Annual Statements Open main menu

ENCORE CAPITAL GROUP INC - Quarter Report: 2020 March (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________________________________________
FORM 10-Q
(Mark One)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020 or
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to__________.
COMMISSION FILE NUMBER: 000-26489
ENCORE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware48-1090909
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
350 Camino De La Reina, Suite 100
San Diego, California 92108
(Address of principal executive offices, including zip code)
(877) 445 - 4581
(Registrant’s telephone number, including area code)
(Not Applicable)
(Former name, former address and former fiscal year, if changed since last report)
_______________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par Value Per ShareECPGThe 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 filerAccelerated filerNon-accelerated filerSmaller 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.
ClassOutstanding at May 4, 2020
Common Stock, $0.01 par value31,234,420 shares



Table of Contents
ENCORE CAPITAL GROUP, INC.
INDEX TO FORM 10-Q
 
 Page



Table of Contents
PART I – FINANCIAL INFORMATION
Item 1— Consolidated Financial Statements (Unaudited)
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Financial Condition
(In Thousands, Except Par Value Amounts)
(Unaudited)
March 31,
2020
December 31,
2019
Assets
Cash and cash equivalents$188,199  $192,335  
Investment in receivable portfolios, net3,166,018  3,283,984  
Deferred court costs, net—  100,172  
Property and equipment, net119,417  120,051  
Other assets302,019  329,223  
Goodwill839,301  884,185  
Total assets
$4,614,954  $4,909,950  
Liabilities and Equity
Liabilities:
Accounts payable and accrued liabilities$168,481  $223,911  
Borrowings3,404,427  3,513,197  
Other liabilities136,235  147,436  
Total liabilities
3,709,143  3,884,544  
Commitments and Contingencies (Note 11)
Equity:
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, 31,234 and 31,097 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively
312  311  
Additional paid-in capital222,403  222,590  
Accumulated earnings833,366  888,058  
Accumulated other comprehensive loss(153,355) (88,766) 
Total Encore Capital Group, Inc. stockholders’ equity902,726  1,022,193  
Noncontrolling interest3,085  3,213  
Total equity
905,811  1,025,406  
Total liabilities and equity
$4,614,954  $4,909,950  
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 9: Variable Interest Entities” for additional information on the Company’s VIEs.
March 31,
2020
December 31,
2019
Assets
Cash and cash equivalents$90  $34  
Investment in receivable portfolios, net478,613  539,596  
Other assets4,645  4,759  
Liabilities
Borrowings$435,099  $464,092  
See accompanying notes to consolidated financial statements
3

Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 Three Months Ended March 31,
 20202019
Revenues
Revenue from receivable portfolios$357,365  $311,158  
Changes in expected current and future recoveries(98,661) —  
Servicing revenue28,680  34,023  
Other revenues1,697  529  
Total revenues289,081  345,710  
Allowance reversals on receivable portfolios, net1,367  
Total revenues, adjusted by net allowances347,077  
Operating expenses
Salaries and employee benefits93,098  91,834  
Cost of legal collections66,279  49,027  
Other operating expenses27,164  29,614  
Collection agency commissions13,176  16,002  
General and administrative expenses31,877  39,547  
Depreciation and amortization10,285  9,995  
Total operating expenses241,879  236,019  
Income from operations  47,202  111,058  
Other (expense) income
Interest expense(54,662) (54,967) 
Other income (expense)1,439  (2,976) 
Total other expense(53,223) (57,943) 
(Loss) income before income taxes (6,021) 53,115  
Provision for income taxes  (4,558) (3,673) 
Net (loss) income (10,579) 49,442  
Net loss (income) attributable to noncontrolling interest 125  (188) 
Net (loss) income attributable to Encore Capital Group, Inc. stockholders $(10,454) $49,254  
(Loss) earnings per share attributable to Encore Capital Group, Inc.:
Basic$(0.33) $1.58  
Diluted$(0.33) $1.57  
Weighted average shares outstanding:
Basic31,308  31,201  
Diluted31,308  31,359  
See accompanying notes to consolidated financial statements
4

Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive (Loss) Income
(Unaudited, In Thousands)
 Three Months Ended March 31,
 20202019
Net (loss) income $(10,579) $49,442  
Other comprehensive (loss) income, net of tax:
Change in unrealized gains/losses on derivative instruments:
Unrealized loss on derivative instruments  (5,051) (2,202) 
Income tax effect1,497  172  
Unrealized loss on derivative instruments, net of tax  (3,554) (2,030) 
Change in foreign currency translation:
Unrealized (loss) gain on foreign currency translation (61,038) 7,580  
Other comprehensive (loss) income, net of tax (64,592) 5,550  
Comprehensive (loss) income (75,171) 54,992  
Comprehensive loss (income) attributable to noncontrolling interest:
Net loss (income) attributable to noncontrolling interest 125  (188) 
Unrealized loss (gain) on foreign currency translation  (427) 
Comprehensive loss (income) attributable to noncontrolling interest 128  (615) 
Comprehensive (loss) income attributable to Encore Capital Group, Inc. stockholders $(75,043) $54,377  
See accompanying notes to consolidated financial statements
5

Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Equity
(Unaudited, In Thousands)
Three Months Ended March 31, 2020
Common StockAdditional
Paid-In
Capital
Accumulated
Earnings
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interest
Total
Equity
SharesPar
Balance as of December 31, 201931,097  $311  $222,590  $888,058  $(88,766) $3,213  $1,025,406  
Cumulative adjustment—  —  —  (44,238) —  —  (44,238) 
Balance as of January 1, 202031,097  311  222,590  843,820  (88,766) 3,213  981,168  
Net loss—  —  —  (10,454) —  (125) (10,579) 
Other comprehensive loss, net of tax—  —  —  —  (64,589) (3) (64,592) 
Issuance of share-based awards, net of shares withheld for employee taxes137   (4,714) —  —  —  (4,713) 
Stock-based compensation—  —  4,527  —  —  —  4,527  
Balance as of March 31, 202031,234  $312  $222,403  $833,366  $(153,355) $3,085  $905,811  

Three Months Ended March 31, 2019
 Common StockAdditional
Paid-In
Capital
Accumulated
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Noncontrolling
Interest
Total
Equity
SharesPar
Balance as of December 31, 201830,884  $309  $208,498  $720,189  $(110,987) $1,679  $819,688  
Net income—  —  —  49,254  —  188  49,442  
Other comprehensive income, net of tax—  —  —  —  5,123  427  5,550  
Issuance of share-based awards, net of shares withheld for employee taxes83   (1,950) —  —  —  (1,949) 
Stock-based compensation—  —  1,826  —  —  —  1,826  
Balance as of March 31, 201930,967  $310  $208,374  $769,443  $(105,864) $2,294  $874,557  
See accompanying notes to consolidated financial statements

6

Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 Three Months Ended March 31,
 20202019
Operating activities:
Net (loss) income $(10,579) $49,442  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization10,285  9,995  
Other non-cash interest expense, net5,909  6,629  
Stock-based compensation expense4,527  1,826  
Deferred income taxes(12,030) 19,682  
Changes in expected current and future recoveries98,661  —  
Allowance reversals on receivable portfolios, net  —  (1,367) 
Other, net  2,161  4,081  
Changes in operating assets and liabilities
Deferred court costs and other assets3,377  18,725  
Prepaid income tax and income taxes payable14,970  (30,247) 
Accounts payable, accrued liabilities and other liabilities(46,476) (67,775) 
Net cash provided by operating activities  70,805  10,991  
Investing activities:
Purchases of receivable portfolios, net of put-backs(209,045) (258,635) 
Collections applied to investment in receivable portfolios, net169,914  202,695  
Purchases of property and equipment(7,538) (10,227) 
Other, net3,414  (3,347) 
Net cash used in investing activities  (43,255) (69,514) 
Financing activities:
Proceeds from credit facilities171,880  196,263  
Repayment of credit facilities(167,221) (119,854) 
Repayment of senior secured notes(16,250) —  
Other, net(10,171) (4,862) 
Net cash (used in) provided by financing activities (21,762) 71,547  
Net increase in cash and cash equivalents  5,788  13,024  
Effect of exchange rate changes on cash and cash equivalents(9,924) (3,346) 
Cash and cash equivalents, beginning of period192,335  157,418  
Cash and cash equivalents, end of period$188,199  $167,096  
Supplemental disclosure of cash information:
Cash paid for interest$60,495  $62,135  
Cash paid for taxes, net of refunds766  15,003  

See accompanying notes to consolidated financial statements
7

Table of Contents
ENCORE CAPITAL GROUP, INC.
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 commitments 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.” In August 2019, the Company completed the sale of Baycorp, which represented the Company’s investments and operations in Australia and New Zealand and was a component of 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, are having an adverse impact on the Company’s ability to collect and are expected to delay a portion of its near-term expected cash collections on purchased receivable portfolios. The resulting impact on expected recoveries has impacted our financial results. We may also incur increased costs or other adverse changes to our business, but such potential impacts are unknown at this time.
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, 2019. 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 COVID-19 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 (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (2) either the obligation to absorb losses or the right to receive benefits. Refer to “Note 9: Variable Interest Entities”, for further details. All intercompany transactions and balances have been eliminated in consolidation.
8

Table of Contents
Translation of Foreign Currencies
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.
Reclassifications
Certain immaterial reclassifications have been made to the consolidated financial statements to conform to the current year’s presentation.
Recently Adopted Accounting Pronouncement
On January 1, 2020, the Company adopted the new accounting standard for Financial Instruments - Credit Losses (“CECL”). CECL introduces a new impairment approach for credit loss recognition based on current expected lifetime losses rather than incurred losses. CECL applies to all financial assets carried at amortized costs, including the Company’s investment in receivable portfolios, which are defined as purchased credit deteriorated (“PCD”) financial assets under CECL. The adoption of CECL represents a significant change from the previous U.S. GAAP guidance relating to purchased credit impaired assets and resulted in changes to the Company’s accounting for its investment in receivable portfolios and the related income from the receivable portfolios.
As part of the adoption of CECL, the Company changed its accounting methodology for its court costs spent in its legal collection channel effective January 1, 2020. Previously, the Company capitalized its upfront court costs spent in its consolidated financial statements (“Deferred Court Costs”) and provided a reserve for those costs that it believed would ultimately be uncollectible. Effective January 1, 2020, the Company expenses all of its court costs as incurred. All expected cash flows, including all the expected collections from the legal channel, are included in the measurement of the negative allowance, or investment in receivable portfolios, at a discounted value. Upon transition, an adjustment was made to retained earnings to reflect the net change from an undiscounted to discounted value prior to writing-off uncollectible receivables and establishing a balance for discounted value of future recoveries of amounts expected to be collected.
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 CECL guidance on the Company’s consolidated statements of financial condition at January 1, 2020 (in thousands):
Balance as of December 31, 2019AdjustmentOpening Balance as of January 1, 2020
Assets
Investment in receivable portfolios, net$3,283,984  $44,166  $3,328,150  
Deferred court costs, net100,172  (100,172) —  
Liabilities
Other liabilities (for deferred tax liabilities)147,436  (11,768) 135,668  
Equity
Accumulated earnings888,058  (44,238) 843,820  
Recent Accounting Pronouncements Not Yet Effective
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The ASU is effective as of March 12, 2020 through December 31, 2022. We will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional
9

