What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-22 · 146 added, 135 removed, 651 unchanged (30% of the section changed)

31 unchanged sentences

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.

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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.

Throughout 2022 we 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.

During 2023, we believe increased supply led to improved portfolio pricing in the U.S.

Inflation in the U.K.

put pressure on wages and other costs early in the year and we took action to control our cost base, including a headcount reduction in support functions at Cabot.

Despite higher interest rates impacting funding costs for market participants in 2023, we believe that the portfolio pricing environment in the U.K.

and Europe did not yet fully reflect increased funding costs that resulted from higher interest rates.

Government Regulation

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

These methods and models allow us to value portfolios accurately (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.

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

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

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Cabot (Europe)

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

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

We also purchase:

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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.

This model generally 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.

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

Purchases and Collections

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MCM (United States)

With lending surpassing pre-pandemic levels and with rising delinquency rates, we have seen an increase in supply.

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 began to soften as a result of increased supply.

Pricing in the fourth quarter continued to improve 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.

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Cabot (Europe)

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.

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 had embedded debt sales as an integral part of their business models.

The percentage of volume that is sold in multi-year forward flow arrangements is increasing.

The Spain, France, and Portugal debt markets continue to be three of the largest in Europe with significant debt sales and an expectation of a significant amount of debt to be sold in the future.

Financial institutions continue to look to dispose of non-performing loans in these markets.

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.

While we have seen a resumption of sales activity across all 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 slightly below pre-pandemic levels while portfolio pricing remains competitive across our European footprint;

however we began to see improvement in pricing in the fourth quarter.

Purchases by Geographic Location

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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.

were robust as supply increased and pricing improved.

Capital deployment increased for the year ended December 31, 2022, as compared to 2021 , primarily due to an increase in supply in the U.S.

to pre-pandemic levels.

In Europe, capital deployment increased during the year ended December 31, 2023, as compared to 2022.

Pricing continues to remain competitive in Europe and as a result purchases were limited for all the periods presented as compared to pre-pandemic levels.

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

Capital deployment decreased for the year ended December 31, 2022, as compared to 2021 , 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.

In addition to the purchases of receivable portfolios discussed above, during the years ended December 31, 2023, 2022, and 2021, we also invested $26.9 million, $39.3 million, and $17.1 million in REO assets, respectively.

Collections from Purchased Receivables by Channel and Geographic Location

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Total collections from purchased receivables $ 1,862,567 $ 1,911,537 $ 2,307,359

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.

Gross collections from purchased receivables remained relatively stable during the year ended December 31, 2023, as compared to gross collections during the year ended December 31, 2022.

Gross collections from purchased receivables decreased $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.

The changes in consumer behavior that resulted from the impacts of the COVID-19 pandemic, while more prevalent in 2021, continued through the first half of 2022.

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

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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 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.

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.

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) :

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

Year Ended December 31,

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Depreciation and amortization 41,737 3.4 % 46,419 3.3 % 50,079 3.1 %

Goodwill impairment 238,200 19.5 % — — % — — %

Impairment of intangible assets

18,726 1.5 % 4,075 0.3 % — — %

Total operating expenses 1,206,145 98.5 % 936,173 66.9 % 981,227 60.8 %

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Total other expense (196,799) (16.2) % (151,185) (10.9) % (196,731) (12.2) %

Income before income taxes 310,989 22.2 % 436,541 27.0 % 282,898 18.9 %

(Loss) income before income taxes (180,264) (14.7) % 310,989 22.2 % 436,541 27.0 %

Provision for income taxes (26,228) (2.1) % (116,425) (8.3) % (85,340) (5.2) %

Net income 194,564 13.9 % 351,201 21.8 % 212,524 14.2 %

Net (loss) income (206,492) (16.8) % 194,564 13.9 % 351,201 21.8 %

Net income attributable to noncontrolling interest — — % — — % (419) (0.1) %

Net income attributable to Encore Capital Group, Inc.

Net (loss) income attributable to Encore Capital Group, Inc.

stockholders $ (206,492) (16.8) % $ 194,564 13.9 % $ 350,782 21.7 %

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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.

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Revenue from receivable portfolios 1,204,437 1,202,361 2,076 0.2 %

Recoveries above forecast 29,253 326,006 (296,753) (91.0) %

Recoveries (below) above forecast

(33,405) 29,253 (62,658) (214.2) %

Changes in expected future recoveries (49,125) 63,892 (113,017) (176.9) %

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

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.

There was no material foreign currency translation impact to our revenue for the year ended December 31, 2023, as compared to the year ended December 31, 2022.

