Item 7. Management’s Discussion and Analysis
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to help investors understand our business, financial condition, results of operations, liquidity and capital resources. You should read this discussion together with our consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains “forward-looking statements” relating to Encore Capital Group, Inc. (“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our” or “us”) within the meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,” “may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services, and financing needs or plans, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors including, but not limited to, those set forth in this Annual Report on Form 10-K under “Part I, Item 1A—Risk Factors,” could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties.
Our Business
We are an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-performing loans in Europe.
Encore Capital Group, Inc. (“Encore”) has three business units: MCM, which consists of Midland Credit Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists of Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations in Latin America and Asia-Pacific.
MCM (United States)
Through MCM, we are a market leader in portfolio purchasing and recovery in the United States.
Cabot (Europe)
Through Cabot, we are one of the largest credit management services providers in Europe and 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 UK contingency debt collection and BPO services company.
LAAP (Latin America and Asia-Pacific)
We have purchased non-performing loans in Mexico. Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India.
To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business in the United States and United Kingdom and strengthening and developing our business in the rest of Europe.
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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. 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
As discussed in more detail under “Part I - Item 1—Business - Government Regulation” contained in this Annual Report on Form 10-K, our operations in the United States are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices. Additionally, our operations in Europe are affected by foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations, ordinances, guidelines and procedures are modified from time to time by the relevant authorities charged with their administration, which could affect the way we conduct our business.
Portfolio Purchasing and Recovery
MCM (United States)
In the United States, the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt portfolios. A small percentage of our capital deployment in the United States is comprised of receivable portfolios subject to Chapter 13 and Chapter 7 bankruptcy proceedings.
We purchase receivables based on robust, account-level valuation methods and employ proprietary statistical and behavioral models across our U.S. operations. These methods and models 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. We maintain strong relationships with many of the largest financial service providers in the United States.
Cabot (Europe)
In Europe, our purchased defaulted debt portfolios primarily consist of paying and non-paying consumer loan accounts. We also purchase: (1) portfolios that are in insolvency status, in particular, individual voluntary arrangements; and (2) non-performing secured mortgage portfolios and real estate assets previously securing mortgage portfolios. When we take possession of the underlying real estate assets or purchase real estate assets, we refer to those as real estate-owned assets, or REO assets.
We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model 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 and Europe.
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Purchases and Collections
Portfolio Pricing, Supply and Demand
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 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.
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)
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 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
The following table summarizes purchases of receivable portfolios by geographic location during the periods presented (in thousands):
Year Ended December 31,
2023 2022 2021
MCM (United States) $ 814,557 $ 556,000 $ 408,741
Cabot (Europe) 259,255 244,507 255,788
Total purchases of receivable portfolios $ 1,073,812 $ 800,507 $ 664,529
In the United States, capital deployment increased during the year ended December 31, 2023, as compared to 2022. 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. Portfolio purchases in 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.
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.
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Collections from Purchased Receivables by Channel and Geographic Location
We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from third-party 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 ):
Year Ended December 31,
2023 2022 2021
MCM (United States):
Call center and digital collections $ 783,164 $ 772,728 $ 971,459
Legal collections 526,197 581,078 662,810
Collection agencies 5,221 1,126 7,429
Subtotal 1,314,582 1,354,932 1,641,698
Cabot (Europe):
Call center and digital collections 217,784 203,378 259,666
Legal collections 189,406 193,348 203,339
Collection agencies 136,841 156,545 181,974
Subtotal 544,031 553,271 644,979
Other geographies: 3,954 3,334 20,682
Total collections from purchased receivables $ 1,862,567 $ 1,911,537 $ 2,307,359
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 in 2021, 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.
