ENCORE CAPITAL GROUP, INC. This Quarterly Report on Form 10-Q contains "forward-looking statements" relating toEncore 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, financing needs or plans or the impacts of COVID-19, 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 our Annual Report on Form 10-K under "Part I, Item 1A-Risk Factors" and those set forth in "Part II, Item 1A, Risk Factors" of this Quarterly Report 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 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. 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.Encore Capital Group, Inc. ("Encore") has three primary business units: MCM, which consists ofMidland Credit Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists ofCabot Credit Management Limited ("CCM") and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations inLatin America andAsia-Pacific . MCM (United States ) Through MCM we are a market leader in portfolio purchasing and recovery inthe United States , includingPuerto Rico . Cabot (Europe ) Through Cabot we are one of the largest credit management services providers inEurope and a market leader in theUnited Kingdom andIreland . 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 throughWescot Credit Services Limited ("Wescot"), a leadingU.K. contingency debt collection and BPO services company. LAAP (Latin America andAsia-Pacific ) We have purchased non-performing loans inColombia ,Peru ,Mexico andBrazil (which was sold inApril 2020 ). Additionally, we have invested inEncore Asset Reconstruction Company ("EARC") inIndia . 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 inthe United States andUnited Kingdom and strengthening and developing our business in the rest ofEurope . 27 -------------------------------------------------------------------------------- Table of Contents Recent Developments InMarch 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns (including court closures in certain jurisdictions). While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations for an indefinite period of time. Although such disruptions did not have a material effect on our day-to-day operations for the first quarter of 2020, they are having an adverse impact on our ability to collect and are expected to delay a portion of our near-term collections on purchased receivable portfolios. Therefore, in accordance with the new accounting standard for Financial Instruments - Credit Losses ("CECL"), we have updated our expectations of timing of future collections primarily as a result of COVID-19, the financial impact of which materially impacted our results of operations. Government Regulation There have been various governmental actions taken, or proposed, in response to the COVID-19 pandemic, such as limiting debt collections efforts and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees. In addition, in certain jurisdictions courts have closed and/or government actions have affected the litigation process. Government actions have not been consistent across jurisdictions and the efficacy and ultimate effect of such actions is not known. We continue to monitor federal, state and international regulatory developments in relation to COVID-19 and their potential impact on our operations. MCM (United States) As discussed in more detail under "Part I - Item 1 - Business - Government Regulation" contained in our Annual Report on Form 10-K, ourU.S. debt purchasing business and collection activities 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. Cabot (Europe ) As discussed in more detail under "Part I - Item 1 - Business - Government Regulation" contained in our Annual Report on Form 10-K, our operations inEurope 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) Inthe United States , the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt portfolios. A small percentage of our capital deployment inthe United States comprises 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 domestic business. These methods and models allow us to value portfolios accurately (and limit 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 inthe United States . Cabot (Europe) InEurope , our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan accounts. We also purchase certain secured mortgage portfolios and portfolios that are in insolvency status, in particular, individual voluntary arrangements. We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows us to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future collections. As a result, we have been able to realize significant returns from the assets 28 -------------------------------------------------------------------------------- Table of Contents we have acquired. We maintain strong relationships with many of the largest financial services providers in theUnited Kingdom and continue to expand in theUnited Kingdom and the rest ofEurope with our acquisitions of portfolios and other credit management services providers. Purchases and Collections Portfolio Pricing, Supply and Demand MCM (United States ) Industry delinquency and charge-off rates have continued to increase, creating higher volumes of charged-off accounts that are sold. In addition, 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. Meanwhile pricing in the first quarter remained favorable. In addition to selling a higher volume of charged-off accounts, issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year. We are closely monitoring the impacts of COVID-19 on pricing and supply as well as collections and cost-to-collect. We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace. We believe this favors larger participants, such as Encore, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements. Cabot (Europe ) TheU.K. market for charged-off portfolios has generally provided a relatively consistent pipeline of opportunities over the past few years, despite an ongoing historic low level of charge-off rates, as creditors have embedded debt sales as an integral part of their business models and consumer indebtedness has continued to grow since the financial crisis. The Spanish debt market continues to be one of the largest inEurope with a significant amount of debt to be sold and serviced. In particular, we anticipate strong debt purchasing and servicing opportunities in the secured and small and medium enterprise asset classes given the backlog of non-performing debt that has accumulated in these sectors. Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should further increase debt purchasing opportunities inSpain . Across all of our European markets, we are closely monitoring the impacts of COVID-19 on pricing and supply of portfolios to purchase. Due to the COVID-19 pandemic, banks have paused portfolio sales to address customers' needs. As a result, we expect a lower level of supply available for purchase in the near-term. Purchased Receivables by Geographic Location The following table summarizes the geographic locations of receivable portfolios we purchased during the periods presented (in thousands): Three Months Ended March 31, 2020 2019 MCM (United States)$ 185,252 $ 174,227 Cabot (Europe) 28,861 83,640 Other geographies - 4,468 Total purchases$ 214,113 $ 262,335 During the three months endedMarch 31, 2020 , we invested$214.1 million to acquire receivable portfolios, with face values aggregating$1.7 billion , for an average purchase price of 12.6% of face value. The amount invested in receivable portfolios decreased$48.2 million , or 18.4%, compared with the$262.3 million invested during the three months endedMarch 31, 2019 , to acquire receivable portfolios with face values aggregating$1.7 billion , for an average purchase price of 15.1% of face value. Inthe United States , capital deployment increased during the three months endedMarch 31, 2020 , as compared to the corresponding periods in the prior year. The majority of our deployments in theU.S. are in forward flow agreements, and the timing, contract duration, and volumes for each contract can fluctuate leading to variation when comparing to prior periods. 