ENCORE CAPITAL GROUP INC 10-K

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. (“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our” or “us”) within the meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,” “may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services, and financing needs or plans, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors including, but not limited to, those set forth in this Annual Report on Form 10-K under “Part I, Item 1A—Risk Factors,” could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties. Our Business We are an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. 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 in Europe. Encore Capital Group, Inc. (“Encore”) has three primary business units: MCM, which consists of Midland Credit Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists of Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations in Latin America and Asia-Pacific. MCM (United States) Through MCM, we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico. Cabot (Europe) 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. contingency debt collection and BPO services company. LAAP (Latin America and Asia-Pacific) 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. 29 Tabl e of Contents 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 market supply in both US and Europe driven mainly by a decrease in charge off rates. Government Regulation As discussed in more detail under “Part I - Item 1—Business - Government Regulation” contained in this Annual Report on Form 10-K, our operations in the United States are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices. Additionally, our operations in Europe are affected by foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations, ordinances, guidelines and procedures are modified from time to time by the relevant authorities charged with their administration, which could affect the way we conduct our business. Portfolio Purchasing and Recovery MCM (United States) 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 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. operations. 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. We maintain strong relationships with many of the largest financial service providers in the United States. Cabot (Europe) In Europe, our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan accounts. 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 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. 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. 30 Tabl e of Contents Purchases and Collections Portfolio Pricing, Supply and Demand MCM (United States) 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. 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 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, like MCM, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements. Cabot (Europe) The U.K. 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 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 The following table summarizes the geographic locations of receivable portfolios we purchased during the periods presented (in thousands): Year Ended December 31, 2021 2020 2019 MCM (United States) $ 408,741 $ 542,973 $ 681,777 Cabot (Europe) 255,788 116,899 306,504 Other geographies — — 11,577 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. 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. 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. 31 Tabl e of Contents 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. 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 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. During the years ended December 31, 2021, 2020, and 2019, we also invested $17.1 million, $1.5 million, and $30.9 million in REO assets, respectively. Collections from Purchased Receivables by Channel and Geographic Location We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from third-party collection agencies that we utilize when we believe they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. 