What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-26 compared with 2024-02-21 · 198 added, 148 removed, 649 unchanged (35% of the section changed)

14 unchanged sentences

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.

We primarily 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.

10 unchanged sentences

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.

Additionally, we have a subsidiary 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.

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

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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.

As a result, we have generally 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.

In Europe, our purchased defaulted debt portfolios primarily consist of credit card and consumer loan accounts.

We purchase 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.

As a result, we have generally 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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MCM (United States)

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

With lending reaching record levels and the highest U.S.

charge-off rate in ten years, supply remains elevated at a record level.

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.

Pricing in the fourth quarter remained at favorable levels as a result of elevated market supply.

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

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

The UK market for charged-off portfolios generally provides 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.

France and Spain continue to be two of the largest markets in Europe with significant portfolio sales.

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.

While we have seen sales activity across all of our European markets, underlying default rates are generally low by historic levels, and consumer lending volumes have stagnated.

Sales levels are expected to fluctuate from quarter to quarter.

general, portfolio pricing remains competitive across our European footprint, constraining the amount of capital we can deploy in Europe.

Purchases by Geographic Location

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Total purchases of receivable portfolios $ 1,352,035 $ 1,073,812 $ 800,507

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

In the United States, capital deployment increased during both the year ended December 31, 2024, as compared to 2023, and during the year ended December 31, 2023, as compared to 2022.

The majority of our deployments in the U.S.

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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.

were robust as supply increased and pricing remained at favorable levels.

In Europe, capital deployment increased during both the year ended December 31, 2024, as compared to 2023, and during the year ended December 31, 2023, as compared to 2022.

Pricing continues to remain competitive in our European footprint;

constraining the amount of capital we can deploy in Europe.

Capital deployment stayed relatively limited during the nine months ended September 30, 2024.

During the fourth quarter of 2024, we made three large spot purchases totaling approximately $145.4 million and as a result, capital deployment increased by $93.9 million during the year ended December 31, 2024, as compared to the year ended December 31, 2023.

Collections from Purchased Receivables by Channel and Geographic Location

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Total collections from purchased receivables $ 2,162,478 $ 1,862,567 $ 1,911,537

Gross collections from purchased receivables increased by $299.9 million, or 16.1%, to $2,162.5 million during the year ended December 31, 2024, from $1,862.6 million during the year ended December 31, 2023.

The increase in collections in the United States was primarily a result of consistent increases in capital deployments in the United States in recent years.

increase in collections from purchased receivables in Europe was primarily due to the acquisition of portfolios with higher returns in recent periods.

Additionally, collections in Europe were favorably impacted by foreign currency translation by approximately $10.5 million, during the year ended December 31, 2024, primarily as a result of the weakening of the U.S.

dollar against the British Pound by approximately 2.7% for the year ended December 31, 2024 as compared to the year ended December 31, 2023.

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.

Results of Operations

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Goodwill impairment 100,600 7.6 % 238,200 19.5 % — — %

Impairment of intangible assets

18,726 1.5 % 4,075 0.3 % — — %

Impairment of assets 18,544 1.4 % 18,726 1.5 % 4,075 0.3 %

Total operating expenses 1,159,031 87.9 % 1,206,145 98.5 % 936,173 66.9 %

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Loss on extinguishment of debt (7,832) (0.6) % — — % — — %

Other income (expense) 5,078 0.3 % 2,123 0.1 % (17,784) (1.1) %

Other income 6,832 0.4 % 5,078 0.3 % 2,123 0.1 %

Total other expense (253,545) (19.4) % (196,799) (16.2) % (151,185) (10.9) %

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Net (loss) income $ (139,244) (10.6) % $ (206,492) (16.8) % $ 194,564 13.9 %

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 %

Comparison of Results of Operations

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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.

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.

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 1,302,567 1,204,437 98,130 8.1 %

Recoveries (below) above forecast

Recoveries above (below) forecast

78,202 (33,405) 111,607

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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.

Our revenue was favorably impacted by foreign currency translation by approximately $6.2 million, during the year ended December 31, 2024, primarily as a result of the weakening of the U.S.

dollar against the British Pound by approximately 2.7% for the year ended December 31, 2024 as compared to the year ended December 31, 2023.

The increase in revenue recognized from portfolio basis during the year ended December 31, 2024, as compared to the year ended December 31, 2023, was primarily due to a higher portfolio basis ( i.e.

a higher investment in receivable balance) in the U.S.

driven by a consistent higher volume of purchases in recent years.

Recoveries above or below forecast represent over and under-performance in the reporting period, respectively and are expected to vary from period to period.

Collections over-performed the forecasted collections by approximately $78.2 million during the year ended December 31, 2024.

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

The over and under performance in the periods presented represented only a small fraction of total collections in the corresponding periods.

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.

During the fourth quarter of 2024, we deployed a new U.K.

forecasting model that develops expected future recoveries for investment in receivable portfolios at Cabot.

The new model update was primarily driven by recent changes in Cabot as it continues to acquire portfolios that have more dynamic characteristics and are better forecasted utilizing a model that processes data inputs at a more granular level.

As part of the new model development process, management updated certain model inputs driven by collection experience, operational performance and recent changes in collection strategies.

This new forecasting model was applied to all vintages, which resulted in a change in the estimate of expected future recoveries.

This change in accounting estimate reduced Cabot’s estimated remaining collections by $361.6 million, which when discounted to present value, resulted in a negative change in expected future recoveries of $75.3 million.

Additionally, we recognized approximately $22.2 million of negative changes in expected future recoveries resulting from the sale of our investment in receivable portfolios associated with the exit of our Italian debt purchasing and recovery business in November 2024.

These significant changes in expected recoveries at Cabot during the fourth quarter of 2024, combined with changes driven by recurring reassessments of the expected future recoveries, reduced Cabot’s total estimated remaining collections by $452.9 million, which when discounted to present value, resulted in a net negative change in expected future recoveries of $129.1 million during the fourth quarter of 2024.

As a result of all the above during the fourth quarter, and the negative changes recorded during the previous quarters in 2024, we recorded a total net negative change in expected future recoveries of approximately $167.9 million during the year ended December 31, 2024.

We recorded approximately $49.1 million in net negative change in expected future recoveries during the year ended December 31, 2023.

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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471,838 277,750 16,152 610,793 3.3 %

2024 238,635 173,924 23,821 954,105 3.4 %

Subtotal 1,571,654 931,420 60,529 2,329,356 3.6 %

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2023 89,799 39,774 (3,124) 187,267 1.5 %

2024 50,469 28,759 361 321,419 2.2 %

Subtotal 588,031 371,147 (152,497) 1,430,182 2.1 %

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_______________________

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

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

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

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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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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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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.

Servicing revenues and other revenues remained relatively consistent during the year ended December 31, 2024, as compared to the year ended December 31, 2023.

Operating Expenses

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100,600 238,200 (137,600) (57.8) %

Impairment of intangible assets

Impairment of assets

18,544 18,726 (182) (1.0) %

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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.

Our operating expenses were unfavorably impacted by foreign currency translation by approximately $7.2 million, during the year ended December 31, 2024, primarily as a result of the weakening of the U.S.

dollar against the British Pound by approximately 2.7% for the year ended December 31, 2024 as compared to the year ended December 31, 2023.

Operating expenses are explained in more detail as follows:

1 unchanged sentence

The increase in salaries and employee benefits during the year ended December 31, 2024, compared to the year ended December 31, 2023, 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.

• An increase in salaries and bonus of approximately $22.6 million primarily due to an increase in overall average headcount and general increase in wage during the year ended December 31, 2024 as compared to 2023;

• An increase in employee benefits and payroll taxes of approximately $8.6 million.

Cost of Legal Collections

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Total cost of legal collections $ 259,298 $ 224,252 $ 35,046 15.6 %

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.

The increase in cost of legal collections during the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily due to an increase in court costs due to increased legal placements in this channel in the U.S.

The increase was partially offset by decreased contingent fees paid to our external network of attorneys as we grow our legal collection activities through our internal legal channel.

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;

• 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.

The increase in general and administrative expenses during the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily due to the following reasons:

• An increase in information technology expenses of approximately $8.9 million;

• An increase in consulting fees of approximately $4.5 million;

• An increase in miscellaneous general and administrative related expenses of approximately $3.8 million.

Other Operating Expenses

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

The increase in other operating expenses during the year ended December 31, 2024, compared to the year ended December 31, 2023, was primarily due to an increase in postage and printing expenses of approximately $10.3 million and an increase in costs relating to skip tracing of approximately $7.1 million.

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

Collection agency commissions decreased by approximately $5.1 million during the year ended December 31, 2024, compared to the year ended December 31, 2023.

The decrease was primarily due to fewer accounts placed with external agencies and favorable commission rates received from such agencies in Europe.

Depreciation and Amortization

1 unchanged sentence

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.

During the fourth quarter of 2024, we performed our annual goodwill impairment assessment as of October 1, 2024, which did not result in any goodwill impairment charge.

Subsequent to the annual goodwill impairment test, we significantly lowered the estimated future recoveries for our investment in receivable portfolios at Cabot during the fourth quarter of 2024, management considered this a triggering event and conducted another quantitative test for goodwill impairment as of December 31, 2024.

This subsequent goodwill impairment analysis resulted in an impairment charge for the Cabot reporting unit of $100.6 million.

The decline in the fair value of the Cabot reporting unit below its carrying value primarily resulted from changes in expected future cash flows as compared to our previous financial forecasts, and to a lesser extent, a decline in market multiples.

We also recorded a goodwill impairment charge of $238.2 million during the year ended December 31, 2023.

No triggering events were identified during the interim periods between the two annual goodwill impairment tests.

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.

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

Impairment of Assets

During the fourth quarter of 2024, we tested for impairment of our long-lived assets held at our servicing business and recorded an impairment charge relating to the computer systems of approximately $18.5 million.

Refer to “Property and Equipment, Net” in “Note 5:

Composition of Certain Financial Statement Items” to our consolidated financial statements for further details.

We recorded an impairment charge of $18.7 million for our acquired definite-lived intangible assets during the year ended December 31, 2023.

Refer to “Note 15:

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

Interest Expense

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• The effect resulting from increased average debt balance of approximately $25.2 million;

• An unfavorable impact of foreign currency translation of approximately $1.6 million driven by the weakening of the U.S.

dollar against the British Pound.

Loss on Extinguishment of Debt

Loss on extinguishment of debt associated with write-offs of unamortized debt discount and debt issuance costs relating to the early redemptions of our senior secured notes and the refinancing of the Cabot Securitisation Senior Facility was $7.8 million during the year ended December 31, 2024.

Refer to “Note 6:

Borrowings” in the notes to our consolidated financial statements for details of our financing activities.

Other Income (Expense)

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Other income was $6.8 million and $5.1 million during the years ended December 31, 2024 and 2023, respectively.

Interest income included in other income, net of other expense, was approximately $7.0 million and $4.7 million during the years ended December 31, 2024 and 2023, respectively.

Provision for Income Taxes

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State provision (5.7) % (3.0) %

Foreign rate differential (2.8) % 0.6 %

Change in valuation allowance (1)

(32.2) % 7.3 %

Goodwill impairment (2)

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

(22.4) % (28.3) %

Taxable gain in foreign jurisdiction (3)

Nondeductible compensation (1.2) % (0.6) %

Return to provision adjustments (1.3) % 0.6 %

Forfeit benefit due to merger/liquidations (4)

(2.7) % (0.3) %

Effective rate (44.7) % (14.5) %

________________________

(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.

(1) The change in valuation allowance during the year ended December 31, 2024 reflected certain foreign subsidiaries’ operating losses.

The change in valuation allowance during the year ended December 31, 2023 was primarily due to the forfeit of tax benefits on merger or liquidation of foreign subsidiaries that maintained full valuation allowances on their deferred tax assets.

(2) During the years ended December 31, 2024 and 2023, we recorded a non-cash goodwill impairment charge of $100.6 million and $238.2 million at our Cabot reporting unit, respectively.

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.

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

(3) Represents taxable foreign currency movement recognized in a foreign subsidiary.

(4) Represents the forfeit of tax benefits on merger or liquidation of foreign subsidiaries that maintained full valuation allowances on their deferred tax assets during the year ended December 31, 2023.

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.

19 unchanged sentences

Net gain on derivative instruments (1)

(267) (3,170) —

Stock-based compensation expense 14,012 13,854 15,402

2 unchanged sentences

Goodwill impairment (3)

Impairment of intangible assets (3)

100,600 238,200 —

Impairment of assets (3)

18,544 18,726 4,075

Adjusted EBITDA $ 332,928 $ 333,615 $ 529,632

7 unchanged sentences

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.

(3) During the years ended December 31, 2024 and 2023, we recorded a non-cash goodwill impairment charge of $100.6 million and $238.2 million, respectively.

We recorded a non-cash impairment of long-lived assets of $18.5 million and a non-cash impairment of intangible assets of $18.7 million during the years ended December 31, 2024 and 2023, respectively.

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.

Goodwill and Identifiable Intangible Assets” and “Property and Equipment, Net” in “Note 5:

Composition of Certain Financial Statement Items” to our consolidated financial statements for further details.

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

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89,740 82,530 (93,145)

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

Other proceeds applied to basis

54,579 35,620 19,231

Collections applied to principal balance $ 1,004,230 $ 776,280 $ 635,262

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(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

As of December 31, 2024, ERC for 84-month was:

United States $ 4,729,938

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

(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.

(5) Real estate-owned assets (“REO”) ERC includes approximately $59.9 million and $0.6 million of estimated future cash flows for Europe and Other Geographies, respectively.

Estimated Future Collections Applied to Investment in Receivable Portfolios

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

Supplemental quarterly financial information

Financial highlights

Three Months Ended December 31,

(in thousands, except percentages and earnings per share) 2024 2023 Change

$ 554,595 $ 458,350 21%

$ 265,619 $ 277,387 (4)%

Portfolio purchases (1)

$ 495,144 $ 292,497 69%

Operating expenses

$ 399,809 $ 494,580 (19)%

GAAP net loss (2)

$ (225,307) $ (270,762) NM

GAAP loss per share (2)

$ (9.42) $ (11.40) NM

__________________

(1) Includes U.S.

purchases of $295.3 million and $208.5 million, and Europe purchases of $199.8 million and $84.0 million in Q4 2024 and Q4 2023, respectively.

(2) NM - Not meaningful.

Consolidated financial statements of operations

Three Months Ended December 31,

(in thousands)

Revenue from receivable portfolios $ 336,666 $ 304,892

Changes in recoveries (95,760) (52,476)

Total debt purchasing revenue 240,906 252,416

Servicing revenue 20,525 19,650

Other revenues 4,188 5,321

Total revenues 265,619 277,387

Operating expenses

Salaries and employee benefits 104,616 96,760

Cost of legal collections 68,989 56,727

General and administrative expenses 52,019 36,809

Other operating expenses 37,786 29,315

Collection agency commissions 8,288 9,074

Depreciation and amortization 8,967 8,969

Goodwill impairment 100,600 238,200

Impairment of assets 18,544 18,726

Total operating expenses 399,809 494,580

Loss from operations

(134,190) (217,193)

Other expense

Interest expense (68,498) (54,501)

Loss on extinguishment of debt (7,832) —

Other income (expense) 541 (2)

Total other expense (75,789) (54,503)

Loss before income taxes

(209,979) (271,696)

(Provision) benefit for income taxes (15,328) 934

Net loss $ (225,307) $ (270,762)

Liquidity and Capital Resources

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Net cash provided by operating activities $ 156,168 $ 152,991 $ 210,681

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

Net cash used in investing activities (440,430) (401,941) (130,235)

Net cash provided by (used in) financing activities 317,774 268,300 (107,445)

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Net cash provided by operating activities was $156.2 million, $153.0 million, and $210.7 million during the years ended December 31, 2024, 2023, and 2022, 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.

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 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, 2024, we recorded a goodwill impairment of $100.6 million and an impairment of long-lived assets of $18.5 million.

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.

Changes in recoveries increased the operating cash flows by $89.7 million, and $82.5 million during the years ended December 31, 2024, and 2023, respectively.

Changes in recoveries decreased the operating cash flows by $93.1 million during the year ended December 31, 2022.

Refer to “Note 4:

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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.

Net cash used in investing activities was $440.4 million, $401.9 million, and $130.2 million during the years ended December 31, 2024, 2023, and 2022, respectively.

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

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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.

Net cash provided by financing activities was $317.8 million, and $268.3 million during the years ended December 31, 2024 and 2023, respectively.

Net cash used in financing activities was $107.4 million during the year ended December 31, 2022.

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

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Repayments of amounts outstanding under our credit facilities were $1,868.1 million, $989.6 million, and $515.7 million during the years ended December 31, 2024, 2023, and 2022, 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, 2024, we issued $1.0 billion in senior secured notes (of which $500.0 million matures in 2029 and $500.0 million matures in 2030).

We used a portion of the proceeds from the senior secured notes issuance to repay drawings under our Global Senior Facility.

Proceeds from the issuance of senior secured notes were $104.2 million during the year ended December 31, 2023.

Using drawings from its Global Senior Facility and cash on hand, we fully redeemed the Encore 2025 Notes and the Encore 2026 Notes in the fourth quarter of 2024.

The total repayments of senior secured notes were $789.1 million, $39.1 million, and $39.1 million during the years ended December 31, 2024, 2023, and 2022, respectively.

Additionally, in connection with the early redemptions of the Encore 2025 Notes and the Encore 2026 Notes, we settled the corresponding 2020 Euro Swaps and the 2023 GBP Swaps on the respective loan redemption date for approximately $40.0 million in cash.

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.

We repaid $221.2 million of convertible senior notes using cash on hand during the year ended December 31, 2022.

Capital Resources

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Available capacity under our Global Senior Facility was $402.8 million as of December 31, 2024.

In March 2024, we issued $500.0 million in aggregate principal amount of 9.250% Senior Secured Notes due 2029 at an issue price of 100.000% through a private placement offering.

Additionally, in May 2024, we issued $500.0 million in aggregate principal amount of 8.500% Senior Secured Notes due 2030 at an issue price of 100.000% through a separate private placement offering.

In October 2024, we fully redeemed the Encore 2025 Notes at par using drawings from our Global Senior Facility and cash on hand.

The Global Senior Facility was subsequently upsized by $92.0 million from $1,203.0 million to $1,295.0 million in October 2024.

In November, 2024, we fully redeemed the Encore 2026 Senior Secured Notes at par using drawings from our Global Senior Facility and cash on hand.

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

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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.

We did not make any repurchases under the share repurchase program during the years ended December 31, 2023 and 2024.

As of December 31, 2024, we had remaining authority to purchase $91.9 million of our common stock.

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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.

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 also includes all revenue from zero basis portfolio (“ZBA”) collections, and

(2) Changes in recoveries, 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;

(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).

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

During the fourth quarter of 2024, we deployed a new U.K.

forecasting model that develops expected future recoveries for investment in receivable portfolios at Cabot.

As part of the new model development process, management updated certain model inputs driven by collection experience, operational performance and recent changes in collection strategies.

This new forecasting model was applied to all vintages, which resulted in a change in the estimate of expected future recoveries.

This change in estimate had no effect on past periods.

We develop a “best estimate” of our expected future recoveries based on reasonable and supportable information at each reporting period.

We evaluate our estimates in light of developing information.

Future changes to internal and external factors that affect our collection forecasts could have a material adverse effect on our financial condition, results of operations, and cash flows.

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

Valuation of Goodwill

Business combinations typically result in the recording of goodwill and other intangible assets.

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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.

Goodwill and Identifiable Intangible Assets” to our consolidated financial statements, we performed goodwill impairment tests in the fourth quarter of 2024 and recorded a goodwill impairment charge of $100.6 million at our Cabot reporting unit.

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

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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.

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.

The goodwill balance relating to the MCM, Cabot, and LAAP reporting units was $148.9 million, $347.6 million, and $11.3 million, respectively, as of December 31, 2024.

Recent Accounting Pronouncements

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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