29 -------------------------------------------------------------------------------- Table of Contents InEurope , capital deployment during the three months endedMarch 31, 2020 decreased as compared to the corresponding periods in the prior year. The decreases were primarily the result of a relatively limited supply of portfolios in the quarter and a continuation of our selective purchasing process in conjunction with a plan to reduce European debt leverage over time. The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios. Collections from Purchased Receivables by Channel and Geographic Location We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from third-party collection agencies that we utilize when we believe they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. The collection agencies channel also includes collections on accounts purchased where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection channels. The following table summarizes the total collections from receivable portfolios by collection channel and geographic area (in thousands): Three Months Ended March 31, 2020 2019 MCM (United States ): Call center and digital collections$ 214,238 $ 185,255 Legal collections 158,026 141,036 Collection agencies 2,465 3,303 Subtotal 374,729 329,594 Cabot (Europe): Call center and digital collections 63,789 62,665 Legal collections 42,900 50,658 Collection agencies 37,414 47,477 Subtotal 144,103 160,800 Other geographies: Call center and digital collections - 10,200 Legal collections - 1,530 Collection agencies 8,447 11,729 Subtotal 8,447 23,459 Total collections from purchased receivables$ 527,279
Gross collections from purchased receivables increased by$13.4 million , or 2.6%, to$527.3 million during the three months endedMarch 31, 2020 , from$513.9 million during the three months endedMarch 31, 2019 . The increase of gross collections was attributable to increased collections inthe United States , offset by decreases in collections inEurope and other geographies. The increase of collections from purchased receivables inthe United States was primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection capacity, and our continued effort in improving liquidation. Our consumer centric collection approach and our capacity buildup are driving a higher proportion of call center collections compared to legal collections inthe United States . The decrease in collections from purchased receivables inEurope was primarily due to a reduced level of capital deployment in recent periods in conjunction with our plan to reduce European debt leverage over time, the impacts of COVID-19, and the unfavorable impact of foreign currency translation, which was primarily the result of the strengthening of theU.S. dollar against the British Pound. The decrease in collections from purchased receivables in other geographies was primarily due to the sale of our wholly-owned subsidiary Baycorp inAugust 2019 . 30 -------------------------------------------------------------------------------- Table of Contents COVID-19 and the resulting containment measures, including impacts to the legal collections process, negatively affected collections beginning in lateMarch 2020 and could continue to affect collections and related costs depending on the duration and severity of the resulting containment measures. Results of Operations Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows (in thousands, except percentages):
Three Months Ended
2020 2019
Revenues
Revenue from receivable portfolios$ 357,365 123.6 %$ 311,158 89.7 % Changes in expected current and future recoveries (98,661) (34.1) % - - % Servicing revenue 28,680 9.9 % 34,023 9.8 % Other revenues 1,697 0.6 % 529 0.1 % Total revenues 289,081 100.0 % 345,710 99.6 % Allowance reversals on receivable portfolios, net 1,367 0.4 % Total revenues, adjusted by net allowances 347,077 100.0 % Operating expenses Salaries and employee benefits 93,098 32.2 % 91,834 26.5 % Cost of legal collections 66,279 22.9 % 49,027 14.1 % Other operating expenses 27,164 9.4 % 29,614 8.5 % Collection agency commissions 13,176 4.6 % 16,002 4.6 % General and administrative expenses 31,877 11.0 % 39,547 11.4 % Depreciation and amortization 10,285 3.6 % 9,995 2.9 % Total operating expenses 241,879 83.7 % 236,019 68.0 % Income from operations 47,202 16.3 % 111,058 32.0 % Other expense Interest expense (54,662) (18.9) % (54,967) (15.8) % Other income (expense) 1,439 0.5 % (2,976) (0.9) % Total other expense (53,223) (18.4) % (57,943) (16.7) % (Loss) income before income taxes (6,021) (2.1) % 53,115 15.3 % Provision for income taxes (4,558) (1.6) % (3,673) (1.1) % Net (loss) income (10,579) (3.7) % 49,442 14.2 % Net loss (income) attributable to noncontrolling interest 125 0.1 % (188) (0.1) % Net (loss) income attributable to Encore Capital Group, Inc. stockholders$ (10,454) (3.6) %$ 49,254 14.1 % 31
-------------------------------------------------------------------------------- Table of Contents Results ofOperations-Cabot Credit Management Limited The following table summarizes the operating results contributed by CCM (which does not consolidate the results of its European affiliate Grove Europe S.á r.l.) during the periods presented (in thousands): Three Months Ended March 31, 2020 2019 Total revenues$ 79,964 $ 129,012 Total operating expenses (75,239) (70,499) Income from operations 4,725 58,513 Interest expense (30,495) (28,955) Other income (expense) 1,700 (302) (Loss) income before income taxes (24,070) 29,256 Benefit (provision) for income taxes 2,094 (5,431) Net (loss) income (21,976) 23,825 Net loss (income) attributable to noncontrolling interest 125 (188)
Net (loss) income attributable to
$ (21,851) $ 23,637 32
-------------------------------------------------------------------------------- Table of Contents Comparison of Results of Operations Revenues Our revenues primarily include revenue recognized from engaging in debt purchasing and recovery activities. EffectiveJanuary 1, 2020 , we adopted the CECL accounting standard. Under CECL, we apply our charge-off policy and fully write-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables we acquire immediately after purchasing the portfolio. We then record a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as "Investment in receivable portfolios, net" in our consolidated statements of financial condition. The discount rate is an effective interest rate (or "purchase EIR") established based on the purchase price of the portfolio and the expected future cash flows at the time of purchase. Revenue generated by such activities primarily includes two components: (1) the accretion of the discount on the negative allowance due to the passage of time, which is included in "Revenue from receivable portfolios" and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries and presented in our consolidated statements of operations as "Changes to expected current and future recoveries." Certain pools already fully recovered their cost basis and became zero basis portfolios ("ZBA") prior to our adoption of CECL. We did not establish negative allowance for these pools as we elected theTransition 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. 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 inEurope and LAAP. Other revenues also include gains recognized on transfers of financial assets. Under the previous accounting standard for purchased credit deteriorated assets, we incurred allowance charges when actual cash flows from our receivable portfolios underperform compared to our expectations or when there was a change in the timing of cash flows. We also recorded allowance reversals on pool groups that have historic allowance reserves when actual cash flows from these receivable portfolios outperform our expectations. 33 -------------------------------------------------------------------------------- We have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The following table summarizes revenues for the periods presented (in thousands): Three months ended March 31, 2020 2019 $ Change % Change
