This Annual Report on Form 10-K 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, and financing needs or plans, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors including, but not limited to, those set forth in this Annual Report on Form 10-K under "Part I, Item 1A-Risk Factors," could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties. Our Business We are an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers' unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-performing loans.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"), contingent collections, trace services and litigation activities. Cabot strengthened its debt servicing offerings with the acquisition ofWescot Credit Services Limited , a leadingU.K. contingency debt collection and BPO services company inNovember 2017 . Previously we controlled CCM via our majority ownership interest in an indirect holding company of CCM. InJuly 2018 , we completed the purchase of all of the outstanding equity of CCM not owned by us (the "Cabot Transaction"). As a result, CCM became a wholly owned subsidiary of Encore. LAAP (Latin America andAsia-Pacific ) We have purchased non-performing loans inColombia ,Peru ,Mexico andBrazil . Additionally, we have invested inEncore Asset Reconstruction Company ("EARC") inIndia , which has completed initial immaterial purchases. InDecember 2018 , we completed the sale of all our interests inRefinancia S.A. and its subsidiaries (collectively, "Refinancia") to the existing minority shareholders of Refinancia, and as a result, we no longer consolidate Refinancia. Refinancia remains the servicer for the non-performing loans we own inColombia andPeru . InAugust 2019 , we completed the sale of Baycorp, which specialized in the management of non-performing loans inAustralia and New Zealand and was previously a component of our LAAP business unit (the "Baycorp Transaction"). 28 -------------------------------------------------------------------------------- Table of Contents 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 . Government Regulation As discussed in more detail under "Part I - Item 1-Business - Government Regulation" contained in this Annual Report on Form 10-K, our operations inthe United States are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices. Additionally, our operations 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 ourU.S. operations. 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 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 remains 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 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 us, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements. Cabot (Europe ) 29 -------------------------------------------------------------------------------- Table of Contents TheU.K. market for charged-off portfolios continues to provide a consistent pipeline of opportunities, despite an ongoing historic low level of charge-off rates, as creditors have embedded debt sales as an integral part of their business models. The record levels of consumer indebtedness suggest that charged-off debt will increase over time and, together with recent commitments by major debt purchasers to deliver a deleveraging profile, resulted in an improvement in pricing pressure in 2019. In order to capture the increasingly attractive purchasing opportunities while maintaining a deleveraging profile, in the fourth quarter of 2019, we entered into co-investment framework agreements with certain third-party investors that enable us to share the investment with co-investors while providing credit management solutions as the lead servicer for the portfolios. Co-investment reduces risk related to large portfolio purchases and allows us to build and maintain scale in our operation, which helps provide cost advantages. Co-investment also allows us to service the demands of our issuer clients. 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 . Although pricing has been elevated, we believe that as our European businesses increase in scale and continue to improve liquidation and collection efficiencies, our margins will remain competitive. Additionally, our continuing investment in our litigation liquidation channel has enabled us to collect from consumers who have the ability to pay but have so far been unwilling to do so. This also enables us to mitigate some of the impact of elevated pricing. Purchases by Geographic Location The following table summarizes the geographic locations of receivable portfolios we purchased during the periods presented (in thousands): Year Ended December 31, 2019 2018 2017 United States$ 681,777 $ 637,881 $ 535,906 Europe(1) 306,504 455,444 464,136 Other geographies 11,577 38,573 58,193
Total purchases
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(1)Amounts exclude receivable portfolios purchased and immediately sold to our co-investors under our co-investment framework. Inthe United States , capital deployment increased for the year endedDecember 31, 2019 , as compared to 2018. 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. The increase in capital deployment inthe United States for the year endedDecember 31, 2019 , as compared to 2018, and for the year endedDecember 31, 2018 , as compared to 2017, was primarily driven by continued growth in the supply of fresh portfolios. InEurope , capital deployment decreased for the year endedDecember 31, 2019 , as compared to 2018. The decrease was primarily the result of a more selective purchasing process in conjunction with a plan to reduce European debt leverage over time and the strengthening of theU.S. dollar against the British Pound. The decrease in capital deployment inEurope for the year endedDecember 31, 2018 , as compared to 2017, was primarily the result of our significant capital deployment during the third quarter of 2017 in response to an unusually large volume of portfolios offered for sale in theU.K. market at that time. The decrease was partially offset by the weakening of theU.S. dollar against the British Pound in 2018 as compared to 2017. The average purchase price as a percentage of face value was 8.6%, 13.3%, and 10.5% for the years endedDecember 31, 2019 , 2018, and 2017, respectively. The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the type and quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios. For example, the average purchase price as a percentage of face value is higher for fresh portfolios as compared to more seasoned portfolios because fresh paper generally has higher returns. Further, paying portfolios tend to have a higher purchase price relative to face value than non-paying accounts due to the higher expectations for collections, as well as lower anticipated collection costs. As a result, in periods that we purchase a higher percentage of fresh paper or paying portfolios, we expect that our purchase price as a percentage of face value would be higher than would be in periods where a higher ratio of seasoned paper or non-paying portfolios were purchased. The average purchase price, as a percentage of face value decreased significantly during the year endedDecember 31, 2019 as compared to 2018, primarily due 30 -------------------------------------------------------------------------------- Table of Contents to capital deployment on certain asset classes inEurope that were deeply discounted during the third quarter of 2019 and a higher concentration of fresh portfolio purchases during the year endedDecember 31, 2018 . 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 by collection channel and geographic area (in thousands): Year Ended December 31, 2019 2018 2017 United States: Call center and digital collections$ 742,272 $ 658,272 $ 526,429 Legal collections 563,038 548,374 546,423 Collection agencies 10,799 17,317 28,089 Subtotal 1,316,109 1,223,963 1,100,941 Europe(1): Call center and digital collections 257,317 291,540 300,545 Legal collections 198,903 161,556 116,620 Collection agencies 178,998 182,081 137,155 Subtotal 635,218 635,177 554,320 Other geographies(2): Call center and digital collections 25,620 86,407 88,129 Legal collections 3,541 7,908 7,892 Collection agencies 46,440 14,165 16,362 Subtotal 75,601 108,480 112,383 Total collections from purchased receivables$ 2,026,928