Revenue recognized from portfolio basis stayed consistent during the year ended December 31, 2023 as compared to the year ended December 31, 2022.

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

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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.

Collections under-performed the forecasted collections by approximately $13.3 million and $33.4 million during the three months and year ended December 31, 2023, respectively.

The under-performance was primarily attributable to shortfalls in collections for our 2022 and 2021 U.S.

vintages as consumers transitioned back to more normalized payment behavior.

Recoveries below forecast were approximately $22.2 million during the three months ended December 31, 2022, recoveries above forecast were approximately $29.3 million during the year ended December 31, 2022.

We reassess the forecasts of expected lifetime recoveries each quarter by considering, among other factors, historical and current collection performance, changes in consumer behaviors, and macroeconomic environment.

As a result, we have updated our forecast, including reducing expected future recoveries for certain static pools, primarily the 2022 and 2021 U.S.

vintages, where the initial cash flow forecasts were established during a period marked by changed consumer behavior, which caused challenges in forecasting.

The changes to the forecast, when discounted to present value, resulted in a net negative change in expected future recoveries of approximately $39.2 million for the three months ended December 31, 2023.

This negative change in expected future recoveries when combined, together with net $9.9 million of negative changes in expected future recoveries recorded in the first nine months of the year resulted in a net negative change in expected future recoveries of approximately $49.1 million during the year ended December 31, 2023.

We recorded approximately $64.0 million net negative change in expected future period recoveries during the three months ended December 31, 2022 and $63.9 million in net positive change in expected future period recoveries during the year ended December 31, 2022.

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 ):

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2022 268,516 179,175 (51,222) 398,824 3.1 %

184,182 136,249 29,359 793,117 3.2 %

Subtotal 1,314,582 837,890 (45,446) 1,920,780 3.7 %

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2022 70,385 40,530 (5,161) 199,024 1.6 %

40,975 18,857 7,258 248,185 1.5 %

Subtotal 544,031 366,547 (37,528) 1,519,388 2.0 %

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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%

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

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

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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.

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

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.

The decrease in servicing revenues during the year ended December 31, 2023, as compared to the year ended December 31, 2022, was primarily attributable to reduced service demand from BPO clients.

Other revenues increased during the year ended December 31, 2023, as compared to the year ended December 31, 2022, 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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Depreciation and amortization 41,737 46,419 (4,682) (10.1) %

Goodwill impairment

238,200 — 238,200 100.0 %

Impairment of intangible assets

18,726 4,075 14,651 359.5 %

Total operating expenses $ 1,206,145 $ 936,173 $ 269,972 28.8 %

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

Our operating expenses were favorably impacted by 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.

There was no material foreign currency translation impact to operating expenses for the year ended December 31, 2023, as compared to the year ended December 31, 2022.

Operating expenses are explained in more detail as follows:

Salaries and Employee Benefits

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.

The increase in salaries and employee benefits during the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to the following reasons:

• An increase in salaries and bonus and payroll related taxes of approximately $10.5 million primarily due to an increase in overall headcount and market adjustments;

• Costs relating to headcount reductions in Europe of approximately $7.4 million;

• The increase was partially offset by decreased stock-based compensation expense of $1.5 million primarily attributed to forfeiture of certain stock awards.

Cost of Legal Collections

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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.

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

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

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Total cost of legal collections $ 224,252 $ 217,944 $ 6,308 2.9 %

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.

The increase in cost of legal collections during the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to an increase in court costs due to more placements in the legal collection channel.

General and Administrative Expenses

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.

The decrease in general and administrative expenses during the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to the following reasons:

• A decrease in rent and lease expenses of approximately $7.7 million and a decrease in legal expenses and consulting fees of approximately $7.3 million;

• This decrease was partial offset by an increase in general and administrative expense of approximately $13.7 million primarily relating to costs associated with information technology, business travel, and facilities expense.

Other Operating Expenses

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.

Other operating expenses remained relatively consistent during the year ended December 31, 2023, compared to the year ended December 31, 2022.

Collection Agency Commissions

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

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.

Collection agency commissions were consistent during the year ended December 31, 2023, compared to the year ended December 31, 2022.

Depreciation and Amortization

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

The decrease in depreciation and amortization expenses during the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to a decrease in depreciation expenses of approximately $2.0 million and a decrease in amortizable expenses of approximately $2.7 million as a result of smaller depreciable and amortizable asset balances during the year ended December 31, 2023, compared to the year ended December 31, 2022.

Goodwill Impairment

During the fourth quarter of 2023, we performed our annual goodwill impairment test and concluded that the fair value of our Cabot reporting was less than its carrying amount.

