ENCORE CAPITAL GROUP, INC. This Quarterly Report on Form 10-Q contains "forward-looking statements" relating toEncore Capital Group, Inc. ("Encore") and its subsidiaries (which we may collectively refer to as the "Company," "we," "our" or "us") within the meaning of the securities laws. The words "believe," "expect," "anticipate," "estimate," "project," "intend," "plan," "will," "may," and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services, financing needs or plans or the impacts of the COVID-19 pandemic, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings, or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors including, but not limited to, those set forth in our Annual Report on Form 10-K under "Part I, Item 1A-Risk Factors" and those set forth in "Part II, Item 1A, Risk Factors" of this Quarterly Report could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties. Our Business We are an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. We 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 . Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a range of debt servicing offerings such as early stage collections, business process outsourcing ("BPO"), and contingent collections, including throughWescot Credit Services Limited ("Wescot"), a leadingU.K. contingency debt collection and BPO services company. LAAP (Latin America andAsia-Pacific ) We have purchased non-performing loans inMexico . Additionally, we have invested inEncore Asset Reconstruction Company ("EARC") inIndia . We previously owned non-performing loans inColombia andPeru (sold inAugust 2021 ) andBrazil (sold inApril 2020 ). 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 . 25 -------------------------------------------------------------------------------- Table of Contents Recent Developments InMarch 2020 , theWorld Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns (including court closures in certain jurisdictions). While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations for an indefinite period of time. Through a combination of work-from-home and social distancing, we remain fully operational in all the markets we serve. As a result of the COVID-19 pandemic and the resulting containment measures, we have observed, among other things, a decrease in supply in both US andEurope driven mainly by a decrease in charge off rates. Government Regulation MCM (United States) As discussed in more detail under "Part I - Item 1 - Business - Government Regulation" contained in our Annual Report on Form 10-K, ourU.S. debt purchasing business and collection activities are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices. OnOctober 30, 2020 , theCFPB issued final rules in the form of a new Regulation F to implement the Fair Debt Collection Practices Act, which rules restate and clarify prohibitions on harassment and abuse, false or misleading representations, and unfair practices by debt collectors when collecting consumer debt. The rules included provisions related to, among other things, the use of newer technologies (text, voicemail and email) to communicate with consumers and limits relating to telephonic communications. OnDecember 18, 2020 , theCFPB also issued an additional debt collection final rule focused on consumer disclosures. This final rule amends Regulation F to provide additional requirements regarding validation information and disclosures provided at the outset of debt collection communications, prohibit suits and threats of suits regarding time-barred debt, and identify actions that must be taken before a debt collector may report information about a debt to consumer reporting agencies. The rules will become effective onNovember 30, 2021 . Based on our assessment of the rules, we believe that the new rules will not have a material incremental effect on our operations. Cabot (Europe ) As discussed in more detail under "Part I - Item 1 - Business - Government Regulation" contained in our Annual Report on Form 10-K, our operations inEurope are affected by foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations, ordinances, guidelines and procedures are modified from time to time by the relevant authorities charged with their administration, which could affect the way we conduct our business. Portfolio Purchasing and Recovery MCM (United States) Inthe United States , the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt portfolios. A small percentage of our capital deployment inthe United States comprises of receivable portfolios subject to Chapter 13 and Chapter 7 bankruptcy proceedings. We purchase receivables based on robust, account-level valuation methods and employ proprietary statistical and behavioral models across 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 . 26 -------------------------------------------------------------------------------- Table of Contents Cabot (Europe) InEurope , our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan accounts. We also purchase: (1) portfolios that are in insolvency status, in particular, individual voluntary arrangements; and (2) non-performing secured mortgage portfolios and real estate assets previously securing mortgage portfolios. When we take possession of the underlying real estate assets or purchase real estate assets, we refer to those as real estate-owned assets, or REO assets. We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows us to value portfolios accurately and quantify portfolio performance in order to maximize future collections. As a result, we have been able to realize significant returns from the assets we have acquired. We maintain strong relationships with many of the largest financial services providers in theUnited Kingdom and continue to expand in theUnited Kingdom and the rest ofEurope with our acquisitions of portfolios. Purchases and Collections Portfolio Pricing, Supply and Demand MCM (United States ) Issuers have continued to sell predominantly fresh portfolios. Fresh portfolios are portfolios that are generally sold within six months of the consumer's account being charged-off by the financial institution. Pricing in the third quarter remained in line with previous periods. Issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year. We are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply. We have observed a decrease in supply as a result of the COVID-19 pandemic, but expect supply to ultimately increase. 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 ) TheU.K. market for charged-off portfolios has generally provided a relatively consistent pipeline of opportunities over the past few years, despite an ongoing historic low level of charge-off rates, as creditors have embedded debt sales as an integral part of their business models and consumer indebtedness has continued to grow since the financial crisis. The Spanish debt market continues to be one of the largest inEurope with significant debt sales activity, and an expectation of a significant amount of debt to be sold and serviced in the future. Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should continue to provide debt purchasing opportunities inSpain . Across all of our European markets, we are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply of portfolios to purchase. Due to the COVID-19 pandemic, banks decreased portfolio sales during 2020 in order to focus on customers' needs. While we have seen a resumption of sales activity across many of our European markets in 2021, underlying default rates are generally low by historic levels, and sales levels are expected to fluctuate from quarter to quarter as banks seek to re-establish a more stable debt sales strategy. In general, supply remains below pre-pandemic levels while portfolio pricing has become more competitive across our European footprint. 27 -------------------------------------------------------------------------------- Table of Contents Purchases by Geographic Location The following table summarizes the geographic locations of receivable portfolios purchased during the periods presented (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 MCM (United States)$ 102,339 $ 141,066 $ 284,230 $ 451,141 Cabot (Europe) 65,849 29,065 196,864 81,042
Total purchases of receivable portfolios