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Results of Operations
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,
2023 2022 2021
Revenues
Revenue from receivable portfolios $ 1,204,437 98.5 % $ 1,202,361 85.9 % $ 1,287,730 79.8 %
Changes in recoveries (82,530) (6.7) % 93,145 6.7 % 199,136 12.3 %
Total debt purchasing revenue 1,121,907 91.8 % 1,295,506 92.6 % 1,486,866 92.1 %
Servicing revenue 83,136 6.8 % 94,922 6.8 % 120,778 7.5 %
Other revenues 17,637 1.4 % 7,919 0.6 % 6,855 0.4 %
Total revenues 1,222,680 100.0 % 1,398,347 100.0 % 1,614,499 100.0 %
Operating expenses
Salaries and employee benefits 391,532 32.0 % 375,135 26.8 % 385,178 23.9 %
Cost of legal collections 224,252 18.3 % 217,944 15.6 % 254,280 15.7 %
General and administrative expenses 144,862 11.8 % 145,798 10.4 % 137,695 8.6 %
Other operating expenses 111,179 9.1 % 111,234 8.0 % 106,938 6.6 %
Collection agency commissions 35,657 2.9 % 35,568 2.5 % 47,057 2.9 %
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 %
Income from operations 16,535 1.5 % 462,174 33.1 % 633,272 39.2 %
Other expense
Interest expense (201,877) (16.5) % (153,308) (11.0) % (169,647) (10.5) %
Loss on extinguishment of debt — — % — — % (9,300) (0.6) %
Other income (expense) 5,078 0.3 % 2,123 0.1 % (17,784) (1.1) %
Total other expense (196,799) (16.2) % (151,185) (10.9) % (196,731) (12.2) %
(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 (loss) income (206,492) (16.8) % 194,564 13.9 % 351,201 21.8 %
Net income attributable to noncontrolling interest — — % — — % (419) (0.1) %
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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Comparison of Results of Operations
Our Annual Report on Form 10-K for the year ended December 31, 2022 includes discussion and analysis of our financial condition and results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Revenues
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. We then record a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as “Investment in receivable portfolios, net” in our consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) established based on the purchase price of the portfolio and the expected future cash flows at the time of purchase.
Debt purchasing revenue includes two components:
(1) Revenue from receivable portfolios , which is the accretion of the discount on the negative allowance due to the passage of time (generally the portfolio balance multiplied by the EIR), and
(2) 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; and
(b) Changes in expected future recoveries, which is the present value change of expected future recoveries, where such change generally results from (i) collections “pulled forward from” or “pushed out to” future periods (i.e. amounts either collected early or expected to be collected later) and (ii) magnitude and timing changes to estimates of expected future collections (which can be increases or decreases).
Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to our adoption of 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. Similar to how we treated ZBA collections prior to the adoption of CECL, all subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in our consolidated statements of operations.
Servicing revenue consists primarily of fee-based income earned on accounts collected on behalf of others, primarily credit originators. We earn fee-based income by providing debt servicing (such as early stage collections, BPO, contingent collections, trace services and litigation activities) to credit originators for non-performing loans in Europe.
Other revenues primarily include revenues recognized from the sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios and real estate assets in Europe and LAAP.
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The following table summarizes revenues for the periods presented ( in thousands, except percentages) :
Year Ended December 31,
2023 2022 $ Change % Change
Revenue recognized from portfolio basis $ 1,176,835 $ 1,169,010 $ 7,825 0.7 %
ZBA revenue 27,602 33,351 (5,749) (17.2) %
Revenue from receivable portfolios 1,204,437 1,202,361 2,076 0.2 %
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) %
Changes in recoveries (82,530) 93,145 (175,675) (188.6) %
Debt purchasing revenue 1,121,907 1,295,506 (173,599) (13.4) %
Servicing revenue 83,136 94,922 (11,786) (12.4) %
Other revenues 17,637 7,919 9,718 122.7 %
Total revenues $ 1,222,680 $ 1,398,347 $ (175,667) (12.6) %
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international revenues. 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. We expect our ZBA revenue to continue to decline as we collect on these legacy pools. We do not expect to have new ZBA pools in the future.
Recoveries above or below forecast represent over and under-performance in the reporting period, respectively. 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.
