What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-23 · 206 added, 308 removed, 580 unchanged (47% of the section changed)

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Encore Capital Group, Inc.

(“Encore”) has three primary business units:

(“Encore”) has three business units:

MCM, which consists of Midland Credit Management, Inc.

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MCM (United States)

Through MCM, we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico.

Through MCM, we are a market leader in portfolio purchasing and recovery in the United States.

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.

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

LAAP (Latin America and Asia-Pacific)

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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

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.

Macroeconomic Update

During 2021, excess consumer liquidity resulting from the COVID-19 pandemic led to consumer behavior (particularly in the U.S.) that contributed to record collections.

Similarly, as reported by leading financial industry publications, excess consumer liquidity resulted in lower levels of delinquencies and charge offs for leading lenders.

As a result, 2021 was a period of decreased supply and competitive pricing.

During 2022, consumer behavior in the U.S.

that contributed to record collections in 2021 normalized, particularly in the second half of the year.

Delinquencies, charge offs and market supply remained at lower levels primarily for the first half of the year, resulting in pressure on portfolio pricing.

As the year progressed, we began to see signs of increased delinquencies and charge offs in the U.S., which we believe contributed to an increase in portfolio supply.

Portfolio pricing in the U.S.

in the fourth quarter began to soften, while pricing in the U.K.

and Europe remained competitive.

We believe that the current pricing environment does not yet reflect increased funding costs that have resulted from higher interest rates.

Throughout 2022 we have noted higher interest rates, elevated levels of inflation, agent staffing challenges as a result of the tight labor market and large foreign exchange rate fluctuations.

Higher interest rates will impact funding costs for market participants.

However, we believe increased supply will lead to improved portfolio pricing over time.

Inflation has put pressure on wages and other costs.

We are taking action to control our cost base, including a headcount reduction in support functions at Cabot that we expect will lead to an approximately $4 million pre-tax charge in the first quarter of 2023.

We cannot predict the full extent these macroeconomic factors may have on our business, results of operations and financial condition due to numerous evolving factors.

See “Part I - Item 1A- Risk Factors” in this Annual Report on Form 10-K.

Government Regulation

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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.

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We maintain strong relationships with many of the largest financial services providers in the United Kingdom.

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 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.

Pricing in the fourth quarter began to soften as a result of increased supply.

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

We believe growth in lending and rising delinquency rates will drive continued growth in supply.

Lending has now surpassed pre-pandemic levels in the U.S.

and we have started to see an increase in portfolio supply.

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 increasing cost of capital.

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 and fluctuating volumes.

Cabot (Europe)

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 UK market for charged-off portfolios prior to the COVID-19 pandemic generally provided a relatively consistent pipeline of opportunities, despite a historically 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.

An increasing amount of volume is sold in multi-year forward flow arrangements.

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.

Banks decreased portfolio sales at the beginning of the COVID-19 pandemic in order to focus on customers’ needs.

While we have seen a resumption of sales activity across many of our European markets, underlying default rates are generally low by historic levels, and sales levels are expected to fluctuate from quarter to quarter.

In general, supply remains below pre-pandemic levels while portfolio pricing remains 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):

The following table summarizes purchases of receivable portfolios by geographic location during the periods presented (in thousands):

Year Ended December 31,

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Cabot (Europe) 244,507 255,788 116,899

Other geographies — — 11,577

Total purchases of receivable portfolios $ 800,507 $ 664,529 $ 659,872

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

In the United States, capital deployment increased during the year ended December 31, 2022, as compared to 2021.

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.

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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.

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.

Portfolio purchases in the U.S.

are returning to pre-pandemic levels as supply increases.

Capital deployment decreased for the year ended December 31, 2021, as compared to 2020, primarily due to a decrease in supply and maintaining our pricing discipline.

In Europe, capital deployment decreased during the year ended December 31, 2022, as compared to 2021.

The decrease was primarily due to the unfavorable impact from foreign currency translation driven by the strengthening of the U.S.

dollar against the British Pound.

Portfolio purchases in Europe remain below pre-pandemic average levels.

In the UK, bank delinquencies remain at relatively low levels, and the level of outstanding unsecured consumer borrowings, while increasing, is still below pre-pandemic levels.

European capital deployment increased for the year ended December 31, 2021, as compared to 2020.