During the three months endedSeptember 30, 2021 , we invested$168.2 million to acquire receivable portfolios, with face values aggregating$1.4 billion , for an average purchase price of 12.0% of face value. The amount invested in receivable portfolios decreased$1.9 million , or 1.1%, compared with the$170.1 million invested during the three months endedSeptember 30, 2020 , to acquire receivable portfolios with face values aggregating$1.8 billion , for an average purchase price of 9.5% of face value. During the nine months endedSeptember 30, 2021 , we invested$481.1 million to acquire receivable portfolios, with face values aggregating$3.9 billion , for an average purchase price of 12.4% of face value. The amount invested in receivable portfolios decreased$51.1 million , or 9.6%, compared with the$532.2 million invested during the nine months endedSeptember 30, 2020 , to acquire receivable portfolios with face values aggregating$4.8 billion , for an average purchase price of 11.1% of face value. Inthe United States , purchases of receivable portfolios decreased during the three and nine months endedSeptember 30, 2021 as compared to the corresponding periods in the prior year. The majority of our purchases 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 decrease in purchases in theU.S. is a result of a decrease in supply, which we believe is temporary. InEurope , purchases of receivable portfolios increased during the three and nine months endedSeptember 30, 2021 as compared to the corresponding periods in the prior year. The increases were primarily the result of a relatively limited supply of portfolios and a continuation of our selective purchasing process in conjunction with a plan to reduce European debt leverage during the three and nine months endedSeptember 30, 2020 . The increases were also attributable to the favorable impact from foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound. The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios. During the three months endedSeptember 30, 2021 and 2020, we invested$8.1 million and$0.2 million in REO assets, respectively. During the nine months endedSeptember 30, 2021 and 2020, we invested$11.7 million and$1.5 million in REO assets, respectively. 28 -------------------------------------------------------------------------------- Table of Contents Collections from Purchased Receivables by Channel and Geographic Location We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections by third parties to whom we pay a fee or commission. We utilize this channel to supplement capacity in our internal call centers, to service accounts in regions where we do not have collections operations or for accounts purchased where we maintain the collection agency servicing relationship. The following table summarizes the total collections by collection channel and geographic area during the periods presented (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 MCM (United States ): Call center and digital collections$ 234,923 $ 246,689 $ 762,487 $ 709,780 Legal collections 170,538 139,473 510,285 431,096 Collection agencies 1,121 4,699 6,833 10,766 Subtotal 406,582 390,861 1,279,605 1,151,642 Cabot (Europe): Call center and digital collections 71,192 65,182 226,873 182,206 Legal collections 45,144 40,171 137,926 115,107 Collection agencies 39,053 36,120 121,545 104,634 Subtotal 155,389 141,473 486,344 401,947 Other geographies: Collection agencies 4,719 7,414 19,629 21,653 Subtotal 4,719 7,414 19,629 21,653
Total collections from purchased receivables
Gross collections from purchased receivables increased by$26.9 million , or 5.0%, to$566.7 million during the three months endedSeptember 30, 2021 , from$539.7 million during the three months endedSeptember 30, 2020 . Gross collections from purchased receivables increased by$210.3 million , or 13.4%, to$1,785.6 million during the nine months endedSeptember 30, 2021 , from$1,575.2 million during the nine months endedSeptember 30, 2020 . The increase in collections from purchased receivables inthe United States was primarily driven by changes in consumer behavior during the COVID-19 pandemic, an increase in legal channel collections and our continued effort in improving liquidation. We are frequently being called upon by our consumers to assist them with their financial recovery through inbound calls and online digital interaction. The large volume of consumer contact resulted in a significant increase in collections and improved our operating efficiency. The increase in collections from purchased receivables inEurope was primarily due to reduced collections in the prior year resulting from the impacts of the COVID-19 pandemic and the favorable impact from foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound. The COVID-19 pandemic and the resulting containment measures, including impacts to the legal collections process, negatively affected legal collections during the three and nine months endedSeptember 30, 2020 . We are closely monitoring the impacts of the COVID-19 pandemic on collections and cost-to-collect. 29
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Table of Contents
Results of Operations
Results of operations, in dollars and as a percentage of total revenues,
adjusted by net allowances, were as follows (in thousands, except percentages):
Three Months Ended
2021 2020
Revenues
Revenue from receivable portfolios$ 316,225 76.6 %$ 342,489 84.8 % Changes in recoveries 65,913 16.0 % 30,451 7.6 % Total debt purchasing revenue 382,138 92.6 % 372,940 92.4 % Servicing revenue 29,321 7.1 % 29,787 7.4 % Other revenues 1,165 0.3 % 949 0.2 % Total revenues 412,624 100.0 % 403,676 100.0 % Operating expenses Salaries and employee benefits 94,662 22.9 % 95,979 23.8 % Cost of legal collections 64,170 15.6 % 60,383 15.0 % General and administrative expenses 35,819 8.7 % 53,459 13.2 % Other operating expenses 25,226 6.1 % 28,088 7.0 % Collection agency commissions 11,964 2.9 % 12,703 3.1 % Depreciation and amortization 14,136 3.4 % 10,609 2.6 % Total operating expenses 245,977 59.6 % 261,221 64.7 % Income from operations 166,647 40.4 % 142,455 35.3 % Other expense Interest expense (40,874) (9.9) % (52,974) (13.1) % Loss on extinguishment of debt - - % (14,988) (3.7) % Other (expense) income (17,504) (4.2) % 361 0.1 % Total other expense (58,378) (14.1) % (67,601) (16.7) % Income before income taxes 108,269 26.3 % 74,854 18.6 % Provision for income taxes (24,703) (6.0) % (19,747) (4.9) % Net income 83,566 20.3 % 55,107 13.7 % Net income attributable to noncontrolling interest - - % (457) (0.1) % Net income attributable toEncore Capital Group, Inc. stockholders$ 83,566 20.3 %$ 54,650 13.6 % 30
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Table of Contents
Nine Months Ended
2021 2020
Revenues
Revenue from receivable portfolios$ 982,393 78.1 %$ 1,035,141 92.5 % Changes in recoveries 176,628 14.1 % (2,203) (0.2) % Total debt purchasing revenue 1,159,021 92.2 % 1,032,938 92.3 % Servicing revenue 93,901 7.5 % 82,417 7.4 % Other revenues 4,274 0.3 % 3,435 0.3 % Total revenues 1,257,196 100.0 % 1,118,790 100.0 % Operating expenses Salaries and employee benefits 288,892 23.0 % 279,944 25.0 % Cost of legal collections 198,212 15.8 % 164,018 14.7 % General and administrative expenses 102,790 8.1 % 113,954 10.2 % Other operating expenses 81,895 6.5 % 83,527 7.5 % Collection agency commissions 38,465 3.1 % 36,562 3.3 % Depreciation and amortization 37,694 3.0 % 31,436 2.8 % Total operating expenses 747,948 59.5 % 709,441 63.5 % Income from operations 509,248 40.5 % 409,349 36.5 % Other expense Interest expense (131,559) (10.5) % (157,963) (14.1) % Loss on extinguishment of debt (9,300) (0.7) % (14,988) (1.4) % Other expense (16,993) (1.4) % (1,211) (0.1) % Total other expense (157,852) (12.6) % (174,162) (15.6) % Income before income taxes 351,396 27.9 % 235,187 20.9 % Provision for income taxes (76,278) (6.1) % (59,875) (5.4) % Net income 275,118 21.8 % 175,312 15.5 % Net income attributable to noncontrolling interest (419) 0.0 % (784) (0.1) % Net income attributable toEncore Capital Group, Inc. stockholders$ 274,699 21.8 %$ 174,528 15.4 % Comparison of Results of Operations Revenues Our revenues primarily include revenue recognized from engaging in debt purchasing and recovery activities, our debt purchasing revenue. EffectiveJanuary 1, 2020 , we adopted the CECL accounting standard. Under CECL, we apply