Table of Contents
guidance on an ongoing basis. The ASU is currently not expected to have a material impact on our consolidated financial statements.
With the exception of the updated standard discussed above, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2020, 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.
Accounting Policy Update
As a result of the adoption of CECL, the Company revised its following accounting policies effective January 1, 2020:
Investment in Receivable Portfolios
The Company purchases portfolios of loans that have experienced significant deterioration of credit quality since origination from banks and other financial institutions. These financial assets are defined as PCD assets under CECL. Under the PCD accounting model, the purchased assets 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. The amount of the negative allowance (i.e., investment in receivable portfolios) will not exceed the total amortized cost basis of the loans written-off.
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. The Company continues to evaluate the reasonable economic life of a pool in each reporting period. Revenue primarily includes two components: (1) accretion of the discount on the negative allowance due to the passage of time, and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries.
The Company elected not to maintain its previously formed pool groups with amortized costs at transition. Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to the transition. The Company did not establish a negative allowance from ZBA pools as the Company elected the Transition Resource Group for Credit Losses’ practical expedient to retain the integrity of its legacy pools. All subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in the Company’s consolidated statements of operations. See “Note 5: Investment in Receivable Portfolios, Net” for further discussion of investment in receivable portfolios.
Deferred Court Costs
The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections, the Company is required to pay certain upfront costs to the applicable courts that are recoverable from the consumer. Effective January 1, 2020, the Company expenses all of its court costs as incurred and no longer capitalizes such costs as Deferred Court Costs. All expected cash flows, including all the expected collections from the legal channel, are included in the measurement of the negative allowance, or investment in receivable portfolios, at a discounted value.
10

Table of Contents
Note 2: (Loss) Earnings Per Share
Basic (loss) 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 (loss) earnings per share is calculated based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock, and the dilutive effect of the convertible and exchangeable senior notes, if applicable. In computing the diluted net loss per share for the three months ended March 31, 2020, dilutive potential common shares are excluded from the diluted loss per share calculation because of their anti-dilutive effect.
A reconciliation of shares used in calculating (loss) earnings per basic and diluted shares follows (in thousands, except per share amounts):
 Three Months Ended March 31,
 20202019
Net (loss) income attributable to Encore Capital Group, Inc. stockholders$(10,454) $49,254  
Total weighted-average basic shares outstanding31,308  31,201  
Dilutive effect of stock-based awards—  158  
Total weighted-average dilutive shares outstanding31,308  31,359  
Basic (loss) earnings per share$(0.33) $1.58  
Diluted (loss) earnings per share$(0.33) $1.57  
Anti-dilutive employee stock options outstanding were approximately 13,000 and 217,000 for the three months ended March 31, 2020 and 2019, respectively.
Note 3: Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The Company uses a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 Fair Value Measurements as of March 31, 2020
 Level 1Level 2Level 3Total
Assets
Interest rate cap contracts$—  $2,150  $—  $2,150  
Liabilities
Foreign currency exchange contracts—  (2,177) —  (2,177) 
Interest rate swap agreements—  (14,735) —  (14,735) 
Contingent consideration—  —  (27) (27) 

11

Table of Contents
 Fair Value Measurements as of December 31, 2019
 Level 1Level 2Level 3Total
Assets
Foreign currency exchange contracts$—  $1,473  $—  $1,473  
Interest rate cap contracts—  2,460  —  2,460  
Liabilities
Interest rate swap agreements—  (9,116) —  (9,116) 
Contingent consideration—  —  (66) (66) 
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 three months ended March 31, 2020 and year ended December 31, 2019 (in thousands):
Amount
Balance as of December 31, 2018$6,198  
Change in fair value of contingent consideration(2,300) 
Payment of contingent consideration(3,686) 
Effect of foreign currency translation(146) 
Balance as of December 31, 201966  
Payment of contingent consideration(35) 
Effect of foreign currency translation(4) 
Balance as of March 31, 2020$27  
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 the assets held for sale was approximately $42.9 million and $46.7 million as of March 31, 2020 and December 31, 2019, 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.




12

Table of Contents
The carrying amounts in the following table are included in the consolidated statements of financial condition as of March 31, 2020 and December 31, 2019 (in thousands):
 March 31, 2020December 31, 2019
 Carrying AmountEstimated Fair ValueCarrying AmountEstimated Fair Value
Financial Assets
Investment in receivable portfolios, net$3,166,018  $3,547,965  $3,283,984  $3,464,050  
Deferred court costs—  —  100,172  100,172  
Financial Liabilities
Encore convertible notes and exchangeable notes(1)
645,591  567,691  642,547  693,708  
Cabot senior secured notes(2)
1,077,548  996,060  1,127,435  1,170,945  
_______________________
(1)Carrying amount represents the portion of the convertible and exchangeable notes classified as debt, while estimated fair value pertains to the face amount of the notes.
(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 its 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.
Deferred Court Costs:
Effective January 1, 2020, the Company no longer carries Deferred Court Costs as a result of its change in accounting policy. The fair value estimate for Deferred Court Costs as of December 31, 2019 involved Level 3 inputs as there was little observable market data available and management was required to use significant judgment in its estimates.
Borrowings:
The majority of the Company’s borrowings are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value. These borrowings include Encore’s senior secured notes and borrowings under its revolving credit and term loan facilities and Cabot’s borrowings under its revolving credit facility. The carrying value of the Company’s revolving credit and term loan facilities approximates fair value due to the short-term nature of the interest rate periods. The fair value of the Company’s senior secured notes was 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 Company’s borrowings also include finance lease liabilities for which the carrying value approximates fair value.
Encore’s convertible notes and exchangeable notes and Cabot’s senior secured notes are carried at historical cost, adjusted for the debt discount. The fair value estimate for these convertible and exchangeable notes incorporates quoted market prices using Level 2 inputs.
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. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging.
13

Table of Contents
The following table summarizes the fair value of derivative instruments as included in the Company’s consolidated statements of financial condition (in thousands):
 March 31, 2020December 31, 2019
Balance Sheet
Location
Fair ValueBalance Sheet
Location
Fair Value
Derivatives designated as hedging instruments:
Interest rate cap contractsOther assets$2,150  Other assets$2,460  
Foreign currency exchange contractsOther liabilities(134) Other assets443  
Interest rate swap agreementsOther liabilities(14,735) Other liabilities(9,116) 
Derivatives not designated as hedging instruments:
Foreign currency exchange contractsOther liabilities(2,043) Other assets1,030  
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 enters 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.
Certain of the Company’s foreign currency forward contracts are designated as cash flow hedging instruments and qualify for hedge accounting treatment. Gains and losses arising from such contracts are recorded as a component of accumulated other comprehensive income (“OCI”) as gains and losses on derivative instruments, net of income taxes. The hedging gains and losses in OCI are subsequently reclassified into earnings in the same period in which the underlying transactions affect the Company’s earnings. If all or a portion of the forecasted transaction is cancelled, the accumulated gains or losses in OCI would be reclassified into earnings.
As of March 31, 2020, the total notional amount of the forward contracts that were designated as cash flow hedging instruments was $6.3 million. The Company estimates that approximately $0.1 million of net derivative loss included in OCI will be reclassified into earnings within the next 12 months. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the three months ended March 31, 2020 and 2019.
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. In accordance with authoritative guidance relating to derivatives and hedging transactions, the Company designates its interest rate swap instruments as cash flow hedges. As of March 31, 2020, there were four interest rate swap agreements outstanding with a total notional amount of $327.9 million.
Previously, the Company held two interest rate cap contracts that matured in 2021 (the “2018 Caps”) which hedged the risk of GBP-LIBOR interest rate fluctuations for interest payments of Cabot Securitisation’s senior facility agreement. As part of the amended and restated senior facility agreement as described in “Note 8: Borrowings”, the Company settled the 2018 Caps and ceased the hedge relationship which resulted in the reclassification of the associated other comprehensive loss balance to interest expense for approximately $2.5 million during the three months ended March 31, 2020.
As of March 31, 2020, the Company held two interest rate cap contracts with a notional amount of approximately $876.4 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 for the Cabot 2024 Floating Rate Notes (“2019 Cap”) has a notional amount of €400.0 million (approximately $435.1 million) and matures in 2024. The interest rate cap hedging the fluctuations in sterling overnight index average (“SONIA”) for the Cabot Securitisation UK Ltd senior facility agreement (“2020 Cap”) has a notional amount of £350.0 million (approximately $441.3 million) and matures in 2023. The 2019 Cap is structured as a series of European call options (“Caplets”) such that if exercised, the Company will receive a payment equal to 3-months EURIBOR on a notional amount equal to the hedged notional amount net of a fixed strike price. The 2020 Cap is also structured as a series of Caplets such that if exercised, the Company will receive a payment equal to SONIA on a notional amount equal to the hedged notional amount net of a fixed strike price. Each interest rate reset date, the Company will elect to exercise the Caplet or let it expire. The potential cash flows from each Caplet are expected to offset any variability in the cash flows of the interest payments to the extent SONIA or EURIBOR exceeds the strike price of the Caplets. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2020 Cap as cash flow hedge instruments.
14

Table of Contents
The following table summarizes the effects of derivatives in cash flow hedging relationships designated as hedging instruments in the Company’s consolidated statements of operations (in thousands):
Derivatives Designated as Hedging InstrumentsGain (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
March 31,
Three Months Ended
March 31,
2020201920202019
Foreign currency exchange contracts$(389) $935  Salaries and employee benefits$127  $(95) 
Foreign currency exchange contracts(45) (78) General and administrative expenses17  (84) 
Interest rate swap agreements(6,707) (2,086) Interest expense(1,088) (420) 
Interest rate cap contracts(1,396) (1,572) Interest expense(2,542) —  
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.
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 Recognized in Income (Loss)
Three Months Ended
March 31,
Derivatives Not Designated as Hedging InstrumentsLocation of Gain Recognized in Income (Loss) on Derivative20202019
Foreign currency exchange contractsOther income (expense) $1,943  $—  