The increase was primarily the result of significantly lower capital deployment during 2020 driven by limited supply of portfolios and a continuation of our disciplined purchasing process.

During the years ended December 31, 2022, 2021, and 2020, we also invested $39.3 million, $17.1 million, and $1.5 million in REO assets, respectively.

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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 collection agencies channel consists of collections from third-party collections agencies to whom we pay a fee or commission.

We utilize this channel to supplement capacity in our internal call centers, to service accounts in regions where we do not have collections operations or for accounts purchased where we maintain the collection agency servicing relationship.

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

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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

3,334 20,682 28,960

Total collections from purchased receivables $ 1,911,537 $ 2,307,359 $ 2,111,848

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.

Gross collections from purchased receivables decreased by $395.8 million, or 17.2%, to $1,911.5 million during the year ended December 31, 2022, from $2,307.4 million during the year ended December 31, 2021.

The decrease of collections in the United States was primarily a result of an unusually high level of collections in 2021 resulting from changes in consumer behavior during the COVID-19 pandemic.

The decrease was also a result of lower purchasing volumes in recent periods due to the COVID-19 pandemic.

The changes in consumer behavior that resulted from the impacts of the COVID-19 pandemic, while more prevalent a year ago, continued through the first half of 2022.

We believe the pandemic-related drivers of this changed behavior have normalized.

The decrease in collections from purchased receivables in Europe was primarily due to the unfavorable impact from foreign currency translation, primarily by the strengthening of the U.S.

dollar against the British Pound.

In addition, continuing labor market tightness in the UK affected agent staffing levels and, consequently, mildly impacted collections for the year.

Gross collections from purchased receivables increased $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.

We were 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.

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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

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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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Total revenues 1,398,347 100.0 % 1,614,499 100.0 % 1,501,400 100.0 %

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

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

Operating expenses

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Depreciation and amortization 50,494 3.6 % 50,079 3.1 % 42,780 2.8 %

Goodwill impairment — — % — — % 10,718 0.8 %

Total operating expenses 936,173 66.9 % 981,227 60.8 % 967,838 64.4 %

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Loss on extinguishment of debt — — % (9,300) (0.6) % (40,951) (2.7) %

Other expense (17,784) (1.1) % (357) — % (18,343) (1.3) %

Other income (expense) 2,123 0.1 % (17,784) (1.1) % (357) — %

Total other expense (151,185) (10.9) % (196,731) (12.2) % (250,664) (16.7) %

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stockholders $ 194,564 13.9 % $ 350,782 21.7 % $ 211,848 14.1 %

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Comparison of Results of Operations

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

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.

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

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.

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(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

(2) Changes 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;

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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.

Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to our adoption of the accounting standard for Financial Instruments - Credit Losses (“CECL”) in January 2020.

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.

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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.

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

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

Year Ended December 31,

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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.

Our revenues were unfavorably impacted by approximately $42.3 million due to foreign currency translation, primarily as a result of the strengthening of the U.S.

dollar, against the British Pound by approximately 11.6%, during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

The decrease in revenue recognized from portfolio basis during the year ended December 31, 2022 as compared to the year ended December 31, 2021, other than resulting from the unfavorable impact from foreign currency translation discussed above, was primarily due to lower portfolio basis (i.e., a lower investment in receivable balance) driven by a lower volume of purchases in recent periods.

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.

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.

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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 ):

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

Collections were above projected cash recoveries in the first half of 2022 but the over-performance was partially offset by the under-performance in the second half of 2022.

In previous periods we had experienced an unusually high level of collections resulting from changes in consumer behavior in the United States during the COVID-19 pandemic in addition to improvements in collections capabilities, and therefore increased expected future cash recoveries for certain pool groups.

The pandemic-related drivers of this changed behavior have normalized in recent quarters, and for the second half of 2022, collections under-performed the revised projected cash recoveries and therefore reduced the collections over-performance for the year ended December 31, 2022 to approximately $29.3 million.

When reassessing the forecasts of expected lifetime recoveries during the year ended December 31, 2022, management considered, among other factors, historical and current collection performance, changes in consumer behaviors, and macroeconomic environment.

We update our expected future recovery each quarter, the re-evaluations resulted in a net positive change in expected future recoveries in the first half of 2022, however, due to collection under-performance we started to experience in the second half of the year, during the three months ended December 31, 2022, we reduced our future estimated collections by approximately 1.5%, which in turn, when discounted to present value, resulted in a negative change in expected future period recoveries of approximately $64.0 million for the quarter.