our charge-off policy and fully write-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables we acquire immediately after purchasing the portfolio. We then record a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as "Investment in receivable portfolios, net" in our consolidated statements of financial condition. The discount rate is an effective interest rate (or "purchase EIR") established based on the purchase price of the portfolio and the expected future cash flows at the time of purchase. Debt purchasing revenue includes two components: (1) Revenue from receivable portfolios, which is the accretion of the discount on the negative allowance due to the passage of time (generally the portfolio balance multiplied by the EIR), and (2) Changes in recoveries, which includes (a) Recoveries above (below) forecast, which is the difference between (i) actual cash collected/recovered during the current period and (ii) expected cash recoveries for the current period, which generally represents over or under performance for the period; and 31 -------------------------------------------------------------------------------- (b) Changes in expected future recoveries, which is the present value change of expected future recoveries, where such change generally results from (i) collections "pulled forward from" or "pushed out to" future periods (i.e. amounts either collected early or expected to be collected later) and (ii) magnitude and timing changes to estimates of expected future collections (which can be increases or decreases). Certain pools already fully recovered their cost basis and became zero basis portfolios ("ZBA") prior to our adoption of CECL. We did not establish a negative allowance for these pools as we elected theTransition Resource Group for Credit Losses' practical expedient to retain the integrity of these legacy pools. Similar to how we treated ZBA collections prior to the adoption of CECL, all subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in our consolidated statements of operations. Servicing revenue consists primarily of fee-based income earned on accounts collected on behalf of others, primarily credit originators. We earn fee-based income by providing debt servicing (such as early stage collections, BPO, contingent collections, trace services and litigation activities) to credit originators for non-performing loans. Other revenues primarily include revenues recognized from the sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios inEurope and LAAP. Other revenues may include gains recognized on transfers of financial assets. The following table summarizes revenues for the periods presented (in thousands, except percentages): Three Months Ended September 30, 2021 2020 $ Change % Change Revenue recognized from portfolio basis$ 304,341 $ 329,106 $ (24,765) (7.5) % ZBA revenue 11,884 13,383 (1,499) (11.2) % Revenue from receivable portfolios 316,225 342,489 (26,264) (7.7) % Recoveries above forecast 77,064 78,268 (1,204) (1.5) % Changes in expected future recoveries (11,151) (47,817) 36,666 (76.7) % Changes in recoveries 65,913 30,451 35,462 116.5 % Debt purchasing revenue 382,138 372,940 9,198 2.5 % Servicing revenue 29,321 29,787 (466) (1.6) % Other revenues 1,165 949 216 22.8 % Total revenues$ 412,624 $ 403,676 $ 8,948 2.2 % Nine Months Ended September 30, 2021 2020 $ Change % Change Revenue recognized from portfolio basis$ 944,012 $ 991,614 $ (47,602) (4.8) % ZBA revenue 38,381 43,527 (5,146) (11.8) % Revenue from receivable portfolios 982,393 1,035,141
(52,748) (5.1) %
Recoveries above forecast 277,861 197,155 80,706 40.9 % Changes in expected future recoveries (101,233) (199,358) 98,125 (49.2) % Changes in recoveries 176,628 (2,203) 178,831 (8117.6) % Debt purchasing revenue 1,159,021 1,032,938 126,083 12.2 % Servicing revenue 93,901 82,417 11,484 13.9 % Other revenues 4,274 3,435 839 24.4 % Total revenues$ 1,257,196 $ 1,118,790 $ 138,406 12.4 % 32
-------------------------------------------------------------------------------- Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than ourU.S. dollar reporting currency. The strengthening of theU.S. dollar relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of theU.S. dollar relative to other foreign currencies has a favorable impact on our international revenues. Our revenues were favorably impacted by foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound by 6.3% during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 and by 8.3% for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The decreases in revenue recognized from portfolio basis during the three and nine months endedSeptember 30, 2021 as compared to the three and nine months endedSeptember 30, 2020 were primarily due to lower portfolio basis driven by the negative changes in expected future period recoveries and a lower volume of purchases in recent quarters. As discussed above, ZBA revenue represents collections from our legacy ZBA pools. We expect our ZBA revenue to continue to decline as we collect on these legacy pools. Recoveries above or below forecast represent over and under-performance in the reporting period. Collections during the three and nine months endedSeptember 30, 2021 significantly outperformed the projected cash flows. We believe the collection over-performance was a result of our sustained improvements in portfolio collections driven by change in consumer behavior during the COVID-19 pandemic and our liquidation improvement initiatives. While we now have additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic, as well as related actions taken by governments. When reassessing the future forecasts of expected lifetime recoveries during the three months endedSeptember 30, 2021 , management considered historical and current collection performance, and believes that for certain static pools collections over-performance resulted in increased total expected recoveries. Although management believes that the relevant macroeconomic conditions have improved and therefore no longer materially impact our collections performance, uncertainty still remains in the geographies in which we operate. As a result of a combination of the above, we have updated our forecast, resulting in a net reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a negative change in expected future period recoveries of approximately$11.2 million and$101.2 million during the three and nine months endedSeptember 30, 2021 , respectively. During the three and nine months endedSeptember 30, 2020 , we recorded approximately$47.8 million and$199.4 million , respectively, in negative change in expected future period recoveries. The circumstances around this pandemic continue to rapidly evolve, and will continue to impact our business and our estimation of expected recoveries in future periods. We will continue to closely monitor the COVID-19 situation and update our assumptions accordingly. 33 -------------------------------------------------------------------------------- The following tables summarize collections from purchased receivables, revenue from receivable portfolios, end of period receivable balance and other related supplemental data, by year of purchase (in thousands, except percentages): Three Months Ended September 30, 2021 As of September 30, 2021 Revenue from Investment in Receivable Changes in Receivable Collections Portfolios Recoveries Portfolios Monthly EIR United States: ZBA$ 11,247 $ 11,247 $ - $ - - % 2011 6,343 4,442 1,815 1,604 88.6 % 2012 6,371 4,371 1,779 3,320 42.0 % 2013 14,535 11,842 2,377 9,658 40.5 % 2014 8,810 5,311 1,365 25,039 6.7 % 2015 9,872 4,829 2,524 39,618 3.9 % 2016 20,762 9,188 7,177 73,942 4.1 % 2017 33,102 16,798 8,297 101,034 5.3 % 2018 54,240 23,335 9,181 188,650 3.8 % 2019 95,390 40,104 22,558 331,071 3.8 % 2020 107,901 46,988 33,139 403,776 3.7 % 2021 38,009 26,023 757 264,786 4.0 % Subtotal 406,582 204,478 90,969 1,442,498 4.4 % Europe: ZBA 22 22 - - - % 2013 23,131 19,265 (4,703) 188,032 3.2 % 2014 20,522 15,195 (3,087) 158,709 3.0 % 2015 13,901 9,775 (2,984) 126,822 2.4 % 2016(1) 11,798 10,087 (7,791) 113,336 2.8 % 2017 19,984 13,325 (6,372) 222,894 1.9 % 2018 18,558 13,090 (6,856) 264,678 1.6 % 2019 20,231 12,403 (1,305) 213,600 1.8 % 2020 14,795 8,432 5,889 120,945 2.3 % 2021 12,447 8,512 796 186,080 1.9 % Subtotal 155,389 110,106 (26,413) 1,595,096 2.2 % Other geographies:(2) ZBA 615 615 - - - % 2013 - - 138 - - % 2014 869 190 414 38,441 - % 2015 741 220 322 2,265 - % 2016 352 110 457 - - % 2017 1,222 294 - 4,971 - % 2018 885 201 15 - - % 2019 35 11 11 - - % Subtotal 4,719 1,641 1,357 45,677 - % Total$ 566,690 $ 316,225 $ 65,913 $ 3,083,271 3.3 % _______________________ (1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue. (2)All portfolios are on non-accrual basis subsequent to the sale of our investments inColombia andPeru inAugust 2021 . 34 --------------------------------------------------------------------------------