Revenue recognized from portfolio basis
$ 55,514 19.5 % ZBA revenue 16,550 25,857 (9,307) (36.0) % Revenue from receivable portfolios 357,365 311,158 46,207 14.9 % Changes in expected current period recoveries 10,315 Changes in expected future period recoveries (108,976) Changes in expected current and future recoveries (98,661) Servicing revenue 28,680 34,023 (5,343) (15.7) % Other revenues 1,697 529 1,168 220.8 % Total revenues$ 289,081 $ 345,710 $ (56,629) (16.4) % Allowance reversals on receivable portfolios, net(1) 1,367 Total revenues, adjusted by net allowances$ 347,077
________________________
(1)Amount includes$2.3 million of allowance reversals for zero-basis portfolios. Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than ourU.S. dollar reporting currency. The strengthening of theU.S. dollar relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of theU.S. dollar relative to other foreign currencies has a favorable impact on our international revenues. Our revenues were unfavorably impacted by foreign currency translation, primarily by the strengthening of theU.S. dollar against the British Pound by 1.8% during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . The increase in revenue recognized from portfolio basis was primarily due to (1) higher portfolio basis used to calculate revenue, (2) higher expected total future cash flows resulting from a change in expected economic life of static pool groups based on a lifetime expected recovery model upon the adoption of CECL, which led to increased EIR, and (3) increased expected total future cash flows resulting from a change in our accounting policy for court costs, under our new accounting policy, all future expected cash flows, including the expected total recoveries in our legal channel, are included in the initial curve in the establishment of negative allowance, which in turn, increased the EIR. As discussed above, ZBA revenue represents collections from our legacy ZBA pools, we expect our ZBA revenue continue to decline as we collect on these legacy pools. Since our forecast period is on a rolling 15 year basis after the adoption of CECL, we do not expect to have new ZBA pools in the future. Under CECL, changes to expected current period recoveries represent over and under-performance in the reporting period. Due to our sustained improvements in portfolio collections driven by liquidation improvement initiatives, collections during the three months endedMarch 31, 2020 outperformed the projected cash flows, the over-performance was partially offset by a slight shortfall of collections in March. We believe such shortfall was primarily the result of the COVID-19 pandemic. During the three months endedMarch 31, 2020 , we reassessed our future forecasts of expected recoveries of receivable portfolios based on our best estimate of the potential impact arising from the COVID-19 pandemic. The updated forecasts changed the timing of future recoveries by reducing the forecasted cash flows in 2020. The majority of the shortfall in near-term cash flows is expected to be recovered in 2021 and most of the rest of the shortfall is expected be recovered in subsequent periods. As a result, the change in the total amount of estimated remaining collections ("ERC") was negligible. The delay in expected future cash flows, when discounted to present-value, resulted in a provision for credit loss adjustment of approximately$109.0 million during the three months endedMarch 31, 2020 . The circumstances around this pandemic are evolving rapidly and will continue to impact our business and our estimation of expected recoveries in future periods. We will continue to monitor the COVID-19 situation closely and update our assumptions accordingly. 34 -------------------------------------------------------------------------------- The following tables summarize collections from purchased receivables, revenue from receivable portfolios, end of period receivable balance and other related supplemental data, by year of purchase (in thousands, except percentages): Three Months Ended March 31, 2020 As of March 31, 2020 Revenue from Changes in Expected Investment in Receivable Current and Future Receivable Collections Portfolios Recoveries Portfolios Monthly EIR United States: ZBA$ 15,274 $ 15,274 $ - $ - - % 2011 7,249 6,865 (215) 2,021 88.6 % 2012 8,495 7,664 (480) 4,795 42.0 % 2013 17,687 18,136 (3,984) 11,564 40.5 % 2014 14,591 10,089 (2,026) 44,820 6.7 % 2015 18,302 9,309 (1,079) 73,901 3.8 % 2016 33,377 16,785 (2,412) 133,941 3.8 % 2017 55,435 30,850 (1,103) 178,176 5.2 % 2018 89,418 46,938 (15,629) 362,553 3.8 % 2019 102,534 72,048 (2,104) 601,892 3.8 % 2020 12,367 8,175 (5,010) 176,543 3.6 % Subtotal 374,729 242,133 (34,042) 1,590,206 4.4 % Europe: ZBA 58 58 - - - % 2013 25,259 22,262 (6,306) 215,495 3.2 % 2014 23,271 17,887 (4,972) 186,139 3.0 % 2015 15,173 11,189 (2,096) 143,275 2.4 % 2016 13,102 11,259 (11,028) 122,994 2.8 % 2017 23,494 15,696 (9,692) 260,314 1.9 % 2018 22,658 15,662 (22,493) 305,824 1.6 % 2019 20,106 14,292 (7,633) 240,124 1.8 % 2020 982 1,400 249 28,086 2.6 % Subtotal 144,103 109,705 (63,971) 1,502,251 2.3 % Other geographies: ZBA 1,218 1,218 - - - % 2014 (1) 1,174 545 (19) 47,819 100.2 % 2015 1,557 941 76 4,544 17.1 % 2016 971 686 (249) 3,391 5.1 % 2017 1,875 1,140 (323) 11,586 6.1 % 2018 1,580 955 (120) 5,986 3.7 % 2019 72 42 (13) 235 4.6 % 2020 - - - - - % Subtotal 8,447 5,527 (648) 73,561 67.7 % Total$ 527,279 $ 357,365 $ (98,661) $ 3,166,018 3.4 % ________________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
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Three Months Ended March 31, 2019 As of March 31, 2019
Net
Revenue from Reversal
Receivable (Portfolio Unamortized
Collections Portfolios Allowance) Balances Monthly EIR
United States :
ZBA(1) $ 25,531 $ 23,270 $ 2,267 $ - - %
2011 2,764 2,280 - 2,422 27.4 %
2012 7,336 6,096 273 8,994 20.2 %
2013 22,034 19,179 (52) 22,838 25.6 %
2014 19,667 10,822 1,090 65,813 5.0 %
2015 24,968 10,196 - 109,436 2.8 %
2016 47,454 20,653 (896) 208,176 3.0 %
2017 77,294 35,626 - 279,667 3.8 %
2018 94,281 52,674 - 527,432 3.1 %
2019 8,265 5,892 - 171,684 3.2 %
Subtotal 329,594 186,688 2,682 1,396,462 3.8 %
Europe:
ZBA(1) 91 91 - - - %
2013 30,110 23,297 - 247,509 3.1 %
2014 28,120 19,679 (175) 228,433 2.7 %
2015 19,509 11,147 (256) 177,460 2.0 %
2016 16,823 11,279 (29) 157,254 2.4 %
2017 32,302 17,366 - 333,760 1.7 %
2018 30,079 18,991 - 418,012 1.5 %
2019 3,766 2,993 - 83,741 1.6 %
Subtotal 160,800 104,843 (460) 1,646,169 2.1 %
Other geographies:
ZBA(1) 2,542 2,542 - - - %
2014 945 4,654 - 64,928 2.4 %
2015 5,410 4,418 - 18,667 7.3 %
2016 4,239 2,067 12 24,867 2.6 %
2017 4,757 2,927 - 30,071 3.2 %
2018 5,131 2,864 (867) 26,284 3.4 %
2019 435 155 - 4,139 3.5 %
Subtotal 23,459 19,627 (855) 168,956 3.3 %
Total $ 513,853 $ 311,158 $ 1,367 $ 3,211,587 2.9 %
________________________
(1)Zero basis revenue typically has a 100% revenue recognition rate. However,
collections on ZBA pool groups where a valuation allowance remains must first be
recorded as an allowance reversal until the allowance for that pool group is
zero. Once the entire valuation allowance is reversed, the revenue recognition
rate will become 100%.
The decrease in servicing revenues was primarily attributable to the sale of
Baycorp in August 2019 . Through Baycorp, we earned servicing revenues during the
three months ended March 31, 2019 , the decrease was also driven by unfavorable
impact of foreign currency translation, which was primarily the result of the
strengthening of the U.S. dollar against the British Pound.
The increase in other revenues was due to the increase in sale of real estate
assets that are acquired as a result of our investments in non-performing
secured residential mortgage portfolios in Europe and LAAP.