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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, 2023 As of December 31, 2023
Collections Revenue from Receivable Portfolios Changes in Recoveries Investment in Receivable Portfolios Monthly EIR
United States:
ZBA $ 27,584 $ 27,584 $ — $ — — %
2011 13,276 12,519 434 1,003 88.6 %
2012 15,881 14,209 1,062 2,479 42.0 %
2013 34,529 32,570 157 5,601 40.5 %
2014 20,910 13,873 3,965 16,271 6.7 %
2015 19,518 10,665 1,541 19,042 3.9 %
2016 35,130 19,773 2,343 33,504 4.2 %
2017 57,985 35,121 3,380 42,838 5.5 %
2018 89,548 51,015 (6,206) 83,861 4.0 %
2019 164,106 91,341 (2,668) 160,976 3.8 %
2020 194,522 104,555 (3,622) 187,358 3.7 %
2021 188,895 109,241 (23,969) 175,906 3.9 %
2022 268,516 179,175 (51,222) 398,824 3.1 %
2023
184,182 136,249 29,359 793,117 3.2 %
Subtotal 1,314,582 837,890 (45,446) 1,920,780 3.7 %
Europe:
ZBA 18 18 — — — %
2013 57,747 51,931 (12,684) 125,541 3.2 %
2014 54,537 44,640 (4,516) 119,369 3.0 %
2015 36,237 27,317 (1,928) 89,034 2.5 %
2016 (1)
35,272 24,957 2,863 76,499 2.8 %
2017 48,763 29,652 (4,282) 120,508 1.9 %
2018 49,675 31,967 (10,229) 157,616 1.6 %
2019 54,544 31,767 1,059 133,484 1.9 %
2020 37,363 23,939 920 83,638 2.2 %
2021 58,515 40,972 (10,828) 166,490 1.9 %
2022 70,385 40,530 (5,161) 199,024 1.6 %
2023
40,975 18,857 7,258 248,185 1.5 %
Subtotal 544,031 366,547 (37,528) 1,519,388 2.0 %
Other geographies: (2)
All vintages 3,954 — 444 28,264 — %
Subtotal 3,954 — 444 28,264 — %
Total $ 1,862,567 $ 1,204,437 $ (82,530) $ 3,468,432 3.0 %
_______________________
(1) Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
(2) All portfolios are on non-accrual basis. Annual pool groups for other geographies have been aggregated for disclosure purposes.
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Year Ended December 31, 2022 As of December 31, 2022
Collections Revenue from Receivable Portfolios Changes in Recoveries Investment in Receivable Portfolios Monthly EIR
United States:
ZBA $ 33,317 $ 33,317 $ — $ — —%
2011 18,425 16,490 1,745 1,328 88.6%
2012 20,173 17,031 3,184 3,090 42.0%
2013 43,687 44,642 (3,503) 7,400 40.5%
2014 25,212 16,400 5,244 19,351 6.7%
2015 25,655 13,960 1,530 26,369 3.9%
2016 51,650 28,222 3,519 46,633 4.1%
2017 85,348 52,769 3,275 62,577 5.5%
2018 144,566 73,850 30,015 128,965 3.9%
2019 256,444 130,768 62,008 236,904 3.8%
2020 311,573 148,651 83,962 281,325 3.7%
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%
Europe:
ZBA 34 34 — — —%
2013 68,938 59,888 (12,516) 137,297 3.2%
2014 65,156 49,286 3,070 127,791 3.0%
2015 42,640 30,477 (2,377) 95,343 2.5%
2016 (1)
40,200 30,292 (5,771) 81,618 2.8%
2017 61,762 38,988 (27,217) 138,529 1.9%
2018 61,691 39,718 (23,906) 179,646 1.6%
2019 63,607 38,051 (5,338) 148,997 1.9%
2020 45,757 28,083 3,253 93,273 2.2%
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: (2)
All vintages 3,334 — — 33,187 —%
Subtotal 3,334 — — 33,187 —%
Total $ 1,911,537 $ 1,202,361 $ 93,145 $ 3,088,261 3.1%
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(1) Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
(2) All portfolios are on non-accrual basis. Annual pool groups for other geographies have been aggregated for disclosure purposes.
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.
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Operating Expenses
The following table summarizes operating expenses during the periods presented ( in thousands, except percentages ):
Year Ended December 31,
2023 2022 $ Change % Change
Salaries and employee benefits $ 391,532 $ 375,135 $ 16,397 4.4 %
Cost of legal collections 224,252 217,944 6,308 2.9 %
General and administrative expenses 144,862 145,798 (936) (0.6) %
Other operating expenses 111,179 111,234 (55) — %
Collection agency commissions 35,657 35,568 89 0.3 %
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 %
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international operating expenses, and the weakening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international operating expenses. 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 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; and
• Costs relating to headcount reductions in Europe of approximately $7.4 million; and
• 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
Cost of legal collections primarily includes contingent fees paid to our external network of attorneys and the cost of litigation. We pursue legal collections using a network of attorneys that specialize in collection matters and through our internal legal channel. Under the agreements with our contracted attorneys, we advance certain out-of-pocket court costs. Cost of legal collections does not include internal legal channel employee costs, which are included in salaries and employee benefits in our consolidated statements of operations.