This negative change in expected recoveries recognized in the fourth quarter reduced the positive change in expected recoveries previous recorded and resulted in a total net positive change of expected future recoveries of approximately $63.9 million during the year ended December 31, 2022.

Recoveries above forecast were approximately $326.0 million during the year ended December 31, 2021, primarily due to changes in consumer behavior during the COVID-19 pandemic.

Despite the collections over-performance, we recorded approximately $126.9 million in net negative change in expected future period recoveries during the year ended December 31, 2021, primarily based on our assumption that the majority of the over-performance was due to acceleration in the timing of collections rather than an increase to total expected future recoveries.

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

Year Ended December 31, 2022 As of December 31, 2022

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2021 240,605 160,520 (19,221) 280,247 3.9 %

2022 98,277 79,830 7,251 542,063 3.1 %

Subtotal 1,354,932 816,450 179,009 1,636,252 4.0 %

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2021 66,529 46,451 (12,637) 188,975 1.9 %

2022 36,957 24,643 (2,425) 227,353 1.6 %

Subtotal 553,271 385,911 (85,864) 1,418,822 2.1 %

Other geographies:

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 — — %

All vintages 3,334 — — 33,187 — %

Subtotal 3,334 — — 33,187 — %

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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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(2) All portfolios are on non-accrual basis.

Annual pool groups for other geographies have been aggregated for disclosure purposes.

Year Ended December 31, 2021 As of December 31, 2021

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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%

Other geographies:

ZBA 4,362 4,363 — — —%

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

4,688 2,649 733 3,477 96.7%

2016 2,633 1,827 (52) 1,523 7.2%

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%

All vintages 20,682 8,542 3,698 41,080 —%

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.

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.

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

Annual pool groups for other geographies have been aggregated for disclosure purposes.

The decrease in servicing revenues during the year ended December 31, 2022, as compared to the year ended December 31, 2021, was primarily attributable to reduced service demand from BPO clients and the unfavorable impact of foreign currency translation, which was primarily the result of the strengthening of the U.S.

dollar against the British Pound.

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Other revenues increased during the year ended December 31, 2022, as compared to the year ended December 31, 2021, primarily driven by the increased sale of real estate assets.

The increase was partially offset by the unfavorable impact of foreign currency translation, which was primarily the result of the strengthening of the U.S.

dollar against the British Pound and the Euro.

Operating Expenses

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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.

Our operating expenses were favorably impacted by approximately $38.1 million due to foreign currency translation, primarily as a result of the strengthening of the U.S.

dollar against the British Pound by approximately 11.6% for the year ended December 31, 2022, as compared to the year ended December 31, 2021.

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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;

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

The decrease in salaries and employee benefits during the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to the following reasons:

• Decrease of average headcount;

• Favorable impact of foreign currency translation of $18.5 million, primarily by the strengthening of the U.S.

dollar against the British Pound;

• Decrease in stock-based compensation expense of $2.9 million primarily attributed to expense reversals due to forfeiture of certain stock awards;

• The decrease was partially offset by increased salaries due to market adjustments.

Cost of Legal Collections

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Total cost of legal collections $ 217,944 $ 254,280 $ (36,336) (14.3) %

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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The decrease in cost of legal collections during the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to the following reasons:

• Decreased court costs due to fewer placements in the legal collection channel;

• Decreased legal collection fees driven by decreased legal channel collections;

• Favorable impact of foreign currency translation of approximately $3.9 million primarily driven by the strengthening of the U.S.

dollar against the British Pound.

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.

The increase in general and administrative expenses during the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to the following reasons:

• Approximately $14.0 million of increased general and administrative expense including costs associated with our return to the office initiatives, business travel, consulting fees, and facilities expense;

• The increase was partially offset by the favorable impact of foreign currency translation of approximately $5.9 million, primarily by the strengthening 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.

The increase in other operating expenses during the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily due to increased various other operating expenses to support our collection activities.

The increase was partially offset by the favorable impact of foreign currency translation of approximately $3.2 million, primarily by the strengthening of the U.S.

dollar against the British Pound.

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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.

Collections through the collections agencies channel are predominately in Europe 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.

Collection agency commissions decreased due to the decreased placement in this channel during the year ended December 31, 2022, compared to the year ended December 31, 2021.

