terminated our at-the-market equity offering program (the “ATM Program”) pursuant to which we could issue and sell shares of Encore’s common stock having an aggregate offering price of $50.0 million.

Our cash and cash equivalents as of December 31, 2021 consisted of $27.7 million held by U.S.-based entities and $161.9 million held by foreign entities.

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

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Future Contractual Cash Obligations

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Income Taxes” to our consolidated financial statements for additional information on our uncertain tax positions.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Critical Accounting Policies and Estimates

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(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.

Tabl e of Contents

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

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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.

This requires us to estimate our current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes.

Deferred income taxes are recognized based on the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

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

When we reduce our valuation allowance in an accounting period, we record a corresponding tax benefit in our statement of operations.

We include interest and penalties related to income taxes within our provision for income taxes.

See “Note 10:

Income Taxes” to our consolidated financial statements for further discussion of income taxes.

We are subject to income taxes in multiple tax jurisdictions worldwide.

Tax laws are complex and subject to different interpretations by the taxpayer and the relevant taxing authorities.

We exercise significant judgement in estimating potential exposure to unresolved tax matters and apply a more likely than not criteria approach for recording uncertain tax positions in the application of complex tax laws.

We prepare our tax provisions based on anticipated tax consequences for various jurisdictions where we conduct business.

The provision for income taxes is estimated using the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and income tax bases of assets and liabilities.

Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which the differences are expected to be realized or settled.

At each reporting date, we consider new evidence, both positive and negative, that could affect future realization of deferred tax assets including historical earnings, taxable income in prior carryback years if permitted under tax law, projections of future income, timing of reversing temporary differences and the implementation of feasible and prudent tax planning strategies.

In the event that it is more likely than not that all or part of the deferred tax assets are determined not to be realizable in the future, we would establish or increase a valuation allowance in the period such determination is made, with a corresponding charge to earnings.

In the event we realize deferred tax assets that were previously determined to be unrealizable, we would release or decrease the respective valuation allowance, with a corresponding positive adjustment to earnings.

The calculation of tax liabilities involves significant judgement in estimating the impact and timing of resolution of uncertainties in the application of complex tax laws.

Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operation and financial position.

Recent Accounting Pronouncements

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Ownership, Description of Business, and Summary of Significant Accounting Policies” to our consolidated financial statements.

Tabl e of Contents

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What changed 10-K

Item 7. Management’s Discussion and Analysis