The following table summarizes our cost of legal collections during the periods presented ( in thousands, except percentages ):
Year Ended December 31,
2023 2022 $ Change % Change
Court costs $ 134,200 $ 125,289 $ 8,911 7.1 %
Legal collection fees 90,052 92,655 (2,603) (2.8) %
Total cost of legal collections $ 224,252 $ 217,944 $ 6,308 2.9 %
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.
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General and Administrative Expenses
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; and
• 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
Other operating expenses remained relatively consistent during the year ended December 31, 2023, compared to the year ended December 31, 2022.
Collection Agency Commissions
Collection agency commissions are commissions paid to third-party collection agencies. Collections through the collections agencies channel are predominately in Europe and 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 were consistent during the year ended December 31, 2023, compared to the year ended December 31, 2022.
Depreciation and Amortization
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
The following table summarizes our interest expense ( in thousands, except percentages ):
Year Ended December 31,
2023 2022 $ Change % Change
Stated interest on debt obligations $ 184,717 $ 137,434 $ 47,283 34.4 %
Amortization of debt issuance costs 15,670 14,539 1,131 7.8 %
Amortization of debt discount
1,490 1,335 155 11.6 %
Total interest expense $ 201,877 $ 153,308 $ 48,569 31.7 %
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; and
• The effect resulting from increased average debt balance of approximately $13.2 million.
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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 $5.1 million and $2.1 million during the years ended December 31, 2023, and 2022, respectively.
Provision for Income Taxes
During the years ended December 31, 2023, and 2022, we recorded income tax provisions of $26.2 million and $116.4 million, respectively.
The effective tax rates for the respective periods are shown below:
Year Ended December 31,
2023 2022
Federal provision 21.0 % 21.0 %
State provision (3.0) % 5.0 %
Change in valuation allowance (1)
7.3 % 13.2 %
Goodwill impairment (2)
(28.3) % — %
Taxable gain (deductible loss) in foreign jurisdiction (3)
2.9 % (2.7) %
Forfeit benefit due to merger/liquidations (4)
(14.7) % — %
Other
0.3 % 0.9 %
Effective rate (14.5) % 37.4 %
________________________
(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.
(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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Non-GAAP Disclosure
In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.
Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.
Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before 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 ):
Year Ended December 31,
2023 2022 2021
GAAP net (loss) income, as reported
$ (206,492) $ 194,564 $ 351,201
Adjustments:
Interest expense 201,877 153,308 169,647
Loss on extinguishment of debt — — 9,300
Interest income (4,746) (1,774) (1,738)
Provision for income taxes 26,228 116,425 85,340
Depreciation and amortization 41,737 46,419 50,079
Net gain on derivative instruments (1)
(3,170) — —
Stock-based compensation expense 13,854 15,402 18,330
Acquisition, integration and restructuring related expenses (2)
7,401 1,213 20,559
Goodwill impairment (3)
238,200 — —
Impairment of intangible assets (3)
18,726 4,075 —
Adjusted EBITDA $ 333,615 $ 529,632 $ 702,718
Collections applied to principal balance (4)
$ 776,280 $ 635,262 $ 843,087
________________________
(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. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
(3) 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:
Year Ended December 31,
2023 2022 2021
Collections applied to investment in receivable portfolios, net $ 658,130 $ 709,176 $ 1,019,629
Changes in recoveries
82,530 (93,145) (199,136)
REO proceeds applied to basis 35,620 19,231 22,594
Collections applied to principal balance $ 776,280 $ 635,262 $ 843,087
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Supplemental Performance Data
The tables included in this supplemental performance data section include detail for purchases, collections and ERC by year of purchase.
Our collection expectations are based on account characteristics and economic variables. Additional adjustments are made to account for qualitative factors that may affect the payment behavior of our consumers and servicing related adjustments to ensure our collection expectations are aligned with our operations. We continue to refine our process of forecasting collections both domestically and internationally with a focus on operational enhancements. Our collection expectations vary between types of portfolio and geographic location. As a result, past performance of pools in certain geographic locations or of certain types of portfolio are not necessarily a suitable indicator of future results in other locations or for other types of portfolio.