As a result, we recorded an impairment charge of $238.2 million to goodwill during the year ended December 31, 2023.

Refer to “Note 15:

Goodwill and Identified Intangible Assets” to our consolidated financial statements for further details.

Impairment of Intangible Assets

In connection with our annual goodwill impairment testing discussed above, we also tested for impairment of our long-lived intangible assets during the fourth quarter of 2023.

As a result of the test, we recorded an impairment charge of approximately $18.7 million for our acquired definite-lived intangible assets during the year ended December 31, 2023.

We recorded an impairment charge of $4.1 million for our acquired definite-lived intangible assets during the year ended December 31, 2022.

Refer to “Note 15:

Goodwill and Identified Intangible Assets” to our consolidated financial statements for further details.

Interest Expense

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Total interest expense $ 201,877 $ 153,308 $ 48,569 31.7 %

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:

• 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.

The increase in interest expense during the year ended December 31, 2023, compared to the year ended December 31, 2022, was primarily due to the following reasons:

• The effect resulting from rising interest rates of approximately $31.8 million;

• The effect resulting from increased average debt balance of approximately $13.2 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.

Other income was $5.1 million and $2.1 million during the years ended December 31, 2023, and 2022, respectively.

Provision for Income Taxes

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State provision (3.0) % 5.0 %

Foreign rate differential (1)

(0.3) % (1.0) %

Change in tax rate (2)

Change in valuation allowance (1)

Goodwill impairment (2)

Taxable gain (deductible loss) in foreign jurisdiction (3)

2.9 % (2.7) %

Deductible loss in foreign jurisdiction (4)

Other 1.2 % 0.8 %

Forfeit benefit due to merger/liquidations (4)

Effective rate (14.5) % 37.4 %

________________________

(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) Includes valuation allowances recorded on U.K.

(1) In 2023, includes reduction in valuation allowance due to the forfeit of tax benefits on merger or liquidation of foreign subsidiaries that maintained full valuation allowances on their deferred tax assets.

In 2022, includes valuation allowance 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.

(2) During the fourth quarter of 2023, we recorded a non-cash goodwill impairment charge of $238.2 million at the Cabot reporting unit.

Refer to “Note 15:

Goodwill and Identified Intangible Assets” to our consolidated financial statements for further details.

(3) In 2023, represents a taxable gain recognized in a foreign subsidiary.

In 2022, represents deductible loss recognized in a foreign subsidiary that maintains a full valuation allowance on its deferred tax assets.

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

(4) Represents the forfeit of tax benefits on merger or liquidation of foreign subsidiaries that maintained full valuation allowances on their deferred tax asset.

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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2023 2022 2021

GAAP net income, as reported $ 194,564 $ 351,201 $ 212,524

GAAP net (loss) income, as reported

$ (206,492) $ 194,564 $ 351,201

Interest expense 201,877 153,308 169,647

3 unchanged sentences

Depreciation and amortization 41,737 46,419 50,079

CFPB settlement fees (1)

Net gain on derivative instruments (1)

Stock-based compensation expense 13,854 15,402 18,330

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7,401 1,213 20,559

Goodwill impairment (3)

Impairment of intangible assets (3)

18,726 4,075 —

Adjusted EBITDA $ 333,615 $ 529,632 $ 702,718

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________________________

(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.

(1) Amount represents gain or loss recognized on derivative instruments that are not designated as hedging instruments or gain or loss recognized on derivative instruments upon dedesignation of hedge relationships.

We adjust for this amount because we believe the gain or loss on derivative contracts is not indicative of ongoing operations.

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

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

(3) During the fourth quarter of 2023, we recorded a non-cash goodwill impairment charge of $238.2 million and a non-cash impairment of intangible assets of $18.7 million.

We recorded a non-cash impairment of intangible assets of $4.1 million during the year ended December 31, 2022.

We believe these non-cash impairment charges are not indicative of ongoing operations, therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

Refer to “Note 15:

Goodwill and Identified Intangible Assets” to our consolidated financial statements for further details.

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

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Changes in recoveries

82,530 (93,145) (199,136)

REO proceeds applied to basis 35,620 19,231 22,594

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Our collection expectations vary between types of portfolio and geographic location.

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.

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.