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(1)Certain reclassifications have been made for prior periods. (2)InDecember 2018 , we completed the sale of all our interest inRefinancia S.A. ("Refinancia"), which remains the servicer for the non-performing loans we own inColombia andPeru . As such, subsequent toDecember 2018 , collections for these non-performing loans are classified as collection agency collections instead of call center and digital collections. Gross collections from purchased receivables increased by$59.3 million , or 3.0%, to$2,026.9 million during the year endedDecember 31, 2019 , from$1,967.6 million during the year endedDecember 31, 2018 . The increase of collections 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. European collection improvement was partially offset by the unfavorable impact of foreign currency translation, primarily from the strengthening of theU.S. dollar against the British Pound during the year endedDecember 31, 2019 as compared to 2018. Gross collections from purchased receivables increased$200.0 million , or 11.3%, to$1,967.6 million during the year endedDecember 31, 2018 , from$1,767.6 million during the year endedDecember 31, 2017 . The increase of collections inthe United States was primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection capacity and our continued effort in improving liquidation. Our consumer centric collection approach and our capacity buildup are driving a higher proportion of call center collections compared to legal collections inthe United States . The increase in collections inEurope was primarily the result of implementing certain liquidation improvement initiatives and the favorable impact of foreign currency translation, which was primarily driven by the weakening of theU.S. dollar against the British Pound. 31 -------------------------------------------------------------------------------- Table of Contents Results of Operations Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows (in thousands, except percentages): Year Ended December 31, 2019 2018 2017 Revenues Revenue from receivable portfolios$ 1,269,288 90.8 %$ 1,167,132 85.7 %$ 1,053,373 88.7 % Servicing revenue 126,527 9.1 % 148,044 10.9 % 90,087 7.6 % Other revenues 9,974 0.7 % 5,381 0.4 % 2,342 0.2 % Total revenues 1,405,789 100.6 % 1,320,557 97.0 % 1,145,802 96.5 % (Allowances) allowance reversals on receivable portfolios, net (8,108) (0.6) % 41,473 3.0 % 41,236 3.5 % Total revenues, adjusted by net allowances 1,397,681 100.0 % 1,362,030 100.0 % 1,187,038 100.0 % Operating expenses Salaries and employee benefits 376,365 26.9 % 369,064 27.1 % 315,742 26.6 % Cost of legal collections 202,670 14.5 % 205,204 15.1 % 200,058 16.9 % General and administrative expenses 148,256 10.6 % 158,352 11.6 % 158,080 13.3 % Other operating expenses 108,433 7.8 % 134,934 9.9 % 104,938 8.8 % Collection agency commissions 63,865 4.6 % 47,948 3.5 % 43,703 3.7 % Depreciation and amortization 41,029 2.9 % 41,228 3.0 % 39,977 3.4 % Goodwill impairment 10,718 0.8 % - - % - - % Total operating expenses 951,336 68.1 % 956,730 70.2 % 862,498 72.7 % Income from operations 446,345 31.9 % 405,300 29.8 % 324,540 27.3 % Other (expense) income Interest expense (226,760) (16.2) % (240,048) (17.6) % (204,161) (17.2) % Other (expense) income (18,343) (1.3) % (8,764) (0.7) % 10,847 1.0 % Total other expense (245,103) (17.5) % (248,812) (18.3) % (193,314) (16.2) % Income from continuing operations before income taxes 201,242 14.4 % 156,488 11.5 % 131,226 11.1 % Provision for income taxes (32,333) (2.3) % (46,752) (3.4) % (52,049) (4.5) % Income from continuing operations 168,909 12.1 % 109,736 8.1 % 79,177 6.6 % Loss from discontinued operations, net of tax - - % - - % (199) 0.0 % Net income 168,909 12.1 % 109,736 8.1 % 78,978 6.6 % Net (income) loss attributable to noncontrolling interest (1,040) (0.1) % 6,150 0.4 % 4,250 0.4 % Net income attributable to Encore Capital Group, Inc. stockholders$ 167,869 12.0 %$ 115,886 8.5 %$ 83,228 7.0 % 32
-------------------------------------------------------------------------------- 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):
Year Ended
2019 2018 2017 Total revenues, adjusted by net allowances$ 505,136 $ 522,885 $ 399,875 Total operating expenses (287,122) (278,676) (230,401) Income from operations 218,014 244,209 169,474 Interest expense-non-PEC (123,203) (128,087) (105,634) PEC interest expense - (17,307) (25,899) Other (expense) income (2,963) 1,383 7,373 Income before income taxes 91,848 100,198 45,314 Provision for income taxes (16,930) (19,884) (17,218) Net income 74,918 80,314 28,096 Net income attributable to noncontrolling interest (1,040) (5,143) (1,923) Net income attributable toEncore Capital Group, Inc. stockholders$ 73,878 $ 75,171 $ 26,173 Comparison of Results of Operations Our Annual Report on Form 10-K for the year endedDecember 31, 2018 includes discussion and analysis of our financial condition and results of operations for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 in Item 7 of Part II, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Year EndedDecember 31, 2019 Compared to Year EndedDecember 31, 2018 Revenues Our revenues consist of revenue from receivable portfolios, servicing revenue, and other revenues. Revenue from receivable portfolios consists of accretion revenue and zero basis revenue. Accretion revenue represents revenue derived from pools (quarterly groupings of purchased receivable portfolios) with a cost basis that has not been fully amortized. Revenue from pools with a remaining unamortized cost basis is accrued based on each pool's effective interest rate applied to each pool's remaining unamortized cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections from purchased receivables and portfolio allowances. The effective interest rate is the internal rate of return ("IRR") derived from the timing and amounts of actual cash received and anticipated future cash flow projections for each pool. All collections realized after the net book value of a portfolio has been fully recovered, or Zero Basis Portfolios ("ZBA"), are recorded as revenue, or ZBA revenue. We account for our investment in receivable portfolios utilizing the interest method in accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality. 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. We may incur allowance charges when actual cash flows from our receivable portfolios underperform compared to our expectations or when there is a change in the timing of cash flows. Factors that may contribute to underperformance and to the recording of valuation allowances may include both internal as well as external factors. Internal factors that may have an impact on our collections include operational activities, such as capacity and the productivity of our collection staff. External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and the overall condition of the economy. We record allowance reversals on pool groups that have historic allowance reserves when actual cash flows from these receivable portfolios outperform our expectations. 33 -------------------------------------------------------------------------------- Table of Contents 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 international revenues were unfavorably impacted by foreign currency translation, primarily from the strengthening of theU.S. dollar, which increased, based on average exchange rates, against the British Pound by approximately 4.6%, during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . 34 -------------------------------------------------------------------------------- Table of Contents The following tables summarize collections from purchased receivables, revenue, end of period receivable balance and other related supplemental data, by year of purchase (in thousands, except percentages): Year EndedDecember 31, 2019 As of December 31, 2019 Net Revenue Reversal Revenue Gross Recognition (Portfolio % of Total Unamortized Monthly Collections(1) Revenue(2) Rate(2) Allowance) Revenue BalancesIRR(3) United States: ZBA(4)$ 83,217 $ 74,614 89.7 %$ 8,626 5.8 % $ - - % 2011 21,684 21,158 97.6 % 304 1.7 % 2,546 85.5 % 2012 32,258 27,850 86.3 % 273 2.2 % 5,916 35.5 % 2013 84,133 73,248 87.1 % (150) 5.8 % 14,697 33.4 % 2014 69,059 41,886 60.7 % 3,905 3.3 % 50,097 6.0 % 2015 85,042 37,207 43.8 % 6,099 2.9 % 82,187 3.1 % 2016 159,279 73,054 45.9 % 109 5.8 % 149,159 3.2 % 2017 255,048 132,946 52.1 % 191 10.5 % 198,714 4.5 % 2018 351,696 199,561 56.7 % (4,955) 15.7 % 409,717 3.3 % 2019 174,693 121,614 69.6 % - 9.6 % 626,911 3.3 % Subtotal 1,316,109 803,138 61.0 % 14,402 63.3 % 1,539,944 4.1 % Europe: ZBA(4) 324 326 100.6 % - - % - - % 2013 113,224 88,244 77.9 % 4,991 7.0 % 238,033 3.1 % 2014 105,337 73,230 69.5 % (372) 5.8 % 206,895 2.9 % 2015 72,042 44,009 61.1 % 462 3.5 % 160,113 2.3 % 2016 63,113 43,309 68.6 % (529) 3.4 % 140,663 2.7 % 2017 118,794 65,501 55.1 % (7,190) 5.2 % 290,071 1.8 % 2018 118,266 70,553 59.7 % (18,332) 5.5 % 347,399 1.5 % 2019 44,118 29,262 66.3 % (470) 2.3 % 264,903 1.8 % Subtotal 635,218 414,434 65.2 % (21,440) 32.7 % 1,648,077 2.2 % Other geographies: ZBA(4) 8,647 8,667 100.2 % - 0.7 % - - % 2014 4,663 6,548 140.4 % - 0.4 % 60,479 103.0 % 2015 16,530 12,149 73.5 % 382 1.0 % 6,240 22.0 % 2016 12,172 6,402 52.6 % (399) 0.5 % 4,680 5.3 % 2017 15,383 8,505 55.3 % (98) 0.7 % 15,894 6.2 % 2018 15,008 8,082 53.9 % (955) 0.6 % 8,330 3.8 % 2019 3,198 1,363 42.6 % - 0.1 % 340 4.6 % Subtotal 75,601 51,716 68.4 % (1,070) 4.0 % 95,963 7.0 % Total$ 2,026,928 $ 1,269,288 62.6 %$ (8,108) 100.0 %$ 3,283,984 3.1 %
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(1)Does not include amounts collected on behalf of others. (2)Gross revenue and the revenue recognition rate exclude the effects of net portfolio allowances or net portfolio allowance reversals. (3)Monthly IRR relates to accretion portfolios and does not include portfolios on cost recovery. (4)ZBA 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%. 35