The supplemental performance data presented in this section is impacted by foreign currency translation, which represents the effect of translating financial results where the functional currency of our foreign subsidiary is different than our U.S. dollar reporting currency. For example, the strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable reporting impact on our international purchases, collections, and ERC, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international purchases, collections, and ERC.
We utilize proprietary forecasting models to continuously evaluate the economic life of each pool.
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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) :
Year of
Purchase
Purchase
Price (1)
Cumulative Collections through December 31, 2023
<2014 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Total (2)
CCMM (3)
United States:
<2014 $ 3,244,415 $ 6,065,954 $ 1,048,635 $ 768,510 $ 523,386 $ 377,466 $ 277,776 $ 221,292 $ 169,334 $ 152,031 $ 115,602 $ 91,270 $ 9,811,256 3.0
2014 517,642 — 144,178 307,814 216,357 142,147 94,929 69,059 47,628 34,896 25,212 20,910 1,103,130 2.1
2015 499,036 — — 105,610 231,102 186,391 125,673 85,042 64,133 42,774 25,655 19,518 885,898 1.8
2016 552,974 — — — 110,875 283,035 234,690 159,279 116,452 87,717 51,650 35,130 1,078,828 2.0
2017 527,499 — — — — 111,902 315,853 255,048 193,328 144,243 85,348 57,985 1,163,707 2.2
2018 629,340 — — — — — 175,042 351,696 308,302 228,919 144,566 89,548 1,298,073 2.1
2019 675,374 — — — — — — 174,693 416,315 400,250 256,444 164,106 1,411,808 2.1
2020 538,032 — — — — — — — 213,450 430,514 311,573 194,522 1,150,059 2.1
2021 404,085 — — — — — — — — 120,354 240,605 188,895 549,854 1.4
2022 550,591 — — — — — — — — — 98,277 268,516 366,793 0.7
2023 811,703 — — — — — — — — — — 184,182 184,182 0.2
Subtotal 8,950,691 6,065,954 1,192,813 1,181,934 1,081,720 1,100,941 1,223,963 1,316,109 1,528,942 1,641,698 1,354,932 1,314,582 19,003,588 2.1
Europe:
<2014 619,079 134,259 249,307 212,129 165,610 146,993 132,663 113,228 93,203 93,907 68,938 57,747 1,467,984 2.4
2014 623,129 — 135,549 198,127 156,665 137,806 129,033 105,337 84,255 84,169 65,156 54,537 1,150,634 1.8
2015 419,941 — — 65,870 127,084 103,823 88,065 72,277 55,261 57,817 42,660 36,249 649,106 1.5
2016 258,218 — — — 44,641 97,587 83,107 63,198 51,609 51,017 40,214 35,278 466,651 1.8
2017 461,571 — — — — 68,111 152,926 118,794 87,549 86,107 61,762 48,763 624,012 1.4
2018 432,258 — — — — — 49,383 118,266 78,846 80,629 61,691 49,675 438,490 1.0
2019 273,354 — — — — — — 44,118 80,502 88,448 63,607 54,544 331,219 1.2
2020 116,227 — — — — — — — 22,721 59,803 45,757 37,363 165,644 1.4
2021 255,788 — — — — — — — — 43,082 66,529 58,515 168,126 0.7
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
Other geographies (4) :
All vintages 340,283 10,465 29,828 42,665 109,884 112,383 108,480 75,601 28,960 20,682 3,334 3,954 546,236 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 3,954 546,236 1.6
Total $ 13,254,302 $ 6,210,678 $ 1,607,497 $ 1,700,725 $ 1,685,604 $ 1,767,644 $ 1,967,620 $ 2,026,928 $ 2,111,848 $ 2,307,359 $ 1,911,537 $ 1,862,567 $ 25,160,007 1.9
________________________
(1) Adjusted for Put-Backs and Recalls. Put-Backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.
(2) Cumulative collections from inception through December 31, 2023, excluding collections on behalf of others.
(3) Cumulative Collections Money Multiple (“CCMM”) through December 31, 2023 refers to cumulative collections as a multiple of purchase price.
(4) Annual pool groups for other geographies have been aggregated for disclosure purposes.