Note 5: Investment in Receivable Portfolios, Net
As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies”, effective January 1, 2020, the Company accounts for its investment in receivable portfolios as PCD assets under CECL and changed its accounting policy for reimbursable court costs. As a result, the Company wrote-off the previous Deferred Court Costs balance that represented an undiscounted value of recoverable historic spend as a result of a loss-rate methodology, and established a discounted value of expected future recoveries of these reimbursable court costs, which is included in the beginning balance of the investment in receivable portfolios.
The table below illustrates the Company’s transition approach for its investment in receivable portfolios as of January 1, 2020 (in thousands):
Amount
Investment in receivable portfolios prior to transition$3,283,984  
Initial transitioned deferred court costs44,166  
3,328,150  
Allowance for credit losses79,028,043  
Amortized cost82,356,193  
Noncredit discount132,533,142  
Face value214,889,335  
Write-off of amortized cost(82,356,193) 
Write-off of noncredit discount(132,533,142) 
Negative allowance3,328,150  
Initial negative allowance from transition$3,328,150  
15

Table of Contents
The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios purchased during the three months ended March 31, 2020 (in thousands):
Three Months Ended March 31, 2020
Purchase price$214,113  
Allowance for credit losses521,194  
Amortized cost735,307  
Noncredit discount967,715  
Face value1,703,022  
Write-off of amortized cost(735,307) 
Write-off of noncredit discount(967,715) 
Negative allowance214,113  
Negative allowance for expected recoveries - current period purchases$214,113  
The following table summarize the changes in the balance of the investment in receivable portfolios during the periods presented (in thousands):
Three Months Ended March 31,
20202019
Balance, beginning of period$3,328,150  $3,137,893  
Purchases of receivable portfolios214,113  262,335  
Put-backs and Recalls(5,068) (3,700) 
Transfers to assets held for sale(1,531) (3,589) 
Cash collections(527,279) (513,853) 
Revenue from receivable portfolios357,365  311,158  
Changes to expected current period recoveries10,315  —  
Changes to expected future period recoveries(108,976) —  
Portfolios allowance reversal, net—  1,367  
Foreign currency adjustments(101,071) 19,976  
Balance, end of period$3,166,018  $3,211,587  
Revenue as a percentage of collections67.8 %60.6 %
During the three months ended March 31, 2020, the Company reassessed its future forecasts of expected recoveries of receivable portfolios based on its best estimate of the potential impact arising from the COVID-19 pandemic. The updated forecasts changed the timing of future recoveries by reducing the forecasted cash flows in 2020. The majority of the shortfall in near-term cash flows is expected to be recovered in 2021 and most of the rest of the shortfall is expected to be recovered in subsequent periods. As a result, the change in the total amount of estimated remaining collections (“ERC”) was negligible. The delay in expected future cash flows, when discounted to present-value, resulted in a provision for credit loss adjustment of approximately $109.0 million during the three months ended March 31, 2020. The circumstances around this pandemic are evolving rapidly and will continue to impact the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to monitor the COVID-19 situation closely and update its assumptions accordingly.
Accretable yield represented the amount of revenue on purchased receivable portfolios the Company expects to recognize over the remaining life of its existing portfolios. The following table summarizes the change in accretable yield under the previous accounting guidance during the three months ended March 31, 2019 (in thousands):
16

Table of Contents
Three Months Ended
March 31,
2019
Balance as of beginning of period$4,026,206  
Revenue from receivable portfolios(311,158) 
Allowance reversals on receivable portfolios, net  (1,367) 
Additions on existing portfolios, net  38,313  
Additions for current purchases285,637  
Effect of foreign currency translation26,461  
Balance as of end of period$4,064,092  
The following table summarizes the change in the valuation allowance for investment in receivable portfolios as accounted for under the previous accounting guidance during the three months ended March 31, 2019 (in thousands):
 Three Months Ended
March 31,
 2019
Balance as of beginning of period$60,631  
Provision for portfolio allowances2,626  
Reversal of prior allowances(3,993) 
Effect of foreign currency translation164  
Balance as of end of period$59,428  

Note 6: Deferred Court Costs, Net
As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies”, effective January 1, 2020 and as part of the adoption of CECL, the Company changed its method of accounting for court costs spent in its legal collection channel. The Company now expenses all of its court costs as incurred and includes all expected recoveries, including the recoveries from the legal channel, in the measurement of the investment in receivable portfolios at a discounted value. As a result, the Company no longer carries Deferred Court Costs.
Net deferred court costs under the previous accounting method consisted of the following as of the date presented (in thousands):
December 31, 2019
Court costs advanced$891,207  
Court costs recovered(369,043) 
Court costs reserve(421,992) 
Deferred court costs, net$100,172  
A roll-forward of the Company’s court cost reserve as accounted for under the previous accounting method is as follows (in thousands):
Three Months Ended
March 31, 2019
Balance at beginning of period$(396,460) 
Provision for court costs(15,713) 
Charge-offs13,779  
Effect of foreign currency translation(1,597) 
Balance at end of period$(399,991) 

17

Table of Contents
Note 7: Other Assets
Other assets consist of the following (in thousands):
March 31,
2020
December 31,
2019
Operating lease right-of-use asset$74,113  $75,254  
Identifiable intangible assets, net46,371  51,371  
Assets held for sale42,947  46,717  
Deferred tax assets26,291  24,134  
Service fee receivables22,786  27,705  
Prepaid expenses22,191  22,272  
Other financial receivables16,213  17,308  
Other51,107  64,462  
Total$302,019  $329,223  

Note 8: Borrowings
The Company is in compliance in all material respects with all covenants under its financing arrangements as of March 31, 2020. The components of the Company’s consolidated borrowings were as follows (in thousands):
March 31,
2020
December 31,
2019
Encore revolving credit facility$528,000  $492,000  
Encore term loan facility167,855  171,677  
Encore senior secured notes292,500  308,750  
Encore convertible notes and exchangeable notes672,855  672,855  
Less: debt discount(27,264) (30,308) 
Cabot senior secured notes1,078,965  1,129,039  
Less: debt discount(1,417) (1,604) 
Cabot senior revolving credit facility241,170  285,749  
Cabot securitisation senior facilities435,099  464,092  
Other47,924  54,151  
Finance lease liabilities8,642  8,121  
3,444,329  3,554,522  
Less: debt issuance costs, net of amortization(39,902) (41,325) 
Total$3,404,427  $3,513,197  
Encore Revolving Credit Facility and Term Loan Facility
The Company has a revolving credit facility (the “Revolving Credit Facility”) and term loan facility (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”) pursuant to a Third Amended and Restated Credit Agreement dated December 20, 2016 (as amended, the “Restated Credit Agreement”). The total commitment for the Revolving Credit Facility is $884.2 million that matures in December 2021. The Term Loan Facility matures in December 2021 and the principal amortizes $15.3 million in 2020 with the remaining principal due in 2021.
18

Table of Contents
Provisions of the Restated Credit Agreement as of March 31, 2020 include, but are not limited to:
A Revolving Credit Facility with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300 basis points depending on the cash flow leverage ratio of Encore and its restricted subsidiaries as defined in the Restated Credit Agreement; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. “Alternate base rate,” as defined in the Restated Credit Agreement, means the highest of (a) the per annum rate which the administrative agent publicly announces from time to time as its prime lending rate, (b) the federal funds effective rate from time to time, plus 0.5% per annum, (c) reserved adjusted LIBOR determined on a daily basis for a one month interest period, plus 1.0% per annum and (d) zero;
A Term Loan Facility with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries;
A borrowing base under the Revolving Credit Facility equal to 35% of all eligible non-bankruptcy estimated remaining collections plus 55% of eligible estimated remaining collections for consumer receivables subject to bankruptcy;
A maximum cash flow leverage ratio permitted of 3.00:1.00;
A maximum cash flow first-lien leverage ratio of 2.00:1.00;
A minimum interest coverage ratio of 1.75:1.00;
The allowance of indebtedness in the form of senior secured notes not to exceed $350.0 million;
The allowance of additional unsecured or subordinated indebtedness not to exceed $1.1 billion, including junior lien indebtedness not to exceed $400.0 million;
Restrictions and covenants, which limit the payment of dividends and the incurrence of additional indebtedness and liens, among other limitations;
Repurchases of up to $150.0 million of Encore’s common stock and permitted indebtedness after July 9, 2015, subject to compliance with certain covenants and available borrowing capacity;
A pre-approved acquisition limit of $225.0 million per fiscal year;
A basket to allow for investments not to exceed the greater of (1) 200% of the consolidated net worth of Encore and its restricted subsidiaries; and (2) an unlimited amount such that after giving effect to the making of any investment, the cash flow leverage ratio is less than 1.25:1:00;
A basket to allow for investments in persons organized under the laws of Canada in the amount of $50.0 million;
Collateralization by all assets of the Company, other than the assets of certain foreign subsidiaries and all unrestricted subsidiaries as defined in the Restated Credit Agreement.
As of March 31, 2020, the outstanding balance under the Revolving Credit Facility was $528.0 million, which bore a weighted average interest rate of 4.58% and 5.50% for the three months ended March 31, 2020 and 2019, respectively. Available capacity under the Revolving Credit Facility, after taking into account borrowing base and applicable debt covenants, was $356.2 million as of March 31, 2020. As of March 31, 2020, the outstanding balance under the Term Loan Facility was $167.9 million.
Encore Senior Secured Notes
In August 2017, Encore entered into $325.0 million in senior secured notes with a group of insurance companies (the “Senior Secured Notes”). The Senior Secured Notes bear an annual interest rate of 5.625%, mature in 2024 and beginning in November 2019, require quarterly principal payments of $16.3 million. As of March 31, 2020, $292.5 million of the Senior Secured Notes remained outstanding.
The covenants and material terms in the purchase agreement for the Senior Secured Notes are substantially similar to those in the Restated Credit Agreement.
19

Table of Contents
Encore 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):
March 31,
2020
December 31,
2019
Maturity dateInterest rate
2020 Convertible Notes$89,355  $89,355  Jul 1, 20203.000 %
2021 Convertible Notes161,000  161,000  Mar 15, 20212.875 %
2022 Convertible Notes150,000  150,000  Mar 15, 20223.250 %
Exchangeable Notes172,500  172,500  Sep 1, 20234.500 %
2025 Convertible Notes100,000  100,000  Oct 1, 20253.250 %
$672,855  $672,855  
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 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 conversion or exchange dates until the close of business on the 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 March 31, 2020 are listed below:
2020 Convertible Notes2021 Convertible Notes2022 Convertible Notes2023 Exchangeable Notes2025 Convertible Notes
Initial conversion or exchange price$45.72  $59.39  $45.57  $44.62  $40.00  
Closing stock price at date of issuance$33.35  $47.51  $35.05  $36.45  $32.00  
Closing stock price dateJun 24, 2013Mar 5, 2014Feb 27, 2017Jul 20, 2018Sep 4, 2019
Conversion or exchange rate (shares per $1,000 principal amount)21.8718  16.8386  21.9467  22.4090  25.0000  
Conversion or exchange dateJan 1, 2020Sep 15, 2020Sep 15, 2021Mar 1, 2023Jul 1, 2025
In the event of conversion or exchange, holders of the Company’s Convertible Notes or Exchangeable Notes will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company’s current intent is to settle conversions and exchanges through combination settlement (i.e., convertible or exchangeable into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and 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, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion or exchange spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion or exchange spread has a dilutive effect when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion or exchange prices listed in the above table.




