Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 Par Value Per Share
ECPG
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Convertible preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding
—
—
Common stock, $0.01 par value, 75,000 shares authorized, 29,598 and 31,345 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
296
313
Additional paid-in capital
105,326
230,440
Accumulated earnings
1,352,825
1,055,668
Accumulated other comprehensive loss
(59,627)
(68,813)
Total Encore Capital Group, Inc. stockholders’ equity
1,398,820
1,217,608
Noncontrolling interest
—
2,468
Total equity
1,398,820
1,220,076
Total liabilities and equity
$
4,549,966
$
4,864,523
The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the consolidated statements of financial condition above. Most assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs. The liabilities exclude amounts where creditors or beneficial interest holders have recourse to the general credit of the Company. See “Note 8: Variable Interest Entities” for additional information on the Company’s VIEs.
September 30, 2021
December 31, 2020
Assets
Cash and cash equivalents
$
718
$
2,223
Investment in receivable portfolios, net
500,304
553,621
Other assets
4,285
5,127
Liabilities
Borrowings
471,570
478,131
Other liabilities
10
37
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements (Unaudited)
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies
Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial obligations to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. The Company also provides debt servicing and other portfolio management services to credit originators for non-performing loans.
Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”), the Company is a market leader in portfolio purchasing and recovery in the United States. Through Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates (collectively, “Cabot”), the Company is one of the largest credit management services providers in Europe and a market leader in the United Kingdom and Ireland. These are the Company’s primary operations.
The Company also has investments and operations in Latin America and Asia-Pacific, which the Company refers to as “LAAP.”
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 outbreak and resulting containment measures implemented by governments around the world, as well as increased business uncertainty, have impacted the Company. The circumstances around the COVID-19 pandemic continue to rapidly evolve and will continue to impact the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its assumptions accordingly.
Financial Statement Preparation and Presentation
The accompanying interim consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. The inputs into the judgments and estimates consider the economic implications of the COVID-19 pandemic on the Company’s critical and significant accounting estimates. Actual results could materially differ from those estimates.
Basis of Consolidation
The consolidated financial statements have been prepared in conformity with GAAP and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates variable interest entities for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (b) either the obligation to absorb losses or the right to receive benefits. Refer to “Note 8: Variable Interest Entities” for further details. All intercompany transactions and balances have been eliminated in consolidation.
The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments and recorded within other comprehensive income or loss. Translation gains or losses are the material components of accumulated other comprehensive income or loss and are reclassified to earnings upon the substantial sale or liquidation of investments in foreign operations.
Recently Adopted Accounting Guidance
On January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) No. 2020-06, Debt — Debt with Conversion and Other Options (“Subtopic 470-20”) and Derivatives and Hedging — Contracts in Entity’s Own Equity (“Subtopic 815-40”): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The Company adopted ASU 2020-06 using the modified-retrospective approach, by recording a net cumulative-effect adjustment to equity of approximately $17.9 million.
The ASU simplifies the accounting for convertible instruments by removing certain models in Subtopic 470-20 and revises the guidance in Subtopic 815-40 to simplify the accounting for contracts in an entity’s own equity. The ASU also amends the guidance to improve the consistency of earnings per share calculations, which requires the if-converted method be used for convertible instruments.
Under ASU 2020-06, the Company’s convertible and exchangeable notes are no longer bifurcated to a debt component and an equity component, instead, they are carried as a single liability which reflects the principal amount of the convertible and exchangeable notes. The interest expense recognized on the convertible and exchangeable notes is based on coupon rates, rather than higher effective interest rates. As a result, the Company recognizes lower interest expense after the adoption. Additionally, effective January 1, 2021, the Company uses the if-converted method in calculating the dilutive effect of its convertible and exchangeable notes for earnings per share.
The Company has 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 the cumulative effects of adopting the new guidance on the Company’s consolidated statements of financial condition at January 1, 2021 (in thousands):
Balance as of December 31, 2020
Adjustment
Opening Balance as of January 1, 2021
Liabilities
Convertible notes and exchangeable notes
$
583,500
$
—
$
583,500
Debt discount
(19,364)
19,364
—
Other liabilities (for deferred tax liabilities)
146,893
(1,450)
145,443
Equity
Additional paid-in capital
230,440
(40,372)
190,068
Accumulated earnings
1,055,668
22,458
1,078,126
With the exception of the updated standard discussed above, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three and nine months ended September 30, 2021, as compared to the recent accounting pronouncements described in our Annual Report, that have significance, or potential significance, to the Company’s consolidated financial statements.
Note 2: Earnings Per Share
Basic earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares during the period. Dilutive potential common shares include outstanding stock options, non-vested share awards, and the dilutive effect of the convertible and exchangeable senior notes, if applicable.
The Company adopted ASU 2020-06 on January 1, 2021, using a modified retrospective approach. Effective January 1, 2021, the dilutive effect of the Company’s convertible and exchangeable notes is calculated using the if-converted method. Prior to the adoption, the dilutive effect of the convertible and exchangeable notes was calculated using the treasury stock method. In September 2021, in accordance with the indenture for the convertible senior notes due in March 2022 (the “2022 Convertible Notes”), the Company irrevocably elected “combination settlement” with a specified dollar amount equal to $1,750 per $1,000 principal amount of the 2022 Convertible Notes for all conversions of the 2022 Convertible Notes that occur on or after September 15, 2021, the free conversion date, which effectively will result in an all cash settlement for the 2022 Convertible Notes so long as the stock price is less than $79.74 at the time of conversion. As a result, the 2022 Convertible Notes were only dilutive prior to September 15, 2021. All of the Company’s other convertible and exchangeable notes require net share settlement, using the if-converted method results in a similar dilutive effect as using the treasury stock method under the previous accounting standard, due to the fact that only in-the-money shares are included in the dilutive effect. The Company had 0.7 million and 0.3 million shares of dilutive effect from its convertible and exchangeable notes during the three and nine months ended September 30, 2021.
On August 12, 2015, the Company’s Board of Directors approved a $50.0 million share repurchase program. On May 5, 2021, the Company announced that the Board of Directors had approved an increase in the size of the repurchase program from $50.0 million to $300.0 million (an increase of $250.0 million). Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by the Company’s management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. During the three and nine months ended September 30, 2021, the Company repurchased 854,002 and 1,976,857 shares of our common stock for approximately $40.7 million and $88.1 million, respectively. The Company’s practice is to retire the shares repurchased.
A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands, except per share amounts):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Net income attributable to Encore Capital Group, Inc. stockholders
$
83,566
$
54,650
$
274,699
$
174,528
Total weighted-average basic shares outstanding
30,225
31,484
30,863
31,402
Dilutive effect of stock-based awards
404
342
358
270
Dilutive effect of convertible and exchangeable senior notes
733
—
310
—
Total weighted-average dilutive shares outstanding
31,362
31,826
31,531
31,672
Basic earnings per share
$
2.76
$
1.74
$
8.90
$
5.56
Diluted earnings per share
$
2.66
$
1.72
$
8.71
$
5.51
Anti-dilutive employee stock options outstanding were 0 and approximately 4,000 during the three and nine months ended September 30, 2021, respectively. Anti-dilutive employee stock options outstanding were approximately 13,000 and 64,000 during each of the three and nine months ended September 30, 2020, respectively.
Note 3: Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The Company uses a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
•Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements as of September 30, 2021
Level 1
Level 2
Level 3
Total
Assets
Interest rate cap contracts
$
—
$
788
$
—
$
788
Liabilities
Interest rate swap agreements
—
(1,155)
—
(1,155)
Cross-currency swap agreements
—
(11,640)
—
(11,640)
Contingent consideration
—
—
(5,211)
(5,211)
Fair Value Measurements as of December 31, 2020
Level 1
Level 2
Level 3
Total
Assets
Cross-currency swap agreements
$
—
$
11,578
$
—
$
11,578
Interest rate cap contracts
—
659
—
659
Liabilities
Interest rate swap agreements
—
(5,232)
—
(5,232)
Contingent consideration
—
—
(2,957)
(2,957)
Derivative Contracts:
The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.
Contingent Consideration:
The Company carries certain contingent liabilities resulting from its mergers and acquisition activities. Certain sellers of the Company’s acquired entities could earn additional earn-out payments in cash based on the entities’ subsequent operating performance. The Company recorded the acquisition date fair values of these contingent liabilities, based on the likelihood of contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to fair value at each reporting date based on actual and forecasted operating performance.
The following table provides a roll-forward of the fair value of contingent consideration for the nine months ended September 30, 2021 and year ended December 31, 2020 (in thousands):
Amount
Balance as of December 31, 2019
$
66
Issuance of contingent consideration in connection with purchase of noncontrolling interest
2,848
Payment of contingent consideration
(88)
Effect of foreign currency translation
131
Balance as of December 31, 2020
2,957
Issuance of contingent consideration in connection with purchase of noncontrolling interest
2,913
Change in fair value of contingent consideration
(388)
Payment of contingent consideration
(167)
Effect of foreign currency translation
(104)
Balance as of September 30, 2021
$
5,211
Non-Recurring Fair Value Measurement:
Certain assets are measured at fair value on a nonrecurring basis. These assets include real estate-owned assets classified as held for sale at the lower of their carrying value or fair value less cost to sell. The fair value of the assets held for sale and estimated selling expenses were determined at the time of initial recognition using Level 3 measurements. The fair value estimate of these assets was approximately $42.8 million and $42.2 million as of September 30, 2021 and December 31, 2020, respectively.
Financial Instruments Not Required To Be Carried At Fair Value
The table below summarizes fair value estimates for the Company's financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
The carrying amounts in the following table are included in the consolidated statements of financial condition as of September 30, 2021 and December 31, 2020 (in thousands):
September 30, 2021
December 31, 2020
Carrying Amount
Estimated Fair Value
Carrying Amount
Estimated Fair Value
Financial Assets
Investment in receivable portfolios, net
$
3,083,271
$
3,439,547
$
3,291,918
$
3,705,672
Financial Liabilities
Convertible notes and exchangeable notes(1)
422,500
537,144
564,136
622,081
Senior secured notes(2)
1,619,110
1,680,277
1,642,058
1,684,729
_______________________
(1)Prior to January 1, 2021, under the previous accounting standard, the convertible and exchangeable notes included a debt discount. The carrying amount as of December 31, 2020 represented the principal amount of the notes, net of the debt discount.
(2)Carrying amount represents historical cost, adjusted for any related debt discount or debt premium.
Investment in Receivable Portfolios:
The fair value of investment in receivable portfolios is measured using Level 3 inputs by discounting the estimated future cash flows generated by the Company’s proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.
The Company’s convertible notes, exchangeable notes and senior secured notes are carried at historical cost, adjusted for the debt discount. The fair value estimate for the convertible and exchangeable notes incorporates quoted market prices using Level 2 inputs. The fair value of the senior secured notes is estimated using widely accepted valuation techniques, including discounted cash flow analyses using available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Accordingly, the Company used Level 2 inputs for these debt instrument fair value estimates.
The carrying value of the Company’s senior secured revolving credit facility agreement approximates fair value due to the short-term nature of the interest rate period. The Company’s borrowings also include private placement notes, a securitisation senior facility and finance lease liabilities for which the carrying value approximates respective fair value.
Note 4: Derivatives and Hedging Instruments
The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency.
The following table summarizes the fair value of derivative instruments as included in the Company’s consolidated statements of financial condition (in thousands):
September 30, 2021
December 31, 2020
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments:
Interest rate cap contracts
Other assets
$
788
Other assets
$
659
Interest rate swap agreements
Other liabilities
(5,232)
Cross-currency swap agreements
Other liabilities
(11,640)
Other assets
11,578
Derivatives Designated as Hedging Instruments
The Company has operations in foreign countries which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company may enter into derivative financial instruments, principally foreign currency forward contracts with financial counterparties. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis.
The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. Under the swap agreements, the Company receives floating interest rate payments and makes interest payments based on fixed interest rates. The Company designates its interest rate swap instruments as cash flow hedges. Previously, the Company held four interest rate swap agreements that hedged the risk of USD-LIBOR interest rate fluctuations for the Encore revolving credit facility and term loan facility. As part of the financing transactions completed in September 2020, the Company settled two of the interest rate swap agreements. As of September 30, 2021, there were two interest rate swap agreements outstanding with a total notional amount of $181.1 million. On September 30, 2021, the Company ceased hedge accounting for its interest rate swap instruments due to the continued pay down of its USD-LIBOR denominated borrowings. As a result, the Company reclassed all the remaining unrealized loss in OCI of approximately $1.9 million into earnings. The two interest swap agreements will mature in December 2021.
The Company uses cross-currency swap agreements to manage foreign currency exchange risk by converting fixed-rate Euro-denominated borrowings including periodic interest payments and the payment of principal at maturity to fixed-rate USD debt. The cross-currency swap agreements are accounted for as cash flow hedges. As of September 30, 2021, there were four cross-currency swap agreements outstanding with a total notional amount of €350.0 million (approximately $405.4 million based on an exchange rate of $1.00 to €0.86, the exchange rate as of September 30, 2021). The Company expects to reclassify approximately $4.9 million of net derivative loss from OCI into earnings relating to cross-currency swaps within the next 12 months.
As of September 30, 2021, the Company held two interest rate cap contracts with a notional amount of approximately $934.8 million that are used to manage its risk related to interest rate fluctuations on the Company’s variable interest rate bearing debt. The interest rate cap hedging the fluctuations in three-month EURIBOR floating rate debt (“2019 Cap”) has a notional amount of €400.0 million (approximately $463.3 million based on an exchange rate of $1.00 to €0.86, the exchange rate as of September 30, 2021) and matures in 2024. The interest rate cap hedging the fluctuations in sterling overnight index average (“SONIA”) bearing debt (“2020 Cap”) has a notional amount of £350.0 million (approximately $471.6 million based on an exchange rate of $1.00 to £0.74, the exchange rate as of September 30, 2021) and matures in 2023. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2020 Cap as cash flow hedge instruments. The Company expects to reclassify approximately $0.7 million of net derivative loss from OCI into earnings relating to interest rate caps within the next 12 months.
The following tables summarize the effects of derivatives in cash flow hedging relationships designated as hedging instruments in the Company’s consolidated financial statements (in thousands):
Derivatives Designated as Hedging Instruments
Gain (Loss) Recognized in OCI
Location of Gain (Loss) Reclassified from OCI into Income (Loss)
Gain (Loss) Reclassified from OCI into Income (Loss)
Three Months Ended September 30,
Three Months Ended September 30,
2021
2020
2021
2020
Foreign currency exchange contracts
$
—
$
—
Salaries and employee benefits
$
—
$
—
Foreign currency exchange contracts
—
—
General and administrative expenses
—
—
Interest rate swap agreements
(20)
(140)
Interest expense / Other expense
(4,203)
(2,458)
Interest rate cap contracts
72
(624)
Interest expense
(109)
(103)
Cross-currency swap agreements
(12,030)
(6,779)
Interest expense / Other expense
(10,963)
(5,100)
Derivatives Designated as Hedging Instruments
Gain (Loss) Recognized in OCI
Location of Gain (Loss) Reclassified from OCI into Income (Loss)
Gain (Loss) Reclassified from OCI into Income (Loss)
Nine Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Foreign currency exchange contracts
$
—
$
(341)
Salaries and employee benefits
$
—
$
49
Foreign currency exchange contracts
—
(44)
General and administrative expenses
—
11
Interest rate swap agreements
(68)
(7,405)
Interest expense / Other expense
(8,742)
(5,558)
Interest rate cap contracts
140
(2,755)
Interest expense
(325)
(2,741)
Cross-currency swap agreements
(26,852)
(6,779)
Interest expense / Other expense
(24,826)
(5,100)
Derivatives Not Designated as Hedging Instruments
The Company enters into currency exchange forward contracts to reduce the effects of currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature within one to three months and are not designated as hedge instruments for accounting purposes. The Company continues to monitor the level of exposure of the foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis. The gains or losses on these derivative contracts are recognized in other income or expense based on the changes in fair value. As of September 30, 2021, the Company had no outstanding currency exchange forward contracts that were not designated as cash flow hedging instruments.
As discussed in “Derivatives Designed as Hedging Instruments,” on September 30, 2021, the Company ceased hedge accounting for its interest rate swap instruments due to the continued pay down of its USD-LIBOR denominated borrowings. The interest rate swap agreements had a liability balance of $1.2 million as of September 30, 2021 and will mature in December 2021.
The following table summarizes the effects of derivatives in cash flow hedging relationships not designated as hedging instruments in the Company’s consolidated statements of operations (in thousands):
Amount of Gain (Loss) Recognized in Income (Loss)
Three Months Ended September 30,
Nine Months Ended September 30,
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income on Derivative
2021
2020
2021
2020
Foreign currency exchange contracts
Other (expense) income
$
(20)
$
(407)
$
(20)
$
3,564
Note 5: Investment in Receivable Portfolios, Net
The Company’s purchased portfolios of loans are grossed-up to their face value with an offsetting allowance and noncredit discount allocated to the individual receivables as the unit of account is at the individual loan level. Since each loan is deeply delinquent and deemed uncollectible at the individual loan level, the Company applies its charge-off policy and fully writes-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables immediately after purchasing the portfolio. The Company then records 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 ultimately equals the amount paid for a portfolio purchase and presented as “Investment in receivable portfolios, net” in the Company’s consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) based on the purchase price of the portfolio and the expected future cash flows at the time of purchase.
Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic location. Once a pool is established, the portfolios will remain in the designated pool unless the underlying risk characteristics change. The purchase EIR of a pool will not change over the life of the pool even if expected future cash flows change.
Revenue is recognized for each static pool over the economic life of the pool. Debt purchasing revenue includes two components:
(1) Revenue from receivable portfolios, which is the accretion of the discount on the negative allowance due to the passage of time (generally the portfolio balance multiplied by the EIR) and also includes all revenue from zero basis portfolio (“ZBA”) collections, and
(2) Changes in recoveries, which includes
(a) Recoveries above or below forecast, which is the difference between (i) actual cash collected/recovered during the current period and (ii) expected cash recoveries for the current period, which generally represents over or under performance for the period; and
(b) Changes in expected future recoveries, which is the present value change of expected future recoveries, where such change generally results from (i) collections “pulled forward from” or “pushed out to” future periods (i.e. amounts either collected early or expected to be collected later) and (ii) magnitude and timing changes to estimates of expected future collections (which can be increases or decreases).
The Company measures expected future recoveries based on historical experience, current conditions, and reasonable and supportable forecasts. Factors that may change the expected future recoveries may include both internal as well as external factors. Internal factors include operational performance, such as capacity and the productivity of our collection staff. External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and macroeconomic conditions.
The following table summarizes the changes in the balance of investment in receivable portfolios, net during the periods presented (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Balance, beginning of period
$
3,154,001
$
3,201,241
$
3,291,918
$
3,328,150
Purchases of receivable portfolios (1)
168,188
170,131
481,094
532,183
Collections applied to investment in receivable portfolios, net (2)
(250,465)
(197,259)
(803,185)
(540,101)
Changes in recoveries (3)
65,913
30,451
176,628
(2,203)
Put-backs and Recalls
(1,724)
(2,830)
(8,081)
(14,224)
Deconsolidation of receivable portfolios(4)
(7,335)
—
(7,335)
(2,822)
Disposals and transfers to assets held for sale
(1,816)
(3,560)
(6,128)
(6,273)
Foreign currency adjustments
(43,491)
67,818
(41,640)
(28,718)
Balance, end of period
$
3,083,271
$
3,265,992
$
3,083,271
$
3,265,992
_______________________
(1)The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios purchased during the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Purchase price
$
168,188
$
170,131
$
481,094
$
532,183
Allowance for credit losses
449,412
507,907
1,174,524
1,400,525
Amortized cost
617,600
678,038
1,655,618
1,932,708
Noncredit discount
786,194
1,104,695
2,228,664
2,858,922
Face value
1,403,794
1,782,733
3,884,282
4,791,630
Write-off of amortized cost
(617,600)
(678,038)
(1,655,618)
(1,932,708)
Write-off of noncredit discount
(786,194)
(1,104,695)
(2,228,664)
(2,858,922)
Negative allowance
168,188
170,131
481,094
532,183
Negative allowance for expected recoveries - current period purchases
$
168,188
$
170,131
$
481,094
$
532,183
(2)Collections applied to investment in receivable portfolios, net, is calculated as follows during the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Cash Collections
$
566,690
$
539,748
$
1,785,578
$
1,575,242
Less - amounts classified to revenue from receivable portfolios
(316,225)
(342,489)
(982,393)
(1,035,141)
Collections applied to investment in receivable portfolios, net
$
250,465
$
197,259
$
803,185
$
540,101
(3)Changes in recoveries is calculated as follows during the periods presented, where recoveries include cash collections, put-backs and recalls, and other cash-based adjustments:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Recoveries above forecast
$
77,064
$
78,268
$
277,861
$
197,155
Changes in expected future recoveries
(11,151)
(47,817)
(101,233)
(199,358)
Changes in recoveries
$
65,913
$
30,451
$
176,628
$
(2,203)
(4)Deconsolidation of receivable portfolios as a result of the Company’s divestiture of its investments in Colombia and Peru in August 2021 and Brazil in April 2020.
Recoveries above or below forecast represent over and under-performance in the reporting period, respectively. Collections during the nine months ended September 30, 2021 significantly outperformed the projected cash flows. The Company believes the collection over-performance was a result of its sustained improvements in portfolio collections driven by change in consumer behavior during the COVID-19 pandemic and its liquidation improvement initiatives.
While the Company now has additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic, as well as related actions taken by governments. When reassessing the future forecasts of expected lifetime recoveries during the three months ended September 30, 2021, management considered historical and current collection performance, and believes that for certain static pools collections over-performance resulted in increased total expected recoveries. Although management believes that the relevant macroeconomic conditions have improved and therefore no longer materially impact the Company’s collections performance, uncertainty still remains in the geographies in which the Company operates. As a result of a combination of the above, the Company has updated its forecast, resulting in a net reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a negative change in expected future period recoveries of approximately $11.2 million and $101.2 million during the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2020, the Company recorded approximately $47.8 million and $199.4 million, respectively, in negative change in expected future period recoveries. The circumstances around this pandemic continue to rapidly evolve, and will continue to impact the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its assumptions accordingly.
Note 6: Other Assets
Other assets consist of the following (in thousands):
The Company is in compliance in all material respects with all covenants under its financing arrangements as of September 30, 2021. The components of the Company’s consolidated borrowings were as follows (in thousands):
September 30, 2021
December 31, 2020
Global senior secured revolving credit facility
$
186,188
$
481,007
Encore private placement notes
117,290
146,550
Senior secured notes
1,627,019
1,651,619
Convertible notes and exchangeable notes
422,500
583,500
Cabot securitisation senior facility
471,570
478,131
Other
23,922
24,398
Finance lease liabilities
8,003
8,288
2,856,492
3,373,493
Less: debt discount and issuance costs, net of amortization
(60,268)
(91,859)
Total
$
2,796,224
$
3,281,634
Encore is the parent of the restricted group for the Global Senior Facility, the Senior Secured Notes and the Private Placement Notes, each of which is guaranteed by the same group of material Encore subsidiaries and secured by the same collateral, which represents substantially all of the assets of those subsidiaries.
Global Senior Secured Revolving Credit Facility
In September 2020, the Company entered into a multi-currency senior secured revolving credit facility agreement (as amended and restated, the “Global Senior Facility”). In previous periods, the Company referred to this facility as the Cabot Credit Facility. On August 5, 2021, the Company amended and restated the Global Senior Facility to, among other things, (1) extend the termination date from September 2024 to September 2025; (2) reduce the LIBOR and EURIBOR floors from 0.75% to 0.00%; and (3) make certain other administrative changes. The amendment was accounted for as a debt modification. Fees incurred were capitalized as debt issuance costs.
The Global Senior Facility provides for a total committed facility of $1,050.0 million that matures in September 2025 and includes the following key provisions:
•Interest at LIBOR (or EURIBOR for any loan drawn in euro or a rate based on SONIA for any loan drawn in British Pound) plus 2.50% per annum, with a LIBOR (or EURIBOR or SONIA) floor of 0.00%;
•A restrictive covenant that limits the LTV Ratio (defined in the Global Senior Facility) to 0.75 in the event that the Global Senior Facility is more than 20% utilized;
•A restrictive covenant that limits the SSRCF LTV Ratio (defined in the Global Senior Facility) to 0.275;
•A restrictive covenant that requires the Company to maintain a Fixed Charge Coverage Ratio (as defined in the Global Senior Facility) of at least 2.0;
•Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens; and
•Standard events of default which, upon occurrence, may permit the lenders to terminate the Global Senior Facility and declare all amounts outstanding to be immediately due and payable.
The Global Senior Facility is secured by substantially all of the assets of the Company and the guarantors. Pursuant to the terms of an intercreditor agreement entered into with respect to the relative positions of (1) the Global Senior Facility, any super priority hedging liabilities and the Private Placement Notes (collectively, “Super Senior Liabilities”) and (2) the Senior Secured Notes, Super Senior Liabilities that are secured by assets that also secure the Senior Secured Notes will receive priority with respect to any proceeds received upon any enforcement action over any such assets.
As of September 30, 2021, the outstanding borrowings under the Global Senior Facility were $186.2 million. The weighted average interest rate of the Global Senior Facility was 3.01% and 3.19% for the three and nine months ended September 30, 2021, respectively. The weighted average interest rate of the previous Cabot Credit Facility was 3.06% and 3.30% for the three and nine months ended September 30, 2020, respectively. The weighted average interest rate of the previous Encore revolving credit facility was 3.63% and 3.90% for the three and nine months ended September 30, 2020, respectively. Available capacity under the Global Senior Facility was approximately $863.8 million as of September 30, 2021.
In August 2017, Encore entered into $325.0 million in senior secured notes with a group of insurance companies (the “Private Placement Notes”). As of September 30, 2021, $117.3 million of the Private Placement Notes remained outstanding. The Private Placement Notes bear an annual interest rate of 5.625%, mature in August 2024 and require quarterly principal payments of $9.8 million. The covenants and material terms for the Private Placement Notes are substantially similar to those for the Global Senior Facility.
Senior Secured Notes
The following table provides a summary of the Company’s senior secured notes (the “Senior Secured Notes”) ($ in thousands):
September 30, 2021
December 31, 2020
Maturity Date
Interest Payment Dates
Interest Rate
Cabot 2023 Notes
$
—
$
309,034
Oct 1, 2023
Apr 1, Oct 1
7.500
%
Encore 2025 Notes
405,350
426,752
Oct 15, 2025
Apr 15, Oct 15
4.875
%
Encore 2026 Notes
404,203
409,827
Feb 15, 2026
Feb 15, Aug 15
5.375
%
Encore 2028 Notes
336,836
—
Jun 1, 2028
Jun 1, Dec 1
4.250
%
Encore 2028 Floating Rate Notes
480,630
506,006
Jan 15, 2028
Jan 15, Apr 15, Jul 15, Oct 15
EURIBOR +4.250%(1)
$
1,627,019
$
1,651,619
_______________________
(1)Interest rate is based on three-month EURIBOR (subject to a 0% floor) plus 4.250% per annum, resets quarterly.
On June 1, 2021, Encore issued £250.0 million (approximately $336.8 million based on an exchange rate of $1.00 to £0.74, the exchange rate as of September 30, 2021) aggregate principal amount of senior secured notes due 2028 (the “Encore 2028 Notes”). The Encore 2028 Notes accrue interest at a rate of 4.250% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2021. The Encore 2028 Notes will mature on June 1, 2028, unless earlier repurchased or redeemed by the Company. Encore used the proceeds from the offering to redeem in full the then outstanding £226.2 million (approximately $304.8 million based on an exchange rate of $1.00 to £0.74, the exchange rate as of September 30, 2021) aggregate principal amount of 7.500% senior secured notesdue 2023 (the “Cabot 2023 Notes”) at a redemption price of 101.875%, and to pay certain transaction fees and expenses incurred in connection with the offering.
The Senior Secured Notes are secured by the same collateral as the Global Senior Facility and the Private Placement Notes. The guarantees provided in respect of the Senior Secured Notes are pari passu with each such guarantee given in respect of the Global Senior Facility and Private Placement Notes. Subject to the intercreditor agreement described above under “Global Senior Secured Revolving Credit Facility,” Super Senior Liabilities that are secured by assets that also secure the Senior Secured Notes will receive priority with respect to any proceeds received upon any enforcement action over any such assets.
Convertible Notes and Exchangeable Notes
The following table provides a summary of the principal balance, maturity date and interest rate for the Company’s convertible and exchangeable senior notes (the “Convertible Notes” or “Exchangeable Notes,” as applicable) ($ in thousands):
September 30, 2021
December 31, 2020
Maturity Date
Interest Payment Dates
Interest Rate
2021 Convertible Notes(1)
$
—
$
161,000
Mar 15, 2021
Mar 15, Sep 15
2.875
%
2022 Convertible Notes
150,000
150,000
Mar 15, 2022
Mar 15, Sep 15
3.250
%
2023 Exchangeable Notes
172,500
172,500
Sep 1, 2023
Mar 1, Sep 1
4.500
%
2025 Convertible Notes
100,000
100,000
Oct 1, 2025
Apr 1, Oct 1
3.250
%
$
422,500
$
583,500
_______________________
(1)The 2021 Convertible Notes matured on March 15, 2021 and the Company repaid the outstanding principal in cash.
As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies,” the Company adopted ASU 2020-06 on January 1, 2021 using a modified-retrospective approach. The Company’s convertible and exchangeable notes are no longer bifurcated into a debt component and an equity component, instead, they are carried as a
single liability, which reflects the principal amount of the convertible and exchangeable notes. The interest expense recognized on the convertible and exchangeable notes is based on coupon rates, rather than higher effective interest rates. The Company has not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance.
The Exchangeable Notes were issued by Encore Capital Europe Finance Limited (“Encore Finance”), a 100% owned finance subsidiary of Encore, and are fully and unconditionally guaranteed by Encore. Unless otherwise indicated in connection with a particular offering of debt securities, Encore will fully and unconditionally guarantee any debt securities issued by Encore Finance. Amounts related to Encore Finance are included in the consolidated financial statements of Encore subsequent to April 30, 2018, the date of the incorporation of Encore Finance.
Prior to the close of business on the business day immediately preceding their respective free conversion or exchange date (listed below), holders may convert or exchange their Convertible Notes or Exchangeable Notes under certain circumstances set forth in the applicable indentures. On or after their respective free conversion or exchange dates until the close of business on the second scheduled trading day immediately preceding their respective maturity date, holders may convert or exchange their notes at any time. Certain key terms related to the convertible and exchangeable features as of September 30, 2021 are listed below:
2022 Convertible Notes
2023 Exchangeable Notes
2025 Convertible Notes
Initial conversion or exchange price
$
45.57
$
44.62
$
40.00
Closing stock price at date of issuance
$
35.05
$
36.45
$
32.00
Closing stock price date
Feb 27, 2017
Jul 20, 2018
Sep 4, 2019
Conversion or exchange rate (shares per $1,000 principal amount)
21.9467
22.4090
25.0000
Free conversion or exchange date
Sep 15, 2021
Mar 1, 2023
Jul 1, 2025
Stated interest rate
3.250
%
4.500
%
3.250
%
In September 2021, in accordance with the indenture for the 2022 Convertible Notes, the Company irrevocably elected “combination settlement” with a specified dollar amount equal to $1,750 per $1,000 principal amount of the 2022 Convertible Notes for all conversions of the 2022 Convertible Notes that occur on or after September 15, 2021, the free conversion date, which effectively will result in an all cash settlement for the 2022 Convertible Notes so long as the stock price is less than $79.74 at the time of conversion. None of the 2022 Convertible Notes have been converted.
In the event of conversion or exchange, the 2025 Convertible Notes and the 2023 Exchangeable Notes are convertible or exchangeable into cash up to the aggregate principal amount of the notes and the excess conversion premium, if any, may be settled in cash or shares of the Company’s common stock at the Company’s election and subject to certain restrictions contained in each of the indentures governing the Convertible Notes and Exchangeable Notes.
Interest expense related to the Convertible Notes and Exchangeable Notes during the periods presented was as follows (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Interest expense—stated coupon rate
$
3,972
$
5,130
$
12,867
$
16,728
Interest expense—amortization of debt discount
—
2,382
—
8,521
Interest expense—Convertible Notes and Exchangeable Notes
$
3,972
$
7,512
$
12,867
$
25,249
Hedge Transactions
In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company may be required to make in the event that the market price of the Company’s common stock becomes greater than the exchange price of the 2023 Exchangeable Notes, the Company maintains a hedge program that increases the effective exchange price for the 2023 Exchangeable Notes. The Company did not hedge the 2022 Convertible Notes or the 2025 Convertible Notes.
The details of the hedge program are listed below (in thousands, except conversion or exchange price):
2023 Exchangeable Notes
Cost of the hedge transaction(s)
$
17,785
Initial exchange price
$
44.62
Effective exchange price
$
62.48
Cabot Securitisation Senior Facility
Cabot Securitisation UK Ltd (“Cabot Securitisation”), an indirect subsidiary of Encore, has a senior facility for a committed amount of £350.0 million (as amended, the “Cabot Securitisation Senior Facility”). The Cabot Securitisation Senior Facility matures in March 2025. Funds drawn under the Cabot Securitisation Senior Facility bear interest at a rate per annum equal to SONIA plus a margin of 3.06% plus, for periods after March 15, 2023, a step-up margin ranging from zero to 1.00%.
As of September 30, 2021, the outstanding borrowings under the Cabot Securitisation Senior Facility were £350.0 million (approximately $471.6 million based on an exchange rate of $1.00 to £0.74, the exchange rate as of September 30, 2021). The obligations of Cabot Securitisation under the Cabot Securitisation Senior Facility are secured by first ranking security interests over all of Cabot Securitisation’s property, assets and rights (including receivables purchased from Cabot Financial UK from time to time), the book value of which was approximately £364.4 million (approximately $491.0 million based on an exchange rate of $1.00 to £0.74, the exchange rate as of September 30, 2021) as of September 30, 2021. The weighted average interest rate was 3.11% for both the three and nine months ended September 30, 2021 and 3.12% and 3.28% for the three and nine months ended September 30, 2020, respectively.
Cabot Securitisation is a securitized financing vehicle and is a VIE for consolidation purposes. Refer to “Note 8: Variable Interest Entities” for further details.
Note 8: Variable Interest Entities
A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb expected losses, or the right to receive expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company consolidates VIEs when it is the primary beneficiary.
As of September 30, 2021, the Company’s VIEs include certain securitized financing vehicles and other immaterial special purpose entities that were created to purchase receivable portfolios in certain geographies. The Company is the primary beneficiary of these VIEs. The Company has the power to direct the activities of the VIEs which includes but is not limited to the ability to exercise discretion in the servicing of the financial assets. The Company evaluates its relationships with its VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary.
Most assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the VIE.
Note 9: Income Taxes
The Company’s effective tax rate for the three and nine months ended September 30, 2021 was 22.8% and 21.7%, respectively. For the three and nine months ended September 30, 2020, the Company’s effective tax rate was 26.4% and 25.5%, respectively. The difference between the effective tax rate and the 21% federal statutory rate in 2021 was primarily due to the proportion of income earned in higher tax rate jurisdictions compared to lower tax rate jurisdictions. The difference between the effective tax rate and the 21% federal statutory rate in 2020 was primarily due to a change in valuation allowance recognized in the period under the discrete method. The Company utilized the discrete method for recording income taxes during 2020 due to uncertainty in estimating annual pre-tax earnings, primarily due to the COVID-19 pandemic. The Company returned to using the estimated annual effective tax rate method beginning January 1, 2021.
Each interim period is considered an integral part of the annual period and tax expense or benefit is measured using an estimated annual effective income tax rate. The estimated annual effective tax rate for the full year is applied to the respective interim period, taking into account year-to-date amounts and projected amounts for the year. Since the Company operates in foreign countries with varying tax rates, the Company's quarterly effective tax rate is dependent on the level of income or loss from international operations in the reporting period.
The Company’s 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, 2021 and 2020, was immaterial.
The Company is subject to income taxes in the U.S. and foreign jurisdictions. Significant judgement is required in evaluating uncertain tax positions and determining the provision for income taxes. There has been no material change to the Company’s total gross unrecognized tax benefits from December 31, 2020.
Note 10: Commitments and Contingencies
Litigation and Regulatory
The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act (“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome.
As of September 30, 2021, there were no material developments in any of the legal proceedings disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
In certain legal proceedings, the Company may have recourse to insurance or third-party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. The Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. The Company continuously assesses the potential liability related to its pending litigation and regulatory matters and revises its estimates when additional information becomes available. The Company’s legal costs are recorded to expense as incurred. As of September 30, 2021, the Company has no material reserves for legal matters.
Purchase Commitments
In the normal course of business, the Company enters into forward flow purchase agreements. A forward flow purchase agreement is a commitment to purchase receivables over a duration that is typically three to twelve months, but can be longer, generally with a specifically defined volume range, frequency, and pricing. Typically, these forward flow contracts have provisions that allow for early termination or price re-negotiation should the underlying quality of the portfolio deteriorate over time or if any particular month’s delivery is materially different than the original portfolio used to price the forward flow contract. Certain of these forward flow purchase agreements may also have termination clauses, whereby the agreements can be canceled by either party upon providing a certain specified amount of notice.
As of September 30, 2021, the Company had entered into forward flow purchase agreements for the purchase of nonperforming loans with an estimated minimum aggregate purchase price of approximately $238.0 million. The Company expects actual purchases under these forward flow purchase agreements to be significantly greater than the estimated minimum aggregate purchase price.
Note 11: Segment and Geographic Information
The Company conducts business through several operating segments that have similar economic and other qualitative characteristics and have been aggregated in accordance with authoritative guidance into one reportable segment, portfolio purchasing and recovery. Since the Company operates in one reportable segment, all required segment information can be found in the consolidated financial statements.
The Company has operations in the United States, Europe and other foreign countries. The following table presents the Company’s total revenues by geographic area in which the Company operates (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Total revenues(1):
United States
$
295,700
$
256,212
$
871,978
$
751,197
International
Europe(2)
113,987
142,495
372,880
353,950
Other geographies
2,937
4,969
12,338
13,643
116,924
147,464
385,218
367,593
Total
$
412,624
$
403,676
$
1,257,196
$
1,118,790
________________________
(1)Total revenues are attributed to countries based on consumer location.
(2)Based on the financial information that is used to produce the general-purpose financial statements, providing further geographic information is impracticable.
Note 12: Goodwill and Identifiable Intangible Assets
The Company’s goodwill is tested for impairment at the reporting unit level annually and in interim periods if certain events occur that indicate that the fair value of a reporting unit may be below its carrying value. Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions.
The annual goodwill testing date for the reporting units that are included in the portfolio purchasing and recovery reportable segment is October 1st. There have been no events or circumstances during the three and nine months ended September 30, 2021 that have required the Company to perform an interim assessment of goodwill carried at these reporting units. Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and long-lived assets. Adverse changes in the Company’s actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future.
The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment. The following table summarizes the activity in the Company’s goodwill balance (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Balance, beginning of period
$
915,067
$
838,024
$
906,962
$
884,185
Effect of foreign currency translation
(19,552)
28,633
(11,447)
(17,528)
Balance, end of period
$
895,515
$
866,657
$
895,515
$
866,657
The Company’s acquired intangible assets are summarized as follows (in thousands):
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains “forward-looking statements” relating to Encore 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 of Midland Credit Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists of Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations in Latin America and Asia-Pacific.
MCM (United States)
Through MCM we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico.
Cabot (Europe)
Through Cabot we are one of the largest credit management services providers in Europe and a market leader in the United Kingdom. Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a range of debt servicing offerings such as early stage collections, business process outsourcing (“BPO”), and contingent collections, including through Wescot Credit Services Limited (“Wescot”), a leading U.K. contingency debt collection and BPO services company.
LAAP (Latin America and Asia-Pacific)
We have purchased non-performing loans in Mexico. Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India. We previously owned non-performing loans in Colombia and Peru (sold in August 2021) and Brazil (sold in April 2020).
To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business in the United States and United Kingdom and strengthening and developing our business in the rest of Europe.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns (including court closures in certain jurisdictions). While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations for an indefinite period of time. Through a combination of work-from-home and social distancing, we remain fully operational in all the markets we serve. As a result of the COVID-19 pandemic and the resulting containment measures, we have observed, among other things, a decrease in supply in both US and Europe driven mainly by a decrease in charge off rates.
Government Regulation
MCM (United States)
As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, our U.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.
On October 30, 2020, the CFPB issued final rules in the form of a new Regulation F to implement the Fair Debt Collection Practices Act, which rules restate and clarify prohibitions on harassment and abuse, false or misleading representations, and unfair practices by debt collectors when collecting consumer debt. The rules included provisions related to, among other things, the use of newer technologies (text, voicemail and email) to communicate with consumers and limits relating to telephonic communications. On December 18, 2020, the CFPB also issued an additional debt collection final rule focused on consumer disclosures. This final rule amends Regulation F to provide additional requirements regarding validation information and disclosures provided at the outset of debt collection communications, prohibit suits and threats of suits regarding time-barred debt, and identify actions that must be taken before a debt collector may report information about a debt to consumer reporting agencies. The rules will become effective on November 30, 2021. Based on our assessment of the rules, we believe that the new rules will not have a material incremental effect on our operations.
Cabot (Europe)
As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, our operations in Europe 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)
In the United States, the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt portfolios. A small percentage of our capital deployment in the United States comprises of receivable portfolios subject to Chapter 13 and Chapter 7 bankruptcy proceedings.
We purchase receivables based on robust, account-level valuation methods and employ proprietary statistical and behavioral models across our U.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 in the United States.
In Europe, 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 the United Kingdom and continue to expand in the United Kingdom and the rest of Europe with our acquisitions of portfolios.
Purchases and Collections
Portfolio Pricing, Supply and Demand
MCM (United States)
Issuers have continued to sell predominantly fresh portfolios. Fresh portfolios are portfolios that are generally sold within six months of the consumer’s account being charged-off by the financial institution. Pricing in the third quarter remained in line with previous periods. Issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year. We are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply. We have observed a decrease in supply as a result of the COVID-19 pandemic, but expect supply to ultimately increase.
We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace. We believe this favors larger participants, such as us, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements.
Cabot (Europe)
The U.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 in Europe with significant debt sales activity, and an expectation of a significant amount of debt to be sold and serviced in the future. Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should continue to provide debt purchasing opportunities in Spain.
Across all of our European markets, we are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply of portfolios to purchase. Due to the COVID-19 pandemic, banks decreased portfolio sales during 2020 in order to focus on customers’ needs. While we have seen a resumption of sales activity across many of our European markets in 2021, underlying default rates are generally low by historic levels, and sales levels are expected to fluctuate from quarter to quarter as banks seek to re-establish a more stable debt sales strategy. In general, supply remains below pre-pandemic levels while portfolio pricing has become more competitive across our European footprint.
The following table summarizes the geographic locations of receivable portfolios purchased during the periods presented (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
MCM (United States)
$
102,339
$
141,066
$
284,230
$
451,141
Cabot (Europe)
65,849
29,065
196,864
81,042
Total purchases of receivable portfolios
$
168,188
$
170,131
$
481,094
$
532,183
During the three months ended September 30, 2021, we invested $168.2 million to acquire receivable portfolios, with face values aggregating $1.4 billion, for an average purchase price of 12.0% of face value. The amount invested in receivable portfolios decreased $1.9 million, or 1.1%, compared with the $170.1 million invested during the three months ended September 30, 2020, to acquire receivable portfolios with face values aggregating $1.8 billion, for an average purchase price of 9.5% of face value.
During the nine months ended September 30, 2021, we invested $481.1 million to acquire receivable portfolios, with face values aggregating $3.9 billion, for an average purchase price of 12.4% of face value. The amount invested in receivable portfolios decreased $51.1 million, or 9.6%, compared with the $532.2 million invested during the nine months ended September 30, 2020, to acquire receivable portfolios with face values aggregating $4.8 billion, for an average purchase price of 11.1% of face value.
In the United States, purchases of receivable portfolios decreased during the three and nine months ended September 30, 2021 as compared to the corresponding periods in the prior year. The majority of our purchases in the U.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 the U.S. is a result of a decrease in supply, which we believe is temporary.
In Europe, purchases of receivable portfolios increased during the three and nine months ended September 30, 2021 as compared to the corresponding periods in the prior year. The increases were primarily the result of a relatively limited supply of portfolios and a continuation of our selective purchasing process in conjunction with a plan to reduce European debt leverage during the three and nine months ended September 30, 2020. The increases were also attributable to the favorable impact from foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound.
The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios.
During the three months ended September 30, 2021 and 2020, we invested $8.1 million and $0.2 million in REO assets, respectively. During the nine months ended September 30, 2021 and 2020, we invested $11.7 million and $1.5 million in REO assets, respectively.
Collections from Purchased Receivables by Channel and Geographic Location
We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections by third parties to whom we pay a fee or commission. We utilize this channel to supplement capacity in our internal call centers, to service accounts in regions where we do not have collections operations or for accounts purchased where we maintain the collection agency servicing relationship. The following table summarizes the total collections by collection channel and geographic area during the periods presented (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
MCM (United States):
Call center and digital collections
$
234,923
$
246,689
$
762,487
$
709,780
Legal collections
170,538
139,473
510,285
431,096
Collection agencies
1,121
4,699
6,833
10,766
Subtotal
406,582
390,861
1,279,605
1,151,642
Cabot (Europe):
Call center and digital collections
71,192
65,182
226,873
182,206
Legal collections
45,144
40,171
137,926
115,107
Collection agencies
39,053
36,120
121,545
104,634
Subtotal
155,389
141,473
486,344
401,947
Other geographies:
Collection agencies
4,719
7,414
19,629
21,653
Subtotal
4,719
7,414
19,629
21,653
Total collections from purchased receivables
$
566,690
$
539,748
$
1,785,578
$
1,575,242
Gross collections from purchased receivables increased by $26.9 million, or 5.0%, to $566.7 million during the three months ended September 30, 2021, from $539.7 million during the three months ended September 30, 2020. Gross collections from purchased receivables increased by $210.3 million, or 13.4%, to $1,785.6 million during the nine months ended September 30, 2021, from $1,575.2 million during the nine months ended September 30, 2020.
The increase in collections from purchased receivables in the United States was primarily driven by changes in consumer behavior during the COVID-19 pandemic, an increase in legal channel collections and our continued effort in improving liquidation. We are frequently being called upon by our consumers to assist them with their financial recovery through inbound calls and online digital interaction. The large volume of consumer contact resulted in a significant increase in collections and improved our operating efficiency.
The increase in collections from purchased receivables in Europe was primarily due to reduced collections in the prior year resulting from the impacts of the COVID-19 pandemic and the favorable impact from foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound.
The COVID-19 pandemic and the resulting containment measures, including impacts to the legal collections process, negatively affected legal collections during the three and nine months ended September 30, 2020. We are closely monitoring the impacts of the COVID-19 pandemic on collections and cost-to-collect.
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 September 30,
2021
2020
Revenues
Revenue from receivable portfolios
$
316,225
76.6
%
$
342,489
84.8
%
Changes in recoveries
65,913
16.0
%
30,451
7.6
%
Total debt purchasing revenue
382,138
92.6
%
372,940
92.4
%
Servicing revenue
29,321
7.1
%
29,787
7.4
%
Other revenues
1,165
0.3
%
949
0.2
%
Total revenues
412,624
100.0
%
403,676
100.0
%
Operating expenses
Salaries and employee benefits
94,662
22.9
%
95,979
23.8
%
Cost of legal collections
64,170
15.6
%
60,383
15.0
%
General and administrative expenses
35,819
8.7
%
53,459
13.2
%
Other operating expenses
25,226
6.1
%
28,088
7.0
%
Collection agency commissions
11,964
2.9
%
12,703
3.1
%
Depreciation and amortization
14,136
3.4
%
10,609
2.6
%
Total operating expenses
245,977
59.6
%
261,221
64.7
%
Income from operations
166,647
40.4
%
142,455
35.3
%
Other expense
Interest expense
(40,874)
(9.9)
%
(52,974)
(13.1)
%
Loss on extinguishment of debt
—
—
%
(14,988)
(3.7)
%
Other (expense) income
(17,504)
(4.2)
%
361
0.1
%
Total other expense
(58,378)
(14.1)
%
(67,601)
(16.7)
%
Income before income taxes
108,269
26.3
%
74,854
18.6
%
Provision for income taxes
(24,703)
(6.0)
%
(19,747)
(4.9)
%
Net income
83,566
20.3
%
55,107
13.7
%
Net income attributable to noncontrolling interest
—
—
%
(457)
(0.1)
%
Net income attributable to Encore Capital Group, Inc. stockholders
Net income attributable to noncontrolling interest
(419)
0.0
%
(784)
(0.1)
%
Net income attributable to Encore Capital Group, Inc. stockholders
$
274,699
21.8
%
$
174,528
15.4
%
Comparison of Results of Operations
Revenues
Our revenues primarily include revenue recognized from engaging in debt purchasing and recovery activities, our debt purchasing revenue. Effective January 1, 2020, we adopted the CECL accounting standard. Under CECL, we apply our charge-off policy and fully write-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables we acquire immediately after purchasing the portfolio. We then record a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as “Investment in receivable portfolios, net” in our consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) established based on the purchase price of the portfolio and the expected future cash flows at the time of purchase.
Debt purchasing revenue includes two components:
(1) Revenue from receivable portfolios, which is the accretion of the discount on the negative allowance due to the passage of time (generally the portfolio balance multiplied by the EIR), and
(2) Changes in recoveries, which includes
(a) Recoveries above (below) forecast, which is the difference between (i) actual cash collected/recovered during the current period and (ii) expected cash recoveries for the current period, which generally represents over or under performance for the period; and
31
(b) Changes in expected future recoveries, which is the present value change of expected future recoveries, where such change generally results from (i) collections “pulled forward from” or “pushed out to” future periods (i.e. amounts either collected early or expected to be collected later) and (ii) magnitude and timing changes to estimates of expected future collections (which can be increases or decreases).
Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to our adoption of CECL. We did not establish a negative allowance for these pools as we elected the Transition Resource Group for Credit Losses’ practical expedient to retain the integrity of these legacy pools. Similar to how we treated ZBA collections prior to the adoption of CECL, all subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in our consolidated statements of operations.
Servicing revenue consists primarily of fee-based income earned on accounts collected on behalf of others, primarily credit originators. We earn fee-based income by providing debt servicing (such as early stage collections, BPO, contingent collections, trace services and litigation activities) to credit originators for non-performing loans.
Other revenues primarily include revenues recognized from the sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios in Europe and LAAP. Other revenues may include gains recognized on transfers of financial assets.
The following table summarizes revenues for the periods presented (in thousands, except percentages):
Three Months Ended September 30,
2021
2020
$ Change
% Change
Revenue recognized from portfolio basis
$
304,341
$
329,106
$
(24,765)
(7.5)
%
ZBA revenue
11,884
13,383
(1,499)
(11.2)
%
Revenue from receivable portfolios
316,225
342,489
(26,264)
(7.7)
%
Recoveries above forecast
77,064
78,268
(1,204)
(1.5)
%
Changes in expected future recoveries
(11,151)
(47,817)
36,666
(76.7)
%
Changes in recoveries
65,913
30,451
35,462
116.5
%
Debt purchasing revenue
382,138
372,940
9,198
2.5
%
Servicing revenue
29,321
29,787
(466)
(1.6)
%
Other revenues
1,165
949
216
22.8
%
Total revenues
$
412,624
$
403,676
$
8,948
2.2
%
Nine Months Ended September 30,
2021
2020
$ Change
% Change
Revenue recognized from portfolio basis
$
944,012
$
991,614
$
(47,602)
(4.8)
%
ZBA revenue
38,381
43,527
(5,146)
(11.8)
%
Revenue from receivable portfolios
982,393
1,035,141
(52,748)
(5.1)
%
Recoveries above forecast
277,861
197,155
80,706
40.9
%
Changes in expected future recoveries
(101,233)
(199,358)
98,125
(49.2)
%
Changes in recoveries
176,628
(2,203)
178,831
(8117.6)
%
Debt purchasing revenue
1,159,021
1,032,938
126,083
12.2
%
Servicing revenue
93,901
82,417
11,484
13.9
%
Other revenues
4,274
3,435
839
24.4
%
Total revenues
$
1,257,196
$
1,118,790
$
138,406
12.4
%
32
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than 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 6.3% during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 and by 8.3% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
The decreases in revenue recognized from portfolio basis during the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020 were primarily due to lower portfolio basis driven by the negative changes in expected future period recoveries and a lower volume of purchases in recent quarters.
As discussed above, ZBA revenue represents collections from our legacy ZBA pools. We expect our ZBA revenue to continue to decline as we collect on these legacy pools.
Recoveries above or below forecast represent over and under-performance in the reporting period. Collections during the three and nine months ended September 30, 2021 significantly outperformed the projected cash flows. We believe the collection over-performance was a result of our sustained improvements in portfolio collections driven by change in consumer behavior during the COVID-19 pandemic and our liquidation improvement initiatives.
While we now have additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic, as well as related actions taken by governments. When reassessing the future forecasts of expected lifetime recoveries during the three months ended September 30, 2021, management considered historical and current collection performance, and believes that for certain static pools collections over-performance resulted in increased total expected recoveries. Although management believes that the relevant macroeconomic conditions have improved and therefore no longer materially impact our collections performance, uncertainty still remains in the geographies in which we operate. As a result of a combination of the above, we have updated our forecast, resulting in a net reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a negative change in expected future period recoveries of approximately $11.2 million and $101.2 million during the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2020, we recorded approximately $47.8 million and $199.4 million, respectively, in negative change in expected future period recoveries. The circumstances around this pandemic continue to rapidly evolve, and will continue to impact our business and our estimation of expected recoveries in future periods. We will continue to closely monitor the COVID-19 situation and update our assumptions accordingly.
33
The following tables summarize collections from purchased receivables, revenue from receivable portfolios, end of period receivable balance and other related supplemental data, by year of purchase (in thousands, except percentages):
Three Months Ended September 30, 2021
As of September 30, 2021
Collections
Revenue from Receivable Portfolios
Changes in Recoveries
Investment in Receivable Portfolios
Monthly EIR
United States:
ZBA
$
11,247
$
11,247
$
—
$
—
—
%
2011
6,343
4,442
1,815
1,604
88.6
%
2012
6,371
4,371
1,779
3,320
42.0
%
2013
14,535
11,842
2,377
9,658
40.5
%
2014
8,810
5,311
1,365
25,039
6.7
%
2015
9,872
4,829
2,524
39,618
3.9
%
2016
20,762
9,188
7,177
73,942
4.1
%
2017
33,102
16,798
8,297
101,034
5.3
%
2018
54,240
23,335
9,181
188,650
3.8
%
2019
95,390
40,104
22,558
331,071
3.8
%
2020
107,901
46,988
33,139
403,776
3.7
%
2021
38,009
26,023
757
264,786
4.0
%
Subtotal
406,582
204,478
90,969
1,442,498
4.4
%
Europe:
ZBA
22
22
—
—
—
%
2013
23,131
19,265
(4,703)
188,032
3.2
%
2014
20,522
15,195
(3,087)
158,709
3.0
%
2015
13,901
9,775
(2,984)
126,822
2.4
%
2016(1)
11,798
10,087
(7,791)
113,336
2.8
%
2017
19,984
13,325
(6,372)
222,894
1.9
%
2018
18,558
13,090
(6,856)
264,678
1.6
%
2019
20,231
12,403
(1,305)
213,600
1.8
%
2020
14,795
8,432
5,889
120,945
2.3
%
2021
12,447
8,512
796
186,080
1.9
%
Subtotal
155,389
110,106
(26,413)
1,595,096
2.2
%
Other geographies:(2)
ZBA
615
615
—
—
—
%
2013
—
—
138
—
—
%
2014
869
190
414
38,441
—
%
2015
741
220
322
2,265
—
%
2016
352
110
457
—
—
%
2017
1,222
294
—
4,971
—
%
2018
885
201
15
—
—
%
2019
35
11
11
—
—
%
Subtotal
4,719
1,641
1,357
45,677
—
%
Total
$
566,690
$
316,225
$
65,913
$
3,083,271
3.3
%
_______________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
(2)All portfolios are on non-accrual basis subsequent to the sale of our investments in Colombia and Peru in August 2021.
34
Three Months Ended September 30, 2020
As of September 30, 2020
Collections
Revenue from Receivable Portfolios
Changes in Recoveries
Investment in Receivable Portfolios
Monthly EIR
United States:
ZBA
$
12,145
$
12,148
$
—
$
—
—
%
2011
6,026
5,275
673
2,027
88.6
%
2012
6,245
5,894
196
4,552
42.0
%
2013
15,028
14,050
718
11,361
40.5
%
2014
11,368
8,334
(1,443)
37,728
6.7
%
2015
15,362
7,465
1,585
59,920
3.9
%
2016
27,343
13,517
2,270
109,636
3.9
%
2017
45,696
24,441
9,872
149,478
5.2
%
2018
73,473
36,907
2,871
297,062
3.8
%
2019
108,410
64,583
(9,618)
522,303
3.8
%
2020
69,765
37,347
18,752
422,572
3.6
%
Subtotal
390,861
229,961
25,876
1,616,639
4.3
%
Europe:
ZBA
42
41
—
—
—
%
2013
24,113
21,588
671
221,977
3.2
%
2014
21,414
17,301
1,189
191,851
3.1
%
2015
13,595
10,745
476
147,919
2.4
%
2016(1)
13,531
10,748
1,629
129,015
2.6
%
2017
21,729
14,891
(689)
259,394
1.8
%
2018
19,341
14,707
(1,577)
309,543
1.6
%
2019
20,682
13,569
(1,557)
239,346
1.8
%
2020
7,026
4,713
3,172
82,980
2.4
%
Subtotal
141,473
108,303
3,314
1,582,025
2.3
%
Other geographies:
ZBA
1,182
1,194
—
—
—
%
2014(1)
922
399
241
45,043
101.7
%
2015(1)
1,054
597
305
3,395
96.7
%
2016
608
390
109
1,626
7.1
%
2017(1)
1,993
925
336
10,933
6.2
%
2018
1,587
686
261
5,922
3.7
%
2019
68
34
9
409
4.6
%
Subtotal
7,414
4,225
1,261
67,328
7.9
%
Total
$
539,748
$
342,489
$
30,451
$
3,265,992
3.4
%
_______________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
35
Nine Months Ended September 30, 2021
As of September 30, 2021
Collections
Revenue from Receivable Portfolios
Changes in Recoveries
Investment in Receivable Portfolios
Monthly EIR
United States:
ZBA
$
35,418
$
35,418
$
—
$
—
—
%
2011
18,660
13,554
5,014
1,604
88.6
%
2012
19,425
13,930
4,786
3,320
42.0
%
2013
44,569
37,252
7,269
9,658
40.5
%
2014
27,714
17,896
936
25,039
6.7
%
2015
34,788
16,393
5,237
39,618
3.9
%
2016
71,702
30,703
17,073
73,942
4.1
%
2017
117,087
57,023
22,940
101,034
5.3
%
2018
184,002
79,230
27,475
188,650
3.8
%
2019
317,708
137,499
42,570
331,071
3.8
%
2020
335,862
151,098
93,395
403,776
3.7
%
2021
72,670
44,963
9,203
264,786
4.0
%
Subtotal
1,279,605
634,959
235,898
1,442,498
4.4
%
Europe:
ZBA
82
82
—
—
—
%
2013
72,423
62,806
(30,524)
188,032
3.2
%
2014
65,210
49,571
(20,137)
158,709
3.0
%
2015
44,723
31,013
(9,323)
126,822
2.4
%
2016(1)
39,204
31,081
(5,594)
113,336
2.8
%
2017
65,295
41,981
(9,409)
222,894
1.9
%
2018
61,584
41,292
(13,968)
264,678
1.6
%
2019
67,610
38,863
3,062
213,600
1.8
%
2020
46,174
25,853
18,272
120,945
2.3
%
2021
24,039
16,350
4,653
186,080
1.9
%
Subtotal
486,344
338,892
(62,968)
1,595,096
2.2
%
Other geographies:(2)
ZBA
2,881
2,881
—
—
—
%
2013
—
—
138
—
—
%
2014
2,896
933
678
38,441
—
%
2015
3,058
1,196
1,009
2,265
—
%
2016
1,533
655
731
—
—
%
2017
5,211
1,656
535
4,971
—
%
2018
3,905
1,161
589
—
—
%
2019
145
60
18
—
—
%
Subtotal
19,629
8,542
3,698
45,677
—
%
Total
$
1,785,578
$
982,393
$
176,628
$
3,083,271
3.3
%
_______________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
(2)All portfolios are on non-accrual basis subsequent to the sale of our investments in Colombia and Peru in August 2021.
36
Nine Months Ended September 30, 2020
As of September 30, 2020
Collections
Revenue from Receivable Portfolios
Changes in Recoveries
Investment in Receivable Portfolios
Monthly EIR
United States:
ZBA
$
40,202
$
40,215
$
—
$
—
—
%
2011
19,494
17,398
1,444
2,027
88.6
%
2012
21,377
19,518
338
4,552
42.0
%
2013
48,854
46,166
(986)
11,361
40.5
%
2014
37,795
27,302
(3,056)
37,728
6.7
%
2015
51,856
25,068
2,821
59,920
3.9
%
2016
93,103
45,161
4,786
109,636
3.9
%
2017
154,198
82,417
17,595
149,478
5.2
%
2018
243,439
124,467
(4,204)
297,062
3.8
%
2019
313,152
205,004
(2,749)
522,303
3.8
%
2020
128,172
69,143
32,567
422,572
3.6
%
Subtotal
1,151,642
701,859
48,556
1,616,639
4.3
%
Europe:
ZBA
142
141
—
—
—
%
2013
69,322
64,334
(6,317)
221,977
3.2
%
2014
62,882
51,799
(1,179)
191,851
3.1
%
2015
40,451
32,138
1,416
147,919
2.4
%
2016(1)
37,144
32,096
(7,235)
129,015
2.6
%
2017
64,225
45,071
(10,603)
259,394
1.8
%
2018
59,452
44,562
(24,395)
309,543
1.6
%
2019
57,277
41,017
(8,139)
239,346
1.8
%
2020
11,052
8,724
4,746
82,980
2.4
%
Subtotal
401,947
319,882
(51,706)
1,582,025
2.3
%
Other geographies:
ZBA
3,162
3,171
—
—
—
%
2014(1)
3,445
1,262
270
45,043
101.7
%
2015(1)
3,559
2,027
525
3,395
96.7
%
2016
2,025
1,474
(100)
1,626
7.1
%
2017(1)
5,082
3,008
52
10,933
6.2
%
2018
4,201
2,348
205
5,922
3.7
%
2019
179
110
(5)
409
4.6
%
Subtotal
21,653
13,400
947
67,328
3.4
%
Total
$
1,575,242
$
1,035,141
$
(2,203)
$
3,265,992
3.4
%
_______________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.
Servicing revenues during the three months ended September 30, 2021 was relatively consistent as compared to servicing revenues during the three months ended September 30, 2020. Servicing revenues increased during the nine months ended September 30, 2021 as compared to the same period in the prior year, the increase was primarily attributable to increased fee-based income driven by growth in BPO operations in Cabot and the favorable impact of foreign currency translation, which was primarily the result of the weakening of the U.S. dollar against the British Pound.
Other revenues increased during the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020, primarily driven by the increased sale of real estate assets and the favorable impact of foreign currency translation, which was primarily the result of the weakening of the U.S. dollar against the British Pound.
The following table summarizes operating expenses for the periods presented (in thousands, except percentages):
Three Months Ended September 30,
2021
2020
$ Change
% Change
Salaries and employee benefits
$
94,662
$
95,979
$
(1,317)
(1.4)
%
Cost of legal collections
64,170
60,383
3,787
6.3
%
General and administrative expenses
35,819
53,459
(17,640)
(33.0)
%
Other operating expenses
25,226
28,088
(2,862)
(10.2)
%
Collection agency commissions
11,964
12,703
(739)
(5.8)
%
Depreciation and amortization
14,136
10,609
3,527
33.2
%
Total operating expenses
$
245,977
$
261,221
$
(15,244)
(5.8)
%
Nine Months Ended September 30,
2021
2020
$ Change
% Change
Salaries and employee benefits
$
288,892
$
279,944
$
8,948
3.2
%
Cost of legal collections
198,212
164,018
34,194
20.8
%
General and administrative expenses
102,790
113,954
(11,164)
(9.8)
%
Other operating expenses
81,895
83,527
(1,632)
(2.0)
%
Collection agency commissions
38,465
36,562
1,903
5.2
%
Depreciation and amortization
37,694
31,436
6,258
19.9
%
Total operating expenses
$
747,948
$
709,441
$
38,507
5.4
%
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international operating expenses, and the weakening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international operating expenses. Our operating expenses were unfavorably impacted by foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound by approximately 6.3% for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020, and by 8.3% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
The decrease in salaries and employee benefits during the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily due to the following reasons:
•Slight decrease of headcount in the US and International locations;
•The decrease was partially offset by the unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound.
The increase in salaries and employee benefits during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 were primarily due to the following reasons:
•Increased salaries and benefits in our fee-based business in Cabot driven by growth in BPO operations;
•The unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound.
Cost of legal collections primarily includes contingent fees paid to our external network of attorneys and the cost of litigation. We pursue legal collections using a network of attorneys that specialize in collection matters and through our internal legal channel. Under the agreements with our contracted attorneys, we advance certain out-of-pocket court costs. Cost of legal collections does not include internal legal channel employee costs, which are included in salaries and employee benefits in our consolidated statements of operations.
The following table summarizes our cost of legal collections during the periods presented (in thousands, except percentages):
Three Months Ended September 30,
2021
2020
$ Change
% Change
Court costs
$
37,970
$
38,500
$
(530)
(1.4)
%
Legal collection fees
26,200
21,883
4,317
19.7
%
Total cost of legal collections
$
64,170
$
60,383
$
3,787
6.3
%
Nine Months Ended September 30,
2021
2020
$ Change
% Change
Court costs
$
119,366
$
96,202
$
23,164
24.1
%
Legal collection fees
78,846
67,816
11,030
16.3
%
Total cost of legal collections
$
198,212
$
164,018
$
34,194
20.8
%
Cost of legal collections increased driven by increased legal channel collections. Beginning in late March of 2020, our legal collection channel spending reduced substantially due to court closures in certain jurisdictions as a result of the COVID-19 pandemic, the legal collection channel spending has gradually increased and are now back to historical levels.
General and Administrative Expenses
The decreases in general and administrative expense during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 were primarily due to the following reasons:
•A charge of $15.0 million relating to our settlement with the CFPB recognized in the three and nine months ended September 30, 2020;
•Certain third-party costs of approximately $6.9 million incurred relating to various financing transactions completed in September 2020;
•The unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound;
•The decreases were partially offset by increased information technology related expense.
Other Operating Expenses
Other operating expenses decreased during the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020, primarily due to reduced expenditures for temporary services and direct collection expenses. The decreases were partially offset by the unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound.
Collection Agency Commissions
Collection agency commissions are commissions paid to third-party collection agencies. Collections through the collections agencies channel are predominately in Europe and Latin America and vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally. Commission rates vary depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time, and commission rates for purchased bankruptcy portfolios are lower than the commission rates for charged-off credit card accounts.
The increases in depreciation and amortization expense during the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020 were primarily due the write-off of certain computer software and equipment and the unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound.
Interest Expense
The following tables summarize our interest expense (in thousands, except percentages):
Three Months Ended September 30,
2021
2020
$ Change
% Change
Stated interest on debt obligations
$
36,600
$
44,484
$
(7,884)
(17.7)
%
Amortization of debt issuance costs
3,917
6,000
(2,083)
(34.7)
%
Amortization of debt discount
357
2,490
(2,133)
(85.7)
%
Total interest expense
$
40,874
$
52,974
$
(12,100)
(22.8)
%
Nine Months Ended September 30,
2021
2020
$ Change
% Change
Stated interest on debt obligations
$
117,881
$
137,366
$
(19,485)
(14.2)
%
Amortization of debt issuance costs
12,469
11,795
674
5.7
%
Amortization of debt discount
1,209
8,802
(7,593)
(86.3)
%
Total interest expense
$
131,559
$
157,963
$
(26,404)
(16.7)
%
In September 2020, we entered into various transactions, agreements and amendments related to our borrowings and completed the implementation of our new global funding structure. In November and December 2020, we completed two offerings of senior secured notes, partially redeemed our Cabot senior secured notes due 2023 and fully redeemed our Cabot floating rate notes due 2024. In June 2021, we completed an offering of senior secured notes due 2028 and fully redeemed the remaining outstanding portion of our Cabot senior secured notes due 2023. These refinancing transactions successfully reduced the interest rates on our outstanding borrowings.
The decreases in interest expense during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 were primarily due to the following reasons:
•Lower average debt balances;
•Decreased interest rates as a result of various refinancing transactions;
•Effective January 1, 2021, we adopted a new accounting standard for our convertible and exchangeable notes and now recognize interest expense at the stated coupon rate of interest, rather than the higher effective interest rate;
•Partially offset by the unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound and increased amortization of loan fees and other loan costs as a result of higher capitalized debt issuance costs.
Loss on Extinguishment of Debt
During the nine months ended September 30, 2021, we recorded $9.3 million of loss on extinguishment of debt in connection with the redemption of our Cabot senior secured notes due 2023. During the three and nine months ended September 30, 2020, we recorded $15.0 million of loss on extinguishment of debt in connection with various financing transactions. Refer to “Note 7: Borrowings” in the notes to our consolidated financial statements for details of our financing activities.
Other income or expense consists primarily of foreign currency exchange gains or losses, interest income, and gains or losses recognized on certain transactions outside of our normal course of business. Other expense was $17.5 million and other income was $0.4 million during the three months ended September 30, 2021 and 2020, respectively. Other expense was $17.0 million during the nine months ended September 30, 2021 and other expense was $1.2 million during the nine months ended September 30, 2020.
Other expense recognized during the three and nine months ended September 30, 2021 primarily included the loss on the sale of our investment in Colombia and Peru of $17.4 million. Other expense recognized during the nine months ended September 30, 2020 primarily included a loss of $4.8 million as a result of the divestiture of our investment in Brazil. This loss was partially offset by other income from fair value changes for currency exchange forward contracts which were not designated as hedge instruments for accounting purposes.
Provision for Income Taxes
Provision for income taxes and effective tax rate are as follows for the periods presented ($in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Provision for income taxes
$
24,703
$
19,747
$
76,278
$
59,875
Effective tax rate
22.8
%
26.4
%
21.7
%
25.5
%
For the three and nine months ended September 30, 2021, the difference between our effective tax rate and the federal statutory rate was primarily due to the proportion of income earned in higher tax rate jurisdictions compared to lower tax rate jurisdictions. In 2020, the difference between our effective tax rate and the federal statutory rate was primarily due to a change in valuation allowance recognized in the period under the discrete method. We utilized the discrete method for recording income taxes during 2020 due to uncertainty in estimating annual pre-tax earnings primarily due to the COVID-19 pandemic. We returned to using the estimated annual effective tax rate beginning January 1, 2021.
Non-GAAP Disclosure
In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.
Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, and derivative instruments, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.
Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
GAAP net income, as reported
$
83,566
$
55,107
$
275,118
$
175,312
Adjustments:
Interest expense
40,874
52,974
131,559
157,963
Interest income
(270)
(394)
(1,170)
(1,953)
Provision for income taxes
24,703
19,747
76,278
59,875
Depreciation and amortization
14,136
10,609
37,694
31,436
CFPB settlement fees(1)
—
15,009
—
15,009
Stock-based compensation expense
3,847
3,884
12,903
13,189
Acquisition, integration and restructuring related expenses(2)
17,950
(23)
17,950
4,940
Loss on extinguishment of debt
—
14,988
9,300
14,988
Adjusted EBITDA
$
184,806
$
171,901
$
559,632
$
470,759
Collections applied to principal balance(3)
$
188,181
$
172,406
$
641,765
$
547,902
________________________
(1)Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
(2)Amount represents acquisition, integration and restructuring related expenses, including the loss recognized on the sale of our investment in Colombia and Peru of $17.4 million during the three and nine months ended September 30, 2021 and the loss on sale of our investment in Brazil of $4.8 million during the nine months ended September 30, 2020. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
(3)Collections applied to principal balance is calculated in the table below. For consistency with our debt covenant reporting, for periods subsequent to June 30, 2020, the collections applied to principal balance also includes proceeds applied to basis from sales of REO assets and related activities; prior period amounts have not been adjusted to reflect this change as such amounts were immaterial.
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
Collections applied to investment in receivable portfolios, net
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 September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
GAAP total operating expenses, as reported
$
245,977
$
261,221
$
747,948
$
709,441
Adjustments:
Operating expenses related to non-portfolio purchasing and recovery business(1)
(47,088)
(54,001)
(133,008)
(137,876)
CFPB settlement fees(2)
—
(15,009)
—
(15,009)
Stock-based compensation expense
(3,847)
(3,884)
(12,903)
(13,189)
Acquisition, integration and restructuring related operating expenses(3)
—
23
—
(132)
Adjusted operating expenses related to portfolio purchasing and recovery business
$
195,042
$
188,350
$
602,037
$
543,235
________________________
(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 the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
(3)Amount represents acquisition, integration and restructuring related operating expenses. We adjust for this amount because we believe these operating expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
Cost per Dollar Collected
We utilize adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections from purchased receivables for our portfolio purchasing and recovery business. The following table summarizes our cost per dollar collected (defined as adjusted operating expenses as a percentage of collections from purchased receivables) by geographic location during the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
United States
35.4
%
36.9
%
34.5
%
36.1
%
Europe
31.0
%
28.1
%
30.7
%
28.7
%
Other geographies
58.7
%
55.6
%
55.4
%
55.5
%
Overall cost per dollar collected
34.4
%
34.9
%
33.7
%
34.5
%
Cost-to-collect decreased during the periods presented, primarily attributable to decreased cost-to-collect in the U.S., driven by continued improvement in operational efficiencies in the collection process.
Cost-to-collect in Europe increased due to increased spend in legal collection channel. Our European legal collection channel spending reduced substantially in 2020 as a result of the COVID-19 pandemic, the legal collection channel spending increased substantially in the third quarter of 2021 as compared to the same period in the prior year and drove the higher overall cost-to-collect in Europe.
Collections from other geographies continue to decline as we continue to focus on the U.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.
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 the U.K., due to the higher concentration of payment plans, as compared to the U.S. and other locations in Europe, 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 our U.S. dollar reporting currency. For example, the strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable reporting impact on our international purchases, collections, and ERC, and the weakening of the U.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.
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
Purchase
Price(1)
Cumulative Collections through September 30, 2021
<2012
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Total(2)
Multiple(3)
United States:
<2012
$
2,143,750
$
3,983,166
$
760,285
$
554,597
$
391,737
$
293,528
$
206,933
$
155,456
$
121,545
$
99,300
$
77,101
$
52,866
$
6,696,514
3.1
2012
548,803
—
187,721
350,134
259,252
176,914
113,067
74,507
48,832
37,327
27,797
19,564
1,295,115
2.4
2013
551,866
—
—
230,051
397,646
298,068
203,386
147,503
107,399
84,665
64,436
45,642
1,578,796
2.9
2014
517,651
—
—
—
144,178
307,814
216,357
142,147
94,929
69,059
47,628
27,714
1,049,826
2.0
2015
499,075
—
—
—
—
105,610
231,102
186,391
125,673
85,042
64,133
34,788
832,739
1.7
2016
553,170
—
—
—
—
—
110,875
283,035
234,690
159,279
116,452
71,702
976,033
1.8
2017
528,087
—
—
—
—
—
—
111,902
315,853
255,048
193,328
117,087
993,218
1.9
2018
630,553
—
—
—
—
—
—
—
175,042
351,696
308,302
184,002
1,019,042
1.6
2019
676,937
—
—
—
—
—
—
—
—
174,693
416,315
317,708
908,716
1.3
2020
539,131
—
—
—
—
—
—
—
—
—
213,450
335,862
549,312
1.0
2021
283,288
—
—
—
—
—
—
—
—
—
—
72,670
72,670
0.3
Subtotal
7,472,311
3,983,166
948,006
1,134,782
1,192,813
1,181,934
1,081,720
1,100,941
1,223,963
1,316,109
1,528,942
1,279,605
15,971,981
2.1
Europe:
2013
619,079
—
—
134,259
249,307
212,129
165,610
146,993
132,663
113,228
93,203
72,423
1,319,815
2.1
2014
623,129
—
—
—
135,549
198,127
156,665
137,806
129,033
105,337
84,255
65,210
1,011,982
1.6
2015
419,941
—
—
—
—
65,870
127,084
103,823
88,065
72,277
55,261
44,776
557,156
1.3
2016
258,218
—
—
—
—
—
44,641
97,587
83,107
63,198
51,609
39,233
379,375
1.5
2017
461,571
—
—
—
—
—
—
68,111
152,926
118,794
87,549
65,295
492,675
1.1
2018
433,302
—
—
—
—
—
—
—
49,383
118,266
78,846
61,584
308,079
0.7
2019
273,354
—
—
—
—
—
—
—
—
44,118
80,502
67,610
192,230
0.7
2020
116,899
—
—
—
—
—
—
—
—
—
22,721
46,174
68,895
0.6
2021
196,864
—
—
—
—
—
—
—
—
—
—
24,039
24,039
0.1
Subtotal
3,402,357
—
—
134,259
384,856
476,126
494,000
554,320
635,177
635,218
553,946
486,344
4,354,246
1.3
Other geographies:
2012
6,721
—
—
3,848
2,561
1,208
542
551
422
390
294
199
10,015
1.5
2013
29,465
—
—
6,617
17,615
10,334
4,606
3,339
2,468
1,573
1,042
708
48,302
1.6
2014
85,418
—
—
—
9,652
16,062
18,403
9,813
7,991
6,472
4,300
3,204
75,897
0.9
2015
81,232
—
—
—
—
15,061
57,064
43,499
32,622
17,499
4,688
3,058
173,491
2.1
2016
61,595
—
—
—
—
—
29,269
39,710
28,992
16,078
5,196
3,199
122,444
2.0
2017
49,670
—
—
—
—
—
—
15,471
23,075
15,383
7,303
5,211
66,443
1.3
2018
25,731
—
—
—
—
—
—
—
12,910
15,008
5,892
3,905
37,715
1.5
2019
2,468
—
—
—
—
—
—
—
—
3,198
245
145
3,588
1.5
Subtotal
342,300
—
—
10,465
29,828
42,665
109,884
112,383
108,480
75,601
28,960
19,629
537,895
1.6
Total
$
11,216,968
$
3,983,166
$
948,006
$
1,279,506
$
1,607,497
$
1,700,725
$
1,685,604
$
1,767,644
$
1,967,620
$
2,026,928
$
2,111,848
$
1,785,578
$
20,864,122
1.9
________________________
(1)Adjusted for Put-Backs and Recalls. Put-Backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.
(2)Cumulative collections from inception through September 30, 2021, excluding collections on behalf of others.
(3)Cumulative Collections Multiple (“Multiple”) through September 30, 2021 refers to collections as a multiple of purchase price.
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):
Purchase Price(1)
Historical
Collections(2)
Estimated Remaining Collections
Total Estimated Gross Collections
Total Estimated Gross Collections to Purchase Price
United States:
<2011
$
1,759,963
$
5,523,904
$
87,587
$
5,611,491
3.2
2011
383,787
1,172,610
50,965
1,223,575
3.2
2012
548,803
1,295,115
51,217
1,346,332
2.5
2013(3)
551,866
1,578,796
139,113
1,717,909
3.1
2014(3)
517,651
1,049,826
81,461
1,131,287
2.2
2015
499,075
832,739
90,200
922,939
1.8
2016
553,170
976,033
168,721
1,144,754
2.1
2017
528,087
993,218
281,518
1,274,736
2.4
2018
630,553
1,019,042
410,059
1,429,101
2.3
2019
676,937
908,716
736,161
1,644,877
2.4
2020
539,131
549,312
866,983
1,416,295
2.6
2021
283,288
72,670
622,332
695,002
2.5
Subtotal
7,472,311
15,971,981
3,586,317
19,558,298
2.6
Europe:
2013(3)
619,079
1,319,815
749,120
2,068,935
3.3
2014(3)
623,129
1,011,982
549,610
1,561,592
2.5
2015(3)
419,941
557,156
359,332
916,488
2.2
2016
258,218
379,375
300,482
679,857
2.6
2017
461,571
492,675
492,610
985,285
2.1
2018
433,302
308,079
546,999
855,078
2.0
2019
273,354
192,230
454,661
646,891
2.4
2020
116,899
68,895
285,049
353,944
3.0
2021
196,864
24,039
420,688
444,727
2.3
Subtotal
3,402,357
4,354,246
4,158,551
8,512,797
2.5
Other geographies:
2012
6,721
10,015
—
10,015
1.5
2013
29,465
48,302
—
48,302
1.6
2014
85,418
75,897
43,032
118,929
1.4
2015
81,232
173,491
8,713
182,204
2.2
2016
61,595
122,444
—
122,444
2.0
2017
49,670
66,443
18,372
84,815
1.7
2018
25,731
37,715
—
37,715
1.5
2019
2,468
3,588
—
3,588
1.5
Subtotal
342,300
537,895
70,117
608,012
1.8
Total
$
11,216,968
$
20,864,122
$
7,814,985
$
28,679,107
2.6
________________________
(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 through September 30, 2021, excluding collections on behalf of others.
(3)Includes portfolios acquired in connection with certain business combinations.
Estimated Remaining Gross Collections by Year of Purchase
The following table summarizes our estimated remaining gross collections from purchased receivable portfolios and estimated future cash flows from real estate-owned assets by year of purchase (in thousands):
Estimated Remaining Gross Collections by Year of Purchase(1)
2021(3)
2022
2023
2024
2025
2026
2027
2028
2029
>2029
Total(2)
United States:
<2011
$
8,163
$
26,306
$
18,251
$
12,631
$
8,595
$
5,815
$
3,846
$
2,374
$
1,221
$
385
$
87,587
2011
4,224
14,326
10,122
7,106
4,993
3,511
2,473
1,744
1,233
1,233
50,965
2012
4,263
14,238
10,097
7,064
4,964
3,492
2,459
1,735
1,227
1,678
51,217
2013(4)
12,543
38,277
26,397
18,705
13,264
9,408
6,674
4,737
3,363
5,745
139,113
2014(4)
6,876
22,954
15,764
10,755
7,580
5,364
3,801
2,696
1,916
3,755
81,461
2015
7,838
26,045
17,718
12,070
8,048
5,578
3,935
2,786
1,977
4,205
90,200
2016
15,720
50,154
33,272
22,245
15,002
9,910
6,788
4,770
3,375
7,485
168,721
2017
25,052
80,723
52,589
37,768
25,771
18,021
12,424
8,833
6,254
14,083
281,518
2018
39,157
123,594
82,906
55,370
36,686
24,444
16,246
10,558
7,198
13,900
410,059
2019
69,662
209,416
140,462
99,741
67,544
46,306
31,966
22,256
15,288
33,520
736,161
2020
77,996
265,217
165,362
113,679
77,896
52,503
35,916
25,042
17,506
35,866
866,983
2021
42,573
175,202
144,756
84,334
54,499
37,777
25,627
17,916
12,643
27,005
622,332
Subtotal
314,067
1,046,452
717,696
481,468
324,842
222,129
152,155
105,447
73,201
148,860
3,586,317
Europe:
2013(4)
21,579
83,496
77,549
70,589
65,365
59,671
54,055
49,522
45,689
221,605
749,120
2014(4)
18,058
68,075
61,742
54,979
49,564
43,928
38,357
34,947
31,261
148,699
549,610
2015(4)
12,661
47,050
41,672
37,045
33,006
29,192
25,089
22,323
19,879
91,415
359,332
2016
13,636
47,744
42,403
35,051
30,149
25,566
20,491
17,246
14,291
53,905
300,482
2017
21,184
76,732
65,552
55,338
46,490
38,930
33,538
28,306
24,451
102,089
492,610
2018
20,441
76,964
70,419
61,516
53,214
46,010
38,916
33,593
28,522
117,404
546,999
2019
20,499
73,974
63,270
53,923
45,296
37,549
29,880
24,897
21,167
84,206
454,661
2020
12,604
46,701
42,463
34,385
27,902
24,548
19,793
16,193
13,261
47,199
285,049
2021
13,972
64,070
59,243
48,965
41,491
35,532
31,164
26,798
22,480
76,973
420,688
Subtotal
154,634
584,806
524,313
451,791
392,477
340,926
291,283
253,825
221,001
943,495
4,158,551
Other geographies:
2012
—
—
—
—
—
—
—
—
—
—
—
2013
—
—
—
—
—
—
—
—
—
—
—
2014
2,095
7,022
6,502
5,814
4,758
2,796
1,591
1,448
1,448
9,558
43,032
2015
296
1,001
1,217
1,131
1,044
754
631
529
445
1,665
8,713
2016
—
—
—
—
—
—
—
—
—
—
—
2017
711
2,621
2,385
2,101
1,894
1,428
822
745
745
4,920
18,372
2018
—
—
—
—
—
—
—
—
—
—
—
2019
—
—
—
—
—
—
—
—
—
—
—
Subtotal
3,102
10,644
10,104
9,046
7,696
4,978
3,044
2,722
2,638
16,143
70,117
Portfolio ERC
471,803
1,641,902
1,252,113
942,305
725,015
568,033
446,482
361,994
296,840
1,108,498
7,814,985
REO ERC(5)
10,393
21,264
17,499
9,377
3,471
1,596
269
218
281
—
64,368
Total ERC
$
482,196
$
1,663,166
$
1,269,612
$
951,682
$
728,486
$
569,629
$
446,751
$
362,212
$
297,121
$
1,108,498
$
7,879,353
________________________
(1)As of September 30, 2021, ERC for Zero Basis Portfolios include approximately $87.6 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and other geographies was immaterial. ERC also includes approximately $70.1 million from cost recovery portfolios, primarily in other geographies.
(2)Represents the expected remaining gross cash collections over a 180-month period. As of September 30, 2021, ERC for 84-month and 120-month periods were:
84-Month ERC
120-Month ERC
United States
$
3,341,255
$
3,515,672
Europe
2,932,487
3,537,275
Other geographies
50,659
58,434
Portfolio ERC
6,324,401
7,111,381
REO ERC
63,872
64,368
Total ERC
$
6,388,273
$
7,175,749
(3)Amount for 2021 consists of three months data from October 1, 2021 to December 31, 2021.
(4)Includes portfolios acquired in connection with certain business combinations.
(5)Real estate-owned assets ERC includes approximately $62.7 million and $1.7 million of estimated future cash flows for Europe and Other Geographies, respectively.
Estimated Future Collections Applied to Investment in Receivable Portfolios
As of September 30, 2021, we had $3.1 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands):
Years Ending December 31,
United States
Europe
Other Geographies
Total
2021(1)
$
120,224
$
54,385
$
3,074
$
177,683
2022
422,620
195,574
10,644
628,838
2023
295,722
185,481
9,111
490,314
2024
194,942
158,762
5,814
359,518
2025
129,002
138,140
4,758
271,900
2026
87,199
121,473
2,796
211,468
2027
58,767
101,652
1,591
162,010
2028
40,550
89,193
1,448
131,191
2029
28,225
78,677
1,448
108,350
2030
19,696
70,113
1,448
91,257
2031
14,002
66,216
1,448
81,666
2032
10,159
63,471
1,448
75,078
2033
7,694
65,008
649
73,351
2034
6,006
67,741
—
73,747
2035
4,928
75,380
—
80,308
2036
2,762
63,830
—
66,592
Total
$
1,442,498
$
1,595,096
$
45,677
$
3,083,271
________________________
(1)Amount for 2021 consists of three months data from October 1, 2021 to December 31, 2021.
The following table summarizes the receivable portfolios we purchased by quarter, and the respective purchase prices and fair value (in thousands):
Quarter
# of Accounts
Face Value
Purchase Price
Q1 2019
854
$
1,732,977
$
262,335
Q2 2019
778
2,307,711
242,697
Q3 2019
1,255
5,313,092
259,910
Q4 2019
803
2,241,628
234,916
Q1 2020
943
1,703,022
214,113
Q2 2020
754
1,305,875
147,939
Q3 2020
735
1,782,733
170,131
Q4 2020
558
1,036,332
127,689
Q1 2021
749
1,328,865
170,178
Q2 2021
612
1,151,623
142,728
Q3 2021
767
1,403,794
168,188
Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activities for the periods presented (in thousands):
Nine Months Ended September 30,
2021
2020
(Unaudited)
Net cash provided by operating activities
$
211,990
$
249,982
Net cash provided by investing activities
312,808
7,575
Net cash used in financing activities
(564,673)
(267,891)
Operating Cash Flows
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities.
Net cash provided by operating activities was $212.0 million and $250.0 million during the nine months ended September 30, 2021 and 2020, respectively. Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in recoveries, stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.
Investing Cash Flows
Cash flows relating to investing activities is primarily affected by receivable portfolio purchases offset by collection proceeds applied to the principal of our receivable portfolios.
Net cash provided by investing activities was $312.8 million and $7.6 million during the nine months ended September 30, 2021 and 2020, respectively. Receivable portfolio purchases, net of put-backs, were $473.0 million and $518.0 million during the nine months ended September 30, 2021 and 2020, respectively. Collection proceeds applied to the investment in receivable portfolios, net, were $803.2 million and $540.1 million during the nine months ended September 30, 2021 and 2020, respectively.
Financing Cash Flows
Financing cash flows are generally affected by borrowings under our credit facilities and proceeds from various debt offerings, offset by repayments of amounts outstanding under our credit facilities and repayments of various notes.
Net cash used in financing activities was $564.7 million and $267.9 million during the nine months ended September 30, 2021 and 2020, respectively. Borrowings under our credit facilities were $418.9 million and $1,695.9 million during the nine months ended September 30, 2021 and 2020, respectively. Repayments of amounts outstanding under our credit facilities were $714.0 million and $2,051.8 million during the nine months ended September 30, 2021 and 2020, respectively. Proceeds from the issuance of senior secured notes were $353.7 million and $410.8 million during the nine months ended September 30, 2021 and 2020, respectively. Repayments of senior secured notes were $349.4 million and $152.4 million during the nine months ended September 30, 2021 and 2020, respectively. We paid $161.0 million of convertible senior notes that matured on March 15, 2021 and $89.4 million of convertible senior notes using cash on hand during the nine months ended September 30, 2021 and 2020, respectively.
Capital Resources
Historically, we have met our cash requirements by utilizing our cash flows from operations, cash collections from our investment in receivable portfolios, bank borrowings, debt offerings, and equity offerings. Depending on the capital markets, we consider additional financings to fund our operations and acquisitions. From time to time, we may repurchase outstanding debt or equity and/or restructure or refinance debt obligations. Our primary cash requirements have included the purchase of receivable portfolios, entity acquisitions, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes.
Currently, all of our portfolio purchases are funded with cash from operations, cash collections from our investment in receivable portfolios, and our bank borrowings.
We are in material compliance with all covenants under our financing arrangements. See “Note 7: Borrowings” in the notes to our consolidated financial statements for a further discussion of our debt.
On August 12, 2015, our Board of Directors approved a $50.0 million share repurchase program. On May 5, 2021, we announced that the Board of Directors had approved an increase in the size of the repurchase program from $50.0 million to $300.0 million (an increase of $250.0 million). Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by our management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at any time at our discretion. During the three and nine months ended September 30, 2021, we repurchased 854,002 and 1,976,857 shares of our common stock for approximately $40.7 million and $88.1 million, respectively. Our practice is to retire the shares repurchased.
On November 3, 2021, we announced our intent to launch a tender offer on November 4, 2021 to purchase with cash up to $300.0 million of shares of our common stock. We expect to fund the purchase of shares pursuant to the tender offer, together with all related fees and expenses, with cash and cash equivalents. We may also make a drawing from our Global Senior Facility. We will retire the shares purchased from the tender offer.
In May 2021, we terminated our at-the-market equity offering program (the “ATM Program”) pursuant to which we could issue and sell shares of Encore’s common stock having an aggregate offering price of $50.0 million.
Our cash and cash equivalents as of September 30, 2021 consisted of $20.7 million held by U.S.-based entities and $137.5 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that our U.S. sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.
Included in cash and cash equivalents is cash that was collected on behalf of, and remains payable to, third-party clients. The balance of cash held for clients was $28.3 million as of September 30, 2021.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from our consumers, and other risks detailed in our Risk Factors. However, we believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, cash collections from our investment in receivable portfolios, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and businesses.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Rates. As of September 30, 2021, there had not been a material change in any of the foreign currency risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Interest Rates. As of September 30, 2021, there had not been a material change in the interest rate risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Item 4 – Controls and Procedures
Attached as exhibits to this Form 10-Q are the certifications required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended. This section includes information concerning the controls and controls evaluation referred to in the certifications.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and accordingly, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on their most recent evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
Except as noted below there were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We have not experienced any material impact to our internal controls over financial reporting due to the COVID-19 pandemic even though many of our employees are working remotely. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.
Information with respect to this item may be found in “Note 10: Commitments and Contingencies,” to the consolidated financial statements.
Item 1A – Risk Factors
There is no material change in the information reported under “Part I-Item 1A-Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Repurchases of Equity Securities
During the three months ended September 30, 2021, the Company repurchased 854,002 shares of our common stock for approximately $40.7 million. The following table presents information with respect to purchases of common stock of the Company during the three months ended September 30, 2021, by the Company or an “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Exchange Act:
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)(2)
Maximum Number
of Shares (or
Approximate Dollar
Value) That May
Yet Be Purchased
Under the Publicly
Announced Plans
or Programs(1)
July 1, 2021 to July 31, 2021
211,176
$
46.74
211,176
$
242,710,103
August 1, 2021 to August 31, 2021
337,983
$
47.64
337,983
$
226,608,593
September 1, 2021 to September 30, 2021
304,843
$
48.31
304,843
$
211,881,627
Total
854,002
$
47.66
854,002
$
211,881,627
________________________
(1)On August 12, 2015, we publicly announced that our Board of Directors had authorized a stock repurchase program for the Company to purchase $50.0 million of our Company’s common stock. On May 5, 2021, we publicly announced that our Board of Directors had authorized a $250.0 million increase to the stock repurchase program, which increased the size of the program from $50.0 million to $300.0 million.
(2)This column discloses the number of shares purchased pursuant to the program during the indicated time periods.
XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. (filed herewith)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