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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)
Historical
Collections (2)
Estimated
Remaining
Collections Total Estimated
Gross Collections Purchase Price Multiple (3)
United States:
<2014 (4)
$ 3,244,415 $ 9,811,256 $ 194,082 $ 10,005,338 3.1
2014 (4)
517,642 1,103,130 48,769 1,151,899 2.2
2015 499,036 885,898 42,100 927,998 1.9
2016 552,974 1,078,828 75,541 1,154,369 2.1
2017 527,499 1,163,707 117,938 1,281,645 2.4
2018 629,340 1,298,073 192,515 1,490,588 2.4
2019 675,374 1,411,808 351,134 1,762,942 2.6
2020 538,032 1,150,059 406,977 1,557,036 2.9
2021 404,085 549,854 395,740 945,594 2.3
2022 550,591 366,793 769,552 1,136,345 2.1
2023 811,703 184,182 1,720,816 1,904,998 2.3
Subtotal 8,950,691 19,003,588 4,315,164 23,318,752 2.6
Europe:
<2014 (4)
619,079 1,467,984 513,334 1,981,318 3.2
2014 (4)
623,129 1,150,634 425,517 1,576,151 2.5
2015 (4)
419,941 649,106 266,604 915,710 2.2
2016 258,218 466,651 220,295 686,946 2.7
2017 461,571 624,012 277,461 901,473 2.0
2018 432,258 438,490 328,785 767,275 1.8
2019 273,354 331,219 299,107 630,326 2.3
2020 116,227 165,644 193,546 359,190 3.1
2021 255,788 168,126 364,176 532,302 2.1
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
Other geographies (5) :
All vintages 340,283 546,236 44,043 590,279 1.7
Subtotal 340,283 546,236 44,043 590,279 1.7
Total $ 13,254,302 $ 25,160,007 $ 8,065,660 $ 33,225,667 2.5
________________________
(1) Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. Put-Backs and Recalls represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.
(2) Cumulative collections from inception through December 31, 2023, 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.
(5) Annual pool groups for other geographies have been aggregated for disclosure purposes.
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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)
2024 2025 2026 2027 2028 2029 2030 2031 2032 >2032
Total (2)
United States:
<2014 (3)
$ 64,621 $ 43,503 $ 30,166 $ 20,809 $ 14,101 $ 9,245 $ 5,817 $ 3,416 $ 1,852 $ 552 $ 194,082
2014 (3)
16,663 10,731 6,619 4,668 3,293 2,324 1,641 1,159 819 852 48,769
2015 14,243 8,737 5,838 4,106 2,894 2,042 1,444 1,023 727 1,046 42,100
2016 26,016 15,898 10,400 7,097 4,990 3,515 2,481 1,754 1,244 2,146 75,541
2017 38,012 25,261 17,218 11,459 7,885 5,560 3,930 2,786 1,980 3,847 117,938
2018 60,013 42,299 28,644 19,531 12,850 8,859 6,254 4,429 3,146 6,490 192,515
2019 114,922 76,489 51,092 34,587 23,533 15,620 10,804 7,611 5,375 11,101 351,134
2020 128,483 90,491 60,127 40,826 27,815 18,938 12,630 8,798 6,206 12,663 406,977
2021 124,813 85,880 59,586 39,589 26,905 18,602 12,849 8,782 6,114 12,620 395,740
2022 263,708 164,126 106,768 73,089 49,315 34,393 24,376 17,385 12,171 24,221 769,552
2023 408,039 450,141 307,426 179,631 118,734 79,619 54,977 38,902 27,642 55,705 1,720,816
Subtotal 1,259,533 1,013,556 683,884 435,392 292,315 198,717 137,203 96,045 67,276 131,243 4,315,164
Europe:
<2014 (3)
56,423 51,891 48,142 44,626 41,449 38,306 35,262 32,752 29,925 134,558 513,334
2014 (3)
52,008 47,266 42,477 38,109 34,597 31,869 28,561 26,311 24,054 100,265 425,517
2015 (3)
33,929 30,277 27,523 24,638 21,928 19,867 17,827 15,793 14,604 60,218 266,604
2016 34,711 27,739 24,941 22,248 18,190 16,055 13,676 11,826 10,154 40,755 220,295
2017 41,371 36,208 30,976 27,631 22,991 19,957 17,558 15,139 13,264 52,366 277,461
2018 48,209 41,516 36,989 32,962 28,087 24,269 20,968 18,281 15,871 61,633 328,785
2019 48,511 41,862 33,953 28,202 23,731 20,891 17,890 15,369 13,547 55,151 299,107
2020 35,681 29,008 24,822 19,416 14,837 11,801 10,333 8,418 7,445 31,785 193,546
2021 58,175 50,910 45,467 38,842 33,059 26,611 21,464 18,148 15,494 56,006 364,176
2022 67,216 58,144 48,547 40,405 32,848 27,118 22,323 17,753 14,593 45,398 374,345
2023
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
Other geographies (4) :
All vintages 7,214 5,981 4,970 4,315 3,757 3,392 3,035 2,673 2,260 6,446 44,043
Subtotal 7,214 5,981 4,970 4,315 3,757 3,392 3,035 2,673 2,260 6,446 44,043
Portfolio ERC 1,824,310 1,506,941 1,112,199 806,062 607,298 470,233 370,894 298,547 244,844 824,332 8,065,660
REO ERC (5)