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Operating Expenses
The following table summarizes operating expenses for the periods presented (in
thousands):
Three Months Ended March 31,
2020 2019 $ Change % Change
Salaries and employee benefits $ 93,098 $ 91,834 $ 1,264 1.4 %
Cost of legal collections 66,279 49,027 17,252 35.2 %
Other operating expenses 27,164 29,614 (2,450) (8.3) %
Collection agency commissions 13,176 16,002 (2,826) (17.7) %
General and administrative expenses 31,877 39,547 (7,670) (19.4) %
Depreciation and amortization 10,285 9,995 290 2.9 %
Total operating expenses $ 241,879 $ 236,019 $ 5,860 2.5 %
Our operating results are impacted by foreign currency translation, which
represents the effect of translating operating results where the functional
currency is different than our U.S. dollar reporting currency. The strengthening
of the U.S. dollar relative to other foreign currencies has a favorable impact
on our international operating expenses, and the weakening of the U.S. dollar
relative to other foreign currencies has an unfavorable impact on our
international operating expenses. Our operating expenses were favorably impacted
by foreign currency translation, primarily by the strengthening of the U.S.
dollar against the British Pound by 1.8% for the three months ended March 31,
2020 compared to the three months ended March 31, 2019 .
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
The increase in salaries and employee benefits was primarily due to the
following reasons:
•Increase in salaries and employee benefits at our domestic sites as part of our
initiative to increase collections capacity; and
•Increased stock compensation due to larger expense reversals in the prior
period;
•Partially offset by a decrease in headcount in other geographies as a result of
the sale of Baycorp and the favorable impact of foreign currency translation,
primarily by the strengthening of the U.S. dollar against the British Pound.
Cost of Legal Collections
Cost of legal collections primarily includes contingent fees paid to our
external network of attorneys and the cost of litigation. We pursue legal
collections using a network of attorneys that specialize in collection matters
and through our internal legal channel. Under the agreements with our contracted
attorneys, we advance certain out-of-pocket court costs. Effective January 1,
2020 , we no longer capitalize upfront court costs and recognize a portion of
court costs as expense based on a loss-rate methodology, but rather, we expense
all court costs as incurred. 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.
Three months ended March 31,
2020 2019 $ Change % Change
Court costs $ 41,355 $ 20,479 $ 20,876 101.9 %
Legal collection fees 24,924 28,548 (3,624) (12.7) %
Total cost of legal collections $ 66,279 $ 49,027 $ 17,252 35.2 %
The increase in cost of legal collections was primarily due to the following
reasons:
•No longer capitalizing upfront court costs but rather expensing all court costs
as incurred;
•Partially offset by a decline in legal collection fees.
Other Operating Expenses
The decrease in other operating expenses was primarily due to the following
reasons:
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•The favorable impact of foreign currency translation, primarily by the
strengthening of the U.S. dollar against the British Pound;
•Reduced expenditures for temporary services; and
•Lower collection expenses primarily due to the sale of Baycorp in August 2019 .
Collection Agency Commissions
Collection agency commissions are predominately in Europe and Latin America and
vary from period to period depending on, among other things, the number of
accounts placed with an agency versus accounts collected internally.
Commissions, as a percentage of collections in this channel also vary from
period to period 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.
The decrease in collections agency commissions was primarily due to the
following reasons:
•Other geographies decreased due to progressive decrement of portfolio
collections during the period; and
•Europe decreased due to the favorable impact of foreign currency translation,
primarily by the strengthening of the U.S. dollar against the British Pound.
General and Administrative Expenses
The decrease in general and administrative expense was primarily due to the
following reasons:
•Reduced consulting fees and infrastructure costs at our domestic sites;
•Lower general and administrative expenses due to the sale of Baycorp in August
2019 ; and
•The favorable impact of foreign currency translation, primarily by the
strengthening of the U.S. dollar against the British Pound;
Depreciation and Amortization
The increase in depreciation and amortization expense was primarily due to the
following reasons:
•Increased depreciation expense primarily incurred at our domestic facilities;
•Partially offset by the favorable impact of foreign currency translation,
primarily by the strengthening of the U.S. dollar against the British Pound.
Interest Expense
The following table summarizes our interest expense (in thousands):
Three Months Ended
2020 2019 $ Change % Change
Stated interest on debt obligations $ 48,755 $ 48,318 $ 437 0.9 %
Amortization of loan costs 2,778 3,326 (548) (16.5) %
Amortization of debt discount 3,129 3,323 (194) (5.8) %
Total interest expense $ 54,662 $ 54,967 $ (305) (0.6) %
The decrease in interest expense was primarily due to the following reasons:
•Favorable impact of foreign currency translation, primarily by the
strengthening of the U.S. dollar against the British Pound;
•Lower balances on the Encore Term Loan Facility, Encore Senior Secured Notes,
and Cabot Credit Facilities;
•Decrease in London Interbank Offered Rate ("LIBOR") which resulted in decreased
interest expense for the Encore Revolving Credit Facility; and
•Partially offset by the effect from higher balances on the Encore Revolving
Credit Facility.
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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 $1.4 million during
the three months ended March 31, 2020 and other expense was $3.0 million during
the three months ended March 31, 2019 . The change in other income (expense) was
primarily due to the following reasons:
•Other income recognized during the three months ended March 31, 2020 based on
fair value changes for currency exchange forward contracts which are not
designated as hedge instruments for accounting purposes;
•Other expense recognized during the three months ended March 31, 2019 primarily
due to foreign currency exchange losses.
Provision for Income Taxes
We recorded income tax expense of $4.6 million on consolidated loss before
income taxes of $6.0 million during the three months ended March 31, 2020 and
income tax expense of $3.7 million on consolidated income before income taxes of
$53.1 million during the three months ended March 31, 2019 . The income tax
expense for the three months ended March 31, 2020 was primarily attributable to
the recording of valuation allowances in certain foreign jurisdictions that
incurred pre-tax losses. The income tax expense for the three months ended March
31, 2019 included a tax benefit of approximately $9.1 million related to a tax
accounting method change for revenue reporting approved by the Internal Revenue
Service during the period.
The effective tax rates for the respective periods are shown below:
Three Months Ended March 31,
2020 2019
Federal provision 21.0 % 21.0 %
State provision (15.6) % 2.5 %
Foreign income taxed at different rates(1) (3.2) % (0.9) %
Change in valuation allowance(2) (66.5) % 1.9 %
Change in tax accounting method(3) - % (17.1) %
Foreign currency remeasurement (6.4) % 0.2 %
Permanent items(4) (1.7) % 0.1 %
Other (3.3) % (0.8) %
Effective tax rate (75.7) % 6.9 %
________________________
(1)Relates primarily to the lower tax rates on the income or loss attributable
to international operations.
(2)Change in valuation allowance during 2020, recognized in the period under the
discrete method, is attributable to losses incurred at certain foreign
subsidiaries with cumulative operating losses for tax purposes.
(3)In 2019, includes tax benefit resulting from tax accounting method change.
(4)Represents a provision for nondeductible expenses.
We utilized the discrete effective tax rate method ("discrete method") for
recording income taxes for the three months ended March 31, 2020 . We believe the
use of the discrete method is more appropriate than the application of the
estimated annual effective tax rate ("AETR") method due to uncertainty in
estimating annual pre-tax earnings primarily due to the ongoing COVID-19
pandemic. We will re-evaluate the use of the discrete method each quarter until
it is deemed appropriate to return to the AETR method.