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 during the periods presented ( in thousands ): Year Ended December 31, 2021 2020 2019 MCM (United States): Call center and digital collections $ 971,459 $ 941,682 $ 742,272 Legal collections 662,810 573,510 563,038 Collection agencies 7,429 13,750 10,799 Subtotal 1,641,698 1,528,942 1,316,109 Cabot (Europe): Call center and digital collections 259,666 245,762 257,317 Legal collections 203,339 165,249 198,903 Collection agencies 181,974 142,935 178,998 Subtotal 644,979 553,946 635,218 Other geographies: Call center and digital collections — — 25,620 Legal collections — — 3,541 Collection agencies 20,682 28,960 46,440 Subtotal 20,682 28,960 75,601 Total collections from purchased receivables $ 2,307,359 $ 2,111,848 $ 2,026,928 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 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 32 Tabl e of Contents 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 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, 2021 2020 2019 Revenues Revenue from receivable portfolios $ 1,287,730 79.8 % $ 1,374,717 91.5 % $ 1,269,288 90.8 % 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 % Other revenues 6,855 0.4 % 4,319 0.3 % 9,974 0.7 % Total revenues 1,614,499 100.0 % 1,501,400 100.0 % 1,405,789 100.6 % Allowances on receivable portfolios, net (8,108) (0.6) % Total revenues, adjusted by net allowances 1,397,681 100.0 % Operating expenses Salaries and employee benefits 385,178 23.9 % 378,176 25.2 % 376,365 26.9 % Cost of legal collections 254,280 15.7 % 239,071 15.9 % 202,670 14.5 % General and administrative expenses 137,695 8.6 % 149,113 9.9 % 148,256 10.6 % Other operating expenses 106,938 6.6 % 108,944 7.3 % 108,433 7.8 % Collection agency commissions 47,057 2.9 % 49,754 3.3 % 63,865 4.6 % Depreciation and amortization 50,079 3.1 % 42,780 2.8 % 41,029 2.9 % Goodwill impairment — — % — — % 10,718 0.8 % Total operating expenses 981,227 60.8 % 967,838 64.4 % 951,336 68.1 % Income from operations 633,272 39.2 % 533,562 35.6 % 446,345 31.9 % Other expense Interest expense (169,647) (10.5) % (209,356) (14.0) % (217,771) (15.6) % Loss on extinguishment of debt (9,300) (0.6) % (40,951) (2.7) % (8,989) (0.6) % Other expense (17,784) (1.1) % (357) — % (18,343) (1.3) % Total other expense (196,731) (12.2) % (250,664) (16.7) % (245,103) (17.5) % Income before income taxes 436,541 27.0 % 282,898 18.9 % 201,242 14.4 % Provision for income taxes (85,340) (5.2) % (70,374) (4.7) % (32,333) (2.3) % Net income 351,201 21.8 % 212,524 14.2 % 168,909 12.1 % 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 % 33 Tabl e of Contents Comparison of Results of Operations Our Annual Report on Form 10-K for the year ended December 31, 2020 includes discussion and analysis of our financial condition and results of operations for the year ended December 31, 2020 as compared to the year ended December 31, 2019 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Revenues 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. 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. 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; and (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 income. 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 in Europe. 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 and real estate assets in Europe and LAAP. Other revenues also include gains recognized on transfers of financial assets. 34 Tabl e of Contents The following table summarizes revenues during the periods presented ( in thousands, except percentages) : Year Ended December 31, 2021 2020 $ Change % Change Revenue recognized from portfolio basis $ 1,240,656 $ 1,318,306 $ (77,650) (5.9) % ZBA revenue 47,074 56,411 (9,337) (16.6) % Revenue from receivable portfolios 1,287,730 1,374,717 (86,987) (6.3) % 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 % Other revenues 6,855 4,319 2,536 58.7 % Total revenues $ 1,614,499 $ 1,501,400 $ 113,099 7.5 % 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. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international revenues. Our international revenues were favorably impacted by foreign currency translation, primarily from the weakening of the U.S. 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. 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. 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 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, 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. 35 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 Recoveries Investment in Receivable Portfolios Monthly EIR United States: ZBA $ 44,098 $ 44,098 $ — $ — — % 2011 24,216 17,680 6,358 1,517 88.6 % 2012 24,941 17,904 6,057 3,048 42.0 % 2013 58,776 48,451 10,571 9,951 40.5 % 2014 34,896 22,801 1,096 22,921 6.7 % 2015 42,774 20,914 5,642 36,544 3.9 % 2016 87,717 39,458 17,015 66,606 4.1 % 2017 144,243 72,660 25,636 92,180 5.4 % 2018 228,919 100,124 33,363 170,489 3.8 % 2019 400,250 173,946 59,235 301,489 3.8 % 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 % Europe: ZBA 96 95 — — — % 2013 93,907 80,836 (38,919) 178,115 3.2 % 2014 84,169 63,648 (17,446) 157,691 3.0 % 2015 57,758 40,064 (10,741) 122,000 2.4 % 2016 (1) 50,980 40,117 (7,321) 107,202 2.8 % 2017 86,107 54,248 (15,455) 207,560 1.9 % 2018 80,629 53,443 (23,720) 246,573 1.6 % 2019 88,448 50,465 (2,676) 198,269 1.8 % 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 % Other geographies: (2) ZBA 2,881 2,881 — — — % 2014 2,712 933 401 37,175 — % 2015 3,222 1,196 918 — — % 2016 1,533 655 423 — — % 2017 6,284 1,656 907 3,905 — % 2018 3,905 1,161 1,028 — — % 2019 145 60 21 — — % Subtotal 20,682 8,542 3,698 41,080 — % Total $ 2,307,359 $ 1,287,730 $ 199,136 $ 3,065,553 3.3 % _______________________ (1) Portfolio balance includes non-accrual pool groups. 