Three Months Ended September 30, 2020 As of September 30, 2020
Revenue from Investment in
Receivable Changes in Receivable
Collections Portfolios Recoveries Portfolios Monthly EIR
United States :
ZBA $ 12,145 $ 12,148 $ - $ - - %
2011 6,026 5,275 673 2,027 88.6 %
2012 6,245 5,894 196 4,552 42.0 %
2013 15,028 14,050 718 11,361 40.5 %
2014 11,368 8,334 (1,443) 37,728 6.7 %
2015 15,362 7,465 1,585 59,920 3.9 %
2016 27,343 13,517 2,270 109,636 3.9 %
2017 45,696 24,441 9,872 149,478 5.2 %
2018 73,473 36,907 2,871 297,062 3.8 %
2019 108,410 64,583 (9,618) 522,303 3.8 %
2020 69,765 37,347 18,752 422,572 3.6 %
Subtotal 390,861 229,961 25,876 1,616,639 4.3 %
Europe:
ZBA 42 41 - - - %
2013 24,113 21,588 671 221,977 3.2 %
2014 21,414 17,301 1,189 191,851 3.1 %
2015 13,595 10,745 476 147,919 2.4 %
2016(1) 13,531 10,748 1,629 129,015 2.6 %
2017 21,729 14,891 (689) 259,394 1.8 %
2018 19,341 14,707 (1,577) 309,543 1.6 %
2019 20,682 13,569 (1,557) 239,346 1.8 %
2020 7,026 4,713 3,172 82,980 2.4 %
Subtotal 141,473 108,303 3,314 1,582,025 2.3 %
Other geographies:
ZBA 1,182 1,194 - - - %
2014(1) 922 399 241 45,043 101.7 %
2015(1) 1,054 597 305 3,395 96.7 %
2016 608 390 109 1,626 7.1 %
2017(1) 1,993 925 336 10,933 6.2 %
2018 1,587 686 261 5,922 3.7 %
2019 68 34 9 409 4.6 %
Subtotal 7,414 4,225 1,261 67,328 7.9 %
Total $ 539,748 $ 342,489 $ 30,451 $ 3,265,992 3.4 %
_______________________(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
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Nine Months Ended September 30, 2021 As of September 30, 2021
Revenue from Investment in
Receivable Changes in Receivable
Collections Portfolios Recoveries Portfolios Monthly EIR
United States :
ZBA $ 35,418 $ 35,418 $ - $ - - %
2011 18,660 13,554 5,014 1,604 88.6 %
2012 19,425 13,930 4,786 3,320 42.0 %
2013 44,569 37,252 7,269 9,658 40.5 %
2014 27,714 17,896 936 25,039 6.7 %
2015 34,788 16,393 5,237 39,618 3.9 %
2016 71,702 30,703 17,073 73,942 4.1 %
2017 117,087 57,023 22,940 101,034 5.3 %
2018 184,002 79,230 27,475 188,650 3.8 %
2019 317,708 137,499 42,570 331,071 3.8 %
2020 335,862 151,098 93,395 403,776 3.7 %
2021 72,670 44,963 9,203 264,786 4.0 %
Subtotal 1,279,605 634,959 235,898 1,442,498 4.4 %
Europe:
ZBA 82 82 - - - %
2013 72,423 62,806 (30,524) 188,032 3.2 %
2014 65,210 49,571 (20,137) 158,709 3.0 %
2015 44,723 31,013 (9,323) 126,822 2.4 %
2016(1) 39,204 31,081 (5,594) 113,336 2.8 %
2017 65,295 41,981 (9,409) 222,894 1.9 %
2018 61,584 41,292 (13,968) 264,678 1.6 %
2019 67,610 38,863 3,062 213,600 1.8 %
2020 46,174 25,853 18,272 120,945 2.3 %
2021 24,039 16,350 4,653 186,080 1.9 %
Subtotal 486,344 338,892 (62,968) 1,595,096 2.2 %
Other geographies:(2)
ZBA 2,881 2,881 - - - %
2013 - - 138 - - %
2014 2,896 933 678 38,441 - %
2015 3,058 1,196 1,009 2,265 - %
2016 1,533 655 731 - - %
2017 5,211 1,656 535 4,971 - %
2018 3,905 1,161 589 - - %
2019 145 60 18 - - %
Subtotal 19,629 8,542 3,698 45,677 - %
Total $ 1,785,578 $ 982,393 $ 176,628 $ 3,083,271 3.3 %
_______________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only
for pool groups that accrete portfolio revenue.
(2)All portfolios are on non-accrual basis subsequent to the sale of our
investments in Colombia and Peru in August 2021 .
36
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Nine Months Ended September 30, 2020 As of September 30, 2020
Revenue from Investment in
Receivable Changes in Receivable
Collections Portfolios Recoveries Portfolios Monthly EIR
United States:
ZBA $ 40,202 $ 40,215 $ - $ - - %
2011 19,494 17,398 1,444 2,027 88.6 %
2012 21,377 19,518 338 4,552 42.0 %
2013 48,854 46,166 (986) 11,361 40.5 %
2014 37,795 27,302 (3,056) 37,728 6.7 %
2015 51,856 25,068 2,821 59,920 3.9 %
2016 93,103 45,161 4,786 109,636 3.9 %
2017 154,198 82,417 17,595 149,478 5.2 %
2018 243,439 124,467 (4,204) 297,062 3.8 %
2019 313,152 205,004 (2,749) 522,303 3.8 %
2020 128,172 69,143 32,567 422,572 3.6 %
Subtotal 1,151,642 701,859 48,556 1,616,639 4.3 %
Europe:
ZBA 142 141 - - - %
2013 69,322 64,334 (6,317) 221,977 3.2 %
2014 62,882 51,799 (1,179) 191,851 3.1 %
2015 40,451 32,138 1,416 147,919 2.4 %
2016(1) 37,144 32,096 (7,235) 129,015 2.6 %
2017 64,225 45,071 (10,603) 259,394 1.8 %
2018 59,452 44,562 (24,395) 309,543 1.6 %
2019 57,277 41,017 (8,139) 239,346 1.8 %
2020 11,052 8,724 4,746 82,980 2.4 %
Subtotal 401,947 319,882 (51,706) 1,582,025 2.3 %
Other geographies:
ZBA 3,162 3,171 - - - %
2014(1) 3,445 1,262 270 45,043 101.7 %
2015(1) 3,559 2,027 525 3,395 96.7 %
2016 2,025 1,474 (100) 1,626 7.1 %
2017(1) 5,082 3,008 52 10,933 6.2 %
2018 4,201 2,348 205 5,922 3.7 %
2019 179 110 (5) 409 4.6 %
Subtotal 21,653 13,400 947 67,328 3.4 %
Total $ 1,575,242 $ 1,035,141 $ (2,203) $ 3,265,992 3.4 %
_______________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue. Servicing revenues during the three months endedSeptember 30, 2021 was relatively consistent as compared to servicing revenues during the three months endedSeptember 30, 2020 . Servicing revenues increased during the nine months endedSeptember 30, 2021 as compared to the same period in the prior year, the increase was primarily attributable to increased fee-based income driven by growth in BPO operations in Cabot and the favorable impact of foreign currency translation, which was primarily the result of the weakening of theU.S. dollar against the British Pound. Other revenues increased during the three and nine months endedSeptember 30, 2021 as compared to the three and nine months endedSeptember 30, 2020 , primarily driven by the increased sale of real estate assets and the favorable impact of foreign currency translation, which was primarily the result of the weakening of theU.S. dollar against the British Pound. 37 -------------------------------------------------------------------------------- Table of Contents Operating Expenses The following table summarizes operating expenses for the periods presented (in thousands, except percentages): Three Months Ended
2021 2020 $ Change % Change
Salaries and employee benefits $ 94,662 $ 95,979 $ (1,317) (1.4) %
Cost of legal collections 64,170 60,383 3,787 6.3 %
General and administrative expenses 35,819 53,459 (17,640) (33.0) %
Other operating expenses 25,226 28,088 (2,862) (10.2) %
Collection agency commissions 11,964 12,703 (739) (5.8) %
Depreciation and amortization 14,136 10,609 3,527 33.2 %
Total operating expenses $ 245,977 $ 261,221 $ (15,244) (5.8) %
Nine Months Ended September 30,
2021 2020 $ Change % Change
Salaries and employee benefits $ 288,892 $ 279,944 $ 8,948 3.2 %
Cost of legal collections 198,212 164,018 34,194 20.8 %
General and administrative expenses 102,790 113,954 (11,164) (9.8) %
Other operating expenses 81,895 83,527 (1,632) (2.0) %
Collection agency commissions 38,465 36,562 1,903 5.2 %
Depreciation and amortization 37,694 31,436 6,258 19.9 %
Total operating expenses $ 747,948 $ 709,441 $ 38,507 5.4 %
Our operating results are impacted by foreign currency translation, which
represents the effect of translating operating results where the functional
currency is different than our U.S. dollar reporting currency. The strengthening
of the U.S. dollar relative to other foreign currencies has a favorable impact
on our international operating expenses, and the weakening of the U.S. dollar
relative to other foreign currencies has an unfavorable impact on our
international operating expenses. Our operating expenses were unfavorably
impacted by foreign currency translation, primarily by the weakening of the U.S.
dollar against the British Pound by approximately 6.3% for the three months
ended September 30, 2021 as compared to the three months ended September 30,
2020 , and by 8.3% for the nine months ended September 30, 2021 compared to the
nine months ended September 30, 2020 .