Our income tax expense includes deferred income taxes arising from temporary
differences between the financial reporting and tax bases of assets and
liabilities, and net operating losses. We regularly evaluate the realizability
of our deferred income tax assets and assess the need for a valuation allowance,
including considerations of whether it is more likely than not that the deferred
income tax assets will be realized. The assessment of realizability requires
significant judgement and our projections of future taxable income required to
fully realize the recorded amount of deferred tax assets reflect numerous
assumptions about our operating business and investments, and are subject to
change as conditions change specific to our operating business, investments or
general economic conditions. Adverse changes in certain jurisdictions could
result in the need to record or increase the valuation allowance, resulting in a
charge against earnings in the respective period.
Our subsidiary in Costa Rica is operating under a 100% tax holiday through
December 31, 2026 . The impact of the tax holiday in Costa Rica for the three
months ended March 31, 2020 and 2019, was immaterial.
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We had gross unrecognized tax benefits, inclusive of penalties and interest,
of $8.2 million as of March 31, 2020 . These unrecognized tax benefits, if
recognized, would result in a net tax benefit of $7.6 million as of March 31,
2020 . There was no material change in gross unrecognized tax benefits from
December 31, 2019 .
We have not provided for applicable income or withholding taxes on the
undistributed earnings from continuing operations for certain of its
subsidiaries operating outside of the United States . Undistributed net income of
these subsidiaries as of March 31, 2020 was approximately $117.1 million . Such
undistributed earnings are considered permanently reinvested. We do not provide
for deferred taxes on translation adjustments on unremitted earnings under the
indefinite reversal exemption. Determination of the amount of unrecognized
deferred tax liability related to these earnings is not practical due to the
complexities of a hypothetical calculation. Subsidiaries operating outside of
the United States for which we do not consider under the indefinite reversal
exemption have no material undistributed earnings or outside basis differences
and therefore no U.S. taxes have been provided.
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 Earnings (Loss) Per Share. Management uses non-GAAP adjusted net income
(loss) and adjusted earnings (loss) per share attributable to Encore to assess
operating performance and to highlight trends in our business that may not
otherwise be apparent when relying on financial measures calculated in
accordance with GAAP. Adjusted net income (loss) attributable to Encore excludes
non-cash interest and issuance cost amortization relating to our convertible
notes and exchangeable notes, acquisition, integration and restructuring related
expenses, amortization of certain acquired intangible assets and other charges
or gains that are not indicative of ongoing operations.
The following table provides a reconciliation between net income (loss) and
diluted earnings (loss) per share attributable to Encore calculated in
accordance with GAAP, to adjusted net income (loss) and adjusted earnings (loss)
per share attributable to Encore, respectively (in thousands, except per share
data):
Three Months Ended March 31,
2020 2019
$ Per Diluted Share $ Per DilutedShare
GAAP net (loss) income attributable to Encore, as reported
$ 49,254 $
1.57
Adjustments:
Convertible notes and exchangeable notes non-cash interest and issuance cost amortization
3,977 0.13 4,002 0.13
Acquisition, integration and restructuring related expenses(1) 187
0.01 1,208 0.04
Amortization of certain acquired intangible assets(2) 1,643 0.05 1,877
0.06
Income tax effect of above non-GAAP adjustments and certain discrete tax items(3)
(1,250) (0.05) (1,383) (0.05)
Change in tax accounting method(4) - - (9,070)
(0.29)
Adjusted net (loss) income attributable to Encore$ (5,897) $ (0.19)$ 45,888 $ 1.46 ________________________ (1)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. 40 -------------------------------------------------------------------------------- Table of Contents (2)As we acquire debt solution service providers around the world, we also acquire intangible assets, such as trade names and customer relationships. These intangible assets are valued at the time of the acquisition and amortized over their estimated lives. We believe that amortization of acquisition-related intangible assets, especially the amortization of an acquired company's trade names and customer relationships, is the result of pre-acquisition activities. In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by operations during any reporting period. As a result, the amortization of certain acquired intangible assets is excluded from our adjusted income (loss) attributable to Encore and adjusted income (loss) per share. (3)Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred. Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing operations. (4)Amount represents the benefit from the tax accounting method change related to revenue reporting. We adjust for certain discrete tax items that are not indicative of our ongoing operations. Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income (loss) before discontinued operations, 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):
Three Months Ended
2020 2019
GAAP net (loss) income, as reported $ (10,579) $ 49,442
Adjustments:
Interest expense 54,662 54,967
Interest income (1,000) (1,022)
Provision for income taxes 4,558 3,673
Depreciation and amortization 10,285 9,995
Stock-based compensation expense 4,527 1,826
Acquisition, integration and restructuring related expenses(1) 187 1,208
Adjusted EBITDA $ 62,640 $ 120,089
Collections applied to principal balance(2) $ 268,575 $ 201,328 ________________________
(1)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.
(2)Amount represents (a) gross collections from receivable portfolios less the
sum of (b) revenue from receivable portfolios and (c) changes in expected
recoveries for 2020. Amount represents (a) gross collections from receivable
portfolios less the sum of (b) revenue from receivable portfolios and (c)
allowance charges or allowance reversals on receivable portfolios for 2019.
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Adjusted Operating Expenses. Management utilizes adjusted operating expenses in
order to facilitate a comparison of approximate costs to cash collections for
our portfolio purchasing and recovery business. Adjusted operating expenses for
our portfolio purchasing and recovery business are calculated by starting with
GAAP total operating expenses and backing out operating expenses related to
non-portfolio purchasing and recovery business, acquisition, integration and
restructuring related operating expenses, stock-based compensation expense,
settlement fees and related administrative expenses and other charges or gains
that are not indicative of ongoing operations. Adjusted operating expenses
related to our portfolio purchasing and recovery business for the periods
presented are as follows (in thousands):
Three Months Ended
2020 2019
GAAP total operating expenses, as reported $ 241,879 $ 236,019 Adjustments:
Operating expenses related to non-portfolio purchasing and recovery business(1)
(41,489) (46,082)
Stock-based compensation expense (4,527) (1,826)
Acquisition, integration and restructuring related expenses(2) (187) (1,208)
Adjusted operating expenses related to portfolio purchasing and
recovery business $ 195,676 $ 186,903
________________________
(1)Operating expenses related to non-portfolio purchasing and recovery business
include operating expenses from other operating segments that primarily engage
in fee-based business, as well as corporate overhead not related to our
portfolio purchasing and recovery business.
(2)Amount represents 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.