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. 36 Tabl e of Contents Year Ended December 31, 2020 As of December 31, 2020 Collections Revenue from Receivable Portfolios Changes in 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% 2012 27,740 24,934 742 4,039 42.0% 2013 64,367 59,837 126 10,718 40.5% 2014 47,628 34,687 (4,364) 33,955 6.7% 2015 64,133 31,837 1,397 52,960 3.9% 2016 116,452 57,473 4,277 98,035 3.9% 2017 193,328 105,124 23,054 138,455 5.2% 2018 308,302 157,303 (2,980) 266,170 3.8% 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% Europe: ZBA 184 183 — — —% 2013 93,203 86,148 (8,540) 230,333 3.2% 2014 84,255 69,170 (2,488) 197,075 3.0% 2015 55,102 42,970 1,150 151,976 2.4% 2016 (1) 51,584 42,806 (6,275) 131,685 2.9% 2017 87,549 59,801 (12,788) 261,915 1.9% 2018 78,846 59,211 (36,973) 307,267 1.6% 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% Other geographies: ZBA 4,362 4,363 — — —% 2014 (1) 3,837 1,703 359 47,909 102.5% 2015 (1) 4,688 2,649 733 3,477 96.7% 2016 2,633 1,827 (52) 1,523 7.2% 2017 (1) 7,303 3,850 212 10,794 6.2% 2018 5,892 2,963 399 5,122 3.7% 2019 245 140 — 214 4.6% Subtotal 28,960 17,495 1,651 69,039 7.9% Total $ 2,111,848 $ 1,374,717 $ 7,246 $ 3,291,918 3.3% _______________________ (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. 37 Tabl e of Contents Operating Expenses The following table summarizes operating expenses during the periods presented ( in thousands, except percentages ): Year Ended December 31, 2021 2020 $ Change $ Change Salaries and employee benefits $ 385,178 $ 378,176 $ 7,002 1.9 % Cost of legal collections 254,280 239,071 15,209 6.4 % General and administrative expenses 137,695 149,113 (11,418) (7.7) % Other operating expenses 106,938 108,944 (2,006) (1.8) % Collection agency commissions 47,057 49,754 (2,697) (5.4) % Depreciation and amortization 50,079 42,780 7,299 17.1 % Total operating expenses $ 981,227 $ 967,838 $ 13,389 1.4 % 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. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international operating expenses, and the weakening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international operating expenses. 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 6.8% for the year ended December 31, 2021 as compared to the year ended December 31, 2020. Operating expenses are explained in more detail as follows: Salaries and Employee Benefits 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: • Additional salaries and benefits incurred in connection with our strategic initiatives; and • The unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound. Cost of Legal Collections 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. 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 ): Year Ended December 31, 2021 2020 $ Change % Change Court costs $ 152,115 $ 148,596 $ 3,519 2.4 % Legal collection fees 102,165 90,475 11,690 12.9 % 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, 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. 38 Tabl e of Contents General and Administrative Expenses 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; • 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 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 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. 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 due to accelerated depreciation of certain computer software and equipment; and • The unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound. Interest Expense The following table summarizes our interest expense during the periods presented ( in thousands, except percentages ): Year Ended December 31, 2021 2020 $ Change % Change Stated interest on debt obligations $ 151,861 $ 181,536 $ (29,675) (16.3) % Amortization of loan fees and other loan costs 16,223 16,343 (120) (0.7) % Amortization of debt discount 1,563 11,477 (9,914) (86.4) % Total interest expense $ 169,647 $ 209,356 $ (39,709) (19.0) % 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. 