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;

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

dollar against the British Pound.

Depreciation and amortization expense remained relatively consistent during the year ended December 31, 2022, compared to the year ended December 31, 2021.

Interest Expense

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

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

Year Ended December 31,

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Stated interest on debt obligations $ 137,434 $ 151,861 $ (14,427) (9.5) %

Amortization of loan fees and other loan costs 16,223 16,343 (120) (0.7) %

Amortization of debt issuance costs 14,539 16,223 (1,684) (10.4) %

Amortization of debt discount

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Total interest expense $ 153,308 $ 169,647 $ (16,339) (9.6) %

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, 2022, compared to the year ended December 31, 2021, was primarily due to the following reasons:

• Lower average debt balances;

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

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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

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.

• Decreased interest expense of approximately $11.9 million driven by lower average debt balances of approximately $157.2 million;

• The favorable impact of foreign currency translation of approximately $11.2 million, primarily by the strengthening of the U.S.

dollar against the British Pound and the Euro;

• The decrease was partially offset by the effect from rising interest rates in recent periods of approximately $12.5 million.

Other Income (Expense)

Other income or expense 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 income was $2.1 million and other expense was $17.8 million during the years ended December 31, 2022, and 2021, 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.

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Change in tax rate (2)

(1.3) % (0.9) %

Change in valuation allowance (3)

13.2 % (2.3) %

Tax effect of CFPB settlement fees (4)

Deductible loss in foreign jurisdiction (4)

Other 1.2 % 0.8 %

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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.

(3) Includes valuation allowances recorded on U.K.

deferred tax assets

(4) This represents a deductible loss recognized in a foreign subsidiary that maintains a full valuation allowance on its deferred tax assets.

Accordingly, this deductible loss increased the valuation allowance and did not result in any tax benefit during the year ended December 31, 2022.

The effective tax rate for the year ended December 31, 2022 increased to 37.4% as compared to 19.5% for the year ended December 31, 2021.

The increase in tax rate was primarily related to recording a full valuation allowance on U.K.

deferred tax assets during the three months ended December 31, 2022.

deferred tax assets include revenue recognition differences between statutory reporting and US GAAP reporting.

In evaluating all positive and negative evidence available to determine whether all or some portion of the deferred tax assets will be realized, significant judgement is required and the weight of all available evidence must be considered.

A significant piece of objective negative evidence evaluated was the U.K.

loss before income taxes for the three-year period ended December 31, 2022.

Objective evidence limits the ability to consider subjective evidence, such as projections for future earnings growth.

We will continue to evaluate the realizability of deferred tax assets each quarter based on all available positive and negative evidence, including current and cumulative earnings, forecasts of future profitability, statutory carryback and carryforward periods and tax planning strategies.

In a period when positive evidence supports a conclusion that a valuation allowance is no longer needed, a tax benefit will be recorded.

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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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.

Management utilizes adjusted EBITDA (defined as net income before interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related 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 ):

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1,213 20,559 4,962

Loss on sale of Baycorp (3)

Goodwill impairment (3)

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

Adjusted EBITDA $ 529,632 $ 702,718 $ 610,119

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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.

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.

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(3) Collections applied to principal balance is calculated in the table below:

Year Ended December 31,

2022 2021 2020

Collections applied to investment in receivable portfolios, net $ 709,176 $ 1,019,629 $ 737,131

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Collections applied to principal balance $ 635,262 $ 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

Operating expenses related to non-portfolio purchasing and recovery business (1)

(173,453) (182,930) (173,190)

CFPB settlement fees (2)

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)

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

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.

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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

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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.

For example, in the UK, 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.

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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

The following table summarizes our receivable purchases and related gross collections by year of purchase (in thousands, except multiples) :

Cumulative Collections Money Multiple - Cumulative Collections from Purchased Receivables to Purchase Price Multiple

The following table summarizes our receivable purchases, related gross collections, and cumulative collections money multiples (in thousands, except multiples) :

Cumulative Collections through December 31, 2022

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2021 255,788 — — — — — — — — — 43,082 66,529 109,611 0.4

2022 244,507 — — — — — — — — — — 36,957 36,957 0.2

Subtotal 3,705,788 — 134,259 384,856 476,126 494,000 554,320 635,177 635,218 553,946 644,979 553,271 5,066,152 1.4

Other geographies (4) :

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

All vintages 340,283 — 10,465 29,828 42,665 109,884 112,383 108,480 75,601 28,960 20,682 3,334 542,282 1.6

Subtotal 340,283 — 10,465 29,828 42,665 109,884 112,383 108,480 75,601 28,960 20,682 3,334 542,282 1.6

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(3) Cumulative Collections Money Multiple (“CCMM”) through December 31, 2022 refers to cumulative collections as a multiple of purchase price.

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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) :

(4) Annual pool groups for other geographies have been aggregated for disclosure purposes.

Purchase Price Multiple - Total Estimated Collections from Purchased Receivables to Purchase Price Multiple

The following table summarizes our purchases, resulting historical gross collections, estimated remaining gross collections from purchased receivables, and purchase price multiple (in thousands, except multiples) :

Purchase Price (1)

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Collections Total Estimated

Gross Collections Total Estimated Gross

Collections to

Purchase Price

Gross Collections Purchase Price Multiple (3)

United States:

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2021 255,788 109,611 417,828 527,439 2.1

2022 244,507 36,957 438,188 475,145 1.9

Subtotal 3,705,788 5,066,152 3,591,712 8,657,864 2.3

Other geographies (5) :

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

All vintages 340,283 542,282 50,012 592,294 1.7

Subtotal 340,283 542,282 50,012 592,294 1.7

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(2) Cumulative collections from inception through December 31, 2022, excluding collections on behalf of others.

(3) Purchase Price Multiple represents total estimated gross collections divided by the purchase price.

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

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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) :

(5) Annual pool groups for other geographies have been aggregated for disclosure purposes.

Estimated Remaining Gross Collections by Year of Purchase

The following table summarizes our estimated remaining gross collections from purchased receivable portfolios and estimated future cash flows from real estate-owned assets (in thousands) :

Estimated Remaining Gross Collections by Year of Purchase (1)

2023 2024 2025 2026 2027 2028 2029 2030 2031 >2031 Total (2)

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2021 62,832 58,648 50,844 45,137 38,622 32,016 26,309 21,045 18,144 64,231 417,828

2022 69,409 67,595 57,222 47,722 39,942 33,565 27,976 22,619 18,102 54,036 438,188

Subtotal 521,972 467,675 404,720 352,595 304,640 263,140 228,076 196,501 172,348 680,045 3,591,712

Other geographies (4) :

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

All vintages 8,345 7,001 5,837 4,989 4,304 3,689 3,208 2,837 2,397 7,405 50,012

Subtotal 8,345 7,001 5,837 4,989 4,304 3,689 3,208 2,837 2,397 7,405 50,012

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28,844 33,277 34,196 10,161 4,005 5,594 1,997 — — — 118,074

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

Total ERC $ 1,737,596 $ 1,378,776 $ 1,008,929 $ 743,567 $ 569,209 $ 447,090 $ 353,361 $ 282,514 $ 232,636 $ 801,325 $ 7,555,003

________________________

(1) ERC for Zero Basis Portfolios can extend beyond our collection forecasts.

(1) As of December 31, 2022, ERC for Zero Basis Portfolios includes approximately $67.2 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:

ERC also include approximately $50.0 million from non-accrual portfolios, primarily in other geographies.

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

As of December 31, 2022, ERC for 84-month and 120-month periods were:

84-Month ERC 120-Month ERC

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

(4) Annual pool groups for other geographies have been aggregated for disclosure purposes.

(5) Real estate-owned assets ERC includes approximately $116.7 million and $1.4 million of estimated future cash flows for Europe and Other Geographies, respectively.

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Estimated Future Collections Applied to Principal

Estimated Future Collections Applied to Investment in Receivable Portfolios

As of December 31, 2022, we had $3.1 billion in investment in receivable portfolios.

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

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Purchases by Quarter

The following table summarizes the receivable portfolios we purchased by quarter, and the respective purchase prices ( in thousands ):

Accounts Face Value Purchase

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

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Liquidity and Capital Resources

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

The following table summarizes our cash flow activities for the periods presented (in thousands) :

Year Ended December 31,

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Net cash provided by operating activities $ 210,681 $ 303,053 $ 312,864

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)

Net cash (used in) provided by investing activities (130,235) 339,896 82,826

Net cash used in financing activities (107,445) (655,692) (403,200)

Operating Cash Flows

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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.

The changes in net cash provided by operating activities during the years ended December 31, 2022, 2021, and 2020, were primarily affected by net income, and changes in expected recoveries during the respective periods.

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 $130.2 million during the year ended December 31, 2022.

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

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

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Repayments of amounts outstanding under our credit facilities were $515.7 million, $896.4 million and $2,290.8 million during the years ended December 31, 2022, 2021, and 2020, 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.

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

Repayments of senior secured notes were $39.1 million, $359.2 million and $1,033.8 million during the years ended December 31, 2022, 2021, and 2020, respectively.

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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.

Our primary sources of capital are 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 any potential acquisitions.

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

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

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

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Our primary cash requirements include funding the purchase of receivable portfolios, operating expenses, the payment of interest and principal on borrowings, the payment of income taxes, funding any entity acquisitions and share repurchases.

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

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Available capacity under our Global Senior Facility was $478.3 million as of December 31, 2022.

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).

Our Board of Directors has approved a $300.0 million share repurchase program.

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.

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During the year ended December 31, 2022, we repurchased 1,497,184 shares of our common stock for approximately $86.9 million under the share repurchase program.

As of December 31, 2022, we had remaining authority to purchase $91.9 million of our common stock.

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, 2022, consisted of $16.7 million held by U.S.-based entities and $127.2 million held by foreign entities.

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The balance of cash held for clients was $17.8 million and $29.3 million as of December 31, 2022 and 2021, 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.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, 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, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities.

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

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Future Contractual Cash Obligations

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

Critical Accounting Policies and Estimates

Critical Accounting 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.

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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.

We continue to evaluate the reasonable economic life of a pool and reversion method on an ongoing basis.

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.

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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) Recoveries above or 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).

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

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

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

Investment in Receivable Portfolios, Net” to our consolidated financial statements for further discussion of investment in receivable portfolios.

Valuation of Goodwill and Other Intangible Assets.

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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.

We perform our annual goodwill impairment assessment at the reporting unit level as of October 1, and any impairment charges resulting from this process are reported in the fourth quarter.

We first assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test.

The qualitative factors include economic environment, business climate, market capitalization, operating performance, competition, and other factors.

If, after completing such assessment, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then there is no need to perform any further testing.

If we conclude otherwise, or if we proceed directly to perform a quantitative assessment, then we calculate the fair value of the reporting unit and compare the fair value with the carrying value of the reporting unit.

As described further in “Note 15:

Goodwill and Identifiable Intangible Assets” to our consolidated financial statements, we performed quantitative goodwill impairment tests for both the MCM and the Cabot reporting units as of October 1, 2022 and concluded that no goodwill impairment existed at these two reporting units.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors.

While we believe we have made reasonable estimates and assumptions to estimate the fair value of our reporting units, if:

actual results are not consistent with our current estimates and assumptions;

management significantly changes its estimates and assumptions;

there is a deterioration in market factors outside of our control, such as general economic conditions in the countries in which we operate, discount rates, income tax rates, foreign currency exchange rates, or inflation;

or there is a sustained decline in our stock price and market capitalization, goodwill impairment charges may be recorded in future periods.

The goodwill impairment charges have no effect on liquidity or capital resources.

However, they are a non-cash charge and could adversely affect our financial results in the period recognized.

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.

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An estimate of fair value can be affected by many assumptions that require significant judgment.

We amortize identifiable intangible assets with finite lives over their useful lives.

Changes in strategy and/or market condition may result in adjustments to recorded intangible asset balances or their useful lives.

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.

We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards.

Accounting standards regarding income taxes require a reduction of the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is more likely than not such assets will not be realized.

Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a more likely than not criteria.

This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, tax credit carryforwards and tax planning strategies.

We recorded a valuation allowance on the net deferred tax assets of certain foreign jurisdictions of $66.6 million and $35.9 million as of December 31, 2022 and 2021, respectively.

Management will reassess the realization of deferred tax assets each reporting period and consider all available evidence including the scheduled reversal of deferred tax liabilities, sources of taxable income and tax planning strategies.

To the extent the financial results of these operations improve and it becomes more likely than not the deferred tax assets are realizable, we will reduce the valuation allowance in the period such determination is made, as appropriate.

Recent Accounting Pronouncements

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

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What changed 10-K

Item 7. Management’s Discussion and Analysis