20

Table of Contents
The debt and equity components, the issuance costs related to the equity component, the stated interest rate, and the effective interest rate for each of the Convertible Notes and Exchangeable Notes at the time of the original offering are listed below (in thousands, except percentages):
2020 Convertible Notes(1)
2021 Convertible Notes2022 Convertible Notes2023 Exchangeable Notes2025 Convertible Notes
Debt component$140,247  $143,645  $137,266  $157,971  $91,024  
Equity component$32,253  $17,355  $12,734  $14,009  $8,976  
Equity issuance cost$1,106  $581  $398  $—  $224  
Stated interest rate3.000 %2.875 %3.250 %4.500 %3.250 %
Effective interest rate6.350 %4.700 %5.200 %6.500 %5.000 %
________________________
(1)The Company used a portion of the net proceeds from the issuance of the 2025 Convertible Notes to repurchase approximately $83.1 million aggregate principal amount of its 2020 Convertible Notes. As a result, the remaining principal amount of the 2020 Convertible Notes was $89.4 million as of March 31, 2020.
The balances of the liability and equity components of all the Convertible Notes and Exchangeable Notes outstanding were as follows (in thousands):
March 31,
2020
December 31,
2019
Liability component—principal amount$672,855  $672,855  
Unamortized debt discount(27,264) (30,308) 
Liability component—net carrying amount$645,591  $642,547  
Equity component$83,127  $83,127  
The debt discount is being amortized into interest expense over the remaining life of the Convertible Notes and Exchangeable Notes using the effective interest rates. Interest expense related to the Convertible Notes and Exchangeable Notes was as follows (in thousands):
Three Months Ended March 31,
20202019
Interest expense—stated coupon rate$5,799  $5,337  
Interest expense—amortization of debt discount3,044  3,121  
Interest expense—Convertible Notes and Exchangeable Notes$8,843  $8,458  
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 conversion or exchange prices of the Convertible Notes and the Exchangeable Notes, the Company maintains a hedge program that increases the effective conversion or exchange price for the 2020 Convertible Notes, the 2021 Convertible Notes and the 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 price):
2020 Convertible Notes2021 Convertible Notes2023 Exchangeable Notes
Cost of the hedge transaction(s)$18,113  $19,545  $17,785  
Initial conversion or exchange price$45.72  $59.39  $44.62  
Effective conversion or exchange price$61.55  $83.14  $62.48  


21

Table of Contents
Cabot Senior Secured Notes
The following table provides a summary of the Cabot senior secured notes ($ in thousands):
March 31,
2020
December 31,
2019
Maturity dateInterest rate
Floating rate senior secured notes due 2024$441,336  $448,921  Jun 1, 2024
EURIBOR +6.375%
Senior secured notes due 2023637,629  680,118  Oct 1, 20237.500 %
$1,078,965  $1,129,039  
Interest expense related to the Cabot senior secured notes was as follows (in thousands):
 Three Months Ended March 31,
20202019
Interest expense—stated coupon rate$19,417  $19,394  
Interest expense—amortization of debt discount85  202  
Interest expense—Cabot senior secured notes$19,502  $19,596  
Cabot Senior Revolving Credit Facility
Cabot Financial (UK) Limited (“Cabot Financial UK”) has an amended and restated senior secured revolving credit facility agreement (as amended and restated, the “Cabot Credit Facility”). As of March 31, 2020, the Cabot Credit Facility provided for a total committed facility of £375.0 million that expires in September 2023 and included the following key provisions:
Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 3.00% per annum;
A restrictive covenant that limits the loan to value ratio to 0.75 in the event that the Cabot Credit Facility is more than 20% utilized;
A restrictive covenant that limits the super senior loan (i.e., the Cabot Credit Facility and any super priority hedging liabilities) to value ratio to 0.275; and
Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens.
As of March 31, 2020, the outstanding borrowings under the Cabot Credit Facility were £194.0 million (approximately $241.2 million). The weighted average interest rate was 3.55% and 3.37% for the three months ended March 31, 2020 and 2019, respectively. Available capacity under the Cabot Credit Facility, after taking into account borrowing base and applicable debt covenants, was £181.0 million (approximately $225.0 million) as of March 31, 2020.
Cabot Securitisation Senior Facility
Cabot’s wholly owned subsidiary Cabot Securitisation UK Ltd (“Cabot Securitisation”) entered into a senior facility agreement (the “Senior Facility Agreement”) for a committed amount of £300.0 million. In November 2018, Cabot’s wholly owned subsidiary Cabot Securitisation UK II Ltd (“Cabot Securitisation II”) entered into a non-recourse asset backed senior facility of £50.0 million.
On February 18, 2020, Cabot Securitisation amended and restated its Senior Facility Agreement. Pursuant to the amendment and restatement of the Senior Facility Agreement, the total commitment amount was increased by £50.0 million from £300.0 million to £350.0 million, the repayment date was extended from September 15, 2023 to March 15, 2025 and SONIA replaced LIBOR as the reference rate. Funds drawn under the amended and restated Senior Facility Agreement 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%. Cabot Securitisation has drawn down the additional £50.0 million and used the proceeds to purchase receivables from Cabot Securitisation II in order to effect the termination of the £50.0 million senior facility of Cabot Securitisation II.
As of March 31, 2020, the outstanding borrowings under the Cabot Securitisation Senior Facility were £350.0 million (approximately $435.1 million). The obligations of Cabot Securitisation under the Senior Facility Agreement 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 £377.6 million (approximately
22

Table of Contents
$469.4 million) as of March 31, 2020. The weighted average interest rate was 3.52% and 3.76% for the three months ended March 31, 2020 and 2019 respectively.
Cabot Securitisation and Cabot Securitisation II are securitized financing vehicles and are VIEs for consolidation purposes. Refer to “Note 9: Variable Interest Entities”, for further details.
Note 9: 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.
The Company evaluates its relationships with its VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary. A reconsideration event is significant if it changes the design of the entity or the entity’s equity investment at risk. Prior to the purchase of all of the outstanding equity of CCM not owned by the Company, CCM’s indirect holding Company Janus Holdings S.a r.l. (“Janus Holdings”) was a VIE. Upon completion of the Cabot Transaction on July 24, 2018 and the subsequent change in organizational structure, Janus Holdings no longer qualified as a VIE and CCM is consolidated via the voting interest model.
As of March 31, 2020, 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.
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 10: Income Taxes
The Company recorded income tax expense of $4.6 million on consolidated loss before income taxes of $6.0 million during the three months ended March 31, 2020 and income tax expense of $3.7 million on consolidated income before income taxes of $53.1 million during the three months ended March 31, 2019. The income tax expense for the three months ended March 31, 2020 was primarily attributable to the recording of valuation allowances in certain foreign jurisdictions that incurred pre-tax losses. The income tax expense for the three months ended March 31, 2019 included a tax benefit of approximately $9.1 million related to a tax accounting method change for revenue reporting approved by the Internal Revenue Service during the period.
23

Table of Contents
The effective tax rates for the respective periods are shown below:
Three Months Ended March 31,
 20202019
Federal provision21.0 %21.0 %
State provision(15.6)%2.5 %
Foreign income taxed at different rates(1)
(3.2)%(0.9)%
Change in valuation allowance(2)
(66.5)%1.9 %
Change in tax accounting method(3)
— %(17.1)%
Foreign currency remeasurement(6.4)%0.2 %
Permanent items(4)
(1.7)%0.1 %
Other(3.3)%(0.8)%
Effective tax rate(75.7)%6.9 %
________________________
(1)Relates primarily to the lower tax rates on the income or loss attributable to international operations.
(2)Change in valuation allowance during 2020, recognized in the period under the discrete method, is attributable to losses incurred at certain foreign subsidiaries with cumulative operating losses for tax purposes.
(3)In 2019, includes tax benefit resulting from tax accounting method change.
(4)Represents a provision for nondeductible expenses
The Company utilized the discrete effective tax rate method (“discrete method”) for recording income taxes for the three months ended March 31, 2020. The Company believes the use of the discrete method is more appropriate than the application of the estimated annual effective tax rate (“AETR”) method due to uncertainty in estimating annual pre-tax earnings primarily due to the ongoing COVID-19 pandemic. The Company will re-evaluate the use of the discrete method each quarter until it is deemed appropriate to return to the AETR method.
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 months ended March 31, 2020 and 2019, was immaterial.
The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $8.2 million as of March 31, 2020. These unrecognized tax benefits, if recognized, would result in a net tax benefit of $7.6 million as of March 31, 2020. There was no material change in gross unrecognized tax benefits from December 31, 2019.
The Company has not provided for applicable income or withholding taxes on the undistributed earnings from continuing operations for certain of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as of March 31, 2020 was approximately $117.1 million. Such undistributed earnings are considered permanently reinvested. The Company does not provide deferred taxes on translation adjustments on unremitted earnings under the indefinite reversal exemption. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practical due to the complexities of a hypothetical calculation. Subsidiaries operating outside of the United States for which the Company does not consider under the indefinite reversal exemption have no material undistributed earnings or outside basis differences and therefore no U.S. taxes have been provided.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in response to the COVID-19 pandemic. The CARES Act contains several corporate income tax provisions, including modifications to the limitation on business interest expense and net operating loss regulations, and provides for a payment delay of employer payroll taxes and income taxes. The CARES Act did not have a material impact on the Company’s effective tax rate or income tax provision for the three months ended March 31, 2020.
Note 11: 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
24

Table of Contents
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 March 31, 2020, 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, 2019.
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 March 31, 2020, 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 and other purchase commitment agreements. As of March 31, 2020, the Company had entered into agreements to purchase receivable portfolios with a face value of approximately $3.0 billion for a purchase price of approximately $378.4 million.
Note 12: 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 March 31,
 20202019
Total revenues(1):
United States$208,218  $189,372  
International
Europe(2)
75,965  135,276  
Other geographies4,898  22,429  
80,863  157,705  
Total$289,081  $347,077  
________________________
(1)Total revenues for periods in 2019 are adjusted by net allowances. 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 13: Goodwill and Identifiable Intangible Assets
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 Company performs its annual goodwill impairment testing in the fourth quarter of each year. During the 2019 impairment testing, both of the two reporting units had fair values substantially in excess of their carrying values. In addition to the annual impairment test, the Company is required to assess whether a triggering event has occurred which would require interim impairment testing. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of the reporting units. Further, the Company assessed the current market capitalization, forecasts and the amount of headroom in the 2019 impairment test. The Company determined that it was
25

Table of Contents
not more likely than not that the fair value of each of the reporting units was less than its respective carrying value as of March 31, 2020. Therefore, an interim quantitative impairment test was not performed.
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 March 31,
20202019
Balance, beginning of period$884,185  $868,126  
Effect of foreign currency translation(44,884) 14,758  
Balance, end of period$839,301  $882,884  
The Company’s acquired intangible assets are summarized as follows (in thousands):
 As of March 31, 2020As of December 31, 2019
 Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Customer relationships$60,718  $(15,565) $45,153  $67,897  $(18,191) $49,706  
Developed technologies4,257  (3,744) 513  4,734  (4,124) 610  
Trade name and other5,248  (4,543) 705  6,299  (5,244) 1,055  
Total intangible assets$70,223  $(23,852) $46,371  $78,930  $(27,559) $51,371  

26

Table of Contents

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 COVID-19, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings, or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors including, but not limited to, those set forth in our Annual Report on Form 10-K under “Part I, Item 1A—Risk Factors” and those set forth in “Part II, Item 1A, Risk Factors” of this Quarterly Report could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties.
Our Business
We are an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. We primarily purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-performing loans.
Encore Capital Group, Inc. (“Encore”) has three primary business units: MCM, which consists 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 and Ireland. 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 Colombia, Peru, Mexico and Brazil (which was sold in April 2020). Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India.
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.
27

Table of Contents
Recent Developments
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.
Although such disruptions did not have a material effect on our day-to-day operations for the first quarter of 2020, they are having an adverse impact on our ability to collect and are expected to delay a portion of our near-term collections on purchased receivable portfolios. Therefore, in accordance with the new accounting standard for Financial Instruments - Credit Losses (“CECL”), we have updated our expectations of timing of future collections primarily as a result of COVID-19, the financial impact of which materially impacted our results of operations.
Government Regulation
There have been various governmental actions taken, or proposed, in response to the COVID-19 pandemic, such as limiting debt collections efforts and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees. In addition, in certain jurisdictions courts have closed and/or government actions have affected the litigation process. Government actions have not been consistent across jurisdictions and the efficacy and ultimate effect of such actions is not known. We continue to monitor federal, state and international regulatory developments in relation to COVID-19 and their potential impact on our operations.
MCM (United States)
As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, 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.
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 domestic business. These methods and models allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or strategies and align the accounts we purchase with our business channels to maximize future collections. As a result, we have been able to realize significant returns from the receivables we acquire. We maintain strong relationships with many of the largest financial service providers in the United States.
Cabot (Europe)
In Europe, our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan accounts. We also purchase certain secured mortgage portfolios and portfolios that are in insolvency status, in particular, individual voluntary arrangements.
We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows us to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future collections. As a result, we have been able to realize significant returns from the assets
28

Table of Contents
we have acquired. We maintain strong relationships with many of the largest financial services providers in the United Kingdom and continue to expand in the United Kingdom and the rest of Europe with our acquisitions of portfolios and other credit management services providers.
Purchases and Collections
Portfolio Pricing, Supply and Demand
MCM (United States)
Industry delinquency and charge-off rates have continued to increase, creating higher volumes of charged-off accounts that are sold. In addition, issuers have continued to sell predominantly fresh portfolios. Fresh portfolios are portfolios that are generally sold within six months of the consumer’s account being charged-off by the financial institution. Meanwhile pricing in the first quarter remained favorable. In addition to selling a higher volume of charged-off accounts, issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year. We are closely monitoring the impacts of COVID-19 on pricing and supply as well as collections and cost-to-collect.
We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace. We believe this favors larger participants, such as Encore, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements.
Cabot (Europe)
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 a significant amount of debt to be sold and serviced. In particular, we anticipate strong debt purchasing and servicing opportunities in the secured and small and medium enterprise asset classes given the backlog of non-performing debt that has accumulated in these sectors. Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should further increase debt purchasing opportunities in Spain.
Across all of our European markets, we are closely monitoring the impacts of COVID-19 on pricing and supply of portfolios to purchase. Due to the COVID-19 pandemic, banks have paused portfolio sales to address customers’ needs. As a result, we expect a lower level of supply available for purchase in the near-term.
Purchased Receivables by Geographic Location
The following table summarizes the geographic locations of receivable portfolios we purchased during the periods presented (in thousands):
 Three Months Ended March 31,
 20202019
MCM (United States)$185,252  $174,227  
Cabot (Europe)28,861  83,640  
Other geographies—  4,468  
Total purchases$214,113  $262,335  
During the three months ended March 31, 2020, we invested $214.1 million to acquire receivable portfolios, with face values aggregating $1.7 billion, for an average purchase price of 12.6% of face value. The amount invested in receivable portfolios decreased $48.2 million, or 18.4%, compared with the $262.3 million invested during the three months ended March 31, 2019, to acquire receivable portfolios with face values aggregating $1.7 billion, for an average purchase price of 15.1% of face value.
In the United States, capital deployment increased during the three months ended March 31, 2020, as compared to the corresponding periods in the prior year. The majority of our deployments 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.
29

Table of Contents
In Europe, capital deployment during the three months ended March 31, 2020 decreased as compared to the corresponding periods in the prior year. The decreases were primarily the result of a relatively limited supply of portfolios in the quarter and a continuation of our selective purchasing process in conjunction with a plan to reduce European debt leverage over time.
The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios.
Collections from Purchased Receivables by Channel and Geographic Location
We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from third-party collection agencies that we utilize when we believe they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. The collection agencies channel also includes collections on accounts purchased where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection channels. The following table summarizes the total collections from receivable portfolios by collection channel and geographic area (in thousands):
 Three Months Ended
March 31,
 20202019
MCM (United States):
Call center and digital collections$214,238  $185,255  
Legal collections158,026  141,036  
Collection agencies2,465  3,303  
Subtotal374,729  329,594  
Cabot (Europe):
Call center and digital collections63,789  62,665  
Legal collections42,900  50,658  
Collection agencies37,414  47,477  
Subtotal144,103  160,800  
Other geographies:
Call center and digital collections—  10,200  
Legal collections—  1,530  
Collection agencies8,447  11,729  
Subtotal8,447  23,459  
Total collections from purchased receivables$527,279  $513,853  

Gross collections from purchased receivables increased by $13.4 million, or 2.6%, to $527.3 million during the three months ended March 31, 2020, from $513.9 million during the three months ended March 31, 2019. The increase of gross collections was attributable to increased collections in the United States, offset by decreases in collections in Europe and other geographies.
The increase of collections from purchased receivables in the United States was primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection capacity, and our continued effort in improving liquidation. Our consumer centric collection approach and our capacity buildup are driving a higher proportion of call center collections compared to legal collections in the United States.
The decrease in collections from purchased receivables in Europe was primarily due to a reduced level of capital deployment in recent periods in conjunction with our plan to reduce European debt leverage over time, the impacts of COVID-19, and the unfavorable impact of foreign currency translation, which was primarily the result of the strengthening of the U.S. dollar against the British Pound.
The decrease in collections from purchased receivables in other geographies was primarily due to the sale of our wholly-owned subsidiary Baycorp in August 2019.
30

Table of Contents
COVID-19 and the resulting containment measures, including impacts to the legal collections process, negatively affected collections beginning in late March 2020 and could continue to affect collections and related costs depending on the duration and severity of the resulting containment measures.
Results of Operations
Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows (in thousands, except percentages):
 Three Months Ended March 31,
 20202019
Revenues
Revenue from receivable portfolios$357,365  123.6 %$311,158  89.7 %
Changes in expected current and future recoveries(98,661) (34.1)%—  — %
Servicing revenue28,680  9.9 %34,023  9.8 %
Other revenues1,697  0.6 %529  0.1 %
Total revenues289,081  100.0 %345,710  99.6 %
Allowance reversals on receivable portfolios, net1,367  0.4 %
Total revenues, adjusted by net allowances347,077  100.0 %
Operating expenses
Salaries and employee benefits93,098  32.2 %91,834  26.5 %
Cost of legal collections66,279  22.9 %49,027  14.1 %
Other operating expenses27,164  9.4 %29,614  8.5 %
Collection agency commissions13,176  4.6 %16,002  4.6 %
General and administrative expenses31,877  11.0 %39,547  11.4 %
Depreciation and amortization10,285  3.6 %9,995  2.9 %
Total operating expenses241,879  83.7 %236,019  68.0 %
Income from operations47,202  16.3 %111,058  32.0 %
Other expense
Interest expense(54,662) (18.9)%(54,967) (15.8)%
Other income (expense)1,439  0.5 %(2,976) (0.9)%
Total other expense(53,223) (18.4)%(57,943) (16.7)%
(Loss) income before income taxes(6,021) (2.1)%53,115  15.3 %
Provision for income taxes(4,558) (1.6)%(3,673) (1.1)%
Net (loss) income(10,579) (3.7)%49,442  14.2 %
Net loss (income) attributable to noncontrolling interest125  0.1 %(188) (0.1)%
Net (loss) income attributable to Encore Capital Group, Inc. stockholders$(10,454) (3.6)%$49,254  14.1 %

31

Table of Contents
Results of Operations—Cabot Credit Management Limited
The following table summarizes the operating results contributed by CCM (which does not consolidate the results of its European affiliate Grove Europe S.á r.l.) during the periods presented (in thousands):
 Three Months Ended
March 31,
 20202019
Total revenues$79,964  $129,012  
Total operating expenses(75,239) (70,499) 
Income from operations4,725  58,513  
Interest expense(30,495) (28,955) 
Other income (expense) 1,700  (302) 
(Loss) income before income taxes(24,070) 29,256  
Benefit (provision) for income taxes2,094  (5,431) 
Net (loss) income(21,976) 23,825  
Net loss (income) attributable to noncontrolling interest
125  (188) 
Net (loss) income attributable to Encore Capital Group, Inc. stockholders
$(21,851) $23,637  

32

Table of Contents
Comparison of Results of Operations
Revenues
Our revenues primarily include revenue recognized from engaging in debt purchasing and recovery activities. 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. Revenue generated by such activities primarily includes two components: (1) the accretion of the discount on the negative allowance due to the passage of time, which is included in “Revenue from receivable portfolios” and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries and presented in our consolidated statements of operations as “Changes to expected current and future recoveries.”
Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to our adoption of CECL. We did not establish negative allowance for these pools as we elected 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 also include gains recognized on transfers of financial assets.
Under the previous accounting standard for purchased credit deteriorated assets, we incurred allowance charges when actual cash flows from our receivable portfolios underperform compared to our expectations or when there was a change in the timing of cash flows. We also recorded allowance reversals on pool groups that have historic allowance reserves when actual cash flows from these receivable portfolios outperform our expectations.
33


We have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The following table summarizes revenues for the periods presented (in thousands):
Three months ended March 31,
20202019$ Change% Change
Revenue recognized from portfolio basis$340,815  $285,301  $55,514  19.5 %
ZBA revenue16,550  25,857  (9,307) (36.0)%
Revenue from receivable portfolios357,365  311,158  46,207  14.9 %
Changes in expected current period recoveries10,315  
Changes in expected future period recoveries(108,976) 
Changes in expected current and future recoveries(98,661) 
Servicing revenue28,680  34,023  (5,343) (15.7)%
Other revenues1,697  529  1,168  220.8 %
Total revenues$289,081  $345,710  $(56,629) (16.4)%
Allowance reversals on receivable portfolios, net(1)
1,367  
Total revenues, adjusted by net allowances$347,077  
________________________
(1)Amount includes $2.3 million of allowance reversals for zero-basis portfolios.
Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than 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 unfavorably impacted by foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound by 1.8% during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
The increase in revenue recognized from portfolio basis was primarily due to (1) higher portfolio basis used to calculate revenue, (2) higher expected total future cash flows resulting from a change in expected economic life of static pool groups based on a lifetime expected recovery model upon the adoption of CECL, which led to increased EIR, and (3) increased expected total future cash flows resulting from a change in our accounting policy for court costs, under our new accounting policy, all future expected cash flows, including the expected total recoveries in our legal channel, are included in the initial curve in the establishment of negative allowance, which in turn, increased the EIR.
As discussed above, ZBA revenue represents collections from our legacy ZBA pools, we expect our ZBA revenue continue to decline as we collect on these legacy pools. Since our forecast period is on a rolling 15 year basis after the adoption of CECL, we do not expect to have new ZBA pools in the future.
Under CECL, changes to expected current period recoveries represent over and under-performance in the reporting period. Due to our sustained improvements in portfolio collections driven by liquidation improvement initiatives, collections during the three months ended March 31, 2020 outperformed the projected cash flows, the over-performance was partially offset by a slight shortfall of collections in March. We believe such shortfall was primarily the result of the COVID-19 pandemic.
During the three months ended March 31, 2020, we reassessed our future forecasts of expected recoveries of receivable portfolios based on our best estimate of the potential impact arising from the COVID-19 pandemic. The updated forecasts changed the timing of future recoveries by reducing the forecasted cash flows in 2020. The majority of the shortfall in near-term cash flows is expected to be recovered in 2021 and most of the rest of the shortfall is expected be recovered in subsequent periods. As a result, the change in the total amount of estimated remaining collections (“ERC”) was negligible. The delay in expected future cash flows, when discounted to present-value, resulted in a provision for credit loss adjustment of approximately $109.0 million during the three months ended March 31, 2020. The circumstances around this pandemic are evolving rapidly and will continue to impact our business and our estimation of expected recoveries in future periods. We will continue to monitor the COVID-19 situation closely and update our assumptions accordingly.
34



The following tables summarize collections from purchased receivables, revenue from receivable portfolios, end of period receivable balance and other related supplemental data, by year of purchase (in thousands, except percentages):
 Three Months Ended March 31, 2020As of March 31, 2020
 CollectionsRevenue from Receivable PortfoliosChanges in Expected Current and Future RecoveriesInvestment in Receivable PortfoliosMonthly EIR
United States:
ZBA$15,274  $15,274  $—  $—  — %
20117,249  6,865  (215) 2,021  88.6 %
20128,495  7,664  (480) 4,795  42.0 %
201317,687  18,136  (3,984) 11,564  40.5 %
201414,591  10,089  (2,026) 44,820  6.7 %
201518,302  9,309  (1,079) 73,901  3.8 %
201633,377  16,785  (2,412) 133,941  3.8 %
201755,435  30,850  (1,103) 178,176  5.2 %
201889,418  46,938  (15,629) 362,553  3.8 %
2019102,534  72,048  (2,104) 601,892  3.8 %
202012,367  8,175  (5,010) 176,543  3.6 %
Subtotal374,729  242,133  (34,042) 1,590,206  4.4 %
Europe:
ZBA58  58  —  —  — %
201325,259  22,262  (6,306) 215,495  3.2 %
201423,271  17,887  (4,972) 186,139  3.0 %
201515,173  11,189  (2,096) 143,275  2.4 %
201613,102  11,259  (11,028) 122,994  2.8 %
201723,494  15,696  (9,692) 260,314  1.9 %
201822,658  15,662  (22,493) 305,824  1.6 %
201920,106  14,292  (7,633) 240,124  1.8 %
2020982  1,400  249  28,086  2.6 %
Subtotal144,103  109,705  (63,971) 1,502,251  2.3 %
Other geographies:
ZBA1,218  1,218  —  —  — %
2014 (1)
1,174  545  (19) 47,819  100.2 %
20151,557  941  76  4,544  17.1 %
2016971  686  (249) 3,391  5.1 %
20171,875  1,140  (323) 11,586  6.1 %
20181,580  955  (120) 5,986  3.7 %
201972  42  (13) 235  4.6 %
2020—  —  —  —  — %
Subtotal8,447  5,527  (648) 73,561  67.7 %
Total$527,279  $357,365  $(98,661) $3,166,018  3.4 %
________________________
(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.

35


 Three Months Ended March 31, 2019As of March 31, 2019
 CollectionsRevenue from Receivable PortfoliosNet
Reversal
(Portfolio
Allowance)
Unamortized
Balances
Monthly EIR
United States:
ZBA(1)
$25,531  $23,270  $2,267  $—  — %
20112,764  2,280  —  2,422  27.4 %
20127,336  6,096  273  8,994  20.2 %
201322,034  19,179  (52) 22,838  25.6 %
201419,667  10,822  1,090  65,813  5.0 %
201524,968  10,196  —  109,436  2.8 %
201647,454  20,653  (896) 208,176  3.0 %
201777,294  35,626  —  279,667  3.8 %
201894,281  52,674  —  527,432  3.1 %
20198,265  5,892  —  171,684  3.2 %
Subtotal329,594  186,688  2,682  1,396,462  3.8 %
Europe:
ZBA(1)
91  91  —  —  — %
201330,110  23,297  —  247,509  3.1 %
201428,120  19,679  (175) 228,433  2.7 %
201519,509  11,147  (256) 177,460  2.0 %
201616,823  11,279  (29) 157,254  2.4 %
201732,302  17,366  —  333,760  1.7 %
201830,079  18,991  —  418,012  1.5 %
20193,766  2,993  —  83,741  1.6 %
Subtotal160,800  104,843  (460) 1,646,169  2.1 %
Other geographies:
ZBA(1)
2,542  2,542  —  —  — %
2014945  4,654  —  64,928  2.4 %
20155,410  4,418  —  18,667  7.3 %
20164,239  2,067  12  24,867  2.6 %
20174,757  2,927  —  30,071  3.2 %
20185,131  2,864  (867) 26,284  3.4 %
2019435  155  —  4,139  3.5 %
Subtotal23,459  19,627  (855) 168,956  3.3 %
Total$513,853  $311,158  $1,367  $3,211,587  2.9 %
________________________
(1)Zero basis revenue typically has a 100% revenue recognition rate. However, collections on ZBA pool groups where a valuation allowance remains must first be recorded as an allowance reversal until the allowance for that pool group is zero. Once the entire valuation allowance is reversed, the revenue recognition rate will become 100%.
The decrease in servicing revenues was primarily attributable to the sale of Baycorp in August 2019. Through Baycorp, we earned servicing revenues during the three months ended March 31, 2019, the decrease was also driven by unfavorable impact of foreign currency translation, which was primarily the result of the strengthening of the U.S. dollar against the British Pound.
The increase in other revenues was due to the increase in sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios in Europe and LAAP.

36

Table of Contents
Operating Expenses
The following table summarizes operating expenses for the periods presented (in thousands):
Three Months Ended March 31,
20202019$ Change% Change
Salaries and employee benefits$93,098  $91,834  $1,264  1.4 %
Cost of legal collections66,279  49,027  17,252  35.2 %
Other operating expenses27,164  29,614  (2,450) (8.3)%
Collection agency commissions13,176  16,002  (2,826) (17.7)%
General and administrative expenses31,877  39,547  (7,670) (19.4)%
Depreciation and amortization10,285  9,995  290  2.9 %
Total operating expenses$241,879  $236,019  $5,860  2.5 %

Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international operating expenses, and the weakening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international operating expenses. Our operating expenses were favorably impacted by foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound by 1.8% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
Operating expenses are explained in more detail as follows:
Salaries and Employee Benefits
The increase in salaries and employee benefits was primarily due to the following reasons:
Increase in salaries and employee benefits at our domestic sites as part of our initiative to increase collections capacity; and
Increased stock compensation due to larger expense reversals in the prior period;
Partially offset by a decrease in headcount in other geographies as a result of the sale of Baycorp and the favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound.
Cost of Legal Collections
Cost of legal collections primarily includes contingent fees paid to our external network of attorneys and the cost of litigation. We pursue legal collections using a network of attorneys that specialize in collection matters and through our internal legal channel. Under the agreements with our contracted attorneys, we advance certain out-of-pocket court costs. Effective January 1, 2020, we no longer capitalize upfront court costs and recognize a portion of court costs as expense based on a loss-rate methodology, but rather, we expense all court costs as incurred. Cost of legal collections does not include internal legal channel employee costs, which are included in salaries and employee benefits in our consolidated statements of operations.
Three months ended March 31,
20202019$ Change% Change
Court costs$41,355  $20,479  $20,876  101.9 %
Legal collection fees24,924  28,548  (3,624) (12.7)%
Total cost of legal collections$66,279  $49,027  $17,252  35.2 %
The increase in cost of legal collections was primarily due to the following reasons:
No longer capitalizing upfront court costs but rather expensing all court costs as incurred;
Partially offset by a decline in legal collection fees.
Other Operating Expenses
The decrease in other operating expenses was primarily due to the following reasons:
37

Table of Contents
The favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound;
Reduced expenditures for temporary services; and
Lower collection expenses primarily due to the sale of Baycorp in August 2019.
Collection Agency Commissions
Collection agency commissions are predominately in Europe and Latin America and vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally. Commissions, as a percentage of collections in this channel also vary from period to period depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time, and commission rates for purchased bankruptcy portfolios are lower than the commission rates for charged-off credit card accounts.
The decrease in collections agency commissions was primarily due to the following reasons:
Other geographies decreased due to progressive decrement of portfolio collections during the period; and
Europe decreased due to the favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound.
General and Administrative Expenses
The decrease in general and administrative expense was primarily due to the following reasons:
Reduced consulting fees and infrastructure costs at our domestic sites;
Lower general and administrative expenses due to the sale of Baycorp in August 2019; and
The favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound;
Depreciation and Amortization
The increase in depreciation and amortization expense was primarily due to the following reasons:
Increased depreciation expense primarily incurred at our domestic facilities;
Partially offset by the favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound.
Interest Expense
The following table summarizes our interest expense (in thousands):
 Three Months Ended March 31,
 20202019$ Change% Change
Stated interest on debt obligations$48,755  $48,318  $437  0.9 %
Amortization of loan costs2,778  3,326  (548) (16.5)%
Amortization of debt discount
3,129  3,323  (194) (5.8)%
Total interest expense$54,662  $54,967  $(305) (0.6)%
The decrease in interest expense was primarily due to the following reasons:
Favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound;
Lower balances on the Encore Term Loan Facility, Encore Senior Secured Notes, and Cabot Credit Facilities;
Decrease in London Interbank Offered Rate (“LIBOR”) which resulted in decreased interest expense for the Encore Revolving Credit Facility; and
Partially offset by the effect from higher balances on the Encore Revolving Credit Facility.
38

Table of Contents
Other Income (Expense)
Other income or expense consists primarily of foreign currency exchange gains or losses, interest income, and gains or losses recognized on certain transactions outside of our normal course of business. Other income was $1.4 million during the three months ended March 31, 2020 and other expense was $3.0 million during the three months ended March 31, 2019. The change in other income (expense) was primarily due to the following reasons:
Other income recognized during the three months ended March 31, 2020 based on fair value changes for currency exchange forward contracts which are not designated as hedge instruments for accounting purposes;
Other expense recognized during the three months ended March 31, 2019 primarily due to foreign currency exchange losses.
Provision for Income Taxes
We recorded income tax expense of $4.6 million on consolidated loss before income taxes of $6.0 million during the three months ended March 31, 2020 and income tax expense of $3.7 million on consolidated income before income taxes of $53.1 million during the three months ended March 31, 2019. The income tax expense for the three months ended March 31, 2020 was primarily attributable to the recording of valuation allowances in certain foreign jurisdictions that incurred pre-tax losses. The income tax expense for the three months ended March 31, 2019 included a tax benefit of approximately $9.1 million related to a tax accounting method change for revenue reporting approved by the Internal Revenue Service during the period.
The effective tax rates for the respective periods are shown below:
Three Months Ended March 31,
 20202019
Federal provision21.0 %21.0 %
State provision(15.6)%2.5 %
Foreign income taxed at different rates(1)
(3.2)%(0.9)%
Change in valuation allowance(2)
(66.5)%1.9 %
Change in tax accounting method(3)
— %(17.1)%
Foreign currency remeasurement(6.4)%0.2 %
Permanent items(4)
(1.7)%0.1 %
Other(3.3)%(0.8)%
Effective tax rate(75.7)%6.9 %
________________________
(1)Relates primarily to the lower tax rates on the income or loss attributable to international operations.
(2)Change in valuation allowance during 2020, recognized in the period under the discrete method, is attributable to losses incurred at certain foreign subsidiaries with cumulative operating losses for tax purposes.
(3)In 2019, includes tax benefit resulting from tax accounting method change.
(4)Represents a provision for nondeductible expenses.
We utilized the discrete effective tax rate method (“discrete method”) for recording income taxes for the three months ended March 31, 2020. We believe the use of the discrete method is more appropriate than the application of the estimated annual effective tax rate (“AETR”) method due to uncertainty in estimating annual pre-tax earnings primarily due to the ongoing COVID-19 pandemic. We will re-evaluate the use of the discrete method each quarter until it is deemed appropriate to return to the AETR method.
Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, and net operating losses. We regularly evaluate the realizability of our deferred income tax assets and assess the need for a valuation allowance, including considerations of whether it is more likely than not that the deferred income tax assets will be realized. The assessment of realizability requires significant judgement and our projections of future taxable income required to fully realize the recorded amount of deferred tax assets reflect numerous assumptions about our operating business and investments, and are subject to change as conditions change specific to our operating business, investments or general economic conditions. Adverse changes in certain jurisdictions could result in the need to record or increase the valuation allowance, resulting in a charge against earnings in the respective period.
Our subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2026. The impact of the tax holiday in Costa Rica for the three months ended March 31, 2020 and 2019, was immaterial.
39

Table of Contents
We had gross unrecognized tax benefits, inclusive of penalties and interest, of $8.2 million as of March 31, 2020. These unrecognized tax benefits, if recognized, would result in a net tax benefit of $7.6 million as of March 31, 2020. There was no material change in gross unrecognized tax benefits from December 31, 2019.
We have not provided for applicable income or withholding taxes on the undistributed earnings from continuing operations for certain of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as of March 31, 2020 was approximately $117.1 million. Such undistributed earnings are considered permanently reinvested. We do not provide for deferred taxes on translation adjustments on unremitted earnings under the indefinite reversal exemption. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practical due to the complexities of a hypothetical calculation. Subsidiaries operating outside of the United States for which we do not consider under the indefinite reversal exemption have no material undistributed earnings or outside basis differences and therefore no U.S. taxes have been provided.
Non-GAAP Disclosure
In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.
Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.
Adjusted Earnings (Loss) Per Share. Management uses non-GAAP adjusted net income (loss) and adjusted earnings (loss) per share attributable to Encore to assess operating performance and to highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. Adjusted net income (loss) attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible notes and exchangeable notes, acquisition, integration and restructuring related expenses, amortization of certain acquired intangible assets and other charges or gains that are not indicative of ongoing operations.
The following table provides a reconciliation between net income (loss) and diluted earnings (loss) per share attributable to Encore calculated in accordance with GAAP, to adjusted net income (loss) and adjusted earnings (loss) per share attributable to Encore, respectively (in thousands, except per share data):
 Three Months Ended March 31,
 20202019
 $Per Diluted Share$Per Diluted Share
GAAP net (loss) income attributable to Encore, as reported
$(10,454) $(0.33) $49,254  $1.57  
Adjustments:
Convertible notes and exchangeable notes non-cash interest and issuance cost amortization
3,977  0.13  4,002  0.13  
Acquisition, integration and restructuring related expenses(1)
187  0.01  1,208  0.04  
Amortization of certain acquired intangible assets(2)
1,643  0.05  1,877  0.06  
Income tax effect of above non-GAAP adjustments and certain discrete tax items(3)
(1,250) (0.05) (1,383) (0.05) 
Change in tax accounting method(4)
—  —  (9,070) (0.29) 
Adjusted net (loss) income attributable to Encore
$(5,897) $(0.19) $45,888  $1.46  
________________________
(1)Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
40

Table of Contents
(2)As we acquire debt solution service providers around the world, we also acquire intangible assets, such as trade names and customer relationships. These intangible assets are valued at the time of the acquisition and amortized over their estimated lives. We believe that amortization of acquisition-related intangible assets, especially the amortization of an acquired company’s trade names and customer relationships, is the result of pre-acquisition activities. In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by operations during any reporting period. As a result, the amortization of certain acquired intangible assets is excluded from our adjusted income (loss) attributable to Encore and adjusted income (loss) per share.
(3)Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred. Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing operations.
(4)Amount represents the benefit from the tax accounting method change related to revenue reporting. We adjust for certain discrete tax items that are not indicative of our ongoing operations.
Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income (loss) before discontinued operations, interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows (in thousands):
 Three Months Ended March 31,
20202019
GAAP net (loss) income, as reported$(10,579) $49,442  
Adjustments:
Interest expense54,662  54,967  
Interest income(1,000) (1,022) 
Provision for income taxes4,558  3,673  
Depreciation and amortization10,285  9,995  
Stock-based compensation expense4,527  1,826  
Acquisition, integration and restructuring related expenses(1)
187  1,208  
Adjusted EBITDA$62,640  $120,089  
Collections applied to principal balance(2)
$268,575  $201,328  
________________________
(1)Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
(2)Amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) changes in expected recoveries for 2020. Amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios for 2019.
41

Table of Contents
Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections for our portfolio purchasing and recovery business. Adjusted operating expenses for our portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out operating expenses related to non-portfolio purchasing and recovery business, acquisition, integration and restructuring related operating expenses, stock-based compensation expense, settlement fees and related administrative expenses and other charges or gains that are not indicative of ongoing operations. Adjusted operating expenses related to our portfolio purchasing and recovery business for the periods presented are as follows (in thousands):
 Three Months Ended March 31,
20202019
GAAP total operating expenses, as reported$241,879  $236,019  
Adjustments:
Operating expenses related to non-portfolio purchasing and recovery business(1)
(41,489) (46,082) 
Stock-based compensation expense(4,527) (1,826) 
Acquisition, integration and restructuring related expenses(2)
(187) (1,208) 
Adjusted operating expenses related to portfolio purchasing and recovery business
$195,676  $186,903  
________________________
(1)Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily engage in fee-based business, as well as corporate overhead not related to our portfolio purchasing and recovery business.
(2)Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.
Cost per Dollar Collected
We utilize adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections from purchased receivables for our portfolio purchasing and recovery business. The following table summarizes our cost per dollar collected (defined as adjusted operating expenses as a percentage of collections from purchased receivables) by geographic location during the periods presented:
 Three Months Ended March 31,
 20202019
United States39.5 %39.6 %
Europe29.9 %27.6 %
Other geographies52.6 %51.2 %
Overall cost per dollar collected37.1 %36.4 %
As discussed in the “Accounting Policy Update” section in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements, effective January 1, 2020, we expense all court costs as incurred and no longer capitalize such costs as Deferred Court Costs based on a loss-rate methodology. This accounting policy change increased the cost-to-collect metric as compared to prior periods because the court costs expense recognized in prior periods only represented costs we did not expect to recover. The accounting policy change has no impact on the amount of court cost payments incurred.
The change in cost per dollar collected was primarily due to the following reasons:
Cost-to-collect increased due to the impact of change in accounting policy relating to court costs as discussed above;
Despite the above increase due to accounting policy change, cost-to-collect in the United States decreased due to a combination of (1) continued improvement in operational efficiencies in the collection process, (2) collection mix shifting towards non-legal collection, which has lower cost-to-collect, and (3) higher total collections that blended down fixed cost and reduced overall cost-to-collect;
Cost-to-collect in LAAP is expected to stay at an elevated level and will continue to fluctuate over time.
Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, product mix, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the changing regulatory and legislative environment.