Cost per Dollar Collected
We utilize adjusted operating expenses in order to facilitate a comparison of
approximate costs to cash collections from purchased receivables for our
portfolio purchasing and recovery business. The following table summarizes our
cost per dollar collected (defined as adjusted operating expenses as a
percentage of collections from purchased receivables) by geographic location
during the periods presented:
Three Months Ended March 31,
2020 2019
United States 39.5 % 39.6 %
Europe 29.9 % 27.6 %
Other geographies 52.6 % 51.2 %
Overall cost per dollar collected 37.1 % 36.4 %
As discussed in the "Accounting Policy Update" section in "Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies" of the notes to the consolidated financial statements, effectiveJanuary 1, 2020 , we expense all court costs as incurred and no longer capitalize such costs as Deferred Court Costs based on a loss-rate methodology. This accounting policy change increased the cost-to-collect metric as compared to prior periods because the court costs expense recognized in prior periods only represented costs we did not expect to recover. The accounting policy change has no impact on the amount of court cost payments incurred. The change in cost per dollar collected was primarily due to the following reasons: •Cost-to-collect increased due to the impact of change in accounting policy relating to court costs as discussed above; •Despite the above increase due to accounting policy change, cost-to-collect inthe United States decreased due to a combination of (1) continued improvement in operational efficiencies in the collection process, (2) collection mix shifting towards non-legal collection, which has lower cost-to-collect, and (3) higher total collections that blended down fixed cost and reduced overall cost-to-collect; •Cost-to-collect in LAAP is expected to stay at an elevated level and will continue to fluctuate over time. Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, product mix, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the changing regulatory and legislative environment. 42 -------------------------------------------------------------------------------- Table of Contents Supplemental Performance Data The tables included in this supplemental performance data section include detail for purchases, collections and ERC by year of purchase. Our collection expectations are based on account characteristics and economic variables. Additional adjustments are made to account for qualitative factors that may affect the payment behavior of our consumers and servicing related adjustments to ensure our collection expectations are aligned with our operations. We continue to refine our process of forecasting collections both domestically and internationally with a focus on operational enhancements. Our collection expectations vary between types of portfolio and geographic location. For example, in theU.K. , due to the higher concentration of payment plans, as compared to theU.S. and other locations inEurope , we expect to receive streams of collections over longer periods of time. As a result, past performance of pools in certain geographic locations or of certain types of portfolio are not necessarily a suitable indicator of future results in other locations or for other types of portfolio. The supplemental performance data presented in this section is impacted by foreign currency translation, which represents the effect of translating financial results where the functional currency of our foreign subsidiary is different than ourU.S. dollar reporting currency. For example, the strengthening of theU.S. dollar relative to other foreign currencies has an unfavorable reporting impact on our international purchases, collections, and ERC, and the weakening of theU.S. dollar relative to other foreign currencies has a favorable impact on our international purchases, collections, and ERC. We utilize proprietary forecasting models to continuously evaluate the economic life of each pool. 43 -------------------------------------------------------------------------------- Table of Contents Cumulative Collections from Purchased Receivables to Purchase Price Multiple The following table summarizes our receivable purchases and related gross collections by year of purchase (in thousands, except multiples): Year of Purchase Cumulative Collections through March 31, 2020 Purchase Price(1) <2011 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total(2) Multiple(3)United States : <2011$ 1,761,007 $ 3,222,155 $ 637,415 $ 458,336 $ 328,076 $ 236,557 $ 180,622 $ 129,676 $ 99,169 $ 80,397 $ 65,855 $ 15,151 $ 5,453,409 3.1 2011 383,805 - 123,596 301,949 226,521 155,180 112,906 77,257 56,287 41,148 33,445 7,372 1,135,661 3.0 2012 548,818 - - 187,721 350,134 259,252 176,914 113,067 74,507 48,832 37,327 8,495 1,256,249 2.3 2013 551,920 - - - 230,051 397,646 298,068 203,386
147,503 107,399 84,665 17,687 1,486,405 2.7
2014 517,774 - - - - 144,178 307,814 216,357 142,147 94,929 69,059 14,591 989,075 1.9
2015 499,371 - - - - - 105,610 231,102 186,391 125,673 85,042 18,302 752,120 1.5
2016 553,544 - - - - - - 110,875 283,035 234,690 159,279 33,377 821,256 1.5
2017 528,642 - - - - - - - 111,902 315,853 255,048 55,435 738,238 1.4
2018 631,288 - - - - - - - - 175,042 351,696 89,418 616,156 1.0
2019 678,821 - - - - - - - - - 174,693 102,534 277,227 0.4
2020 185,240 - - - - - - - - - - 12,367 12,367 0.1
Subtotal 6,840,230 3,222,155 761,011 948,006 1,134,782 1,192,813 1,181,934 1,081,720 1,100,941 1,223,963 1,316,109 374,729 13,538,163 2.0
Europe :
2013 619,079 - - - 134,259 249,307 212,129 165,610 146,993 132,663 113,228 25,316 1,179,505 1.9
2014 623,129 - - - - 135,549 198,127 156,665 137,806 129,033 105,337 23,271 885,788 1.4
2015 419,941 - - - - - 65,870 127,084 103,823 88,065 72,277 15,173 472,292 1.1
2016 258,218 - - - - - - 44,641 97,587 83,107 63,198 13,102 301,635 1.2
2017 461,571 - - - - - - - 68,111 152,926 118,794 23,494 363,325 0.8
2018 433,302 - - - - - - - - 49,383 118,266 22,658 190,307 0.4
2019 273,354 - - - - - - - - - 44,118 20,107 64,225 0.2
2020 28,861 - - - - - - - - - - 982 982 0.0
Subtotal 3,117,455 - - - 134,259 384,856 476,126 494,000 554,320 635,177 635,218 144,103 3,458,059 1.1
Other geographies:
2012 6,721 - - - 3,848 2,561 1,208 542 551 422 390 70 9,592 1.4
2013 29,568 - - - 6,617 17,615 10,334 4,606
3,339 2,468 1,573 291 46,843 1.6
2014 86,989 - - - - 9,652 16,062 18,403 9,813 7,991 6,472 1,350 69,743 0.8
2015 83,198 - - - - - 15,061 57,064 43,499 32,622 17,499 1,557 167,302 2.0
2016 64,450 - - - - - - 29,269 39,710 28,992 16,078 1,652 115,701 1.8
2017 49,670 - - - - - - - 15,471 23,075 15,383 1,875 55,804 1.1
2018 26,371 - - - - - - - - 12,910 15,008 1,580 29,498 1.1
2019 2,668 - - - - - - - - - 3,198 72 3,270 1.2
2020 - - - - - - - - - - - - - -
Subtotal 349,635 - - - 10,465 29,828 42,665 109,884 112,383 108,480 75,601 8,447 497,753 1.4
Total $ 10,307,320 $ 3,222,155 $ 761,011 $ 948,006 $ 1,279,506 $ 1,607,497 $ 1,700,725 $ 1,685,604 $ 1,767,644 $ 1,967,620 $ 2,026,928 $ 527,279 $ 17,493,975 1.7
________________________
(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 March 31, 2020 , excluding
collections on behalf of others.
(3)Cumulative Collections Multiple ("Multiple") through March 31, 2020 refers to
collections as a multiple of purchase price.