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2022 244,508 — — — — — — — — — 36,957 70,385 107,342 0.4

2023 259,255 — — — — — — — — — — 40,975 40,975 0.2

Subtotal 3,963,328 134,259 384,856 476,126 494,000 554,320 635,177 635,218 553,946 644,979 553,271 544,031 5,610,183 1.4

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2022 244,508 107,342 374,345 481,687 2.0

2023 259,255 40,975 443,283 484,258 1.9

Subtotal 3,963,328 5,610,183 3,706,453 9,316,636 2.4

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Estimated Remaining Gross Collections by Year of Purchase (1)

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

2024 2025 2026 2027 2028 2029 2030 2031 2032 >2032

United States:

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2022 67,216 58,144 48,547 40,405 32,848 27,118 22,323 17,753 14,593 45,398 374,345

81,329 72,583 59,508 49,276 39,509 31,380 24,794 20,039 16,357 48,508 443,283

Subtotal 557,563 487,404 423,345 366,355 311,226 268,124 230,656 199,829 175,308 686,643 3,706,453

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Net cash (used in) provided by investing activities (401,941) (130,235) 339,896

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

Net cash provided by (used in) financing activities 268,300 (107,445) (655,692)

Operating Cash Flows

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Net cash provided by operating activities was $153.0 million, $210.7 million, and $303.1 million during the years ended December 31, 2023, 2022, and 2021, 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.

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.

Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in recoveries, goodwill impairment, impairment of intangible assets, stock-based compensation charges, deferred income tax, 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.

During the year ended December 31, 2023, we recorded a goodwill impairment of $238.2 million and an impairment of intangible assets of $18.7 million.

Changes in recoveries increased the operating cash flows by $82.5 million during the year ended December 31, 2023 and decreased the operating cash flows by $93.1 million and $199.1 million during the years ended December 31, 2022 and 2021, respectively.

Refer to “Note 4:

Investment in Receivable Portfolios, Net” in the notes to our consolidated financial statements for discussion relating to changes in recoveries.

Investing Cash Flows

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.

Net cash used in investing activities was $401.9 million, and $130.2 million during the years ended December 31, 2023, and 2022, respectively.

Net cash provided by investing activities was $339.9 million during the year ended December 31 2021.

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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Collection proceeds applied to the principal of our receivable portfolios were $658.1 million, $709.2 million, and $1,019.6 million during the years ended December 31, 2023, 2022, and 2021, respectively.

Refer to Purchases and Collections within “Item 7:

Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion relating to purchases and collections.

Financing Cash Flows

Net cash used in financing activities was $107.4 million, $655.7 million, and $403.2 million during the years ended December 31, 2022, 2021, and 2020, respectively.

Net cash provided by financing activities was $268.3 million during the year ended December 31, 2023.

Net cash used in financing activities was $107.4 million, and $655.7 million during the years ended December 31, 2022, and 2021, respectively.

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

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Repayments of senior secured notes were $39.1 million, $39.1 million and $359.2 million during the years ended December 31, 2023, 2022, and 2021, respectively.

We repaid $221.2 million, $161.0 million, and $89.4 million of convertible senior notes using cash on hand during the years ended December 31, 2022, 2021, and 2020, respectively.

During the year ended December 31, 2023, we issued $230.0 million 4.00% convertible senior notes that mature in 2029, and used $212.5 million in cash to repurchase and settle our exchangeable senior notes due 2023.

We repaid $221.2 million, and $161.0 million of convertible senior notes using cash on hand during the years ended December 31, 2022, and 2021, respectively.

Capital Resources

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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.

We did not make any repurchases under the share repurchase program during the year ended December 31, 2023.

As of December 31, 2023, we had remaining authority to purchase $91.9 million of our common stock.

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See “Note 11:

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

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

Critical Accounting Estimates

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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.

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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.

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

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

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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.

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 perform our annual goodwill impairment assessment at the reporting unit level as of the first day of the fourth quarter, 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.

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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.

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

Income Taxes.

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 during our annual goodwill impairment in the fourth quarter of 2023 and recorded a goodwill impairment charge of $238.2 million at our Cabot reporting unit.

We also recorded an impairment charge of $18.7 million relating to our intangible assets during the fourth quarter of 2023.

The carrying value of our Cabot reporting unit was equal to its fair value immediately after the goodwill impairment was recorded.

We continue to evaluate and monitor all key factors impacting the goodwill carried at the Cabot reporting unit.

Adverse changes in our actual or expected operating results, our market capitalization, business climate, economic factors or other negative events could result in further goodwill impairment at our Cabot reporting unit.

The goodwill balance relating to the MCM and the Cabot reporting units was $148.9 million and $457.5 million, respectively, as of December 31, 2023.

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

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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.

We recorded valuation allowances on the net deferred tax assets of certain foreign jurisdictions of $55.0 million and $66.6 million as of December 31, 2023 and 2022, 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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis