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 andIreland . Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a range of debt servicing offerings such as early stage collections, business process outsourcing ("BPO"), and contingent collections, including throughWescot Credit Services Limited ("Wescot"), a leadingU.K. contingency debt collection and BPO services company. LAAP (Latin America andAsia-Pacific ) We have purchased non-performing loans inColombia ,Peru ,Mexico andBrazil (which was sold inApril 2020 ). Additionally, we have invested inEncore Asset Reconstruction Company ("EARC") inIndia . To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business inthe United States andUnited Kingdom and strengthening and developing our business in the rest ofEurope . 30 -------------------------------------------------------------------------------- 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 theU.S. driven mainly by a decrease in charge-off rates; a decrease in supply inEurope , which we believe is driven by both a decrease in charge-off rates and decreased sales as the banks focus on their customers' needs; and impacts to the legal collections process, which negatively affected legal collections beginning in lateMarch 2020 and could continue to affect legal collections and related costs depending on the duration and severity of the COVID-19 pandemic and the resulting containment measures. Government Regulation There have been various governmental actions taken, or proposed, in response to the COVID-19 pandemic, such as limiting debt collections efforts and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees. In addition, in certain jurisdictions courts have closed and/or government actions have affected the litigation process. Government actions have not been consistent across jurisdictions and the efficacy and ultimate effect of such actions is not known. We continue to monitor federal, state and international regulatory developments in relation to the COVID-19 pandemic and their potential impact on our operations. MCM (United States ) As discussed in more detail under "Part I - Item 1 - Business - Government Regulation" contained in our Annual Report on Form 10-K, ourU.S. debt purchasing business and collection activities are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices. InSeptember 2015 , we entered into a consent order (the "2015 Consent Order") with theConsumer Financial Protection Bureau (the "CFPB") in which we settled allegations arising from our practices between 2011 and 2015. OnSeptember 8, 2020 , theCFPB filed a suit alleging that we violated the 2015 Consent Order. In the suit, theCFPB alleged that we did not perfectly adhere to certain operational provisions of the 2015 Consent Order, leading to alleged violations of federal consumer financial law. OnOctober 15, 2020 , the parties entered into a stipulated judgment ("Stipulated Judgment") to resolve the lawsuit. The Stipulated Judgment includes obligations on us to, among other things: (1) continue to follow a narrow subset of the operational requirements contained in the 2015 Consent Order, all of which have long been part of our routine practices; (2) pay a$15.0 million civil monetary penalty; and (3) provide redress of approximately$9,000 to 14 affected consumers, which is in addition to approximately$70,000 of redress that we had previously voluntarily provided. Under the Stipulated Judgment, we neither admit nor deny the allegations in theCFPB's suit. In connection with the Stipulated Judgment, theCFPB has formally terminated the 2015 Consent Order. We recorded an after-tax charge of$15.0 million for the three and nine months endedSeptember 30, 2020 as a result of the Stipulated Judgment. OnOctober 30, 2020 , theCFPB issued final rules to implement the Fair Debt Collection Practices Act, which 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. The rules will become effective one year after publication in theFederal Register . Based on our preliminary assessment of the rules, we believe that the new rules will not have a material incremental effect on our operations. TheCFPB also announced that it intends to issue an additional debt collection final rule focused on consumer disclosures inDecember 2020 . 31 -------------------------------------------------------------------------------- Table of Contents 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 . 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 and other credit management services providers. 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 favorable. 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 slight decrease in supply as a result of the COVID-19 pandemic, but expect an increase in supply in the second half of 2021. 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 selective with buyers in the marketplace. We believe this favors larger participants, such as Encore, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements. Cabot (Europe ) TheU.K. market for charged-off portfolios has generally provided a relatively consistent pipeline of opportunities over the past few years, despite an ongoing historic low level of charge-off rates, as creditors have embedded debt sales as an integral part of their business models and consumer indebtedness has continued to grow since the financial crisis. The Spanish debt market continues to be one of the largest inEurope with a significant amount of debt to be sold and serviced. In particular, we anticipate strong debt purchasing and servicing opportunities in the secured and small and medium enterprise asset classes given the backlog of non-performing debt that has accumulated in these sectors. Additionally, financial 32 -------------------------------------------------------------------------------- Table of Contents institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should further increase debt purchasing opportunities inSpain . Across all of our European markets, we are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply of portfolios to purchase. Due to the COVID-19 pandemic, banks have decreased portfolio sales in order to focus on customers' needs. As a result, we expect a lower level of supply available for purchase in the near-term. 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, 2020 2019 2020 2019 MCM (United States)$ 141,066 $ 173,214 $ 451,141 $ 527,318 Cabot (Europe) 29,065 85,201 81,042 226,047 Other geographies - 1,495
- 11,577
Total purchases of receivable portfolios
During the three months endedSeptember 30, 2020 , we invested$170.1 million to acquire receivable portfolios, with face values aggregating$1.8 billion , for an average purchase price of 9.5% of face value. The amount invested in receivable portfolios decreased$89.8 million , or 34.6%, compared with the$259.9 million invested during the three months endedSeptember 30, 2019 , to acquire receivable portfolios with face values aggregating$5.3 billion , for an average purchase price of 4.9% of face value. During the nine months endedSeptember 30, 2020 , we invested$532.2 million to acquire receivable portfolios, with face values aggregating$4.8 billion , for an average purchase price of 11.1% of face value. The amount invested in receivable portfolios decreased$232.8 million , or 30.4%, compared with the$764.9 million invested during the nine months endedSeptember 30, 2019 , to acquire receivable portfolios with face values aggregating$9.4 billion , for an average purchase price of 8.2% of face value. Inthe United States , purchases of receivable portfolios decreased during the three and nine months endedSeptember 30, 2020 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. resulted from a decrease in supply and our cautious approach to purchasing at the beginning of the COVID-19 pandemic when the potential impacts were relatively unknown. InEurope , purchases of receivable portfolios decreased during the three and nine months endedSeptember 30, 2020 as compared to the corresponding periods in the prior year. The decreases were primarily the result of a relatively limited supply of portfolios during the three and nine months endedSeptember 30, 2020 and a heightened return expectation as a result of greater uncertainty relating to the future impact of the COVID-19 pandemic. 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, 2020 and 2019, we also invested$0.2 million and$8.2 million in REO assets, respectively. During the nine months endedSeptember 30, 2020 and 2019, we invested$1.5 million and$21.1 million in REO assets, respectively. 33 -------------------------------------------------------------------------------- Table of Contents Collections from Purchased Receivables by Channel and Geographic Location We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from third-party collection agencies that we utilize when we believe they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. The collection agencies channel also includes collections on accounts purchased where we maintain the collection agency servicing until the accounts can be placed in our internal collection channels. The following table summarizes the total collections from receivable portfolios by collection channel and geographic area (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 MCM (United States ): Call center and digital collections$ 246,689 $ 187,500 $ 709,780 $ 557,135 Legal collections 139,473 141,269 431,096 428,296 Collection agencies 4,699 2,459 10,766 8,682 Subtotal 390,861 331,228 1,151,642 994,113 Cabot (Europe): Call center and digital collections 65,182 64,492 182,206 192,832 Legal collections 40,171 45,276 115,107 145,285 Collection agencies 36,120 40,452 104,634 131,162 Subtotal 141,473 150,220 401,947 469,279 Other geographies: Call center and digital collections - 5,383 - 25,620 Legal collections - 744 - 3,541 Collection agencies 7,414 11,820 21,653 35,576 Subtotal 7,414 17,947 21,653 64,737
Total collections from purchased receivables
Gross collections from purchased receivables increased by$40.4 million , or 8.1%, to$539.7 million during the three months endedSeptember 30, 2020 , from$499.4 million during the three months endedSeptember 30, 2019 . Gross collections from purchased receivables increased by$47.1 million , or 3.1%, to$1,575.2 million during the nine months endedSeptember 30, 2020 , from$1,528.1 million during the nine months endedSeptember 30, 2019 . Gross collections from receivable portfolios inthe United States increased significantly in both periods presented. The increases were primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection capacity, and our continued effort in improving liquidation. Our consumer centric collection approach and our capacity buildup are driving a higher proportion of call center and digital collections compared to legal collections inthe United States . The decreases in collections from purchased receivables inEurope were primarily due to the impacts of the COVID-19 pandemic. We anticipate a material portion of the reduced collections in 2020 will be recovered in future years. The decreases in collections from purchased receivables in other geographies were primarily due to the sale of our wholly-owned subsidiary Baycorp inAugust 2019 . The COVID-19 pandemic and the resulting containment measures, including impacts to the legal collections process, negatively affected legal collections beginning in lateMarch 2020 and could continue to affect legal collections and related costs depending on the duration and severity of the COVID-19 pandemic and the resulting containment measures. We are closely monitoring the impacts of the COVID-19 pandemic on collections and cost-to-collect. 34 -------------------------------------------------------------------------------- Table of Contents Results of Operations Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows (in thousands, except percentages):
Three Months Ended
2020 2019
Revenues
Revenue from receivable portfolios$ 342,489 84.8 %$ 316,217 88.8 % Changes in expected current and future recoveries 30,451 7.6 % - - % Servicing revenue 29,787 7.4 % 31,060 8.7 % Other revenues 949 0.2 % 144 0.1 % Total revenues 403,676 100.0 % 347,421 97.6 % Allowance reversals on receivable portfolios, net 8,515 2.4 % Total revenues, adjusted by net allowances 355,936 100.0 % Operating expenses Salaries and employee benefits 95,979 23.8 % 96,638 27.2 % Cost of legal collections 60,383 15.0 % 48,971 13.8 % General and administrative expenses 53,459 13.2 % 38,168 10.7 % Other operating expenses 28,088 7.0 % 25,753 7.2 % Collection agency commissions 12,703 3.1 % 17,343 4.9 % Depreciation and amortization 10,609 2.6 % 10,000 2.8 % Goodwill impairment - - % 10,718 3.0 % Total operating expenses 261,221 64.7 % 247,591 69.6 % Income from operations 142,455 35.3 % 108,345 30.4 % Other expense Interest expense (67,962) (16.8) % (54,365) (15.3) % Other income (expense) 361 0.1 % (11,546) (3.2) % Total other expense (67,601) (16.7) % (65,911) (18.5) % Income before income taxes 74,854 18.6 % 42,434 11.9 % Provision for income taxes (19,747) (4.9) % (3,021) (0.8) % Net income 55,107 13.7 % 39,413 11.1 % Net income attributable to noncontrolling interest (457) (0.1) % (544) (0.2) % Net income attributable toEncore Capital Group, Inc. stockholders$ 54,650 13.6 %$ 38,869 10.9 % 35
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Table of Contents
Nine Months Ended
2020 2019
Revenues
Revenue from receivable portfolios$ 1,035,141 92.5 %$ 939,870 89.5 % Changes in expected current and future recoveries (2,203) (0.2) % - - % Servicing revenue 82,417 7.4 % 97,399 9.3 % Other revenues 3,435 0.3 % 673 0.1 % Total revenues 1,118,790 100.0 % 1,037,942 98.9 % Allowance reversals on receivable portfolios, net 11,945 1.1 % Total revenues, adjusted by net allowances 1,049,887 100.0 % Operating expenses Salaries and employee benefits 279,944 25.0 % 284,699 27.1 % Cost of legal collections 164,018 14.7 % 149,446 14.2 % General and administrative expenses 113,954 10.2 % 110,335 10.5 % Other operating expenses 83,527 7.5 % 84,913 8.1 % Collection agency commissions 36,562 3.3 % 46,905 4.5 % Depreciation and amortization 31,436 2.8 % 29,736 2.9 % Goodwill impairment - - % 10,718 1.0 % Total operating expenses 709,441 63.5 % 716,752 68.3 % Income from operations 409,349 36.5 % 333,135 31.7 % Other expense Interest expense (172,951) (15.5) % (173,245) (16.5) % Other expense (1,211) (0.1) % (15,766) (1.5) % Total other expense (174,162) (15.6) % (189,011) (18.0) % Income before income taxes 235,187 20.9 % 144,124 13.7 % Provision for income taxes (59,875) (5.4) % (18,447) (1.7) % Net income 175,312 15.5 % 125,677 12.0 % Net income attributable to noncontrolling interest (784) (0.1) % (893) (0.1) % Net income attributable to Encore Capital Group, Inc. stockholders $ 174,528 15.4 %$ 124,784 11.9 % Comparison of Results of Operations Revenues Our revenues primarily include revenue recognized from engaging in debt purchasing and recovery activities. EffectiveJanuary 1, 2020 , we adopted the CECL accounting standard. Under CECL, we apply our charge-off policy and fully write-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables we acquire immediately after purchasing the portfolio. We then record a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as "Investment in receivable portfolios, net" in our consolidated statements of financial condition. The discount rate is an effective interest rate (or "purchase EIR") established based on the purchase price of the portfolio and the expected future cash flows at the time of purchase. Revenue generated by such activities primarily includes two components: (1) the accretion of the discount on the negative allowance due to the passage of time, which is included in "Revenue from receivable portfolios" and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries, and is presented in our consolidated statements of operations as "Changes in expected current and future recoveries." Certain pools already fully recovered their cost basis and became zero basis portfolios ("ZBA") prior to our adoption of CECL. We did not establish 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 36 -------------------------------------------------------------------------------- adoption of CECL, all subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in our consolidated statements of operations. Servicing revenue consists primarily of fee-based income earned on accounts collected on behalf of others, primarily credit originators. We earn fee-based income by providing debt servicing (such as early stage collections, BPO, contingent collections, trace services and litigation activities) to credit originators for non-performing loans. Other revenues primarily include revenues recognized from the sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios inEurope and LAAP. Other revenues also include gains recognized on transfers of financial assets. Under the previous accounting standard for purchased credit deteriorated assets, we incurred allowance charges when actual cash flows from our receivable portfolios underperformed compared to our expectations or when there was a change in the timing of cash flows. We also recorded allowance reversals on pool groups that had historic allowance reserves when actual cash flows from these receivable portfolios outperformed our expectations. 37 -------------------------------------------------------------------------------- We have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The following table summarizes revenues for the periods presented (in thousands, except percentages): Three
Months Ended
2020 2019 $ Change % Change
Revenue recognized from portfolio basis $ 329,106 $ 300,048 $ 29,058 9.7 %
ZBA revenue 13,383 16,169 (2,786) (17.2) %
Revenue from receivable portfolios 342,489 316,217 26,272 8.3 %
Changes in expected current period
recoveries 78,268
Changes in expected future period
recoveries (47,817)
Changes in expected current and future
recoveries 30,451
Servicing revenue 29,787 31,060 (1,273) (4.1) %
Other revenues 949 144 805 559.0 %
Total revenues $ 403,676 $ 347,421 $ 56,255 16.2 %
Allowance reversals on receivable
portfolios, net(1) 8,515
Total revenues, adjusted by net allowances $
355,936
________________________
(1)Amount includes$2.0 million of allowance reversals for zero-basis portfolios. Nine Months Ended September 30, 2020 2019 $ Change % Change
Revenue recognized from portfolio basis
$ 120,749 13.9 % ZBA revenue 43,527 69,005 (25,478) (36.9) % Revenue from receivable portfolios 1,035,141 939,870 95,271 10.1 % Changes in expected current period recoveries 197,155 Changes in expected future period recoveries (199,358) Changes in expected current and future recoveries (2,203) Servicing revenue 82,417 97,399 (14,982) (15.4) % Other revenues 3,435 673 2,762 410.4 % Total revenues$ 1,118,790 $ 1,037,942 $ 80,848 7.8 % Allowance reversals on receivable portfolios, net(1) 11,945 Total revenues, adjusted by net allowances$ 1,049,887
________________________
(1)Amount includes
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Our operating results are impacted by foreign currency translation, which
represents the effect of translating operating results where the functional
currency is different than our U.S. dollar reporting currency. The strengthening
of the U.S. dollar relative to other foreign currencies has an unfavorable
impact on our international revenues, and the weakening of the U.S. dollar
relative to other foreign currencies has a favorable impact on our international
revenues. Our revenues were favorably impacted by foreign currency translation,
primarily by the weakening of the U.S. dollar against the British Pound by 4.6%
during the three months ended September 30, 2020 compared to the three months
ended September 30, 2019 . The foreign currency translation effect on our
revenues for the nine months ended September 30, 2020 compared to the nine
months ended September 30, 2019 was negligible.
The increases in revenue recognized from portfolio basis during the three and
nine months ended September 30, 2020 as compared to the three and nine months
ended September 30, 2019 were primarily due to higher expected total future cash
flows resulting from a change in the expected economic life of static pool
groups based on a lifetime expected recovery model upon the adoption of CECL
which led to increased EIR, and increased expected total future cash flows
resulting from a change in our accounting policy for court costs. Under our new
accounting policy, all future expected cash flows, including the expected total
recoveries in our legal channel, are included in the initial curve in the
establishment of negative allowance, which in turn, increased the EIR.
As discussed above, ZBA revenue represents collections from our legacy ZBA
pools. We expect our ZBA revenue to continue to decline as we collect on these
legacy pools. Since our forecast period is on a rolling 15 year basis after the
adoption of CECL, we do not expect to have new ZBA pools in the future.
Under CECL, changes in expected current period recoveries represent over and
under-performance in the reporting period. Collections during the three and nine
months ended September 30, 2020 significantly outperformed the projected cash
flows. We believe the collection over-performance was largely driven by the
reduced near-term expected recoveries as a result of adjustments made to our
projected cash flow forecast during the first quarter of 2020 associated with
the COVID-19 pandemic. The over-performance was also a result of our sustained
improvements in portfolio collections driven by 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 and related actions taken by governments. When
reassessing the future forecasts of expected lifetime recoveries during the
three months ended September 30, 2020 , management considered historical and
current collection performance, uncertainty in economic forecasts in the
geographies in which we operate, and believes that the operational disruption as
a result of the COVID-19 pandemic has, for the near term, been resolved through
a combination of social distancing in the workplace and working remotely.
However, the macroeconomic driven consumer distress is still present and will
likely continue to impact our collections performance in the near future. As a
result, we have updated our forecast, resulting in a reduction of total
estimated remaining collections which in turn, when discounted to present value,
resulted in a provision for credit loss adjustment of approximately $47.8
million and $199.4 million during the three and nine months ended September 30,
2020 , respectively. The circumstances around this pandemic are evolving rapidly
and will continue to impact our business and our estimation of expected
recoveries in future periods. We will continue to closely monitor the COVID-19
situation and update our assumptions accordingly.
The following tables summarize collections from purchased receivables, revenue
from receivable portfolios, end of period receivable balance and other related
supplemental data, by year of purchase (in thousands, except percentages):
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Three Months Ended September 30, 2020 As of September 30, 2020
Revenue from Changes in Expected Investment in
Receivable Current and Future 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 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 %
2020 - - - - - %
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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Three Months Ended September 30, 2019 As of September 30, 2019
Revenue from Net Reversal
Receivable (Portfolio Unamortized
Collections Portfolios Allowance) Balances Monthly EIR
United States :
ZBA $ 16,333 $ 14,301 $ 2,045 $ - - %
2011 8,310 9,264 - 2,907 77.2 %
2012 9,072 8,392 - 6,692 33.5 %
2013 20,387 17,559 - 15,844 33.3 %
2014 16,358 10,422 1,717 53,863 6.0 %
2015 20,305 8,728 4,636 88,511 3.0 %
2016 37,609 16,817 - 163,481 3.2 %
2017 59,238 31,909 - 219,053 4.5 %
2018 86,185 47,839 (196) 450,300 3.3 %
2019 57,431 37,680 - 491,560 3.2 %
Subtotal 331,228 202,911 8,202 1,492,211 4.1 %
Europe:
ZBA 73 72 - - - %
2013 26,530 20,858 - 221,599 3.1 %
2014 25,112 17,701 29 200,040 2.9 %
2015 18,042 11,273 450 154,572 2.3 %
2016 13,957 10,214 - 139,951 2.5 %
2017 27,412 15,558 - 292,257 1.7 %
2018 24,413 17,188 (888) 380,162 1.5 %
2019 14,681 9,287 - 208,934 1.8 %
Subtotal 150,220 102,151 (409) 1,597,515 2.1 %
Other geographies:
ZBA 1,777 1,796 - - - %
2014 1,492 942 - 60,827 80.8 %
2015 3,714 2,804 267 7,295 13.7 %
2016 2,757 1,640 455 4,998 4.9 %
2017 3,652 1,827 - 16,169 5.2 %
2018 3,369 1,673 - 8,792 3.1 %
2019 1,186 473 - 360 3.2 %
Subtotal 17,947 11,155 722 98,441 6.0 %
Total $ 499,395 $ 316,217 $ 8,515 $ 3,188,167 3.1 %
41
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Nine Months Ended September 30, 2020 As of September 30, 2020
Revenue from Changes in Expected Investment in
Receivable Current and Future Receivable
Collections Portfolios Recoveries Portfolios Monthly EIRUnited 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 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 % 2020 - - - - - % Subtotal 21,653 13,400 947 67,328 7.9 % 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.
42
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Nine Months Ended September 30, 2019 As of September 30, 2019
Revenue from Net Reversal
Receivable (Portfolio Unamortized
Collections Portfolios Allowance) Balances Monthly EIR
United States :
ZBA $ 68,127 $ 61,518 $ 6,630 $ - - %
2011 14,186 13,925 304 2,907 77.2 %
2012 23,552 20,018 273 6,692 33.5 %
2013 65,132 55,298 (52) 15,844 33.3 %
2014 54,569 31,766 3,247 53,863 6.0 %
2015 68,045 27,925 4,636 88,511 3.0 %
2016 127,311 56,240 (896) 163,481 3.2 %
2017 203,288 101,421 - 219,053 4.5 %
2018 269,545 152,323 (196) 450,300 3.3 %
2019 100,358 65,552 - 491,560 3.2 %
Subtotal 994,113 585,986 13,946 1,492,211 4.1 %
Europe:
ZBA 265 266 - - - %
2013 85,001 66,525 - 221,599 3.1 %
2014 80,303 55,567 (145) 200,040 2.9 %
2015 55,456 32,964 267 154,572 2.3 %
2016 47,175 32,116 (29) 139,951 2.5 %
2017 89,966 49,503 - 292,257 1.7 %
2018 85,015 54,332 (888) 380,162 1.5 %
2019 26,098 17,525 - 208,934 1.8 %
Subtotal 469,279 308,798 (795) 1,597,515 2.1 %
Other geographies:
ZBA 7,202 7,221 - - - %
2014 3,316 5,803 - 60,827 80.8 %
2015 14,448 10,881 267 7,295 13.7 %
2016 10,663 5,598 (606) 4,998 4.9 %
2017 12,822 7,192 - 16,169 5.2 %
2018 13,176 7,110 (867) 8,792 3.1 %
2019 3,110 1,281 - 360 3.2 %
Subtotal 64,737 45,086 (1,206) 98,441 6.0 %
Total $ 1,528,129 $ 939,870 $ 11,945 $ 3,188,167 3.1 %
The decreases in servicing revenues during the three and nine months ended
September 30, 2020 as compared to the three and nine months ended September 30,
2019 were primarily attributable to the sale of Baycorp in August 2019 . Through
Baycorp, we earned servicing revenues through August 2019 . The decreases were
also driven by the COVID-19 pandemic. The decrease during the three months ended
September 30, 2020 as compared to the corresponding period in the prior year was
partially offset by the favorable impact of foreign currency translation, which
was primarily the result of the weakening of the U.S. dollar against the British
Pound.
The increases in other revenues during the three and nine months ended September
30, 2020 as compared to the three and nine months ended September 30, 2019 were
due to increased gains recognized upon sale of real estate assets that are
acquired as a result of our investments in non-performing secured residential
mortgage portfolios in Europe and LAAP.
Operating Expenses
The following table summarizes operating expenses for the periods presented (in
thousands, except percentages):
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Table of Contents
Three Months Ended September 30,
2020 2019 $ Change % Change
Salaries and employee benefits $ 95,979 $ 96,638 $ (659) (0.7) %
Cost of legal collections 60,383 48,971 11,412 23.3 %
General and administrative expenses 53,459 38,168 15,291 40.1 %
Other operating expenses 28,088 25,753 2,335 9.1 %
Collection agency commissions 12,703 17,343 (4,640) (26.8) %
Depreciation and amortization 10,609 10,000 609 6.1 %
Goodwill impairment - 10,718 (10,718) (100.0) %
Total operating expenses $ 261,221 $ 247,591 $ 13,630 5.5 %
Nine Months Ended September 30,
2020 2019 $ Change % Change
Salaries and employee benefits $ 279,944 $ 284,699 $ (4,755) (1.7) %
Cost of legal collections 164,018 149,446 14,572 9.8 %
General and administrative expenses 113,954 110,335 3,619 3.3 %
Other operating expenses 83,527 84,913 (1,386) (1.6) %
Collection agency commissions 36,562 46,905 (10,343) (22.1) %
Depreciation and amortization 31,436 29,736 1,700 5.7 %
Goodwill impairment - 10,718 (10,718) (100.0) %
Total operating expenses $ 709,441 $ 716,752 $ (7,311) (1.0) %
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 4.6% for the three months ended September
30, 2020 compared to the three months ended September 30, 2019 , the foreign
currency translation effect on our operating expenses for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 was
negligible.
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, 2020 compared to the three months ended September 30, 2019 was
primarily due to the following reasons:
•Decrease in headcount in other geographies as a result of the sale of Baycorp
in August 2019 ;
•The unfavorable impact of foreign currency translation, primarily by the
weakening of the U.S. dollar against the British Pound during the three months
ended September 30, 2020 compared to the three months ended September 30, 2019 .
The decrease in salaries and employee benefits during the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 was
primarily due to the following reasons:
•Decrease in headcount in other geographies as a result of the sale of Baycorp
in August 2019 ;
•Partially offset by increased stock compensation for the nine months ended
September 30, 2020 due to adjustments to estimated vesting of certain
performance-based awards.
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Cost of Legal Collections
Cost of legal collections primarily includes contingent fees paid to our
external network of attorneys and the cost of litigation. We pursue legal
collections using a network of attorneys that specialize in collection matters
and through our internal legal channel. Under the agreements with our contracted
attorneys, we advance certain out-of-pocket court costs. Effective January 1,
2020 , we no longer capitalize upfront court costs and recognize a portion of
court costs as expense based on a loss-rate methodology, but rather, we expense
all court costs as incurred. Cost of legal collections does not include internal
legal channel employee costs, which are included in salaries and employee
benefits in our consolidated statements of operations.
The following table summarizes our cost of legal collections for the periods
presented (in thousands, except percentages):
Three Months Ended September 30,
2020 2019 $ Change % Change
Court costs $ 38,500 $ 22,471 $ 16,029 71.3 %
Legal collection fees 21,883 26,500 (4,617) (17.4) %
Total cost of legal collections $ 60,383 $ 48,971 $ 11,412 23.3 %
Nine Months Ended September 30,
2020 2019 $ Change % Change
Court costs $ 96,202 $ 67,285 $ 28,917 43.0 %
Legal collection fees 67,816 82,161
(14,345) (17.5) %
Total cost of legal collections
The increase in cost of legal collections during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 was primarily due to the following reasons: •No longer capitalizing upfront court costs but rather expensing all court costs as incurred; •The unfavorable impact of foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 ; •Partially offset by lower court cost spending due to court closures in certain jurisdictions. The increase in cost of legal collections during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 was primarily due to the following reasons: •No longer capitalizing upfront court costs but rather expensing all court costs as incurred; •Partially offset by lower court cost spending due to court closures in certain jurisdictions. General and Administrative Expenses The increases in general and administrative expense during the three and nine months endedSeptember 30, 2020 compared to the three and nine months endedSeptember 30, 2019 were primarily due to the following reasons: •A charge of$15.0 million relating to our settlement with theCFPB ; •Certain third-party costs of approximately$6.9 million incurred relating to various financing transactions completed inSeptember 2020 ; •The increases were partially offset by reduced travel and facilities expenses, and consulting fees and lower general and administrative expenses due to the sale of Baycorp inAugust 2019 . Other Operating Expenses The increase in other operating expenses during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 was primarily due to the following reasons: •Increased postage and printing expenses primarily at our domestic operations; •The unfavorable impact of foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound. 45 -------------------------------------------------------------------------------- Table of Contents The decrease in other operating expenses during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 was primarily due to the following reasons: •Lower collection expenses primarily due to the sale of Baycorp inAugust 2019 ; •Reduced expenditures for bank charges; •The decrease was partially offset by the increase in other operating expenses during the three months endedSeptember 30, 2020 as compared to the corresponding period in the prior year as described above. Collection Agency Commissions Collection agency commissions 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 decreases in collections agency commissions during the three and nine months endedSeptember 30, 2020 compared to the three and nine months endedSeptember 30, 2019 were primarily due to the decrease in agency collections inEurope and other geographies. Depreciation and Amortization The increases in depreciation and amortization expense during the three and nine months endedSeptember 30, 2020 compared to the three and nine months endedSeptember 30, 2019 were primarily due to the following reasons: •Increased depreciation expense primarily incurred at ourU.S. facilities; •The unfavorable impact of foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . Goodwill Impairment InAugust 2019 , we completed the sale of Baycorp. The Baycorp transaction resulted in a goodwill impairment charge of$10.7 million and an additional loss on sale of$12.5 million during the three and nine months endedSeptember 30, 2019 . Interest Expense The following tables summarize our interest expense (in thousands, except percentages): Three Months Ended September 30, 2020 2019 $ Change % Change Stated interest on debt obligations$ 44,484 $ 48,413 $ (3,929) (8.1) % Amortization of debt issuance costs 10,610 2,466 8,144 330.3 % Amortization of debt discount 2,490 3,486 (996) (28.6) % Other interest expense 10,378 - 10,378 100.0 % Total interest expense$ 67,962 $ 54,365 $ 13,597 25.0 % InSeptember 2020 we entered into various transactions, agreements and amendments (collectively, the "Financing Transactions") related to our borrowings and completed the implementation of our new global funding structure. The increase in interest expense during the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 was primarily due to the following reasons: •$7.3 million of unamortized debt issuance costs were written-off primarily as a result of the Financing Transactions completed inSeptember 2020 ; •$10.4 million of other interest expense relating to the payment of a make-whole provision inSeptember 2020 in connection with the prepayment of the Encore Private Placement Notes as part of the Financing Transactions; 46 -------------------------------------------------------------------------------- Table of Contents •The unfavorable impact of foreign currency translation, primarily by the weakening of theU.S. dollar against the British Pound; •Partially offset by a decrease in London Interbank Offered Rate ("LIBOR") which resulted in decreased interest expense for the revolving credit facilities that reference LIBOR. Nine Months Ended September 30, 2020 2019 $ Change % Change Stated interest on debt obligations$ 137,366 $ 145,297 $ (7,931) (5.5) % Amortization of debt issuance costs 16,405 17,731 (1,326) (7.5) % Amortization of debt discount 8,802 10,217 (1,415) (13.8) % Other interest expense 10,378 - 10,378 100.0 % Total interest expense$ 172,951 $ 173,245 $ (294) (0.2) % The decrease in interest expense during the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 was primarily due to the following reasons: •$9.0 million of Euro-denominated bond refinancing fees incurred during the nine months endedSeptember 30, 2019 ; •A decrease in LIBOR which resulted in decreased interest expense for the revolving credit facilities that reference LIBOR; •The decrease was partially offset by increased upfront costs incurred inSeptember 2020 relating to the Financing Transactions, including the write-off of$7.3 million of unamortized debt issuance costs and the payment of$10.4 million make-whole provision in connection with the prepayment of the Encore Private Placement Notes. Other Income (Expense) Other income or expense consists primarily of foreign currency exchange gains or losses, interest income, and gains or losses recognized on certain transactions outside of our normal course of business. Other income was$0.4 million during the three months endedSeptember 30, 2020 and other expense was$11.5 million during the three months endedSeptember 30, 2019 . Other expense was$1.2 million during the nine months endedSeptember 30, 2020 and$15.8 million during the nine months endedSeptember 30, 2019 . Other income recognized during the three months endedSeptember 30, 2020 primarily represented income generated from our EARC operations partially offset by foreign currency exchange losses. 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. Other expense recognized during the three and nine months endedSeptember 30, 2019 primarily included the loss recognized on the Baycorp transaction of$12.5 million . Provision for Income Taxes We recorded income tax expense of$19.7 million and$3.0 million during the three months endedSeptember 30, 2020 and 2019, respectively, and income tax expense of$59.9 million and$18.4 million during the nine months endedSeptember 30, 2020 and 2019, respectively. The effective tax rates for the respective periods are shown below: 47
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Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Federal provision 21.0 % 21.0 % 21.0 % 21.0 %
State provision 2.7 % 5.3 % 3.0 % 3.7 %
Tax benefit relating to Baycorp Transaction - % (29.1) % - % (8.6) %
Tax effect of CFPB settlement fees(1) 4.2 % - % 1.3 % - %
Audit assessment - % 8.9 % - % 2.6 %
Change in valuation allowance(2) 2.0 % 1.9 % 2.2 % 2.1 %
Tax benefit from divestiture of foreign
investment - % - % (1.3) % - %
Change in tax accounting method - % - % - % (6.3) %
Tax rate change (3.5) % - % (1.1) % - %
Other - % (0.9) % 0.4 % (1.7) %
Effective tax rate 26.4 % 7.1 % 25.5 % 12.8 %
________________________
(1)Non-deductible expense for tax purposes, refer to "Note 14: Subsequent
Event."
(2)Attributable to losses incurred at certain foreign subsidiaries with
cumulative operating losses for tax purposes.
We utilized the discrete effective tax rate method ("discrete method") for
recording income taxes for the three and nine months ended September 30, 2020 .
We believe the use of the discrete method is more appropriate than the
application of the estimated annual effective tax rate ("AETR") method due to
uncertainty in estimating annual pre-tax earnings primarily due to the ongoing
COVID-19 pandemic. We will re-evaluate the use of the discrete method each
quarter until it is deemed appropriate to return to the AETR method.
Our income tax expense includes deferred income taxes arising from temporary
differences between the financial reporting and tax bases of assets and
liabilities, and net operating losses. We regularly evaluate the realizability
of our deferred income tax assets and assess the need for a valuation allowance,
including considerations of whether it is more likely than not that the deferred
income tax assets will be realized. The assessment of realizability requires
significant judgement and our projections of future taxable income required to
fully realize the recorded amount of deferred tax assets reflect numerous
assumptions about our operating business and investments, and are subject to
change as conditions change specific to our operating business, investments or
general economic conditions. Adverse changes in certain jurisdictions could
result in the need to record or increase the valuation allowance, resulting in a
charge against earnings in the respective period.
Our subsidiary in Costa Rica is operating under a 100% tax holiday through
December 31, 2026 . The impact of the tax holiday in Costa Rica for the three and
nine months ended September 30, 2020 and 2019, was immaterial.
We had gross unrecognized tax benefits, inclusive of penalties and interest,
of $8.2 million as of September 30, 2020 . These unrecognized tax benefits, if
recognized, would result in a net tax benefit of $7.6 million as of
September 30, 2020 . There was no material change in gross unrecognized tax
benefits from December 31, 2019 .
We have not provided for applicable income or withholding taxes on the
undistributed earnings for certain of its subsidiaries operating outside of the
United States . Undistributed net income of these subsidiaries as of September
30, 2020 was approximately $180.5 million . Such undistributed earnings are
considered permanently reinvested. We do not provide for deferred taxes on
translation adjustments on unremitted earnings under the indefinite reversal
exemption. Determination of the amount of unrecognized deferred tax liability
related to these earnings is not practical due to the complexities of a
hypothetical calculation. Subsidiaries operating outside of the United States
for which we do not consider under the indefinite reversal exemption have no
material undistributed earnings or outside basis differences and therefore no
U.S. taxes have been provided.
The UK Finance Act 2020 received Royal Assent in the United Kingdom on July 22,
2020 , changing the corporate income tax rate from the previously enacted 17% to
19% effective on April 1, 2020 .
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Non-GAAP Disclosure
In addition to the financial information prepared in conformity with Generally
Accepted Accounting Principles ("GAAP"), we provide historical non-GAAP
financial information. Management believes that the presentation of such
non-GAAP financial information is meaningful and useful in understanding the
activities and business metrics of our operations. Management believes that
these non-GAAP financial measures reflect an additional way of viewing aspects
of our business that, when viewed with our GAAP results, provide a more complete
understanding of factors and trends affecting our business.
Management believes that the presentation of these measures provides investors
with greater transparency and facilitates comparison of operating results across
a broad spectrum of companies with varying capital structures, compensation
strategies, derivative instruments, and amortization methods, which provide a
more complete understanding of our financial performance, competitive position,
and prospects for the future. Readers should consider the information in
addition to, but not instead of, our financial statements prepared in accordance
with GAAP. This non-GAAP financial information may be determined or calculated
differently by other companies, limiting the usefulness of these measures for
comparative purposes.
Adjusted Earnings Per Share. Management uses non-GAAP adjusted net income and
adjusted earnings per share attributable to Encore to assess operating
performance and to highlight trends in our business that may not otherwise be
apparent when relying on financial measures calculated in accordance with GAAP.
Adjusted net income attributable to Encore excludes non-cash interest and
issuance cost amortization relating to our convertible notes and exchangeable
notes, acquisition, integration and restructuring related expenses, amortization
of certain acquired intangible assets and other charges or gains that are not
indicative of ongoing operations.
The following table provides a reconciliation between net income and diluted
earnings per share attributable to Encore calculated in accordance with GAAP, to
adjusted net income and adjusted earnings per share attributable to Encore,
respectively (in thousands, except per share data):
Three Months Ended September 30,
2020 2019
$ Per Diluted Share $ Per Diluted Share
GAAP net income attributable to Encore, as reported $ 54,650 $ 1.72 $ 38,869 $ 1.23
Adjustments:
CFPB settlement fees(1) 15,009 0.47 - -Convertible notes and exchangeable notes non-cash interest and issuance cost amortization
3,180 0.10 3,531 0.11
Acquisition, integration and restructuring related expenses(2) (23) 0.00 3,819
0.12
Amortization of certain acquired intangible assets(3) 1,773 0.06 1,644
0.05
Loss on Baycorp Transaction(4) - - 12,489 0.39 Goodwill impairment(4) - - 10,718 0.34 Net gain on fair value adjustments to contingent consideration(5) - - (101)
0.00
Income tax effect of above non-GAAP adjustments and certain discrete tax items(6)
(1,052) (0.04) (19,069) (0.60)
Adjusted net income attributable to Encore$ 73,537 $ 2.31$ 51,900 $ 1.64 ________________________ 49
-------------------------------------------------------------------------------- Table of Contents (1)Amount represents a charge resulting from the Stipulated Judgment with theCFPB . We adjust 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. 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)We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers. 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 attributable to Encore and adjusted earnings per share. (4)The Baycorp Transaction resulted in a goodwill impairment charge of$10.7 million and a loss on sale of$12.5 million during the three months endedSeptember 30, 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. (5)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 3: Fair Value Measurements" in the notes to our consolidated financial statements for further details. (6)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.
Nine Months Ended
2020 2019
Per Diluted Per Diluted
$ Share $ Share
GAAP net income attributable to Encore, as reported
$ 5.51 $ 124,784 $ 3.97 Adjustments: CFPB settlement fees(1) 15,009 0.47 - - Convertible notes and exchangeable notes non-cash interest and issuance cost amortization 11,205 0.35 11,571 0.37
Acquisition, integration and restructuring related expenses(2)
4,940 0.16 6,345 0.20
Amortization of certain acquired intangible assets(3) 5,207
0.16 5,358 0.17
Loss on Baycorp Transaction(4) - - 12,489 0.40
Goodwill impairment(4) - - 10,718 0.34
Net gain on fair value adjustments to contingent
consideration(5) - - (2,300) (0.07)
Income tax effect of above non-GAAP adjustments and certain discrete tax items(6)
(6,399) (0.19) (21,840) (0.69)
Change in tax accounting method(7) - - (9,070) (0.29)
Adjusted net income attributable to Encore $ 204,490 ________________________
(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. 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)We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers. 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 attributable to Encore and adjusted income per share. (4)The Baycorp Transaction resulted in a goodwill impairment charge of$10.7 million and a loss on sale of$12.5 million during the three months endedSeptember 30, 2019 . We believe the goodwill impairment charge and the loss on sale are not indicative of ongoing operations, therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors' results. (5)Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers inEurope . We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of "Note 3: Fair Value Measurements" in the notes to our consolidated financial statements for further details. 50 -------------------------------------------------------------------------------- Table of Contents (6)Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred. Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing operations. (7)Amount represents the benefit from the tax accounting method change related to revenue reporting. We adjust for certain discrete tax items that are not indicative of our ongoing operations. Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before discontinued operations, interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 GAAP net income, as reported$ 55,107 $ 39,413 $ 175,312 $ 125,677 Adjustments: Interest expense 67,962 54,365 172,951 173,245 Interest income (394) (590) (1,953) (2,850) Provision for income taxes 19,747 3,021 59,875 18,447 Depreciation and amortization 10,609 10,000 31,436 29,736 CFPB settlement fees (1) 15,009 - 15,009 - Stock-based compensation expense 3,884 4,005 13,189 9,412
Acquisition, integration and restructuring related expenses(2)
(23) 3,819 4,940 6,345
Loss on Baycorp Transaction(3) - 12,489 - 12,489
Goodwill impairment(3) - 10,718 - 10,718
Net gain on fair value adjustments to contingent
consideration(4) - (101) - (2,300)
Adjusted EBITDA $ 171,901 $
137,139
________________________
(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. 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)The Baycorp Transaction resulted in a goodwill impairment charge of$10.7 million and a loss on sale of$12.5 million during the three and nine months endedSeptember 30, 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. (4)Amount represents the 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 3: Fair Value Measurements" in the notes to our consolidated financial statements for further details. (5)For periods prior toJanuary 1, 2020 , amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios. For periods subsequent toJanuary 1, 2020 amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) changes in expected recoveries. For consistency with the Company 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. 51 -------------------------------------------------------------------------------- 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, 2020 2019 2020 2019 GAAP total operating expenses, as reported$ 261,221 $ 247,591 $ 709,441 $ 716,752 Adjustments: Operating expenses related to non-portfolio purchasing and recovery business(1) (54,001) (42,503) (137,876) (130,817) CFPB settlement fees (2) (15,009) - (15,009) - Stock-based compensation expense (3,884) (4,005) (13,189) (9,412)
Acquisition, integration and restructuring related expenses(3)
23 (3,819) (132) (6,345)
Goodwill impairment(4) - (10,718) - (10,718)
Net gain on fair value adjustments to contingent
consideration(5) - 101 - 2,300
Adjusted operating expenses related to portfolio
purchasing and recovery business $ 188,350 $
186,647
________________________
(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 expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors' results. (4)The Baycorp Transaction resulted in a goodwill impairment charge of$10.7 million that is included in operating expenses during the three and nine months endedSeptember 30, 2019 . We believe the goodwill impairment charge is not indicative of ongoing operations, therefore, adjusting for the expense enhances comparability to prior periods, anticipated future periods, and our competitors' results. (5)Amount represents the 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 3: Fair Value Measurements" in the notes to our consolidated financial statements for further details. 52 -------------------------------------------------------------------------------- Table of Contents 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, 2020 2019 2020 2019 United States 36.9 % 39.8 % 36.1 % 39.5 % Europe 28.1 % 29.0 % 28.7 % 28.5 % Other geographies 55.6 % 63.5 % 55.5 % 54.6 % Overall cost per dollar collected 34.9 % 37.4 %
34.5 % 36.8 %
As discussed in the "Accounting Policy Update" section in "Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies" of the notes to the consolidated financial statements, effectiveJanuary 1, 2020 , we expense all court costs as incurred and no longer capitalize such costs as Deferred Court Costs based on a loss-rate methodology. This accounting policy change increased the cost-to-collect metric as compared to prior periods because the court costs expense recognized in prior periods only represented costs we did not expect to recover. The accounting policy change has no impact on the amount of court cost payments incurred. Despite the increase in expense due to the accounting policy change discussed above, cost-to-collect decreased during the periods presented, due to a combination of (1) continued improvement in operational efficiencies in the collection process and (2) a large reduction in legal channel spending due to court closures in certain jurisdictions as a result of the COVID-19 pandemic, the legal channel spending has gradually increased as compared to the previous two quarters but is still lower than historical levels and (3) collection mix shifting towards non-legal collection, which has a lower cost-to-collect. 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. 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. 53 -------------------------------------------------------------------------------- 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, 2020 Purchase Price(1) <2011 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total(2) Multiple(3)United States : <2011$ 1,760,989 $ 3,222,155 $ 637,415 $ 458,336
99,169
3.1
2011 383,796 - 123,596 301,949 226,521 155,180 112,906 77,257 56,287 41,148 33,445 19,617 1,147,906 3.0
2012 548,812 - - 187,721 350,134 259,252 176,914 113,067
74,507 48,832 37,327 21,434 1,269,188 2.3 2013 551,896 - - - 230,051 397,646 298,068 203,386 147,503 107,399 84,665 48,923 1,517,641 2.7 2014 517,702 - - - - 144,178 307,814 216,357 142,147 94,929 69,059 37,795 1,012,279 2.0 2015 499,285 - - - - - 105,610 231,102 186,391 125,673 85,042 51,856 785,674 1.6 2016 553,391 - - - - - - 110,875 283,035 234,690 159,279 93,103 880,982 1.6 2017 528,443 - - - - - - - 111,902 315,853 255,048 154,198 837,001 1.6 2018 630,864 - - - - - - - - 175,042 351,696 243,439 770,177 1.2 2019 677,539 - - - - - - - - - 174,693 313,152 487,845 0.7 2020 449,089 - - - - - - - - - - 128,172 128,172 0.3 Subtotal 7,101,806 3,222,155 761,011 948,006
1,134,782 1,192,813 1,181,934 1,081,720 1,100,941 1,223,963 1,316,109 1,151,642 14,315,076
2.0
2013 619,079 - - - 134,259 249,307 212,129 165,610 146,993 132,663 113,228 69,322 1,223,511 2.0 2014 623,129 - - - - 135,549 198,127 156,665 137,806 129,033 105,337 62,882 925,399 1.5 2015 419,941 - - - - - 65,870 127,084 103,823 88,065 72,277 40,580 497,699 1.2 2016 258,218 - - - - - - 44,641 97,587 83,107 63,198 37,157 325,690 1.3 2017 461,571 - - - - - - - 68,111 152,926 118,794 64,225 404,056 0.9 2018 433,302 - - - - - - - - 49,383 118,266 59,452 227,101 0.5 2019 273,354 - - - - - - - - - 44,118 57,277 101,395 0.4 2020 81,041 - - - - - - - - - - 11,052 11,052 0.1 Subtotal 3,169,635 - - -
134,259 384,856 476,126 494,000 554,320 635,177 635,218 401,947 3,715,903
1.2
Other geographies:
2012 6,721 - - - 3,848 2,561 1,208 542 551 422 390 215 9,737 1.4
2013 29,568 - - - 6,617 17,615 10,334 4,606 3,339 2,468 1,573 745 47,297 1.6
2014 86,989 - - - - 9,652 16,062 18,403 9,813 7,991 6,472 3,787 72,180 0.8
2015 83,198 - - - - - 15,061 57,064 43,499 32,622 17,499 3,559 169,304 2.0
2016 64,450 - - - - - - 29,269 39,710 28,992 16,078 3,885 117,934 1.8
2017 49,670 - - - - - - - 15,471 23,075 15,383 5,082 59,011 1.2
2018 26,371 - - - - - - - - 12,910 15,008 4,201 32,119 1.2
2019 2,668 - - - - - - - - - 3,198 179 3,377 1.3
2020 - - - - - - - - - - - - - -
Subtotal 349,635 - - - 10,465 29,828 42,665 109,884 112,383 108,480 75,601 21,653 510,959 1.5
Total
1.7
________________________
(1)Adjusted for Put-Backs and Recalls. Put-Backs ("Put-Backs") and recalls
("Recalls") represent ineligible accounts that are returned by us or recalled by
the seller pursuant to specific guidelines as set forth in the respective
purchase agreement.
(2)Cumulative collections from inception through September 30, 2020 , excluding
collections on behalf of others.
(3)Cumulative Collections Multiple ("Multiple") through September 30, 2020
refers to collections as a multiple of purchase price.
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Total Estimated Collections from Purchased Receivables to Purchase Price
Multiple
The following table summarizes our purchases, resulting historical gross
collections, and estimated remaining gross collections from purchased
receivables, by year of purchase (in thousands, except multiples):
Estimated Total Estimated Gross
Historical Remaining Total Estimated Collections to
Purchase Price(1) Collections(2) Collections Gross Collections Purchase Price
United States:
<2011 $ 1,760,989 $ 5,478,211 $ 121,918 $ 5,600,129 3.2
2011 383,796 1,147,906 60,593 1,208,499 3.1
2012 548,812 1,269,188 67,941 1,337,129 2.4
2013(3) 551,896 1,517,641 192,744 1,710,385 3.1
2014(3) 517,702 1,012,279 123,269 1,135,548 2.2
2015 499,285 785,674 133,411 919,085 1.8
2016 553,391 880,982 246,922 1,127,904 2.0
2017 528,443 837,001 395,466 1,232,467 2.3
2018 630,864 770,177 627,656 1,397,833 2.2
2019 677,539 487,845 1,097,746 1,585,591 2.3
2020 449,089 128,172 964,006 1,092,178 2.4
Subtotal 7,101,806 14,315,076 4,031,672 18,346,748 2.6
Europe:
2013(3) 619,079 1,223,511 883,363 2,106,874 3.4
2014(3) 623,129 925,399 660,771 1,586,170 2.5
2015(3) 419,941 497,699 423,782 921,481 2.2
2016 258,218 325,690 331,604 657,294 2.5
2017 461,571 404,056 579,509 983,565 2.1
2018 433,302 227,101 624,762 851,863 2.0
2019 273,354 101,395 518,846 620,241 2.3
2020 81,041 11,052 207,477 218,529 2.7
Subtotal 3,169,635 3,715,903 4,230,114 7,946,017 2.5
Other geographies:
2012 6,721 9,737 219 9,956 1.5
2013 29,568 47,297 1,267 48,564 1.6
2014 86,989 72,180 51,215 123,395 1.4
2015 83,198 169,304 17,108 186,412 2.2
2016 64,450 117,934 6,740 124,674 1.9
2017 49,670 59,011 29,653 88,664 1.8
2018 26,371 32,119 10,503 42,622 1.6
2019 2,668 3,377 440 3,817 1.4
2020 - - - - -
Subtotal 349,635 510,959 117,145 628,104 1.8
Total $ 10,621,076 $ 18,541,938 $ 8,378,931 $ 26,920,869 2.5
________________________
(1)Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. Put-Backs and Recalls represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement. (2)Cumulative collections from inception throughSeptember 30, 2020 , excluding collections on behalf of others. (3)Includes portfolios acquired in connection with certain business combinations. 55 -------------------------------------------------------------------------------- Table of Contents Estimated Remaining Gross Collections by Year of Purchase The following table summarizes our estimated remaining gross collections from purchased receivable portfolios and estimated future cash flows from real estate-owned assets by year of purchase (in thousands): Estimated Remaining Gross Collections by Year of Purchase(1) 2020(3) 2021 2022 2023 2024 2025 2026 2027 2028 >2028
Total(2)
United States : <2011$ 10,630 $ 35,010 $ 25,248 $ 17,528 $ 12,132 $ 8,265 $ 5,577 $ 3,701 $ 2,286 $ 1,541 $ 121,918 2011 5,278 16,568 11,875 8,325 5,861 4,133 2,920 2,068 1,468 2,097 60,593 2012 5,909 18,687 13,089 9,247 6,505 4,585 3,237 2,291 1,626 2,765 67,941 2013(4) 13,957 51,436 37,540 26,539 18,778 13,317 9,449 6,706 4,761 10,261 192,744 2014(4) 10,400 34,372 24,137 16,553 11,318 7,964 5,635 3,992 2,831 6,067 123,269 2015 12,273 39,128 26,762 17,867 11,936 7,831 5,358 3,774 2,664 5,818 133,411 2016 23,162 74,494 46,516 31,484 21,991 15,223 10,441 7,298 5,133 11,180 246,922 2017 35,858 119,171 79,757 50,338 33,716 23,283 16,254 11,415 8,071 17,603 395,466 2018 61,932 192,762 132,071 84,943 53,478 35,161 23,203 15,315 10,016 18,775 627,656 2019 109,314 354,853 210,468 131,837 89,240 60,901 42,730 30,774 22,034 45,595 1,097,746 2020 61,376 248,475 244,161 139,955 85,258 57,486 38,887 27,360 19,531 41,517 964,006 Subtotal 350,089 1,184,956 851,624 534,616 350,213 238,149 163,691 114,694 80,421 163,219 4,031,672Europe : 2013(4) 24,105 95,517 92,781 87,795 80,626 73,626 66,225 59,637 53,578 249,473 883,363 2014(4) 20,924 81,176 74,759 67,819 62,415 55,483 47,451 41,601 37,470 171,673 660,771 2015(4) 15,274 53,301 47,339 43,312 39,408 35,331 31,222 26,728 23,397 108,470 423,782 2016 12,917 57,057 51,900 37,940 32,016 27,564 22,747 18,671 15,774 55,018 331,604 2017 22,335 87,038 80,082 67,643 57,548 48,193 40,033 34,490 28,522 113,625 579,509 2018 21,190 93,126 82,561 71,266 61,883 53,506 45,836 38,945 32,410 124,039 624,762 2019 19,555 80,356 72,906 62,447 52,403 42,971 35,135 29,679 25,374 98,020 518,846 2020 4,839 31,237 31,239 25,955 21,720 17,754 14,777 12,064 10,159 37,733 207,477 Subtotal 141,139 578,808 533,567 464,177 408,019 354,428 303,426 261,815 226,684 958,051 4,230,114 Other geographies: 2012 43 118 58 - - - - - - - 219 2013 177 546 357 187 - - - - - - 1,267 2014 2,108 9,592 7,718 6,917 5,889 4,443 2,610 1,486 1,352 9,100 51,215 2015 907 3,224 2,747 2,515 1,743 1,156 854 748 647 2,567 17,108 2016 989 3,046 1,613 573 255 169 95 - - - 6,740 2017 2,097 7,220 5,105 3,742 2,086 1,847 1,383 793 696 4,684 29,653 2018 1,107 3,576 2,305 1,619 860 461 301 197 77 - 10,503 2019 51 165 100 67 48 9 - - - - 440 2020 - - - - - - - - - - - Subtotal 7,479 27,487 20,003 15,620 10,881 8,085 5,243 3,224 2,772 16,351 117,145 Portfolio ERC 498,707 1,791,251 1,405,194 1,014,413 769,113 600,662 472,360 379,733 309,877 1,137,621 8,378,931 REO ERC(5) 8,774 35,262 19,370 8,676 7,056 1,614 56 - - - 80,808 Total ERC$ 507,481 $ 1,826,513 $ 1,424,564
$ 1,023,089 $ 776,169 $ 602,276 $ 472,416 $ 379,733 $ 309,877 $ 1,137,621 $ 8,459,739 ________________________ (1)As ofSeptember 30, 2020 , ERC for Zero Basis Portfolios include approximately$121.9 million for purchased consumer and bankruptcy receivables inthe United States . ERC for Zero Basis Portfolios inEurope and other geographies was immaterial. (2)Represents the expected remaining gross cash collections over a 180-month period. As ofSeptember 30, 2020 , ERC for 84-month and 120-month periods were: 56
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84-Month ERC 120-Month ERC
United States $ 3,763,006 $ 3,954,550
Europe 2,982,780 3,599,914
Other geographies 97,284 105,273
Portfolio ERC $ 6,843,070 $ 7,659,737
REO ERC $ 80,808 $ 80,808
Total ERC $ 6,923,878 $ 7,740,545
(3)Amount for 2020 consists of three months data from October 1, 2020 to
December 31, 2020 .
(4)Includes portfolios acquired in connection with certain business
combinations.
(5)Real estate-owned assets ERC includes approximately $78.6 million and $2.2
million of estimated future cash flows for Europe and Other Geographies,
respectively.
Estimated Future Collections Applied to Principal
As of September 30, 2020 , we had $3.3 billion in investment in receivable
portfolios. The estimated future collections applied to the investment in
receivable portfolios net balance is as follows (in thousands):
Years Ending December 31, United States Europe Other Geographies Total
2020(1) $ 130,037 $ 33,414 $ 4,523 $ 167,974
2021 471,409 177,744 16,298 665,451
2022 370,544 182,097 13,333 565,974
2023 218,436 158,642 8,430 385,508
2024 135,474 142,795 6,217 284,486
2025 89,819 125,640 4,867 220,326
2026 60,288 106,883 2,889 170,060
2027 42,228 92,423 1,641 136,292
2028 29,924 80,764 1,419 112,107
2029 20,966 71,514 1,352 93,832
2030 14,815 66,342 1,352 82,509
2031 10,674 63,481 1,352 75,507
2032 7,922 64,564 1,352 73,838
2033 6,280 69,072 1,352 76,704
2034 5,572 76,283 951 82,806
2035 2,251 70,367 - 72,618
Total $ 1,616,639 $ 1,582,025 $ 67,328 $ 3,265,992 ________________________
(1)Amount for 2020 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 2018 973 $ 1,799,804 $ 276,762
Q2 2018 1,031 2,870,456 359,580
Q3 2018 706 1,559,241 248,691
Q4 2018 766 2,272,113 246,865
Q1 2019 854 1,732,977 262,335
Q2 2019 778 2,307,711 242,697
Q3 2019 1,255 5,313,092 259,910
Q4 2019 803 2,241,628 234,916
Q1 2020 943 1,703,022 214,113
Q2 2020 754 1,305,875 147,939
Q3 2020 735 1,782,733 170,131
Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activities for the periods
presented (in thousands):
Nine Months Ended September 30,
2020 2019
(Unaudited)
Net cash provided by operating activities $ 249,982 $ 196,946
Net cash provided by (used in) investing activities 7,575 (197,958)
Net cash (used in) provided by financing activities (267,891) 31,313
Operating Cash Flows
Cash flows from operating activities represent the cash receipts and
disbursements related to all of our activities other than investing and
financing activities. Operating cash flows are derived by adjusting net income
for non-cash operating items such as depreciation and amortization, changes in
expected recoveries, allowance charges and stock-based compensation charges, and
changes in operating assets and liabilities which reflect timing differences
between the receipt and payment of cash associated with transactions and when
they are recognized in results of operations.
Net cash provided by operating activities increased $53.0 million for the nine
months ended September 30, 2020 as compared to the prior period, mainly driven
by a significant increase in net income, changes in expected recoveries compared
to the prior year net allowance reversals, and the change in prepaid income tax
and income taxes payable.
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Investing Cash Flows
Cash flow relating to investing activities is primarily affected by receivable
portfolio purchases offset by collection proceeds applied to the principal of
our receivable portfolios.
Net cash provided by investing activities was $7.6 million during the nine
months ended September 30, 2020 as compared to net cash used in investing
activities of $198.0 million for the nine months ended September 30, 2019 ,
mainly driven by reduced purchasing volume. Receivable portfolio purchases, net
of put-backs, were $518.0 million and $757.1 million during the nine months
ended September 30, 2020 and 2019, respectively. Collection proceeds applied to
the principal of our receivable portfolios, net, were $540.1 million and $588.3
million during the nine months ended September 30, 2020 and 2019, respectively.
Financing Cash Flows
Net cash used in financing activities was $267.9 million during the nine months
ended September 30, 2020 , and net cash provided by financing activities was
$31.3 million during the nine months ended September 30, 2019 . Financing cash
flows are generally affected by borrowings under our credit facilities and
proceeds from various debt offerings, offset by repayments of amounts
outstanding under our credit facilities and repayments of various notes.
Proceeds from our credit facilities were $1,695.9 million and $481.1 million
during the nine months ended September 30, 2020 and 2019, respectively.
Repayments of amounts outstanding under our credit facilities were $2,051.8
million and $441.0 million during the nine months ended September 30, 2020 and
2019, respectively. Proceeds from the issuance of senior secured notes were
$410.8 million and $460.5 million during the nine months ended September 30,
2020 and 2019, respectively. Repayments of senior secured notes were $152.4
million and $460.5 million during the nine months ended September 30, 2020 and
2019, 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.
In September 2020 , we entered into various transactions, agreements and
amendments related to our borrowings including (collectively, the "Financing
Transactions"):
•an amended multi-currency revolving credit facility the "Global Senior
Facility" that formerly supported only Cabot that now supports the operations of
all operating units. The Global Senior Facility provides for a total committed
facility of $1,050.0 million that matures in September 2024 . Available capacity
under the Global Senior Facility was $464.8 million as of September 30, 2020 ;
•an issuance of €350.0 million (approximately $410.8 million ) in 4.875% senior
secured notes due 2025; and
•an amendment to the terms of our existing senior secured notes originally
issued by affiliates of Cabot to, among other things, add Encore and its
material subsidiaries as guarantors and have Encore become the parent of the
restricted group.
As part of the Financing Transactions, we prepaid $103.7 million of Encore's
senior secured notes with a group of insurance companies and made a
$10.4 million make-whole payment to the holders of notes that were prepaid. As
of September 30, 2020 , $156.3 million of the notes remained outstanding.
Additionally, we paid $89.4 million of convertible senior notes that matured on
July 1, 2020 using cash on hand.
We are in material compliance with all covenants under our financing
arrangements. See "Note 8: Borrowings" to our consolidated financial statements
for a further discussion of our debt.
Our cash and cash equivalents as of September 30, 2020 consisted of $39.8
million held by U.S. -based entities and $130.2 million held by foreign entities.
Most of our cash and cash equivalents held by foreign entities is indefinitely
reinvested and may be subject to material tax effects if repatriated. However,
we believe that our U.S. sources of cash and liquidity are sufficient to meet
our business needs in the United States .
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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 $20.4 million as of September 30, 2020 .
Cash from operations could also be affected by various risks and uncertainties,
including, but not limited to, the effects of the COVID-19 pandemic, including
timing of cash collections from our consumers, and other risks detailed in Risk
Factors. However, we believe that we have sufficient liquidity to fund our
operations for at least the next twelve months, given our expectation of
continued positive cash flows from operations, cash collections from our
investment in receivable portfolios, our cash and cash equivalents, our access
to capital markets, and availability under our credit facilities. Our future
cash needs will depend on our acquisitions of portfolios and businesses.
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