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Table of Contents Year EndedDecember 31, 2018 As of December 31, 2018 Net Revenue Reversal Revenue Gross Recognition (Portfolio % of Total Unamortized Monthly Collections(1) Revenue(2) Rate(2) Allowance) Revenue BalancesIRR(3) United States : ZBA(4)$ 121,216 $ 112,347 92.7 %$ 9,044 9.6 % $ - - % 2008 1,652 237 14.3 % - 0.0 % - - % 2011 14,104 12,737 90.3 % (304) 1.1 % 2,905 27.4 % 2012 35,927 29,762 82.8 % (273) 2.6 % 9,963 19.7 % 2013 104,877 82,059 78.2 % - 7.0 % 25,747 23.9 % 2014 94,929 51,252 54.0 % 5,035 4.4 % 73,615 4.8 % 2015 125,673 54,052 43.0 % (6,226) 4.6 % 124,301 2.8 % 2016 234,690 102,674 43.7 % (401) 8.8 % 236,032 3.0 % 2017 315,853 147,719 46.8 % (646) 12.7 % 321,730 3.2 % 2018 175,042 110,323 63.0 % - 9.4 % 570,440 3.1 % Subtotal 1,223,963 703,162 57.4 % 6,229 60.2 % 1,364,733 3.7 % Europe: ZBA Adjustment(5) - 798 - % - 0.1 % - - % ZBA(4) 184 185 100.5 % - 0.0 % - - % 2013 132,663 98,307 74.1 % 29,172 8.4 % 247,672 3.1 % 2014 129,033 82,474 63.9 % 7,956 7.1 % 233,718 2.7 % 2015 88,002 49,701 56.5 % 893 4.3 % 183,069 2.0 % 2016 82,986 49,078 59.1 % - 4.2 % 165,432 2.2 % 2017 152,926 68,942 45.1 % - 5.9 % 345,438 1.7 % 2018 49,383 36,950 74.8 % - 3.1 % 428,657 1.5 % Subtotal 635,177 386,435 60.8 % 38,021 33.1 % 1,603,986 2.1 % Other geographies: ZBA(4) 11,855 11,855 100.0 % - 1.0 % - - % 2013 150 - - % - - % - - % 2014 5,209 17,345 333.0 % - 1.5 % 62,455 2.4 % 2015 30,677 20,188 65.8 % (1,748) 1.7 % 19,592 7.0 % 2016 24,604 11,268 45.8 % (869) 1.0 % 26,779 2.5 % 2017 23,075 10,377 45.0 % - 0.9 % 30,599 2.7 % 2018 12,910 6,502 50.4 % (160) 0.6 % 29,749 3.4 % Subtotal 108,480 77,535 71.5 % (2,777) 6.7 % 169,174 3.2 % Total$ 1,967,620 $ 1,167,132 59.3 %$ 41,473 100.0 %$ 3,137,893 2.9 %
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(1)Does not include amounts collected on behalf of others. (2)Gross revenue and the revenue recognition rate exclude the effects of net portfolio allowances or net portfolio allowance reversals. (3)Monthly IRR relates to accretion portfolios and does not include portfolios on cost recovery. (4)ZBA 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%. All 2009 and 2010 vintages have been converted to ZBA. (5)Adjustment resulting from certain ZBA revenue that was classified as collections in cost recovery portfolios in prior periods. The increase in revenue from receivable portfolios was primarily due to increased IRRs resulting from sustained improvements in portfolio collections driven by liquidation improvement initiatives. Servicing revenue primarily consists of fee-based income earned inEurope for debt servicing and other portfolio management services for credit originators for non-performing loans. The decrease in fee income was primarily attributable to 36 -------------------------------------------------------------------------------- Table of Contents the unfavorable impact of foreign currency translation, which was primarily the result of the strengthening of theU.S. dollar against the British Pound, and the sale of Baycorp inAugust 2019 as well as the sale of Refinancia inDecember 2018 . Subsequent to the sales, we no longer earn servicing revenue from Baycorp or Refinancia. Other revenues included a gain of approximately$9.3 million recognized on the sale of certain portfolios inEurope during the year endedDecember 31, 2019 . Refer to "Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies" of the notes to our consolidated financial statements for our accounting policy on transfers of financial assets. Net receivable portfolio allowances were$8.1 million for the year endedDecember 31, 2019 and were primarily attributable to underperformance of certain European portfolios. Net receivable portfolio allowance reversals were$41.5 million for the year endedDecember 31, 2018 . Allowance reversals were primarily a result of sustained improvements in portfolio collections on certain portfolios on which we had previously recorded portfolio allowances in the past. These improvements in portfolio collections were driven by liquidation improvement initiatives. Operating Expenses 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 a favorable impact on our international operating expenses, and the weakening of theU.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 theU.S. dollar against the British Pound by approximately 4.6% for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Operating expenses are explained in more detail as follows: Salaries and Employee Benefits Salaries and employee benefits increased as a result of an increase in salaries and employee benefits at our domestic sites as part of our initiative to increase collections capacity. The increase was partially offset by a decrease in headcount at our international subsidiaries and the favorable impact of foreign currency translation, primarily from the strengthening of theU.S. dollar against the British Pound. Stock-based compensation decreased$0.4 million , or 3.3%, to$12.6 million during the year endedDecember 31, 2019 , from$13.0 million during the year endedDecember 31, 2018 . The slight decrease was primarily attributable to larger expense reversals during the current year as compared to the corresponding periods in the prior year resulting from adjustments to estimated vesting of certain performance-based awards. The decrease was partially offset by additional expenses recognized due to the continued vesting of equity awards for the Cabot Transaction. Cost of Legal Collections Cost of legal collections primarily includes contingent fees paid to our 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, or Deferred Court Costs. We capitalize these costs in the consolidated financial statements and provide a reserve for those costs that we believe will ultimately be uncollectible. We determine the reserve based on our analysis of historical court costs recovery data. The cost of legal collections inthe United States increased by$2.7 million , or 1.6%, to$174.4 million during the year endedDecember 31, 2019 compared to$171.7 million during the year endedDecember 31, 2018 . The cost of legal collections inEurope decreased by$4.4 million , or 14.0%, to$27.4 million during the year endedDecember 31, 2019 compared to$31.8 million during the year endedDecember 31, 2018 . The decrease inEurope was primarily due to the shift of account placements towards non-legal collection channels. General and Administrative Expenses Excluding the indirect costs relating to the Cabot Transaction of approximately$8.6 million in 2018, general and administrative expenses decreased$1.5 million , or 1.0% during the year endedDecember 31, 2019 as compared to the prior year. The decrease was primarily due to (1) higher merger and acquisition costs incurred in prior periods, (2) the favorable impact of the strengthening of theU.S. dollar relative to other foreign currencies and (3) higher infrastructure costs incurred at our domestic sites in prior periods. Other Operating Expenses 37 -------------------------------------------------------------------------------- Table of Contents The decrease in other operating expenses was primarily due to a large expense incurred in our previously owned subsidiary Refinancia during the prior periods, in addition to reduced expenditures for temporary services and the favorable impact of the strengthening of theU.S. dollar relative to other foreign currencies. Collection Agency Commissions During the year endedDecember 31, 2019 , we incurred$63.9 million in commissions to third-party collection agencies, or 27.0% of the related gross collections of$236.2 million . During the period, the commission rate as a percentage of related gross collections was 18.5% and 22.7% for our collection outsourcing channels inthe United States andEurope , respectively. During the year endedDecember 31, 2018 , we incurred$47.9 million in commissions, or 22.5%, of the related gross collections of$213.6 million . During 2018, the commission rate as a percentage of related gross collections was 15.0% and 22.7% for our collection outsourcing channels inthe United States andEurope , respectively. The increase in collection agency commissions during the year endedDecember 31, 2019 as compared with the year endedDecember 31, 2018 was primarily driven by the change in our LAAP operations. As discussed in the "Collections from Purchased Receivables by Channel and Geographic Location" section above, inDecember 2018 , we completed the sale of all our interest in Refinancia, which remains the servicer for the non-performing loans we own inColombia andPeru . Subsequent toDecember 2018 , collections for these non-performing loans are classified as collection agency collections instead of call center and digital collections. As a result, costs associated with these collections are included in collection agency commissions. Collections through the collection agencies channel are predominately inEurope andLatin 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 United States collection agency commission rate is generally lower than the European rate due to a higher concentration of lower commission rate bankruptcy portfolios collected through the collection agency channel inthe United States . Interest Expense The following table summarizes our interest expense (in thousands, except percentages): Year Ended December 31, 2019 2018 $ Change % Change Stated interest on debt obligations$ 193,003 $ 186,178 $ 6,825 3.7 % Interest expense on preferred equity certificates - 17,307 (17,307) (100.0) % Amortization of loan fees and other loan costs 20,777 25,332 (4,555) (18.0) % Amortization of debt discount 12,980 11,231 1,749 15.6 % Total interest expense$ 226,760 $ 240,048 $ (13,288) (5.5) % The decrease in interest expense during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 was primarily attributable to the decrease in preferred equity certificates ("PECs") interest expense. OnJuly 24, 2018 , in connection with the Cabot Transaction, we purchased all outstanding PECs including accrued interest that were held by Cabot's minority shareholders. As a result, no PEC interest expense was incurred subsequent to the Cabot Transaction. The decrease in interest expense was also attributable to higher expenses incurred during the year endedDecember 31, 2018 relating to finance charges associated with our refinancing activities. During the year endedDecember 31, 2018 , interest expense included approximately$9.2 million in fees relating to the refinancing of the Cabot senior secured notes and approximately$2.5 million of fees for a bridge loan commitment related to the Cabot Transaction. The decrease in interest expense during the year endedDecember 31, 2019 was also attributable to the favorable impact of the strengthening of theU.S. dollar relative to other foreign currencies. The decrease in interest expense was partially offset by (1) increases in LIBOR, which resulted in increased interest expense for the Encore Revolving Credit Facility and the Cabot Securitisation Senior Facility and (2) higher balances on the Encore Revolving Credit Facility, Cabot Securitisation Senior Facility, and Cabot Credit Facilities. In addition, the decrease was partially offset by$9.0 million of refinancing costs incurred during the year endedDecember 31, 2019 associated with the issuance of the 2024 Cabot Floating Rate Notes. 38 -------------------------------------------------------------------------------- Table of Contents Other Expense or Income Other expense or income consists primarily of foreign currency exchange gains or losses, interest income and gains or losses recognized on certain transactions outside of our normal course of business. Other expense was$18.3 million during the year endedDecember 31, 2019 and primarily included the loss recognized on the Baycorp Transaction of$12.5 million . Other expense was$8.8 million during the year endedDecember 31, 2018 and was primarily the result of a loss on a derivative contract of$9.3 million . OnMay 8, 2018 , in anticipation of the completion of the Cabot Transaction, we entered into a foreign exchange forward contract with a notional amount of £176.0 million, which was approximately the anticipated cash consideration for the Cabot Transaction. OnAugust 3, 2018 , we settled this contract in cash and recognized a total loss of$9.3 million . This loss was substantially offset by the decrease of final cash consideration inU.S. dollars for the Cabot Transaction. Provision for Income Taxes During the years endedDecember 31, 2019 and 2018, we recorded income tax provisions for income from continuing operations of$32.3 million and$46.8 million , respectively. The effective tax rates for the respective periods are shown below: Year Ended December 31, 2019 2018 Federal provision 21.0 % 21.0 % State provision 0.2 % 0.1 % Foreign rate differential(1) (2.2) % (11.7) % Transaction costs(2) 0.0 % 1.0 % Permanent items(3) 0.0 % 1.1 % Change in valuation allowance(4) (0.5) % 17.7 % IRS settlement(5) (2.4) % - % Other 0.0 % 0.7 % Effective rate 16.1 % 29.9 % ________________________ (1)Relates primarily to the lower tax rates on the income or loss attributable to international operations. (2)In 2018, relates primarily to transaction costs incurred in connection with the Cabot Transaction. (3)Represents a provision for nondeductible items. (4)Net decrease in valuation allowance during 2019 is attributable to disposition of certain foreign subsidiaries with cumulative operating losses for tax purposes. In 2018, valuation allowance net increase recorded as a result of certain foreign subsidiaries' cumulative operating losses for tax purposes. (5)In 2019, includes tax benefit resulting from tax accounting method change. The effective tax rate for the year endedDecember 31, 2019 decreased to 16.1% as compared to 29.9% for the year endedDecember 31, 2018 . The decrease was primarily related to the disposition of certain foreign entities with cumulative operating losses for tax purposes during the period endedDecember 31, 2019 . 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. 39 -------------------------------------------------------------------------------- Table of Contents Cost per Dollar Collected We utilize cost per dollar collected (or "cost-to-collect") in order to facilitate a comparison of approximate costs to cash collections from purchased receivables for our portfolio purchasing and recovery business. Cost-to-collect is calculated by dividing adjusted operating expenses by collections from purchased receivables. The calculation of adjusted operating expenses is illustrated in detail in the "Non-GAAP Disclosure" section. The following table summarizes our overall cost per dollar collected by geographic location during the periods presented: Year Ended December 31, 2019 2018 United States 40.3 % 42.4 % Europe 28.2 % 27.7 % Other geographies 54.3 % 47.0 % Overall cost per dollar collected 37.0 % 37.9 % Cost-to-collect decreased 90 basis points to 37.0% for the year endedDecember 31, 2019 from 37.9% during the prior year. The decrease in overall cost-to-collect was driven by improved cost-to-collect inthe United States , which was 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, (3) higher total collections that blended down fixed cost and reduced overall cost-to-collect, and (4) reduced cost-to-collect in the legal channel that was driven by improved court cost recovery rates. Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, product mix of purchases, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the changing regulatory and legislative environment. As discussed in the "Recent Accounting Pronouncements Not Yet Effective" section in "Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies" of the notes to the consolidated financial statements, effective for our financial statements for reporting periods subsequent toJanuary 1, 2020 , we will no longer capitalize our upfront court costs, instead we will expense all court costs as incurred, which will adversely impact the cost-to-collect metric but will have no impact on the amount of court cost payments incurred. 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 Income From Continuing Operations Per Share. Management uses non-GAAP adjusted income from continuing operations attributable to Encore and adjusted income from continuing operations per share (which we also refer to from time to time as adjusted earnings per share), to assess operating performance, in order to highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. Adjusted income from continuing operations attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible and exchangeable notes, acquisition, integration and restructuring related expenses, settlement fees and related administrative expenses, amortization of certain acquired intangible assets and other charges or gains that are not indicative of ongoing operations. 40 -------------------------------------------------------------------------------- Table of Contents The following table provides a reconciliation between income from continuing operations and diluted income from continuing operations per share attributable to Encore calculated in accordance with GAAP to adjusted income from continuing operations and adjusted income from continuing operations per share attributable to Encore, respectively. GAAP diluted earnings per share for the year endedDecember 31, 2017 , includes the effect of approximately 0.2 million common shares that were issuable upon conversion of certain convertible senior notes because the average stock price during the period exceeded the conversion price of these notes. However, as described in "Note 8: Borrowings-Encore Convertible Notes and Exchangeable Notes" in the notes to our consolidated financial statements, we have certain hedging transactions in place that have the effect of increasing the effective conversion and exchange price of some of these notes. Accordingly, while these common shares are included in our diluted earnings per share, the hedge transactions will offset the impact of this dilution and no shares will be issued unless our stock price exceeds the effective conversion price, thereby creating a discrepancy between the accounting effect of those notes under GAAP and their economic impact. There was no dilutive effect relating to our convertible or exchangeable notes during the year endedDecember 31, 2019 or during the year endedDecember 31, 2018 . We have presented the following metrics both including and excluding the dilutive effect of these convertible and exchangeable notes to better illustrate the economic impact of those notes and the related hedging transactions to shareholders (in thousands, except per share data): Year Ended December 31, 2019 2018 2017 Per Diluted Per Diluted Share- Share- Accounting Accounting Per Diluted Per Diluted and and Share- Share- $ Economic $ Economic $ Accounting Economic GAAP net income from continuing operations attributable to Encore, as reported$ 167,869 $ 5.33 $ 115,886 $ 4.06 $ 83,427 $ 3.16 $ 3.18 Adjustments: Convertible and exchangeable notes non-cash interest and issuance cost amortization 15,501 0.50 13,896 0.50 12,353 0.47 0.47 Acquisition, integration and restructuring related expenses(1) 7,049 0.22 11,506 0.40 16,628 0.63 0.63 Amortization of certain acquired intangible assets(2) 7,017 0.22 8,337 0.29 3,561 0.13 0.14 Net gain on fair value adjustments to contingent considerations(3) (2,300) (0.07) (5,664) (0.20) (2,822) (0.11) (0.11) Expenses related to withdrawn Cabot IPO(4) - - 2,984 0.10 15,339 0.58 0.58 Loss on derivatives in connection with the Cabot Transaction(5) - - 9,315 0.33 - - - Goodwill impairment(6) 10,718 0.34 - - - - - Loss on Baycorp Transaction(6) 12,489 0.40 - - - - - Income tax effect of the adjustments(7) (23,230) (0.74) (9,079) (0.32) (7,936) (0.30) (0.30) Impact from tax reform(8) - - - - 1,182 0.05 0.05 Change in tax accounting method(9) (7,825) (0.25) - - - - - Adjustments attributable to noncontrolling interest(10) - - (5,022) (0.18) (15,720) (0.60) (0.60) Adjusted income from continuing operations attributable to Encore$ 187,288 $ 5.95 $ 142,159 $ 4.98 $ 106,012 $ 4.01 $ 4.04 ________________________ (1)Amount represents acquisition, integration and restructuring related expenses, which for the year endedDecember 31, 2019 includes approximately$1.3 million of transaction costs incurred associated with the Baycorp Transaction. 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. 41 -------------------------------------------------------------------------------- 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 from continuing operations attributable to Encore and adjusted income from continuing operations per share. (3)Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers inEurope . We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of "Note 2: Fair Value Measurements" in the notes to our consolidated financial statements for further details. (4)Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM. 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. (5)Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction. We adjust for this amount because we believe the loss is not indicative of ongoing operations; therefore, adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors' results. (6)The Baycorp Transaction resulted in a goodwill impairment charge of$10.7 million and a loss on sale of$12.5 million during the year endedDecember 31, 2019 . We believe the goodwill impairment charge and the loss on sale are not indicative of ongoing operations, therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors' results. (7)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. We recognized approximately$17.5 million , or$0.55 per diluted share, in tax benefit as a result of the Baycorp Transaction, which is included in this income tax adjustment during the year endedDecember 31, 2019 . (8)As a result of the Tax Reform Act, we incurred a net additional tax expense of approximately$1.2 million during the year endedDecember 31, 2017 . We believe the Tax Reform Act related expenses are not indicative of our ongoing operations, therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors' results. (9)Amount represents the benefit from the tax accounting method change related to revenue reporting. We adjust for certain discrete tax items that are not indicative of our ongoing operations. (10)Certain of the above pre-tax adjustments include expenses recognized by our partially-owned subsidiaries. This adjustment represents the portion of the non-GAAP adjustments that are attributable to noncontrolling interest. Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before discontinued operations, interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, settlement fees and related administrative expenses and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows (in thousands): Year Ended December 31, 2019 2018 2017 GAAP net income, as reported$ 168,909 $ 109,736 $ 78,978
Adjustments:
Loss from discontinued operations, net of tax - - 199 Interest expense 226,760 240,048 204,161 Provision for income taxes 32,333 46,752 52,049 Depreciation and amortization 41,029 41,228 39,977 Stock-based compensation expense 12,557 12,980 10,399 Loss on derivative in connection with the Cabot Transaction(1) - 9,315 -
Acquisition, integration and restructuring related expenses(2)
7,049 7,523 11,962 Net gain on fair value adjustments to contingent considerations(3) (2,300) (5,664) (2,822) Expenses related to withdrawn Cabot IPO(4) - 2,984 15,339 Goodwill impairment(5) 10,718 - - Loss on Baycorp Transaction(5) 12,489 - - Interest income (3,693) (3,345) (3,635) Adjusted EBITDA$ 505,851 $ 461,557 $ 406,607 Collections applied to principal balance(6)$ 765,748 $ 759,014 $ 673,035 ________________________ 42
-------------------------------------------------------------------------------- Table of Contents (1)Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction. We adjust for this amount because we believe the loss is not indicative of ongoing operations; therefore, adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors' results. (2)Amount represents acquisition, integration and restructuring related expenses, which includes approximately$1.3 million of transaction costs incurred associated with the Baycorp Transaction during the year endedDecember 31, 2019 . We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors' results. (3)Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers inEurope . We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of "Note 2: Fair Value Measurements" in the notes to our consolidated financial statements for further details. (4)Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM. 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. (5)The Baycorp Transaction resulted in a goodwill impairment charge of$10.7 million and a loss on sale of$12.5 million during the year endedDecember 31, 2019 . We believe the goodwill impairment charge and the loss on sale are not indicative of ongoing operations, therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors' results. (6)Amount represents (a) gross collections from receivable portfolios less (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios. Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections for our portfolio purchasing and recovery business. Adjusted operating expenses for our portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out stock-based compensation expense, operating expenses related to non-portfolio purchasing and recovery business, acquisition, integration and restructuring related operating expenses, settlement fees and related administrative expenses and other charges or gains that are not indicative of ongoing operations. Adjusted operating expenses related to our portfolio purchasing and recovery business for the periods presented are as follows (in thousands):
Year Ended
2019 2018 2017 GAAP total operating expenses, as reported$ 951,336 $ 956,730 $ 862,498
Adjustments:
Operating expenses related to non-portfolio purchasing and recovery business(1)
(173,190) (193,715) (125,028) Stock-based compensation expense (12,557) (12,980) (10,399)
Acquisition, integration and restructuring related operating expenses(2)
(7,049) (7,523) (16,628) Expenses related to withdrawn Cabot IPO(3) - (2,984) (15,339) Goodwill impairment (10,718) - - Net gain on fair value adjustments to contingent considerations(4) 2,300 5,664 2,822 Adjusted operating expenses related to portfolio purchasing and recovery business$ 750,122 $ 745,192 $ 697,926
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(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 operating expenses (including approximately$1.3 million of transaction costs incurred associated with the Baycorp Transaction during the year endedDecember 31, 2019 and excluding amounts already included in stock-based compensation expense). We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors' results. (3)Amount represents expenses related to the proposed and later withdrawn initial public offering by CCM. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors' results. (4)Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers inEurope . We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of "Note 2: Fair Value Measurements" in the notes to our consolidated financial statements for further details. 43 -------------------------------------------------------------------------------- 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. During any fiscal quarter in which we acquire an entity that has portfolio, the entire historical portfolio of the acquired company is aggregated into static pools for the quarter of acquisition based on common characteristics, resulting in pools for that quarter that may consist of several different vintages of portfolio. These quarterly pools are included in the tables in this section by year of purchase. For example, with the acquisition of Cabot inJuly 2013 , all of Cabot's historical portfolio to the date of the acquisition (which included several years of historical purchases at various stages of maturity) is included in 2013 forEurope . 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. 44 -------------------------------------------------------------------------------- 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 December 31, 2019 Purchase Price(1) <2010 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total(2) Multiple(3) United States: <2010$ 1,403,708 $ 2,617,761 $ 478,541 $ 348,627 $ 237,650 $ 171,270 $ 124,564 $ 97,044 $ 74,026 $ 58,976 $ 48,698 $ 40,907 $ 4,298,064 3.1 2010 357,299 - 125,853 288,788 220,686 156,806 111,993 83,578 55,650 40,193 31,699 24,948 1,140,194 3.2 2011 383,805 - - 123,596 301,949 226,521 155,180 112,906 77,257 56,287 41,148 33,445 1,128,289 2.9 2012 548,818 - - - 187,721 350,134 259,252 176,914 113,067 74,507 48,832 37,327 1,247,754 2.3 2013 551,922 - - - - 230,051 397,646 298,068 203,386 147,503 107,399 84,665 1,468,718 2.7 2014 517,800 - - - - - 144,178 307,814 216,357 142,147 94,929 69,059 974,484 1.9 2015 499,429 - - - - - - 105,610 231,102 186,391 125,673 85,042 733,818 1.5 2016 553,648 - - - - - - - 110,875 283,035 234,690 159,279 787,879 1.4 2017 528,779 - - - - - - - - 111,902 315,853 255,048 682,803 1.3 2018 631,453 - - - - - - - - - 175,042 351,696 526,738 0.8 2019 679,875 - - - - - - - - - - 174,693 174,693 0.3 Subtotal 6,656,536 2,617,761 604,394 761,011 948,006 1,134,782 1,192,813 1,181,934 1,081,720 1,100,941 1,223,963 1,316,109 13,163,434 2.0Europe : 2013 619,079 - - - - 134,259 249,307 212,129 165,610 146,993 132,663 113,228 1,154,189 1.9 2014 630,342 - - - - - 135,549 198,127 156,665 137,806 129,033 105,337 862,517 1.4 2015 423,297 - - - - - - 65,870 127,084 103,823 88,065 72,277 457,119 1.1 2016 258,841 - - - - - - - 44,641 97,587 83,107 63,198 288,533 1.1 2017 464,110 - - - - - - - - 68,111 152,926 118,794 339,831 0.7 2018 455,549 - - - - - - - - - 49,383 118,266 167,649 0.4 2019 296,937 - - - - - - - - - - 44,118 44,118 0.1 Subtotal 3,148,155 - - - - 134,259 384,856 476,126 494,000 554,320 635,177 635,218 3,313,956 1.1 Other geographies: 2012 6,721 - - - - 3,848 2,561 1,208 542 551 422 390 9,522 1.4 2013 29,568 - - - - 6,617 17,615 10,334 4,606 3,339 2,468 1,573 46,552 1.6 2014 86,989 - - - - - 9,652 16,062 18,403 9,813 7,991 6,472 68,393 0.8 2015 83,198 - - - - - - 15,061 57,064 43,499 32,622 17,499 165,745 2.0 2016 64,450 - - - - - - - 29,269 39,710 28,992 16,078 114,049 1.8 2017 49,670 - - - - - - - - 15,471 23,075 15,383 53,929 1.1 2018 26,371 - - - - - - - - - 12,910 15,008 27,918 1.1 2019 2,668 - - - - - - - - - - 3,198 3,198 1.2 Subtotal 349,635 - - - - 10,465 29,828 42,665
109,884 112,383 108,480 75,601
489,306 1.4 Total$ 10,154,326 $ 2,617,761 $ 604,394 $ 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 $ 16,966,696 1.7
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(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 throughDecember 31, 2019 , excluding collections on behalf of others. (3)Cumulative Collections Multiple ("Multiple") throughDecember 31, 2019 refers to collections as a multiple of purchase price. 45 -------------------------------------------------------------------------------- Table of Contents Total Estimated Collections from Purchased Receivables to Purchase Price Multiple The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross collections for purchased receivables, by year of purchase (in thousands, except multiples): Estimated Total Estimated Gross Historical Remaining Total Estimated Collections to Purchase Price(1) Collections(2) Collections Gross Collections Purchase Price United States: <2010$ 1,403,708 $ 4,298,064 $ 84,162 $ 4,382,226 3.1 2010 357,299 1,140,194 43,752 1,183,946 3.3 2011 383,805 1,128,289 69,577 1,197,866 3.1 2012 548,818 1,247,754 80,806 1,328,560 2.4 2013(3) 551,922 1,468,718 226,760 1,695,478 3.1 2014(3) 517,800 974,484 152,772 1,127,256 2.2 2015 499,429 733,818 172,175 905,993 1.8 2016 553,648 787,879 314,521 1,102,400 2.0 2017 528,779 682,803 491,853 1,174,656 2.2 2018 631,453 526,738 818,780 1,345,518 2.1 2019 679,875 174,693 1,303,125 1,477,818 2.2 Subtotal 6,656,536 13,163,434 3,758,283 16,921,717 2.5 Europe: 2013(3) 619,079 1,154,189 694,503 1,848,692 3.0 2014(3) 630,342 862,517 551,966 1,414,483 2.2 2015(3) 423,297 457,119 380,155 837,274 2.0 2016 258,841 288,533 336,439 624,972 2.4 2017 464,110 339,831 598,570 938,401 2.0 2018 455,549 167,649 672,146 839,795 1.8 2019 296,937 44,118 565,983 610,101 2.1 Subtotal 3,148,155 3,313,956 3,799,762 7,113,718 2.3 Other geographies: 2012 6,721 9,522 482 10,004 1.5 2013 29,568 46,552 2,214 48,766 1.6 2014 86,989 68,393 68,373 136,766 1.6 2015 83,198 165,745 26,970 192,715 2.3 2016 64,450 114,049 15,187 129,236 2.0 2017 49,670 53,929 44,093 98,022 2.0 2018 26,371 27,918 16,969 44,887 1.7 2019 2,668 3,198 722 3,920 1.5 Subtotal 349,635 489,306 175,010 664,316 1.9 Total$ 10,154,326 $ 16,966,696 $ 7,733,055 $ 24,699,751 2.4
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(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 throughDecember 31, 2019 , excluding collections on behalf of others. (3)Includes portfolios acquired in connection with certain business combinations. 46 -------------------------------------------------------------------------------- Table of Contents Estimated Remaining Gross Collections from Purchased Receivables by Year of Purchase The following table summarizes our estimated remaining gross collections for purchased receivables by year of purchase (in thousands):
Estimated Remaining Gross Collections by Year of Purchase(1), (2)
2020 2021 2022 2023 2024 2025 2026 2027
2028 >2028 Total(3)United States : <2010$ 36,427 $ 23,517 $ 14,684 $ 7,608 $ 1,926 $ - $ - $ - $ - $ -$ 84,162 2010 15,238 10,591 7,439 5,240 3,696 1,548 - - - - 43,752 2011 23,594 16,063 11,143 7,822 5,508 3,884 1,563 - - - 69,577 2012 26,491 18,248 12,610 8,826 6,211 4,380 3,094 946 - - 80,806 2013(4) 64,630 51,329 36,333 25,667 18,165 12,884 9,143 6,490 2,119 - 226,760 2014(4) 48,489 33,595 23,126 15,902 10,899 7,676 5,433 3,850 2,731 1,071 152,772 2015 58,742 37,379 25,721 17,280 11,595 7,527 5,152 3,630 2,563 2,586 172,175 2016 106,773 70,017 43,489 29,615 20,861 14,622 10,048 7,057 4,963 7,076 314,521 2017 167,896 109,009 72,033 45,566
30,750 21,339 14,949 10,413 7,344 12,554
491,853 2018 297,261 184,050 119,778 77,459
49,205 32,749 22,038 14,902 9,811 11,527
818,780 2019 401,288 340,755 195,987 123,246
83,984 57,723 40,791 29,503 21,131
8,717 1,303,125 Subtotal 1,246,829 894,553 562,343 364,231 242,800 164,332 112,211 76,791 50,662 43,531 3,758,283Europe : 2013(4) 103,100 98,801 93,026 86,592
79,194 71,572 64,135 57,813 40,270
- 694,503 2014(4) 88,964 81,449 73,765 67,389
59,729 50,985 43,913 38,911 34,776 12,085
551,966 2015(4) 59,404 52,884 47,470 43,021
38,325 33,377 28,333 24,867 22,411 30,063
380,155 2016 58,856 60,458 44,231 37,186
29,742 25,343 23,922 16,127 13,861 26,713
336,439 2017 97,872 89,186 77,349 65,927
55,536 46,462 38,411 32,235 26,073 69,519
598,570 2018 106,980 94,045 80,080 69,976
60,541 52,211 45,361 38,474 31,720 92,758
672,146 2019 85,762 82,763 72,295 61,404
51,048 41,565 34,663 29,653 25,682 81,148
565,983 Subtotal 600,938 559,586 488,216 431,495 374,115 321,515 278,738 238,080 194,793 312,286 3,799,762 Other geographies: 2012 205 173 104 - - - - - - - 482 2013 872 648 461 233 - - - - - - 2,214 2014 7,532 9,848 8,243 7,831 7,018 5,586 3,357 1,819 1,709 15,430 68,373 2015(4) 5,295 4,531 3,996 3,246 2,266 1,517 1,050 920 795 3,354 26,970 2016 6,450 4,672 3,120 812 87 39 7 - - - 15,187 2017 9,192 8,067 6,105 4,514 2,629 2,281 1,627 893 865 7,920 44,093 2018 5,673 4,110 2,960 2,016 1,000 537 351 230 92 - 16,969 2019 270 181 122 82 56 11 - - - - 722 Subtotal 35,489 32,230 25,111 18,734 13,056 9,971 6,392 3,862 3,461 26,704 175,010 Total$ 1,883,256 $ 1,486,369 $ 1,075,670 $ 814,460
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(1)ERC for Zero Basis Portfolios can extend beyond our collection forecasts. As ofDecember 31, 2019 , ERC for Zero Basis Portfolios includes approximately$127.9 million for purchased consumer and bankruptcy receivables inthe United States . ERC for Zero Basis Portfolios inEurope and other geographies was immaterial. ERC also includes approximately$110.3 million from cost recovery portfolios, primarily in other geographies. (2)The collection forecast of each pool in the calculation of accretion revenue is generally estimated up to 120 months inthe United States and up to 180 months inEurope . Expected collections beyond the 120-month collection forecast inthe United States are included in the presentation of ERC but are not included in the calculation of IRRs. (3)Represents the expected remaining gross cash collections on purchased portfolios over a 180-month period. As ofDecember 31, 2019 , ERC for purchased receivables for 84-month and 120-month periods were: 84-Month ERC 120-Month ERC United States 3,587,300 3,739,633 Europe 3,054,604 3,600,233 Other geographies 140,984 151,542 Total 6,782,888 7,491,408
(4) Includes portfolios acquired in connection with certain business combinations.
47 -------------------------------------------------------------------------------- Table of Contents Unamortized Balances of Portfolios The following table summarizes the remaining unamortized balances of our purchased receivable portfolios by year of purchase (in thousands, except percentages): Unamortized Unamortized Unamortized Balance Balance as a Balance as a as of December 31, Purchase Percentage of Percentage 2019 Price(1) Purchase Price of Total United States: 2011$ 2,546 $ 383,805 0.7 % 0.1 % 2012 5,916 548,818 1.1 % 0.2 % 2013(2) 14,697 551,922 2.7 % 0.4 % 2014(2) 50,097 517,800 9.7 % 1.5 % 2015 82,187 499,429 16.5 % 2.5 % 2016 149,159 553,648 26.9 % 4.5 % 2017 198,714 528,779 37.6 % 6.1 % 2018 409,717 631,453 64.9 % 12.5 % 2019 626,911 679,875 92.2 % 19.1 % Subtotal 1,539,944 4,895,529 31.5 % 46.9 % Europe: 2013(2) 238,033 619,079 38.4 % 7.2 % 2014(2) 206,895 630,342 32.8 % 6.3 % 2015(2) 160,113 423,297 37.8 % 4.9 % 2016 140,663 258,841 54.3 % 4.3 % 2017 290,071 464,110 62.5 % 8.8 % 2018 347,399 455,549 76.3 % 10.6 % 2019 264,903 296,937 89.2 % 8.1 % Subtotal 1,648,077 3,148,155 52.4 % 50.2 % Other geographies: 2014 60,479 86,989 69.5 % 1.8 % 2015 6,240 83,198 7.5 % 0.2 % 2016 4,680 64,450 7.3 % 0.1 % 2017 15,894 49,670 32.0 % 0.5 % 2018 8,330 26,371 31.6 % 0.3 % 2019 340 2,668 12.7 % 0.0 % Subtotal 95,963 313,346 30.6 % 2.9 % Total$ 3,283,984 $ 8,357,030 39.3 % 100.0 % ________________________ (1)Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. (2)Includes portfolios acquired in connection with certain business combinations. 48 -------------------------------------------------------------------------------- Table of Contents Estimated Future Amortization of Portfolios As ofDecember 31, 2019 , we had$3.3 billion in investment in receivable portfolios. This balance will be amortized based upon current projections of cash collections in excess of revenue applied to the principal balance. The estimated amortization of the investment in receivable portfolios balance is as follows (in thousands): Other Total Years Ending December 31, United States Europe Geographies Amortization 2020$ 490,321 $ 193,958 $ 16,067 $ 700,346 2021 391,655 202,906 18,140 612,701 2022 235,306 179,320 15,618 430,244 2023 150,312 167,795 10,277 328,384 2024 99,254 153,618 7,368 260,240 2025 66,509 141,433 6,045 213,987 2026 46,443 135,836 3,596 185,875 2027 32,055 131,219 1,987 165,261 2028 20,610 126,117 1,787 148,514 2029 7,479 71,236 1,706 80,421 2030 - 52,379 1,703 54,082 2031 - 39,122 1,700 40,822 2032 - 30,183 1,697 31,880 2033 - 16,888 1,695 18,583 2034 - 6,067 1,692 7,759 Thereafter - - 4,885 4,885 Total$ 1,539,944 $ 1,648,077 $ 95,963 $ 3,283,984 Headcount by Function by Geographic Location The following table summarizes our headcount by function and by geographic location: Headcount as of December 31, 2019 2018 2017 Domestic International Domestic International(1) Domestic International(2) General & Administrative 1,106 2,171 1,060 2,381 923 2,693 Account Manager 418 3,560 504 3,921 381 4,239 Total 1,524 5,731 1,564 6,302 1,304 6,932 ________________________ (1)Headcount as ofDecember 31, 2018 includes 191 general and administrative and 361 account manager Baycorp employees. (2)Headcount as ofDecember 31, 2017 includes 262 general and administrative and 509 account manager Refinancia employees and 191 general and administrative and 379 account manager Baycorp employees. 49 -------------------------------------------------------------------------------- Table of Contents Purchases by Quarter The following table summarizes the receivable portfolios we purchased by quarter, and the respective purchase prices (in thousands): # of Purchase Quarter Accounts Face Value Price Q1 2017 807$ 1,657,393 $ 218,727 Q2 2017 1,347 2,441,909 246,415 Q3 2017 1,010 3,018,072 292,332 Q4 2017 1,434 2,985,978 300,761 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 Liquidity and Capital Resources Liquidity The following table summarizes our cash flow activity, including the cash flows from discontinued operations, for the periods presented (in thousands): Year
Ended
2019 2018 2017 Net cash provided by operating activities$ 244,733 $ 186,791 $ 123,818 Net cash used in investing activities (202,333) (397,516) (452,131) Net cash (used in) provided by financing activities (19,770) 166,377 378,217 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, 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$244.7 million ,$186.8 million , and$123.8 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively. Cash provided by operating activities is affected by net income, various non-cash add backs in operating activities, including portfolio allowance reversals, and changes in operating assets and liabilities. The primary drivers of the changes in operating cash flow included cash collections recognized as revenue from receivable portfolios, income tax payments, and interest payments. Cash collections recognized as revenue from receivable portfolios were$1,269.3 million ,$1,167.1 million , and$1,053.4 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively. Cash paid for income taxes, net of income tax refunds, was$44.0 million ,$5.7 million , and$42.4 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively. Interest payments were$178.9 million ,$198.8 million , and$162.5 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively. 50 -------------------------------------------------------------------------------- Table of Contents Investing Cash Flows Net cash used in investing activities was$202.3 million ,$397.5 million and$452.1 million during the years endedDecember 31, 2019 , 2018 and 2017, 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. Receivable portfolio purchases were$1,035.1 million ,$1,131.1 million , and$1,045.8 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively. Collection proceeds applied to the principal of our receivable portfolios were$757.6 million ,$809.7 million , and$709.4 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively. Financing Cash Flows Net cash used in financing activities was$19.8 million for the year endedDecember 31, 2019 , and cash provided by financing activities was$166.4 million and$378.2 million for the years endedDecember 31, 2018 and 2017, respectively. Cash provided by financing activities is primarily affected by borrowings under our credit facilities and proceeds from the issuance of convertible and exchangeable notes offset by repayments of amounts outstanding under our credit facilities, repayments of senior secured notes, and repayments of Encore's convertible and exchangeable notes. Borrowings under our credit facilities were$603.6 million ,$942.2 million and$1,434.5 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively. Proceeds from the issuance of convertible and exchangeable notes were$100.0 million ,$172.5 million and$150.0 million during the years endedDecember 31, 2019 , 2018 and 2017. Repayments of amounts outstanding under our credit facilities were$586.4 million ,$571.1 million and$1,168.1 million and repayments of senior secured notes were$470.8 million ,$91.6 million and$204.2 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively. Capital Resources Historically, we have met our cash requirements by utilizing our cash flows from operations, bank borrowings, debt offerings, and equity offerings. From time to time, depending on the capital markets, we consider additional financings to fund our operations and acquisitions. From time to time, we may repurchase outstanding debt or equity and/or restructure or refinance current 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. We have a revolving credit facility (the "Revolving Credit Facility") and term loan facility (the "Term Loan Facility", and together with the Revolving Credit Facility, the "Senior Secured Credit Facilities") pursuant to a Third Amended and Restated Credit Agreement datedDecember 20, 2016 (as amended, the "Restated Credit Agreement"). The Senior Secured Credit Facilities have a five-year maturity, expiring inDecember 2021 . As ofDecember 31, 2019 , we had$492.0 million outstanding and$272.3 million of availability under the Revolving Credit Facility and$171.7 million outstanding under the Term Loan Facility. Through Cabot, we have a revolving credit facility of £375.0 million (approximately$497.2 million ) (the "Cabot Credit Facility"). As ofDecember 31, 2019 , we had £215.5 million (approximately$285.7 million ) outstanding and £159.5 million (approximately$211.5 million ) of availability under the Cabot Credit Facility. InAugust 2018 , we established an at-the-market equity offering program (the "ATM Program") pursuant to which we may issue and sell shares of Encore's common stock having an aggregate offering price of$50.0 million . During the year endedDecember 31, 2019 , we did not issue any shares under our ATM Program. We have issued a total of 13,600 shares under our ATM Program, generating proceeds of approximately$0.54 million , net of commissions of approximately$5,000 . We have no obligation to sell any of such shares under our ATM Program. Actual sales will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of our common stock, our determination of the appropriate sources of funding for the Company, and potential uses of funding available to us. We intend to use the net proceeds from the offering of such shares, if any, for general corporate purposes, which could include repayments of our credit facilities from time to time. Currently, all of our portfolio purchases are funded with cash from operations and borrowings under our Senior Secured Credit Facilities and our Cabot Credit Facility. 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 atDecember 31, 2019 consisted of$51.5 million held byU.S. -based entities and$140.8 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that ourU.S. sources of cash and liquidity are sufficient to meet our business needs inthe United States and do not expect that we will need to repatriate the funds. 51 -------------------------------------------------------------------------------- Table of Contents We believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and businesses. Future Contractual Cash Obligations The following table summarizes our future contractual cash obligations as ofDecember 31, 2019 (in thousands): Payment Due By Period Less More Than Than Contractual Obligations Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years Principal payments on debt$ 3,578,313 $ 194,467
726,020 188,875 350,489 183,406 3,250 Finance leases 8,740 2,898 5,245 597 - Operating leases 114,775 17,898 30,571 24,809 41,497 Purchase commitments on receivable portfolios 298,938 298,938 - - -
Total contractual cash obligations(2)
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(1)Estimated interest payments are calculated based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as ofDecember 31, 2019 for variable rate debt, timing of scheduled payments and the term of the debt obligations. (2)We had approximately$8.2 million of liabilities and accrued interests related to uncertain tax positions atDecember 31, 2019 . We are unable to reasonably estimate the timing of the cash settlement with the tax authorities due to uncertainties related to these tax matters and, as a result, these obligations are not included in the table. See "Note 11: Income Taxes" to our consolidated financial statements for additional information on our uncertain tax positions. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K. Critical Accounting Policies and Estimates We prepare our financial statements, in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. "Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies" of the notes to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates and such differences may be material. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors. Investment in Receivable Portfolios and Related Revenue. Static pools are established on a quarterly basis with accounts purchased during the quarter that have common risk characteristics. Discrete receivable portfolio purchases during a quarter are aggregated into pools based on these common risk characteristics. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because we expect to collect a relatively small percentage of each static pool's contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios. We account for our investments in consumer receivable portfolios using either the interest method or the cost recovery method. The interest method applies an IRR to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows. Subsequent increases in expected cash flows are generally recognized prospectively through an upward adjustment of the pool's IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of operations as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition. 52 -------------------------------------------------------------------------------- Table of Contents We account for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool's IRR applied to each pool's adjusted cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances. If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, we account for that pool using the cost recovery method. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the carrying value of a cost recovery portfolio has been fully recovered. EffectiveJanuary 1, 2020 , our investment in receivable portfolios is accounted for under CECL. Deferred Court Costs. We pursue legal collection using a network of attorneys that specialize in collection matters and through our internal legal channel. We generally pursue collections through legal means only when we believe a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In connection with our agreements with our contracted attorneys, we advance certain out-of-pocket court costs, or Deferred Court Costs. We capitalize these costs in the consolidated financial statements and provide a reserve for those costs that we believe will ultimately be uncollectible. We determine the reserve based on our analysis of historical court costs recovery data. We estimate deferral periods for Deferred Court Costs based on jurisdiction and nature of litigation and write off any Deferred Court Costs not recovered within the respective deferral period. Collections received through litigation are first applied against related court costs with the balance applied to the debtors' account. EffectiveJanuary 1, 2020 , in connection with the adoption of CECL, we expense all upfront court costs in our statements of operations and include all future projected recoveries of these upfront court costs in the measurement of our investment in receivable portfolios, at a discounted value. Valuation ofGoodwill and Other Intangible Assets. Business combinations typically result in the recording of goodwill and other intangible assets. The excess of the purchase price over the fair value assigned to the tangible and identifiable intangible assets, liabilities assumed, and noncontrolling interest in the acquiree is recorded as goodwill.Goodwill is tested annually for impairment and in interim periods if events or changes in circumstances indicate that the assets may be impaired. Our judgments regarding the existence of impairment indicators and future cash flows related to goodwill may be based on economic environment, business climate, market capitalization, operating performance, competition, and other factors. Significant judgments are required to estimate the fair value of reporting units including estimating future cash flows, determining appropriate discount rates, growth rates, comparable guideline companies and other assumptions. Future business conditions and/or activities could differ materially from the projections made by management, which in turn, could result in the need for impairment charges. We will perform additional impairment testing if events occur or circumstances change indicating that the carrying amounts may be impaired. 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. Income Taxes. We use the liability method of accounting for income taxes. When we prepare the consolidated financial statements, we estimate our income taxes based on the various jurisdictions where we conduct business. This requires us to estimate our current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. Deferred income taxes are recognized based on the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We then assess the likelihood that our deferred tax assets will be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding tax expense in our statement of operations. When we reduce our valuation allowance in an accounting period, we record a corresponding tax benefit in our statement of operations. We include interest and penalties related to income taxes within our provision for income taxes. See "Note 11: Income Taxes" to our consolidated financial statements for further discussion of income taxes. Recent Accounting Pronouncements Information regarding recent accounting pronouncements and the impact of those pronouncements, if any, on our consolidated financial statements is provided in this Annual Report in "Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies" to our consolidated financial statements. 53
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