34,929 23,289 26,639 19,090 12,886 4,926 3,474 1,020 — — 126,253
Total ERC $ 1,859,239 $ 1,530,230 $ 1,138,838 $ 825,152 $ 620,184 $ 475,159 $ 374,368 $ 299,567 $ 244,844 $ 824,332 $ 8,191,913
________________________
(1) As of December 31, 2023, ERC for Zero Basis Portfolios includes approximately $51.7 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 include approximately $48.7 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, 2023, ERC for 84-month and 120-month periods were:
84-Month ERC 120-Month ERC
United States $ 4,020,600 $ 4,230,518
Europe 2,644,673 3,174,063
Other geographies 32,664 39,422
Portfolio ERC 6,697,937 7,444,003
REO ERC 125,233 126,253
Total ERC $ 6,823,170 $ 7,570,256
(3) Includes portfolios acquired in connection with certain business combinations.
(4) Annual pool groups for other geographies have been aggregated for disclosure purposes.
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(5) Real estate-owned assets ERC includes approximately $125.0 million and $1.2 million of estimated future cash flows for Europe and Other Geographies, respectively.
Estimated Future Collections Applied to Investment in Receivable Portfolios
As of December 31, 2023, we had $3.5 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands):
Years Ending December 31,
United States Europe Other
Geographies Total
Amortization
2024 $ 500,037 $ 210,329 $ 5,751 $ 716,117
2025 471,245 186,915 4,783 662,943
2026 329,180 163,512 3,959 496,651
2027 199,461 141,095 3,431 343,987
2028 131,091 117,542 2,974 251,607
2029 87,623 100,482 2,650 190,755
2030 60,094 85,813 2,356 148,263
2031 42,559 74,397 2,090 119,046
2032 30,389 67,320 270 97,979
2033 21,838 62,509 — 84,347
2034 15,792 59,446 — 75,238
2035 11,760 58,370 — 70,130
2036 9,276 59,659 — 68,935
2037 6,896 62,402 — 69,298
2038 3,539 69,597 — 73,136
Total $ 1,920,780 $ 1,519,388 $ 28,264 $ 3,468,432
Headcount by Function by Geographic Location
The following table summarizes our headcount by function and by geographic location:
Headcount as of December 31,
2023 2022 2021
United States:
General & Administrative 999 929 1,049
Account Manager 407 306 310
Subtotal 1,406 1,235 1,359
Europe:
General & Administrative 955 1,030 1,023
Account Manager 1,883 2,062 1,990
Subtotal 2,838 3,092 3,013
Other Geographies (1) :
General & Administrative 1,252 1,150 1,128
Account Manager 1,879 1,456 1,104
Subtotal 3,131 2,606 2,232
Total 7,375 6,933 6,604
________________________
(1) Headcount for other geographies includes employees in India and Costa Rica that service accounts originated in the United States.
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Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activities for the periods presented (in thousands) :
Year Ended December 31,
2023 2022 2021
Net cash provided by operating activities $ 152,991 $ 210,681 $ 303,053
Net cash (used in) provided by investing activities (401,941) (130,235) 339,896
Net cash provided by (used in) financing activities 268,300 (107,445) (655,692)
Operating Cash Flows
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities.
Net cash provided by operating activities was $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, 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 $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. Receivable portfolio purchases were $1,060.2 million, $790.6 million, and $657.3 million during the years ended December 31, 2023, 2022, and 2021, respectively. 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 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. Borrowings under our credit facilities were $1,196.0 million, $779.5 million and $821.9 million during the years ended December 31, 2023, 2022, and 2021, respectively. Repayments of amounts outstanding under our credit facilities were $989.6 million, $515.7 million and $896.4 million during the years ended December 31, 2023, 2022, and 2021, respectively. Proceeds from the issuance of senior secured notes were $104.2 million and $353.7 million during the years ended December 31, 2023 and 2021, respectively. 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. 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.