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. The decrease in interest expense during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to the following reasons: • Lower average debt balances; • Decreased interest rates as a result of various refinancing transactions; and 39 Tabl e of Contents • 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 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: 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 $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, 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: Year Ended December 31, 2021 2020 Federal provision 21.0 % 21.0 % State provision 2.3 % 3.2 % Foreign rate differential (1) (1.0) % (0.5) % Change in tax rate (2) (1.3) % (0.9) % Change in valuation allowance (3) (2.3) % 0.9 % Tax effect of CFPB settlement fees (4) — % 1.1 % Other 0.8 % 0.1 % Effective rate 19.5 % 24.9 % ________________________ (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. 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. Non-GAAP Disclosure In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business. 40 Tabl e of Contents Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes. Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before discontinued operations, interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, settlement fees and related administrative expenses and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows ( in thousands ): Year Ended December 31, 2021 2020 2019 GAAP net income, as reported $ 351,201 $ 212,524 $ 168,909 Adjustments: Interest expense 169,647 209,356 217,771 Loss on extinguishment of debt 9,300 40,951 8,989 Interest income (1,738) (2,397) (3,693) Provision for income taxes 85,340 70,374 32,333 Depreciation and amortization 50,079 42,780 41,029 CFPB settlement fees (1) — 15,009 — Stock-based compensation expense 18,330 16,560 12,557 Acquisition, integration and restructuring related expenses (2) 20,559 4,962 7,049 Loss on sale of Baycorp (3) — — 12,489 Goodwill impairment (3) — — 10,718 Net gain on fair value adjustments to contingent considerations (4) — — (2,300) Adjusted EBITDA $ 702,718 $ 610,119 $ 505,851 Collections applied to principal balance (5) $ 843,087 $ 740,350 $ 765,748 ________________________ (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) 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. 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. (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. 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. (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, 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. 41 Tabl e of Contents Year Ended December 31, 2021 2020 Collections applied to investment in receivable portfolios, net $ 1,019,629 $ 737,131 Less: 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. Management utilizes adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections for our portfolio purchasing and recovery business. Adjusted operating expenses for our portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out stock-based compensation expense, operating expenses related to non-portfolio purchasing and recovery business, acquisition, integration and restructuring related operating expenses, settlement fees and related administrative expenses and other charges or gains that are not indicative of ongoing operations. Adjusted operating expenses related to our portfolio purchasing and recovery business for the periods presented are as follows ( in thousands ): Year Ended December 31, 2021 2020 2019 GAAP total operating expenses, as reported $ 981,227 $ 967,838 $ 951,336 Adjustments: Operating expenses related to non-portfolio purchasing and recovery business (1) (173,453) (182,930) (173,190) CFPB settlement fees (2) — (15,009) — Stock-based compensation expense (18,330) (16,560) (12,557) Acquisition, integration and restructuring related operating expenses (3) (1,692) (154) (7,049) Goodwill impairment (4) — — (10,718) Net gain on fair value adjustments to contingent considerations (5) — — 2,300 Adjusted operating expenses related to portfolio purchasing and recovery business $ 787,752 $ 753,185 $ 750,122 ________________________ (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 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. (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. 42 Tabl e of Contents Cost per Dollar Collected 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 % Overall cost per dollar collected 34.1 % 35.7 % 37.0 % 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 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. Supplemental Performance Data The tables included in this supplemental performance data section include detail for purchases, collections and ERC by year of purchase. Our collection expectations are based on account characteristics and economic variables. Additional adjustments are made to account for qualitative factors that may affect the payment behavior of our consumers and servicing related adjustments to ensure our collection expectations are aligned with our operations. We continue to refine our process of forecasting collections both domestically and internationally with a focus on operational enhancements. Our collection expectations vary between types of portfolio and geographic location. For example, in the U.K., due to the higher concentration of payment plans, as compared to the U.S. and other locations in Europe, we expect to receive streams of collections over longer periods of time. As a result, past performance of pools in certain geographic locations or of certain types of portfolio are not necessarily a suitable indicator of future results in other locations or for other types of portfolio. The supplemental performance data presented in this section is impacted by foreign currency translation, which represents the effect of translating financial results where the functional currency of our foreign subsidiary is different than our U.S. dollar reporting currency. For example, the strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable reporting impact on our international purchases, collections, and ERC, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international purchases, collections, and ERC. We utilize proprietary forecasting models to continuously evaluate the economic life of each pool. 43 Tabl e of Contents Cumulative Collections from Purchased Receivables to Purchase Price Multiple The following table summarizes our receivable purchases and related gross collections by year of purchase (in thousands, except multiples) : Year of Purchase Purchase Price (1) Cumulative Collections through December 31, 2021 <2012 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Total (2) CCMM (3) United States: <2012 $ 2,143,750 $ 3,983,166 $ 760,285 $ 554,597 $ 391,737 $ 293,528 $ 206,933 $ 155,456 $ 121,545 $ 99,300 $ 77,101 $ 67,082 $ 6,710,730 3.1 2012 548,803 — 187,721 350,134 259,252 176,914 113,067 74,507 48,832 37,327 27,797 25,090 1,300,641 2.4 2013 551,865 — — 230,051 397,646 298,068 203,386 147,503 107,399 84,665 64,436 59,859 1,593,013 2.9 2014 517,650 — — — 144,178 307,814 216,357 142,147 94,929 69,059 47,628 34,896 1,057,008 2.0 2015 499,061 — — — — 105,610 231,102 186,391 125,673 85,042 64,133 42,774 840,725 1.7 2016 553,152 — — — — — 110,875 283,035 234,690 159,279 116,452 87,717 992,048 1.8 2017 528,055 — — — — — — 111,902 315,853 255,048 193,328 144,243 1,020,374 1.9 2018 630,526 — — — — — — — 175,042 351,696 308,302 228,919 1,063,959 1.7 2019 676,785 — — — — — — — — 174,693 416,315 400,250 991,258 1.5 2020 538,978 — — — — — — — — — 213,450 430,514 643,964 1.2 2021 406,925 — — — — — — — — — — 120,354 120,354 0.3 Subtotal 7,595,550 3,983,166 948,006 1,134,782 1,192,813 1,181,934 1,081,720 1,100,941 1,223,963 1,316,109 1,528,942 1,641,698 16,334,074 2.2 Europe: 2013 619,079 — — 134,259 249,307 212,129 165,610 146,993 132,663 113,228 93,203 93,907 1,341,299 2.2 2014 623,129 — — — 135,549 198,127 156,665 137,806 129,033 105,337 84,255 84,169 1,030,941 1.7 2015 419,941 — — — — 65,870 127,084 103,823 88,065 72,277 55,261 57,817 570,197 1.4 2016 258,218 — — — — — 44,641 97,587 83,107 63,198 51,609 51,017 391,159 1.5 2017 461,571 — — — — — — 68,111 152,926 118,794 87,549 86,107 513,487 1.1 2018 433,302 — — — — — — — 49,383 118,266 78,846 80,629 327,124 0.8 2019 273,354 — — — — — — — — 44,118 80,502 88,448 213,068 0.8 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 Other geographies: 2012 6,721 — — 3,848 2,561 1,208 542 551 422 390 294 199 10,015 1.5 2013 29,465 — — 6,617 17,615 10,334 4,606 3,339 2,468 1,573 1,042 708 48,302 1.6 2014 85,418 — — — 9,652 16,062 18,403 9,813 7,991 6,472 4,300 3,020 75,713 0.9 2015 79,215 — — — — 15,061 57,064 43,499 32,622 17,499 4,688 3,222 173,655 2.2 2016 61,595 — — — — — 29,269 39,710 28,992 16,078 5,196 3,199 122,444 2.0 2017 49,670 — — — — — — 15,471 23,075 15,383 7,303 6,284 67,516 1.4 2018 25,731 — — — — — — — 12,910 15,008 5,892 3,905 37,715 1.5 2019 2,468 — — — — — — — — 3,198 245 145 3,588 1.5 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 Total $ 11,397,114 $ 3,983,166 $ 948,006 $ 1,279,506 $ 1,607,497 $ 1,700,725 $ 1,685,604 $ 1,767,644 $ 1,967,620 $ 2,026,928 $ 2,111,848 $ 2,307,359 $ 21,385,903 1.9 ________________________ (1) Adjusted for Put-Backs and Recalls. Put-Backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement. (2) Cumulative collections from inception through December 31, 2021, excluding collections on behalf of others. (3) Cumulative Collections Money Multiple (“CCMM”) through December 31, 2021 refers to cumulative collections as a multiple of purchase price. 44 Tabl e of Contents Total Estimated Collections from Purchased Receivables to Purchase Price Multiple The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross collections for purchased receivables, by year of purchase (in thousands, except multiples) : Purchase Price (1) Historical Collections (2) Estimated Remaining Collections Total Estimated Gross Collections Total Estimated Gross Collections to Purchase Price United States: <2012 $ 2,143,750 $ 6,710,730 $ 126,017 $ 6,836,747 3.2 2012 548,803 1,300,641 47,110 1,347,751 2.5 2013 (3) 551,865 1,593,013 135,075 1,728,088 3.1 2014 (3) 517,650 1,057,008 74,541 1,131,549 2.2 2015 499,061 840,725 82,906 923,631 1.9 2016 553,152 992,048 153,513 1,145,561 2.1 2017 528,055 1,020,374 256,408 1,276,782 2.4 2018 630,526 1,063,959 370,195 1,434,154 2.3 2019 676,785 991,258 671,044 1,662,302 2.5 2020 538,978 643,964 786,297 1,430,261 2.7 2021 406,925 120,354 873,423 993,777 2.4 Subtotal 7,595,550 16,334,074 3,576,529 19,910,603 2.6 Europe: 2013 (3) 619,079 1,341,299 693,898 2,035,197 3.3 2014 (3) 623,129 1,030,941 531,913 1,562,854 2.5 2015 (3) 419,941 570,197 340,588 910,785 2.2 2016 258,218 391,159 281,101 672,260 2.6 2017 461,571 513,487 459,259 972,746 2.1 2018 433,302 327,124 510,957 838,081 1.9 2019 273,354 213,068 423,855 636,923 2.3 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 Other geographies: 2012 6,721 10,015 — 10,015 1.5 2013 29,465 48,302 — 48,302 1.6 2014 85,418 75,713 41,468 117,181 1.4 2015 79,215 173,655 — 173,655 2.2 2016 61,595 122,444 — 122,444 2.0 2017 49,670 67,516 17,915 85,431 1.7 2018 25,731 37,715 — 37,715 1.5 2019 2,468 3,588 — 3,588 1.5 Subtotal 340,283 538,948 59,383 598,331 1.8 Total $ 11,397,114 $ 21,385,903 $ 7,678,960 $ 29,064,863 2.6 ________________________ (1) Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. Put-Backs and Recalls represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement. (2) Cumulative collections from inception through December 31, 2021, excluding collections on behalf of others. (3) Includes portfolios acquired in connection with certain business combinations. 45 Tabl e of Contents Estimated Remaining Gross Collections from Purchased Receivables by Year of Purchase The following table summarizes our estimated remaining gross collections for purchased receivables by year of purchase (in thousands) : Estimated Remaining Gross Collections by Year of Purchase (1) 2022 2023 2024 2025 2026 2027 2028 2029 2030 >2030 Total (2) United States: <2012 $ 40,897 $ 28,446 $ 19,725 $ 13,544 $ 9,241 $ 6,204 $ 4,021 $ 2,380 $ 1,212 $ 347 $ 126,017 2012 14,366 10,174 7,121 4,986 3,492 2,446 1,713 1,201 841 770 47,110 2013 (3) 46,708 26,466 18,744 13,283 9,414 6,673 4,730 3,353 2,377 3,327 135,075 2014 (3) 22,711 15,871 10,876 7,655 5,398 3,808 2,688 1,897 1,340 2,297 74,541 2015 26,231 17,731 12,084 8,171 5,685 4,003 2,825 1,997 1,415 2,764 82,906 2016 49,737 32,976 22,280 15,228 10,170 7,040 4,954 3,493 2,467 5,168 153,513 2017 81,215 53,152 37,850 25,533 17,886 12,371 8,671 6,109 4,320 9,301 256,408 2018 124,143 82,326 55,248 36,566 24,331 16,170 10,507 7,134 4,774 8,996 370,195 2019 212,950 141,888 100,055 67,343 46,089 31,859 22,158 15,175 10,781 22,746 671,044 2020 254,920 162,534 115,430 79,617 54,131 37,190 25,965 18,116 12,433 25,961 786,297 2021 249,366 222,681 132,106 84,128 57,792 39,111 27,257 19,251 13,677 28,054 873,423 Subtotal 1,123,244 794,245 531,519 356,054 243,629 166,875 115,489 80,106 55,637 109,731 3,576,529 Europe: 2013 (3) 81,154 74,863 68,723 63,097 56,933 51,374 46,794 42,053 38,333 170,574 693,898 2014 (3) 70,649 62,718 56,064 49,605 43,494 38,233 33,944 30,595 27,523 119,088 531,913 2015 (3) 46,594 42,161 36,152 31,980 28,704 24,689 21,920 19,276 17,278 71,834 340,588 2016 48,182 42,446 33,996 29,179 24,641 19,709 16,704 13,749 11,856 40,639 281,101 2017 74,622 63,460 53,593 44,922 38,025 32,890 27,375 23,579 20,500 80,293 459,259 2018 73,847 67,443 58,756 50,742 44,427 37,867 32,725 28,072 23,697 93,381 510,957 2019 72,040 61,165 52,193 43,189 35,805 29,159 24,122 20,536 17,252 68,394 423,855 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 Other geographies: 2014 7,064 6,542 5,849 4,787 2,812 1,601 1,457 1,457 1,457 8,442 41,468 2017 2,637 2,399 2,114 1,906 1,437 827 750 750 750 4,345 17,915 Subtotal 9,701 8,941 7,963 6,693 4,249 2,428 2,207 2,207 2,207 12,787 59,383 Portfolio ERC 1,729,232 1,338,073 999,861 