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Total Estimated Collections from Purchased Receivables to Purchase Price
Multiple
The following table summarizes our purchases, resulting historical gross
collections, and estimated remaining gross collections from purchased
receivables, by year of purchase (in thousands, except multiples):
Estimated Total Estimated Gross
Historical Remaining Total Estimated Collections to
Purchase Price(1) Collections(2) Collections Gross Collections Purchase Price
United States:
<2011 $ 1,761,007 $ 5,453,409 $ 156,749 $ 5,610,158 3.2
2011 383,805 1,135,661 73,676 1,209,337 3.2
2012 548,818 1,256,249 83,474 1,339,723 2.4
2013(3) 551,920 1,486,405 227,630 1,714,035 3.1
2014(3) 517,774 989,075 150,849 1,139,924 2.2
2015 499,371 752,120 165,897 918,017 1.8
2016 553,544 821,256 305,060 1,126,316 2.0
2017 528,642 738,238 477,336 1,215,574 2.3
2018 631,288 616,156 776,619 1,392,775 2.2
2019 678,821 277,227 1,327,476 1,604,703 2.4
2020 185,240 12,367 408,161 420,528 2.3
Subtotal 6,840,230 13,538,163 4,152,927 17,691,090 2.6
Europe:
2013(3) 619,079 1,179,505 864,253 2,043,758 3.3
2014(3) 623,129 885,788 651,050 1,536,838 2.5
2015(3) 419,941 472,292 421,602 893,894 2.1
2016 258,218 301,635 334,423 636,058 2.5
2017 461,571 363,325 586,845 950,170 2.1
2018 433,302 190,307 633,275 823,582 1.9
2019 273,354 64,225 528,265 592,490 2.2
2020 28,861 982 71,820 72,802 2.5
Subtotal 3,117,455 3,458,059 4,091,533 7,549,592 2.4
Other geographies:
2012 6,721 9,592 340 9,932 1.5
2013 29,568 46,843 1,629 48,472 1.6
2014 86,989 69,743 50,060 119,803 1.4
2015 83,198 167,302 20,132 187,434 2.3
2016 64,450 115,701 11,131 126,832 2.0
2017 49,670 55,804 32,047 87,851 1.8
2018 26,371 29,498 12,406 41,904 1.6
2019 2,668 3,270 513 3,783 1.4
2020 - - - - -
Subtotal 349,635 497,753 128,258 626,011 1.8
Total $ 10,307,320 $ 17,493,975 $ 8,372,718 $ 25,866,693 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 throughMarch 31, 2020 , excluding collections on behalf of others. (3)Includes portfolios acquired in connection with certain business combinations. 45 -------------------------------------------------------------------------------- Table of Contents 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 by year of purchase (in thousands): Estimated Remaining Gross Collections by Year of Purchase(1) 2020(3) 2021 2022 2023 2024 2025 2026 2027 2028 >2028 Total(2)United States : <2011$ 34,003 $ 42,770 $ 26,618 $ 18,485 $ 12,801 $ 8,718 $ 5,834 $ 3,800 $ 2,298 $ 1,422 $ 156,749 2011 15,679 19,195 11,871 8,334 5,874 4,142 2,927 2,074 1,473 2,107 73,676 2012 17,801 21,976 13,273 9,297 6,541 4,611 3,255 2,304 1,635 2,781 83,474 2013(4) 41,433 58,706 37,648 26,573 18,807 13,338 9,464 6,717 4,769 10,175 227,630 2014(4) 31,726 39,781 24,335 16,725 11,468 8,076 5,713 4,047 2,869 6,109 150,849 2015 38,224 44,482 27,102 18,120 12,206 7,948 5,446 3,835 2,706 5,828 165,897 2016 69,574 83,698 46,158 31,673 22,481 15,859 10,957 7,709 5,419 11,532 305,060 2017 110,650 131,493 76,280 48,620 33,282 23,388 16,531 11,566 8,162 17,364 477,336 2018 188,052 219,573 130,602 84,092 53,048 34,947 23,049 15,144 9,890 18,222 776,619 2019 289,653 405,226 207,586 129,623 88,517 61,172 43,469 31,721 23,032 47,477 1,327,476 2020 66,269 118,820 82,316 46,276 29,463 19,988 13,595 9,693 6,972 14,769 408,161 Subtotal 903,064 1,185,720 683,789 437,818 294,488 202,187 140,240 98,610 69,225 137,786 4,152,927Europe : 2013(4) 65,016 97,245 89,756 82,763 75,784 68,460 61,018 54,687 49,026 220,498 864,253 2014(4) 53,447 82,619 72,490 64,437 57,662 50,983 43,579 38,471 34,418 152,944 651,050 2015(4) 33,723 54,501 46,837 41,600 37,365 33,430 29,283 25,112 22,306 97,445 421,602 2016 28,748 56,789 54,024 37,176 29,545 25,543 21,344 17,597 14,385 49,272 334,423 2017 54,962 89,183 77,170 65,197 55,192 45,740 37,969 32,331 26,477 102,624 586,845 2018 55,516 93,158 79,957 68,919 59,021 51,049 43,671 36,832 31,218 113,934 633,275 2019 47,943 84,335 71,488 60,228 50,094 40,533 33,591 28,671 24,603 86,779 528,265 2020 5,231 12,610 11,064 8,806 7,193 5,802 4,756 3,679 2,969 9,710 71,820 Subtotal 344,586 570,440 502,786 429,126 371,856 321,540 275,211 237,380 205,402 833,206 4,091,533 Other geographies: 2012 107 149 84 - - - - - - - 340 2013 459 591 387 192 - - - - - - 1,629 2014 5,108 8,163 6,681 6,328 5,643 4,471 2,687 1,455 1,367 8,157 50,060 2015 2,894 3,776 3,197 2,605 1,814 1,212 840 736 636 2,422 20,132 2016 3,388 4,036 2,498 669 263 177 100 - - - 11,131 2017 5,539 6,974 5,005 3,689 2,126 1,840 1,311 719 692 4,152 32,047 2018 2,899 3,645 2,420 1,650 813 435 284 186 74 - 12,406 2019 134 159 99 67 45 9 - - - - 513 2020 - - - - - - - - - - - Subtotal 20,528 27,493 20,371 15,200 10,704 8,144 5,222 3,096 2,769 14,731 128,258 Portfolio ERC 1,268,178 1,783,653 1,206,946 882,144 677,048 531,871 420,673 339,086 277,396 985,723 8,372,718 REO ERC(5) 13,461 35,374 17,655 8,913 7,148 3,615 64 - - - 86,230 Total ERC$ 1,281,639 $ 1,819,027 $ 1,224,601 $ 891,057 $ 684,196 $ 535,486 $ 420,737 $ 339,086 $ 277,396 $ 985,723 $ 8,458,948
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(1)As ofMarch 31, 2020 , ERC for Zero Basis Portfolios include approximately$156.7 million for purchased consumer and bankruptcy receivables inthe United States . ERC for Zero Basis Portfolios inEurope and other geographies was immaterial. (2)Represents the expected remaining gross cash collections on purchased portfolios over a 180-month period. As ofMarch 31, 2020 , ERC from purchased receivables for 84-month and 120-month periods were: 84-Month ERC 120-Month ERC United States$ 3,875,245 $ 4,072,425 Europe 2,878,292 3,478,009 Other geographies 108,446 116,744 Total$ 6,861,983 $ 7,667,178 46
-------------------------------------------------------------------------------- Table of Contents (3)2020 amount consists of nine months data fromApril 1, 2020 toDecember 31, 2020 . (4)Includes portfolios acquired in connection with certain business combinations. (5)Real estate-owned assets ERC includes approximately$82.5 million and$3.7 million of estimated future cash flows forEurope and Other Geographies, respectively. As ofDecember 31, 2019 , estimated future cash flows for real estate-owned assets were approximately$88.0 million and$4.4 million , forEurope and Other Geographies, respectively. Estimated Future Collections Applied to Principal As ofMarch 31, 2020 , we had$3.2 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands): Years Ending December 31, United States Europe Other Geographies Total 2020(1)$ 262,775 $ 40,238 $ 9,895$ 312,908 2021 532,398 195,560 15,337 743,295 2022 281,131 179,894 12,456 473,481 2023 166,963 151,215 7,899 326,077 2024 107,866 131,691 6,028 245,585 2025 72,481 114,933 4,952 192,366 2026 49,487 97,881 2,961 150,329 2027 35,029 84,748 1,603 121,380 2028 25,029 74,317 1,432 100,778 2029 17,517 66,645 1,365 85,527 2030 12,430 62,460 1,363 76,253 2031 9,006 62,480 1,360 72,846 2032 6,765 64,548 1,358 72,671 2033 5,500 70,066 1,356 76,922 2034 5,104 79,311 1,354 85,769 2035 725 26,264 2,842 29,831 Total$ 1,590,206 $ 1,502,251 $ 73,561$ 3,166,018