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Capital Resources
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 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. See “Note 6: Borrowings” in the notes to our consolidated financial statements for a further discussion of our debt. Available capacity under our Global Senior Facility was $363.8 million as of December 31, 2023.
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. The program does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at our discretion. During the year ended December 31, 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. Our practice is to retire the shares repurchased.
Our cash and cash equivalents as of December 31, 2023, consisted of $32.6 million held by U.S.-based entities and $125.8 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that our sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.
Included in cash and cash equivalents is cash that was collected on behalf of, and remains payable to, third-party clients. The balance of cash held for clients was $16.0 million and $17.8 million as of December 31, 2023 and 2022, respectively.
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.
Future Contractual Cash Obligations
The following table summarizes our future contractual cash obligations as of December 31, 2023 ( in thousands ):
Payment Due By Period
Contractual Obligations Total Less
Than
1 Year 1 – 3 Years 3 – 5 Years More
Than
5 Years
Principal payments on debt $ 3,355,729 $ 39,426 $ 1,054,381 $ 2,030,651 $ 231,271
Estimated interest payments (1)
736,153 198,539 372,479 160,535 4,600
Finance leases 2,922 2,013 867 42 —
Operating leases 95,466 17,941 33,183 24,925 19,417
Purchase commitments on receivable portfolios
384,576 346,426 38,150 — —
Total contractual cash obligations (2)
$ 4,574,846 $ 604,345 $ 1,499,060 $ 2,216,153 $ 255,288
________________________
(1) Estimated interest payments are calculated based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of December 31, 2023 for variable rate debt, timing of scheduled payments and the term of the debt obligations.
(2) We had approximately $8.2 million of liabilities and accrued interests related to uncertain tax positions as of December 31, 2023. We are unable to reasonably estimate the timing of the cash settlement with the tax authorities due to uncertainties related to these tax matters and, as a result, these obligations are not included in the table. See “Note 11: Income Taxes” in the notes to our consolidated financial statements for additional information on our uncertain tax positions.
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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. “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.
We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates and such differences may be material. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors.
Investment in Receivable Portfolios and Related Revenue
Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. Our static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. We further group these static pools by geographic location. Once a pool is established, the portfolios will remain in the designated pool unless the underlying risk characteristics change. The purchase EIR of a pool will not change over the life of the pool even if expected future cash flows change.
Revenue is recognized for each static pool over the economic life of the pool. We make significant assumptions in determining the economic life of a pool, including the reasonable and supportable economic forecast period based on asset type and geography, which considers the availability of forward-looking scenarios and their respective time horizons. In general, we forecast recoveries over one or two years prior to reverting to historical averages at an estimate-level over the remaining life using various methodologies depending on the asset type and geography. The speed at which forecasts revert varies based on the spread between the forecast period and historical data. In addition, estimated recoveries include a qualitative component, which generally reflects management’s assessment of macroeconomic environment. 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) 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. Factors that may change the expected future recoveries may include both internal as well as external factors. Internal factors include operational performance, such as capacity and the productivity of our collection staff. External factors that may have an impact on our collections include macroeconomic conditions, new laws or regulations, and new interpretations of existing laws or regulations. See “Note 4: Investment in Receivable Portfolios, Net” to our consolidated financial statements for further discussion of investment in receivable portfolios.
Valuation of Goodwill and Other Intangible Assets
Business combinations typically result in the recording of goodwill and other intangible assets. The excess of the purchase price over the fair value assigned to the tangible and identifiable intangible assets, liabilities assumed, and noncontrolling interest in the acquiree is recorded as goodwill.
Goodwill is tested annually for impairment and in interim periods if events or changes in circumstances indicate that the assets may be impaired. 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.
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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.
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. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. An estimate of fair value can be affected by many assumptions that require significant judgment. 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.
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.
Income Taxes
We are subject to income taxes in multiple tax jurisdictions worldwide. 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 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. 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
Information regarding recent accounting pronouncements and the impact of those pronouncements, if any, on our consolidated financial statements is provided in this Annual Report in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies” to our consolidated financial statements.
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