760,519 591,605 461,200 369,191 301,107 247,204 880,968 7,678,960 REO ERC (4) 14,686 29,556 17,200 5,378 615 1,040 1,801 704 14 — 70,994 Total $ 1,743,918 $ 1,367,629 $ 1,017,061 $ 765,897 $ 592,220 $ 462,240 $ 370,992 $ 301,811 $ 247,218 $ 880,968 $ 7,749,954 ________________________ (1) ERC for Zero Basis Portfolios can extend beyond our collection forecasts. As of December 31, 2021, ERC for Zero Basis Portfolios includes approximately $79.2 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and other geographies was immaterial. ERC also includes approximately $59.4 million from cost recovery portfolios, primarily in other geographies. (2) Represents the expected remaining gross cash collections on purchased portfolios over a 180-month period. As of December 31, 2021, ERC for purchased receivables for 84-month and 120-month periods were: 84-Month ERC 120-Month ERC United States $ 3,331,055 $ 3,505,432 Europe 2,945,164 3,522,005 Other geographies 43,738 50,359 Portfolio ERC $ 6,319,957 $ 7,077,796 REO ERC $ 70,276 $ 70,994 Total ERC $ 6,390,233 $ 7,148,790 (3) Includes portfolios acquired in connection with certain business combinations. (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. 46 Tabl e of Contents Estimated Future Collections Applied to Principal As of December 31, 2021, we had $3.1 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands): Years Ending December 31, United States Europe Other Geographies Total Amortization 2022 $ 441,066 $ 206,376 $ 9,678 $ 657,120 2023 331,682 192,116 7,810 531,608 2024 219,359 165,716 5,849 390,924 2025 143,297 143,916 4,787 292,000 2026 97,078 125,696 2,812 225,586 2027 65,499 104,321 1,601 171,421 2028 45,094 89,400 1,457 135,951 2029 31,290 78,877 1,457 111,624 2030 21,896 68,784 1,457 92,137 2031 15,573 65,143 1,457 82,173 2032 11,246 61,551 1,457 74,254 2033 8,406 61,998 1,258 71,662 2034 6,426 64,294 — 70,720 2035 5,285 69,573 — 74,858 2036 3,985 79,530 — 83,515 Total $ 1,447,182 $ 1,577,291 $ 41,080 $ 3,065,553 Headcount by Function by Geographic Location The following table summarizes our headcount by function and by geographic location: Headcount as of December 31, 2021 2020 2019 United States: General & Administrative 1,049 1,167 1,106 Account Manager 310 389 418 Subtotal 1,359 1,556 1,524 Europe: General & Administrative 1,023 997 998 Account Manager 1,990 2,483 2,085 Subtotal 3,013 3,480 3,083 Other Geographies (1) : General & Administrative 1,128 1,227 1,173 Account Manager 1,104 1,462 1,475 Subtotal 2,232 2,689 2,648 Total 6,604 7,725 7,255 ________________________ (1) Headcount for other geographies includes employees in India and Costa Rica that service accounts originated in the United States. 47 Tabl e of Contents Purchases by Quarter The following table summarizes the receivable portfolios we purchased by quarter, and the respective purchase prices ( in thousands ): Quarter # of Accounts Face Value Purchase Price Q1 2019 854 $ 1,732,977 $ 262,335 Q2 2019 778 2,307,711 242,697 Q3 2019 1,255 5,313,092 259,910 Q4 2019 803 2,241,628 234,916 Q1 2020 943 1,703,022 214,113 Q2 2020 754 1,305,875 147,939 Q3 2020 735 1,782,733 170,131 Q4 2020 558 1,036,332 127,689 Q1 2021 749 1,328,865 170,178 Q2 2021 612 1,151,623 142,728 Q3 2021 767 1,403,794 168,188 Q4 2021 861 1,888,198 183,435 48 Tabl e of Contents Liquidity and Capital Resources Liquidity The following table summarizes our cash flow activity during the periods presented (in thousands) : Year Ended December 31, 2021 2020 2019 Net cash provided by operating activities $ 303,053 $ 312,864 $ 244,733 Net cash provided by (used in) investing activities 339,896 82,826 (202,333) Net cash used in by financing activities (655,692) (403,200) (19,770) Operating Cash Flows Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. 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 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 $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. Receivable portfolio purchases were $657.3 million, $644.0 million, and $1,035.1 million during the years ended December 31, 2021, 2020, and 2019, respectively. Collection proceeds applied to the principal of our receivable portfolios were $1,019.6 million, $737.1 million, and $757.6 million during the years ended December 31, 2021, 2020, and 2019, respectively. Financing Cash Flows 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. Borrowings under our credit facilities were $821.9 million, $1,820.6 million and $603.6 million during the years ended December 31, 2021, 2020, and 2019, respectively. 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 $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 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. 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. 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. Currently, all of our portfolio purchases are funded with cash from operations, cash collections from our investment in receivable portfolios, and our bank borrowings. 49 Tabl e of Contents We are in material compliance with all covenants under our financing arrangements. See “Note 6: Borrowings” in the notes to our consolidated financial statements for a further discussion of our debt. 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. 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 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 $29.3 million and $20.3 million as of December 31, 2021 and 2020, 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. 50 Tabl e of Contents Future Contractual Cash Obligations The following table summarizes our future contractual cash obligations as of December 31, 2021 ( in thousands ): Payment Due By Period Contractual Obligations Total Less Than 1 Year 1 – 3 Years 3 – 5 Years More Than 5 Years Principal payments on debt $ 3,048,676 $ 199,879 $ 251,230 $ 1,787,564 $ 810,003 Estimated interest payments (1) 552,814 121,447 222,829 160,255 48,283 Finance leases 7,353 4,182 3,171 — — Operating leases 102,737 17,880 31,208 25,142 28,507 Purchase commitments on receivable portfolios 259,175 212,528 46,647 — — Total contractual cash obligations (2) $ 3,970,755 $ 555,916 $ 555,085 $ 1,972,961 $ 886,793 ________________________ (1) Estimated interest payments are calculated based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of December 31, 2021 for variable rate debt, timing of scheduled payments and the term of the debt obligations. (2) We had approximately $4.6 million of liabilities and accrued interests related to uncertain tax positions as of December 31, 2021. 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. See “Note 11: Income Taxes” to our consolidated financial statements for additional information on our uncertain tax positions. Critical Accounting Policies and Estimates We prepare our financial statements, in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates and such differences may be material. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors. Investment in Receivable Portfolios and Related Revenue . Effective January 1, 2020, our investment in receivable portfolios is accounted for under CECL. 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. 51 Tabl e of Contents 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. See “Note 4: Investment in Receivable Portfolios, Net” for further discussion of investment in receivable portfolios. Valuation of Goodwill and Other Intangible Assets. Business combinations typically result in the recording of goodwill and other intangible assets. The excess of the purchase price over the fair value assigned to the tangible and identifiable intangible assets, liabilities assumed, and noncontrolling interest in the acquiree is recorded as goodwill. Goodwill is tested annually for impairment and in interim periods if events or changes in circumstances indicate that the assets may be impaired. Our judgments regarding the existence of impairment indicators and future cash flows related to goodwill may be based on economic environment, business climate, market capitalization, operating performance, competition, and other factors. Significant judgments are required to estimate the fair value of reporting units including estimating future cash flows, determining appropriate discount rates, growth rates, comparable guideline companies and other assumptions. Future business conditions and/or activities could differ materially from the projections made by management, which in turn, could result in the need for impairment charges. We will perform additional impairment testing if events occur or circumstances change indicating that the carrying amounts may be impaired. The determination of the recorded value of intangible assets acquired in a business combination requires management to make estimates and assumptions that affect our consolidated financial statements. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. An estimate of fair value can be affected by many assumptions that require significant judgment. 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 Information regarding recent accounting pronouncements and the impact of those pronouncements, if any, on our consolidated financial statements is provided in this Annual Report in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies” to our consolidated financial statements. 52 Tabl e of Contents