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
The decrease in salaries and employee benefits during the three months ended
September 30, 2021 as compared to the three months ended September 30, 2020 was
primarily due to the following reasons:
•Slight decrease of headcount in the US and International locations;
•The decrease was partially offset by the unfavorable impact of foreign currency
translation, primarily by the weakening of the U.S. dollar against the British
Pound.
The increase in salaries and employee benefits during the nine months ended
September 30, 2021 as compared to the nine months ended September 30, 2020 were
primarily due to the following reasons:
•Increased salaries and benefits in our fee-based business in Cabot driven by
growth in BPO operations;
•The unfavorable impact of foreign currency translation, primarily by the
weakening of the U.S. dollar against the British Pound.
38
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Table of Contents
Cost of Legal Collections
Cost of legal collections primarily includes contingent fees paid to our
external network of attorneys and the cost of litigation. We pursue legal
collections using a network of attorneys that specialize in collection matters
and through our internal legal channel. Under the agreements with our contracted
attorneys, we advance certain out-of-pocket court costs. Cost of legal
collections does not include internal legal channel employee costs, which are
included in salaries and employee benefits in our consolidated statements of
operations.
The following table summarizes our cost of legal collections during the periods
presented (in thousands, except percentages):
Three Months Ended September 30,
2021 2020 $ Change % Change
Court costs $ 37,970 $ 38,500 $ (530) (1.4) %
Legal collection fees 26,200 21,883 4,317 19.7 %
Total cost of legal collections $ 64,170 $ 60,383 $ 3,787 6.3 %
Nine Months Ended September 30,
2021 2020 $ Change % Change
Court costs $ 119,366 $ 96,202 $ 23,164 24.1 %
Legal collection fees 78,846 67,816
11,030 16.3 %
Total cost of legal collections
Cost of legal collections increased driven by increased legal channel collections. Beginning in late March of 2020, our legal collection channel spending reduced substantially due to court closures in certain jurisdictions as a result of the COVID-19 pandemic, the legal collection channel spending has gradually increased and are now back to historical levels. General and Administrative Expenses The decreases in general and administrative expense during the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 were primarily due to the following reasons: •A charge of$15.0 million relating to our settlement with theCFPB recognized in the three and nine months endedSeptember 30, 2020 ; •Certain third-party costs of approximately$6.9 million incurred relating to various financing transactions completed inSeptember 2020 ; •The unfavorable impact of foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound; •The decreases were partially offset by increased information technology related expense. Other Operating Expenses Other operating expenses decreased during the three and nine months endedSeptember 30, 2021 as compared to the three and nine months endedSeptember 30, 2020 , primarily due to reduced expenditures for temporary services and direct collection expenses. The decreases were partially offset by the unfavorable impact of foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound. Collection Agency Commissions Collection agency commissions are commissions paid to third-party collection agencies. Collections through the collections 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. Commission rates vary depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time, and commission rates for purchased bankruptcy portfolios are lower than the commission rates for charged-off credit card accounts. 39 -------------------------------------------------------------------------------- Table of Contents Depreciation and Amortization The increases in depreciation and amortization expense during the three and nine months endedSeptember 30, 2021 as compared to the three and nine months endedSeptember 30, 2020 were primarily due the write-off of certain computer software and equipment and the unfavorable impact of foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound. Interest Expense The following tables summarize our interest expense (in thousands, except percentages): Three Months Ended September 30, 2021 2020 $ Change % Change Stated interest on debt obligations$ 36,600 $ 44,484 $ (7,884) (17.7) % Amortization of debt issuance costs 3,917 6,000 (2,083) (34.7) % Amortization of debt discount 357 2,490 (2,133) (85.7) % Total interest expense$ 40,874 $ 52,974 $ (12,100) (22.8) % Nine Months Ended September 30, 2021 2020 $ Change % Change Stated interest on debt obligations$ 117,881 $ 137,366 $ (19,485) (14.2) % Amortization of debt issuance costs 12,469 11,795 674 5.7 % Amortization of debt discount 1,209 8,802 (7,593) (86.3) % Total interest expense$ 131,559 $ 157,963 $ (26,404) (16.7) % InSeptember 2020 , we entered into various transactions, agreements and amendments related to our borrowings and completed the implementation of our new global funding structure. In November andDecember 2020 , we completed two offerings of senior secured notes, partially redeemed our Cabot senior secured notes due 2023 and fully redeemed our Cabot floating rate notes due 2024. InJune 2021 , we completed an offering of senior secured notes due 2028 and fully redeemed the remaining outstanding portion of our Cabot senior secured notes due 2023. These refinancing transactions successfully reduced the interest rates on our outstanding borrowings. The decreases in interest expense during the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 were primarily due to the following reasons: •Lower average debt balances; •Decreased interest rates as a result of various refinancing transactions; •EffectiveJanuary 1, 2021 , we adopted a new accounting standard for our convertible and exchangeable notes and now recognize interest expense at the stated coupon rate of interest, rather than the higher effective interest rate; •Partially offset by the unfavorable impact of foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound and increased amortization of loan fees and other loan costs as a result of higher capitalized debt issuance costs. Loss on Extinguishment of Debt During the nine months endedSeptember 30, 2021 , we recorded$9.3 million of loss on extinguishment of debt in connection with the redemption of our Cabot senior secured notes due 2023. During the three and nine months endedSeptember 30, 2020 , we recorded$15.0 million of loss on extinguishment of debt in connection with various financing transactions. Refer to "Note 7: Borrowings" in the notes to our consolidated financial statements for details of our financing activities. 40 -------------------------------------------------------------------------------- Table of Contents Other (Expense) Income Other income or expense consists primarily of foreign currency exchange gains or losses, interest income, and gains or losses recognized on certain transactions outside of our normal course of business. Other expense was$17.5 million and other income was$0.4 million during the three months endedSeptember 30, 2021 and 2020, respectively. Other expense was$17.0 million during the nine months endedSeptember 30, 2021 and other expense was$1.2 million during the nine months endedSeptember 30, 2020 . Other expense recognized during the three and nine months endedSeptember 30, 2021 primarily included the loss on the sale of our investment inColombia andPeru of$17.4 million . Other expense recognized during the nine months endedSeptember 30, 2020 primarily included a loss of$4.8 million as a result of the divestiture of our investment inBrazil . This loss was partially offset by other income from fair value changes for currency exchange forward contracts which were not designated as hedge instruments for accounting purposes. Provision for Income Taxes Provision for income taxes and effective tax rate are as follows for the periods presented ($ in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Provision for income taxes$ 24,703 $ 19,747 $ 76,278 $ 59,875 Effective tax rate 22.8 % 26.4 % 21.7 % 25.5 % For the three and nine months endedSeptember 30, 2021 , the difference between our effective tax rate and the federal statutory rate was primarily due to the proportion of income earned in higher tax rate jurisdictions compared to lower tax rate jurisdictions. In 2020, the difference between our effective tax rate and the federal statutory rate was primarily due to a change in valuation allowance recognized in the period under the discrete method. We utilized the discrete method for recording income taxes during 2020 due to uncertainty in estimating annual pre-tax earnings primarily due to the COVID-19 pandemic. We returned to using the estimated annual effective tax rate beginningJanuary 1, 2021 . 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, and derivative instruments, 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. 41 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 GAAP net income, as reported$ 83,566 $ 55,107 $ 275,118 $ 175,312 Adjustments: Interest expense 40,874 52,974 131,559 157,963 Interest income (270) (394) (1,170) (1,953) Provision for income taxes 24,703 19,747 76,278 59,875 Depreciation and amortization 14,136 10,609 37,694 31,436 CFPB settlement fees(1) - 15,009 - 15,009 Stock-based compensation expense 3,847 3,884 12,903 13,189 Acquisition, integration and restructuring related expenses(2) 17,950 (23) 17,950 4,940 Loss on extinguishment of debt - 14,988 9,300 14,988 Adjusted EBITDA$ 184,806 $
171,901
________________________
(1)Amount represents a charge resulting from the Stipulated Judgment with theCFPB . We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors' results. (2)Amount represents acquisition, integration and restructuring related expenses, including the loss recognized on the sale of our investment inColombia andPeru of$17.4 million during the three and nine months endedSeptember 30, 2021 and the loss on sale of our investment inBrazil of$4.8 million during the nine months endedSeptember 30, 2020 . We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors' results. (3)Collections applied to principal balance is calculated in the table below. For consistency with our debt covenant reporting, for periods subsequent toJune 30, 2020 , the collections applied to principal balance also includes proceeds applied to basis from sales of REO assets and related activities; prior period amounts have not been adjusted to reflect this change as such amounts were immaterial. Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Collections applied to investment in receivable portfolios, net$ 250,465 $ 197,259 $ 803,185 $ 540,101 Less: Changes in recoveries (65,913) (30,451) (176,628) 2,203 REO proceeds applied to basis 3,629 5,598 15,208 5,598
Collections applied to principal balance
$ 641,765 $ 547,902 42
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Table of Contents
Adjusted Operating Expenses. Management utilizes adjusted operating expenses in
order to facilitate a comparison of approximate costs to cash collections for
our portfolio purchasing and recovery business. Adjusted operating expenses for
our portfolio purchasing and recovery business are calculated by starting with
GAAP total operating expenses and backing out operating expenses related to
non-portfolio purchasing and recovery business, acquisition, integration and
restructuring related operating expenses, stock-based compensation expense,
settlement fees and related administrative expenses and other charges or gains
that are not indicative of ongoing operations. Adjusted operating expenses
related to our portfolio purchasing and recovery business for the periods
presented are as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
GAAP total operating expenses, as reported $ 245,977 $ 261,221 $ 747,948 $ 709,441
Adjustments:
Operating expenses related to non-portfolio
purchasing and recovery business(1) (47,088) (54,001) (133,008) (137,876)
CFPB settlement fees(2) - (15,009) - (15,009)
Stock-based compensation expense (3,847) (3,884) (12,903) (13,189)
Acquisition, integration and restructuring
related operating expenses(3) - 23 - (132)
Adjusted operating expenses related to portfolio
purchasing and recovery business $ 195,042 $
188,350
________________________
(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 a charge resulting from the Stipulated Judgment with theCFPB . We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors' results. (3)Amount represents acquisition, integration and restructuring related operating expenses. We adjust for this amount because we believe these operating expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors' results. Cost per Dollar Collected We utilize adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections from purchased receivables for our portfolio purchasing and recovery business. The following table summarizes our cost per dollar collected (defined as adjusted operating expenses as a percentage of collections from purchased receivables) by geographic location during the periods presented: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 United States 35.4 % 36.9 % 34.5 % 36.1 % Europe 31.0 % 28.1 % 30.7 % 28.7 % Other geographies 58.7 % 55.6 % 55.4 % 55.5 % Overall cost per dollar collected 34.4 % 34.9 %
33.7 % 34.5 %
Cost-to-collect decreased during the periods presented, primarily attributable to decreased cost-to-collect in theU.S. , driven by continued improvement in operational efficiencies in the collection process. Cost-to-collect inEurope increased due to increased spend in legal collection channel. Our European legal collection channel spending reduced substantially in 2020 as a result of the COVID-19 pandemic, the legal collection channel spending increased substantially in the third quarter of 2021 as compared to the same period in the prior year and drove the higher overall cost-to-collect inEurope . Collections from other geographies continue to decline as we continue to focus on theU.S. and European markets. Cost-to-collect in LAAP is expected to stay at an elevated level and will continue to fluctuate over time. Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, product mix, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the changing regulatory and legislative environment. 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. 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 September 30, 2021 Purchase Price(1) <2012 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Total(2) Multiple(3)United States : <2012$ 2,143,750 $ 3,983,166 $ 760,285 $ 554,597 $ 391,737 $ 293,528 $ 206,933 $ 155,456
3.1
2012 548,803 - 187,721 350,134 259,252 176,914 113,067 74,507 48,832 37,327 27,797 19,564 1,295,115 2.4
2013 551,866 - - 230,051 397,646 298,068 203,386 147,503
107,399 84,665 64,436 45,642 1,578,796 2.9
2014 517,651 - - - 144,178 307,814 216,357 142,147 94,929 69,059 47,628 27,714 1,049,826 2.0
2015 499,075 - - - - 105,610 231,102 186,391 125,673 85,042 64,133 34,788 832,739 1.7
2016 553,170 - - - - - 110,875 283,035 234,690 159,279 116,452 71,702 976,033 1.8
2017 528,087 - - - - - - 111,902 315,853 255,048 193,328 117,087 993,218 1.9
2018 630,553 - - - - - - - 175,042 351,696 308,302 184,002 1,019,042 1.6
2019 676,937 - - - - - - - - 174,693 416,315 317,708 908,716 1.3
2020 539,131 - - - - - - - - - 213,450 335,862 549,312 1.0
2021 283,288 - - - - - - - - - - 72,670 72,670 0.3
Subtotal 7,472,311 3,983,166 948,006 1,134,782 1,192,813 1,181,934 1,081,720 1,100,941 1,223,963 1,316,109 1,528,942 1,279,605 15,971,981 2.1
Europe :
2013 619,079 - - 134,259 249,307 212,129 165,610 146,993 132,663 113,228 93,203 72,423 1,319,815 2.1
2014 623,129 - - - 135,549 198,127 156,665 137,806 129,033 105,337 84,255 65,210 1,011,982 1.6
2015 419,941 - - - - 65,870 127,084 103,823 88,065 72,277 55,261 44,776 557,156 1.3
2016 258,218 - - - - - 44,641 97,587 83,107 63,198 51,609 39,233 379,375 1.5
2017 461,571 - - - - - - 68,111 152,926 118,794 87,549 65,295 492,675 1.1
2018 433,302 - - - - - - - 49,383 118,266 78,846 61,584 308,079 0.7
2019 273,354 - - - - - - - - 44,118 80,502 67,610 192,230 0.7
2020 116,899 - - - - - - - - - 22,721 46,174 68,895 0.6
2021 196,864 - - - - - - - - - - 24,039 24,039 0.1
Subtotal 3,402,357 - - 134,259 384,856 476,126 494,000 554,320635,177 635,218 553,946 486,344 4,354,246
1.3
Other geographies:
2012 6,721 - - 3,848 2,561 1,208 542 551 422 390 294 199 10,015 1.5
2013 29,465 - - 6,617 17,615 10,334 4,606 3,339 2,468 1,573 1,042 708 48,302 1.6
2014 85,418 - - - 9,652 16,062 18,403 9,813 7,991 6,472 4,300 3,204 75,897 0.9
2015 81,232 - - - - 15,061 57,064 43,499 32,622 17,499 4,688 3,058 173,491 2.1
2016 61,595 - - - - - 29,269 39,710 28,992 16,078 5,196 3,199 122,444 2.0
2017 49,670 - - - - - - 15,471 23,075 15,383 7,303 5,211 66,443 1.3
2018 25,731 - - - - - - - 12,910 15,008 5,892 3,905 37,715 1.5
2019 2,468 - - - - - - - - 3,198 245 145 3,588 1.5
Subtotal 342,300 - - 10,465 29,828 42,665 109,884 112,383 108,480 75,601 28,960 19,629 537,895 1.6
Total $ 11,216,968 $ 3,983,166 $ 948,006 $ 1,279,506 $ 1,607,497 $ 1,700,725 $ 1,685,604 $ 1,767,644 $ 1,967,620 $ 2,026,928 $ 2,111,848 $ 1,785,578 $ 20,864,122 1.9
________________________
(1)Adjusted for Put-Backs and Recalls. Put-Backs ("Put-Backs") and recalls
("Recalls") represent ineligible accounts that are returned by us or recalled by
the seller pursuant to specific guidelines as set forth in the respective
purchase agreement.
(2)Cumulative collections from inception through September 30, 2021 , excluding
collections on behalf of others.
(3)Cumulative Collections Multiple ("Multiple") through September 30, 2021
refers to collections as a multiple of purchase price.
45
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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 from purchased
receivables, by year of purchase (in thousands, except multiples):
Estimated Total Estimated Gross
Historical Remaining Total Estimated Collections to
Purchase Price(1) Collections(2) Collections Gross Collections Purchase Price
United States:
<2011 $ 1,759,963 $ 5,523,904 $ 87,587 $ 5,611,491 3.2
2011 383,787 1,172,610 50,965 1,223,575 3.2
2012 548,803 1,295,115 51,217 1,346,332 2.5
2013(3) 551,866 1,578,796 139,113 1,717,909 3.1
2014(3) 517,651 1,049,826 81,461 1,131,287 2.2
2015 499,075 832,739 90,200 922,939 1.8
2016 553,170 976,033 168,721 1,144,754 2.1
2017 528,087 993,218 281,518 1,274,736 2.4
2018 630,553 1,019,042 410,059 1,429,101 2.3
2019 676,937 908,716 736,161 1,644,877 2.4
2020 539,131 549,312 866,983 1,416,295 2.6
2021 283,288 72,670 622,332 695,002 2.5
Subtotal 7,472,311 15,971,981 3,586,317 19,558,298 2.6
Europe:
2013(3) 619,079 1,319,815 749,120 2,068,935 3.3
2014(3) 623,129 1,011,982 549,610 1,561,592 2.5
2015(3) 419,941 557,156 359,332 916,488 2.2
2016 258,218 379,375 300,482 679,857 2.6
2017 461,571 492,675 492,610 985,285 2.1
2018 433,302 308,079 546,999 855,078 2.0
2019 273,354 192,230 454,661 646,891 2.4
2020 116,899 68,895 285,049 353,944 3.0
2021 196,864 24,039 420,688 444,727 2.3
Subtotal 3,402,357 4,354,246 4,158,551 8,512,797 2.5
Other geographies:
2012 6,721 10,015 - 10,015 1.5
2013 29,465 48,302 - 48,302 1.6
2014 85,418 75,897 43,032 118,929 1.4
2015 81,232 173,491 8,713 182,204 2.2
2016 61,595 122,444 - 122,444 2.0
2017 49,670 66,443 18,372 84,815 1.7
2018 25,731 37,715 - 37,715 1.5
2019 2,468 3,588 - 3,588 1.5
Subtotal 342,300 537,895 70,117 608,012 1.8
Total $ 11,216,968 $ 20,864,122 $ 7,814,985 $ 28,679,107 2.6
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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 throughSeptember 30, 2021 , excluding collections on behalf of others. (3)Includes portfolios acquired in connection with certain business combinations. 46 -------------------------------------------------------------------------------- Table of Contents Estimated Remaining Gross Collections by Year of Purchase The following table summarizes our estimated remaining gross collections from purchased receivable portfolios and estimated future cash flows from real estate-owned assets by year of purchase (in thousands): Estimated Remaining Gross Collections by Year of Purchase(1) 2021(3) 2022 2023 2024 2025 2026 2027 2028 2029 >2029 Total(2)United States : <2011$ 8,163 $ 26,306 $ 18,251 $ 12,631 $ 8,595 $ 5,815 $ 3,846 $ 2,374 $ 1,221 $ 385 $ 87,587 2011 4,224 14,326 10,122 7,106 4,993 3,511 2,473 1,744 1,233 1,233 50,965 2012 4,263 14,238 10,097 7,064 4,964 3,492 2,459 1,735 1,227 1,678 51,217 2013(4) 12,543 38,277 26,397 18,705 13,264 9,408 6,674 4,737 3,363 5,745 139,113 2014(4) 6,876 22,954 15,764 10,755 7,580 5,364 3,801 2,696 1,916 3,755 81,461 2015 7,838 26,045 17,718 12,070 8,048 5,578 3,935 2,786 1,977 4,205 90,200 2016 15,720 50,154 33,272 22,245 15,002 9,910 6,788 4,770 3,375 7,485 168,721 2017 25,052 80,723 52,589 37,768 25,771 18,021 12,424 8,833 6,254 14,083 281,518 2018 39,157 123,594 82,906 55,370 36,686 24,444 16,246 10,558 7,198 13,900 410,059 2019 69,662 209,416 140,462 99,741 67,544 46,306 31,966 22,256 15,288 33,520 736,161 2020 77,996 265,217 165,362 113,679 77,896 52,503 35,916 25,042 17,506 35,866 866,983 2021 42,573 175,202 144,756 84,334 54,499 37,777 25,627 17,916 12,643 27,005 622,332 Subtotal 314,067 1,046,452 717,696 481,468 324,842 222,129 152,155 105,447 73,201 148,860 3,586,317Europe : 2013(4) 21,579 83,496 77,549 70,589 65,365 59,671 54,055 49,522 45,689 221,605 749,120 2014(4) 18,058 68,075 61,742 54,979 49,564 43,928 38,357 34,947 31,261 148,699 549,610 2015(4) 12,661 47,050 41,672 37,045 33,006 29,192 25,089 22,323 19,879 91,415 359,332 2016 13,636 47,744 42,403 35,051 30,149 25,566 20,491 17,246 14,291 53,905 300,482 2017 21,184 76,732 65,552 55,338 46,490 38,930 33,538 28,306 24,451 102,089 492,610 2018 20,441 76,964 70,419 61,516 53,214 46,010 38,916 33,593 28,522 117,404 546,999 2019 20,499 73,974 63,270 53,923 45,296 37,549 29,880 24,897 21,167 84,206 454,661 2020 12,604 46,701 42,463 34,385 27,902 24,548 19,793 16,193 13,261 47,199 285,049 2021 13,972 64,070 59,243 48,965 41,491 35,532 31,164 26,798 22,480 76,973 420,688 Subtotal 154,634 584,806 524,313 451,791 392,477 340,926 291,283 253,825 221,001 943,495 4,158,551 Other geographies: 2012 - - - - - - - - - - - 2013 - - - - - - - - - - - 2014 2,095 7,022 6,502 5,814 4,758 2,796 1,591 1,448 1,448 9,558 43,032 2015 296 1,001 1,217 1,131 1,044 754 631 529 445 1,665 8,713 2016 - - - - - - - - - - - 2017 711 2,621 2,385 2,101 1,894 1,428 822 745 745 4,920 18,372 2018 - - - - - - - - - - - 2019 - - - - - - - - - - - Subtotal 3,102 10,644 10,104 9,046 7,696 4,978 3,044 2,722 2,638 16,143 70,117 Portfolio ERC 471,803 1,641,902 1,252,113 942,305 725,015 568,033 446,482 361,994 296,840 1,108,498 7,814,985 REO ERC(5) 10,393 21,264 17,499 9,377 3,471 1,596 269 218 281 - 64,368 Total ERC$ 482,196 $ 1,663,166 $ 1,269,612 $ 951,682 $ 728,486 $ 569,629 $ 446,751 $ 362,212 $ 297,121 $ 1,108,498 $ 7,879,353
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(1)As ofSeptember 30, 2021 , ERC for Zero Basis Portfolios include approximately$87.6 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$70.1 million from cost recovery portfolios, primarily in other geographies. 47 -------------------------------------------------------------------------------- Table of Contents (2)Represents the expected remaining gross cash collections over a 180-month period. As ofSeptember 30, 2021 , ERC for 84-month and 120-month periods were: 84-Month ERC 120-Month ERC United States$ 3,341,255 $ 3,515,672 Europe 2,932,487 3,537,275 Other geographies 50,659 58,434 Portfolio ERC 6,324,401 7,111,381 REO ERC 63,872 64,368 Total ERC$ 6,388,273 $ 7,175,749 (3)Amount for 2021 consists of three months data fromOctober 1, 2021 toDecember 31, 2021 . (4)Includes portfolios acquired in connection with certain business combinations. (5)Real estate-owned assets ERC includes approximately$62.7 million and$1.7 million of estimated future cash flows forEurope and Other Geographies, respectively. Estimated Future Collections Applied to Investment in Receivable Portfolios As ofSeptember 30, 2021 , we had$3.1 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands): Years Ending December 31, United States Europe Other Geographies Total 2021(1)$ 120,224 $ 54,385 $ 3,074$ 177,683 2022 422,620 195,574 10,644 628,838 2023 295,722 185,481 9,111 490,314 2024 194,942 158,762 5,814 359,518 2025 129,002 138,140 4,758 271,900 2026 87,199 121,473 2,796 211,468 2027 58,767 101,652 1,591 162,010 2028 40,550 89,193 1,448 131,191 2029 28,225 78,677 1,448 108,350 2030 19,696 70,113 1,448 91,257 2031 14,002 66,216 1,448 81,666 2032 10,159 63,471 1,448 75,078 2033 7,694 65,008 649 73,351 2034 6,006 67,741 - 73,747 2035 4,928 75,380 - 80,308 2036 2,762 63,830 - 66,592 Total$ 1,442,498 $ 1,595,096 $ 45,677$ 3,083,271
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(1)Amount for 2021 consists of three months data from
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Purchases by Quarter
The following table summarizes the receivable portfolios we purchased by
quarter, and the respective purchase prices and fair value (in thousands):
# of Purchase
Quarter Accounts Face Value Price
Q1 2019 854 $ 1,732,977 $ 262,335
Q2 2019 778 2,307,711 242,697
Q3 2019 1,255 5,313,092 259,910
Q4 2019 803 2,241,628 234,916
Q1 2020 943 1,703,022 214,113
Q2 2020 754 1,305,875 147,939
Q3 2020 735 1,782,733 170,131
Q4 2020 558 1,036,332 127,689
Q1 2021 749 1,328,865 170,178
Q2 2021 612 1,151,623 142,728
Q3 2021 767 1,403,794 168,188
Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activities for the periods
presented (in thousands):
Nine Months Ended September 30,
2021 2020
(Unaudited)
Net cash provided by operating activities $ 211,990 $ 249,982
Net cash provided by investing activities 312,808 7,575
Net cash used in financing activities (564,673)
(267,891)
Operating Cash Flows Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Net cash provided by operating activities was$212.0 million and$250.0 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in recoveries, stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations. Investing Cash Flows Cash flows relating to investing activities is primarily affected by receivable portfolio purchases offset by collection proceeds applied to the principal of our receivable portfolios. 49 -------------------------------------------------------------------------------- Table of Contents Net cash provided by investing activities was$312.8 million and$7.6 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Receivable portfolio purchases, net of put-backs, were$473.0 million and$518.0 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Collection proceeds applied to the investment in receivable portfolios, net, were$803.2 million and$540.1 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Financing Cash Flows Financing cash flows are generally affected by borrowings under our credit facilities and proceeds from various debt offerings, offset by repayments of amounts outstanding under our credit facilities and repayments of various notes. Net cash used in financing activities was$564.7 million and$267.9 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Borrowings under our credit facilities were$418.9 million and$1,695.9 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Repayments of amounts outstanding under our credit facilities were$714.0 million and$2,051.8 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Proceeds from the issuance of senior secured notes were$353.7 million and$410.8 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Repayments of senior secured notes were$349.4 million and$152.4 million during the nine months endedSeptember 30, 2021 and 2020, respectively. We paid$161.0 million of convertible senior notes that matured onMarch 15, 2021 and$89.4 million of convertible senior notes using cash on hand during the nine months endedSeptember 30, 2021 and 2020, respectively. Capital Resources Historically, we have met our cash requirements by utilizing our cash flows from operations, cash collections from our investment in receivable portfolios, bank borrowings, debt offerings, and equity offerings. Depending on the capital markets, we consider additional financings to fund our operations and acquisitions. From time to time, we may repurchase outstanding debt or equity and/or restructure or refinance debt obligations. Our primary cash requirements have included the purchase of receivable portfolios, entity acquisitions, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes. Currently, all of our portfolio purchases are funded with cash from operations, cash collections from our investment in receivable portfolios, and our bank borrowings. We are in material compliance with all covenants under our financing arrangements. See "Note 7: Borrowings" in the notes to our consolidated financial statements for a further discussion of our debt. OnAugust 12, 2015 , our Board of Directors approved a$50.0 million share repurchase program. OnMay 5, 2021 , we announced that the Board of Directors had approved an increase in the size of the repurchase program from$50.0 million to$300.0 million (an increase of$250.0 million ). Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by our management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at any time at our discretion. During the three and nine months endedSeptember 30, 2021 , we repurchased 854,002 and 1,976,857 shares of our common stock for approximately$40.7 million and$88.1 million , respectively. Our practice is to retire the shares repurchased. OnNovember 3, 2021 , we announced our intent to launch a tender offer onNovember 4, 2021 to purchase with cash up to$300.0 million of shares of our common stock. We expect to fund the purchase of shares pursuant to the tender offer, together with all related fees and expenses, with cash and cash equivalents. We may also make a drawing from our Global Senior Facility. We will retire the shares purchased from the tender offer. InMay 2021 , we terminated our at-the-market equity offering program (the "ATM Program") pursuant to which we could issue and sell shares of Encore's common stock having an aggregate offering price of$50.0 million . Our cash and cash equivalents as ofSeptember 30, 2021 consisted of$20.7 million held byU.S. -based entities and$137.5 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that 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. Included in cash and cash equivalents is cash that was collected on behalf of, and remains payable to, third-party clients. The balance of cash held for clients was$28.3 million as ofSeptember 30, 2021 . 50 -------------------------------------------------------------------------------- Table of Contents Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from our consumers, and other risks detailed in our Risk Factors. However, we believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, cash collections from our investment in receivable portfolios, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and businesses. 51
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