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(1)2020 amount consists of nine months data from
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Headcount by Geographic Location and Function
The following table summarizes our headcount by geographic location and by
function:
Headcount as of March 31,
2020 2019
United States:
General & Administrative 1,137 1,097
Account Manager 416 495
Subtotal 1,553 1,592
Europe:
General & Administrative 1,079 1,049
Account Manager 2,234 2,111
Subtotal 3,313 3,160
Other Geographies(1):
General & Administrative 621 1,353
Account Manager 2,137 1,830
Subtotal 2,758 3,183
Total 7,624 7,935
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(1)Headcount as of
Purchases by Quarter The following table summarizes the receivable portfolios we purchased by quarter, and the respective purchase prices and fair value (in thousands):
# of Purchase
Quarter Accounts Face Value Price
Q1 2018 973 $ 1,799,804 $ 276,762
Q2 2018 1,031 2,870,456 359,580
Q3 2018 706 1,559,241 248,691
Q4 2018 766 2,272,113 246,865
Q1 2019 854 1,732,977 262,335
Q2 2019 778 2,307,711 242,697
Q3 2019 1,255 5,313,092 259,910
Q4 2019 803 2,241,628 234,916
Q1 2020 943 1,703,021 214,113
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Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activities for the periods
presented (in thousands):
Three Months Ended March 31,
2020 2019
(Unaudited)
Net cash provided by operating activities $ 70,805 $ 10,991
Net cash used in investing activities (43,255) (69,514)
Net cash (used in) provided by financing activities (21,762) 71,547
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. Operating cash flows are derived by adjusting net income
for non-cash operating items such as depreciation and amortization, changes in
expected future recoveries, allowance charges and stock-based compensation
charges, and changes in operating assets and liabilities which reflect timing
differences between the receipt and payment of cash associated with transactions
and when they are recognized in results of operations.
Net cash provided by operating activities was $70.8 million and $11.0 million
during the three months ended March 31, 2020 and 2019, respectively. Included in
the net loss of $10.6 million during the three months ended March 31, 2020 was
an adjustment of $98.7 million due to the changes in our expected current and
future recoveries. After adjusting for this item, net cash provided by operating
activities significantly increased. Additionally, prepaid income tax and income
taxes payable provided $15.0 million and consumed $30.2 million of cash during
the three months ended March 31, 2020 and 2019, respectively, while accounts
payable, accrued liabilities and other liabilities consumed $46.5 million and
$67.8 million during the three months ended March 31, 2020 and 2019,
respectively.
Investing Cash Flows
Net cash used in investing activities was $43.3 million and $69.5 million during
the three months ended March 31, 2020 and 2019, respectively. Cash used in
investing activities is primarily affected by receivable portfolio purchases
offset by collection proceeds applied to the principal of our receivable
portfolios, net of the change in principal balance due to the change in expected
future recoveries or allowance adjustments. Receivable portfolio purchases were
$209.0 million and $258.6 million during the three months ended March 31, 2020
and 2019, respectively. Collection proceeds applied to the principal of our
receivable portfolios, net, were $169.9 million and $202.7 million during the
three months ended March 31, 2020 and 2019, respectively. Capital expenditures
for fixed assets acquired with internal cash flows were $7.5 million and $10.2
million for the three months ended March 31, 2020 and 2019, respectively.
Financing Cash Flows
Net cash used in financing activities was $21.8 million during the three months
ended March 31, 2020 , and net cash provided by financing activities was $71.5
million during the three months ended March 31, 2019 . 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 $171.9 million and $196.3 million during the three months ended
March 31, 2020 and 2019, respectively. Repayments of amounts outstanding under
our credit facilities were $167.2 million and $119.9 million during the three
months ended March 31, 2020 and 2019, respectively. Repayment of senior secured
notes was $16.3 million during the three months ended March 31, 2020 .
Capital Resources
Historically, we have met our cash requirements by utilizing our cash flows from
operations, cash collections from our investment in receivable portfolios, bank
borrowings, debt offerings, and equity offerings. Depending on the capital
markets, we consider additional financings to fund our operations and
acquisitions. We continue to explore possible synergies with respect to Cabot,
including in connection with potential debt financing options. From time to
time, we may repurchase outstanding debt or equity and/or restructure or
refinance debt obligations. Our primary cash requirements have included the
purchase of receivable portfolios, entity acquisitions, operating expenses, the
payment of interest and principal on borrowings, and the payment of income
taxes.
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Currently, all of our portfolio purchases are funded with cash from operations,
cash collections from our investment in receivable portfolios, and our bank
borrowings.
We are in material compliance with all covenants under our financing
arrangements. See "Note 8: Borrowings" to our consolidated financial statements
for a further discussion of our debt.
Our cash and cash equivalents as of March 31, 2020 consisted of $55.7 million
held by U.S. -based entities and $132.5 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 U.S. sources of cash and liquidity are sufficient to meet
our business needs in the United States .
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 $19.4 million as of March 31, 2020 .
Cash from operations could also be affected by various risks and uncertainties,
including, but not limited to, the effects of the COVID-19 pandemic, including
timing of cash collections from our consumers, and other risks detailed in Risk
Factors. However, we believe that we have sufficient liquidity to fund our
operations for at least the next twelve months, given our expectation of
continued positive cash flows from operations, cash collections from our
investment in receivable portfolios, our cash and cash equivalents, our access
to capital markets, and availability under our credit facilities. Our future
cash needs will depend on our acquisitions of portfolios and businesses.
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