42

Table of Contents
Supplemental Performance Data
The tables included in this supplemental performance data section include detail for purchases, collections and ERC by year of purchase.
Our collection expectations are based on account characteristics and economic variables. Additional adjustments are made to account for qualitative factors that may affect the payment behavior of our consumers and servicing related adjustments to ensure our collection expectations are aligned with our operations. We continue to refine our process of forecasting collections both domestically and internationally with a focus on operational enhancements. Our collection expectations vary between types of portfolio and geographic location. For example, in 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.
43

Table of Contents
Cumulative Collections from Purchased Receivables to Purchase Price Multiple
The following table summarizes our receivable purchases and related gross collections by year of purchase (in thousands, except multiples):
Year of
Purchase
Purchase
Price(1)
Cumulative Collections through March 31, 2020
<20112011201220132014201520162017201820192020
Total(2)
Multiple(3)
United States:
<2011$1,761,007  $3,222,155  $637,415  $458,336  $328,076  $236,557  $180,622  $129,676  $99,169  $80,397  $65,855  $15,151  $5,453,409  3.1  
2011383,805  —  123,596  301,949  226,521  155,180  112,906  77,257  56,287  41,148  33,445  7,372  1,135,661  3.0  
2012548,818  —  —  187,721  350,134  259,252  176,914  113,067  74,507  48,832  37,327  8,495  1,256,249  2.3  
2013551,920  —  —  —  230,051  397,646  298,068  203,386  147,503  107,399  84,665  17,687  1,486,405  2.7  
2014517,774  —  —  —  —  144,178  307,814  216,357  142,147  94,929  69,059  14,591  989,075  1.9  
2015499,371  —  —  —  —  —  105,610  231,102  186,391  125,673  85,042  18,302  752,120  1.5  
2016553,544  —  —  —  —  —  —  110,875  283,035  234,690  159,279  33,377  821,256  1.5  
2017528,642  —  —  —  —  —  —  —  111,902  315,853  255,048  55,435  738,238  1.4  
2018631,288  —  —  —  —  —  —  —  —  175,042  351,696  89,418  616,156  1.0  
2019678,821  —  —  —  —  —  —  —  —  —  174,693  102,534  277,227  0.4  
2020185,240  —  —  —  —  —  —  —  —  —  —  12,367  12,367  0.1  
Subtotal6,840,230  3,222,155  761,011  948,006  1,134,782  1,192,813  1,181,934  1,081,720  1,100,941  1,223,963  1,316,109  374,729  13,538,163  2.0  
Europe:
2013619,079  —  —  —  134,259  249,307  212,129  165,610  146,993  132,663  113,228  25,316  1,179,505  1.9  
2014623,129  —  —  —  —  135,549  198,127  156,665  137,806  129,033  105,337  23,271  885,788  1.4  
2015419,941  —  —  —  —  —  65,870  127,084  103,823  88,065  72,277  15,173  472,292  1.1  
2016258,218  —  —  —  —  —  —  44,641  97,587  83,107  63,198  13,102  301,635  1.2  
2017461,571  —  —  —  —  —  —  —  68,111  152,926  118,794  23,494  363,325  0.8  
2018433,302  —  —  —  —  —  —  —  —  49,383  118,266  22,658  190,307  0.4  
2019273,354  —  —  —  —  —  —  —  —  —  44,118  20,107  64,225  0.2  
202028,861  —  —  —  —  —  —  —  —  —  —  982  982  0.0  
Subtotal3,117,455  —  —  —  134,259  384,856  476,126  494,000  554,320  635,177  635,218  144,103  3,458,059  1.1  
Other geographies:
20126,721  —  —  —  3,848  2,561  1,208  542  551  422  390  70  9,592  1.4  
201329,568  —  —  —  6,617  17,615  10,334  4,606  3,339  2,468  1,573  291  46,843  1.6  
201486,989  —  —  —  —  9,652  16,062  18,403  9,813  7,991  6,472  1,350  69,743  0.8  
201583,198  —  —  —  —  —  15,061  57,064  43,499  32,622  17,499  1,557  167,302  2.0  
201664,450  —  —  —  —  —  —  29,269  39,710  28,992  16,078  1,652  115,701  1.8  
201749,670  —  —  —  —  —  —  —  15,471  23,075  15,383  1,875  55,804  1.1  
201826,371  —  —  —  —  —  —  —  —  12,910  15,008  1,580  29,498  1.1  
20192,668  —  —  —  —  —  —  —  —  —  3,198  72  3,270  1.2  
2020—  —  —  —  —  —  —  —  —  —  —  —  —  —  
Subtotal349,635  —  —  —  10,465  29,828  42,665  109,884  112,383  108,480  75,601  8,447  497,753  1.4  
Total$10,307,320  $3,222,155  $761,011  $948,006  $1,279,506  $1,607,497  $1,700,725  $1,685,604  $1,767,644  $1,967,620  $2,026,928  $527,279  $17,493,975  1.7  
________________________
(1)Adjusted for Put-Backs and Recalls. Put-Backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.
(2)Cumulative collections from inception through March 31, 2020, excluding collections on behalf of others.
(3)Cumulative Collections Multiple (“Multiple”) through March 31, 2020 refers to collections as a multiple of purchase price.
44

Table of Contents
Total Estimated Collections from Purchased Receivables to Purchase Price Multiple
The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross collections from purchased receivables, by year of purchase (in thousands, except multiples):
Purchase Price(1)
Historical
Collections(2)
Estimated
Remaining
Collections
Total Estimated
Gross Collections
Total Estimated Gross
Collections to
Purchase Price
United States:
<2011$1,761,007  $5,453,409  $156,749  $5,610,158  3.2  
2011383,805  1,135,661  73,676  1,209,337  3.2  
2012548,818  1,256,249  83,474  1,339,723  2.4  
2013(3)
551,920  1,486,405  227,630  1,714,035  3.1  
2014(3)
517,774  989,075  150,849  1,139,924  2.2  
2015499,371  752,120  165,897  918,017  1.8  
2016553,544  821,256  305,060  1,126,316  2.0  
2017528,642  738,238  477,336  1,215,574  2.3  
2018631,288  616,156  776,619  1,392,775  2.2  
2019678,821  277,227  1,327,476  1,604,703  2.4  
2020185,240  12,367  408,161  420,528  2.3  
Subtotal6,840,230  13,538,163  4,152,927  17,691,090  2.6  
Europe:
2013(3)
619,079  1,179,505  864,253  2,043,758  3.3  
2014(3)
623,129  885,788  651,050  1,536,838  2.5  
2015(3)
419,941  472,292  421,602  893,894  2.1  
2016258,218  301,635  334,423  636,058  2.5  
2017461,571  363,325  586,845  950,170  2.1  
2018433,302  190,307  633,275  823,582  1.9  
2019273,354  64,225  528,265  592,490  2.2  
202028,861  982  71,820  72,802  2.5  
Subtotal3,117,455  3,458,059  4,091,533  7,549,592  2.4  
Other geographies:
20126,721  9,592  340  9,932  1.5  
201329,568  46,843  1,629  48,472  1.6  
201486,989  69,743  50,060  119,803  1.4  
201583,198  167,302  20,132  187,434  2.3  
201664,450  115,701  11,131  126,832  2.0  
201749,670  55,804  32,047  87,851  1.8  
201826,371  29,498  12,406  41,904  1.6  
20192,668  3,270  513  3,783  1.4  
2020—  —  —  —  —  
Subtotal349,635  497,753  128,258  626,011  1.8  
Total$10,307,320  $17,493,975  $8,372,718  $25,866,693  2.5  
________________________
(1)Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. Put-Backs and Recalls represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.
(2)Cumulative collections from inception through March 31, 2020, excluding collections on behalf of others.
(3)Includes portfolios acquired in connection with certain business combinations.

45

Table of Contents
Estimated Remaining Gross Collections by Year of Purchase
The following table summarizes our estimated remaining gross collections from purchased receivable portfolios and estimated future cash flows from real estate-owned assets by year of purchase (in thousands):
 
Estimated Remaining Gross Collections by Year of Purchase(1)
 
2020(3)
20212022202320242025202620272028>2028
Total(2)
United States:
<2011$34,003  $42,770  $26,618  $18,485  $12,801  $8,718  $5,834  $3,800  $2,298  $1,422  $156,749  
201115,679  19,195  11,871  8,334  5,874  4,142  2,927  2,074  1,473  2,107  73,676  
201217,801  21,976  13,273  9,297  6,541  4,611  3,255  2,304  1,635  2,781  83,474  
2013(4)
41,433  58,706  37,648  26,573  18,807  13,338  9,464  6,717  4,769  10,175  227,630  
2014(4)
31,726  39,781  24,335  16,725  11,468  8,076  5,713  4,047  2,869  6,109  150,849  
201538,224  44,482  27,102  18,120  12,206  7,948  5,446  3,835  2,706  5,828  165,897  
201669,574  83,698  46,158  31,673  22,481  15,859  10,957  7,709  5,419  11,532  305,060  
2017110,650  131,493  76,280  48,620  33,282  23,388  16,531  11,566  8,162  17,364  477,336  
2018188,052  219,573  130,602  84,092  53,048  34,947  23,049  15,144  9,890  18,222  776,619  
2019289,653  405,226  207,586  129,623  88,517  61,172  43,469  31,721  23,032  47,477  1,327,476  
202066,269  118,820  82,316  46,276  29,463  19,988  13,595  9,693  6,972  14,769  408,161  
Subtotal903,064  1,185,720  683,789  437,818  294,488  202,187  140,240  98,610  69,225  137,786  4,152,927  
Europe:
2013(4)
65,016  97,245  89,756  82,763  75,784  68,460  61,018  54,687  49,026  220,498  864,253  
2014(4)
53,447  82,619  72,490  64,437  57,662  50,983  43,579  38,471  34,418  152,944  651,050  
2015(4)
33,723  54,501  46,837  41,600  37,365  33,430  29,283  25,112  22,306  97,445  421,602  
201628,748  56,789  54,024  37,176  29,545  25,543  21,344  17,597  14,385  49,272  334,423  
201754,962  89,183  77,170  65,197  55,192  45,740  37,969  32,331  26,477  102,624  586,845  
201855,516  93,158  79,957  68,919  59,021  51,049  43,671  36,832  31,218  113,934  633,275  
201947,943  84,335  71,488  60,228  50,094  40,533  33,591  28,671  24,603  86,779  528,265  
20205,231  12,610  11,064  8,806  7,193  5,802  4,756  3,679  2,969  9,710  71,820  
Subtotal344,586  570,440  502,786  429,126  371,856  321,540  275,211  237,380  205,402  833,206  4,091,533  
Other geographies:
2012107  149  84  —  —  —  —  —  —  —  340  
2013459  591  387  192  —  —  —  —  —  —  1,629  
20145,108  8,163  6,681  6,328  5,643  4,471  2,687  1,455  1,367  8,157  50,060  
20152,894  3,776  3,197  2,605  1,814  1,212  840  736  636  2,422  20,132  
20163,388  4,036  2,498  669  263  177  100  —  —  —  11,131  
20175,539  6,974  5,005  3,689  2,126  1,840  1,311  719  692  4,152  32,047  
20182,899  3,645  2,420  1,650  813  435  284  186  74  —  12,406  
2019134  159  99  67  45   —  —  —  —  513  
2020—  —  —  —  —  —  —  —  —  —  —  
Subtotal20,528  27,493  20,371  15,200  10,704  8,144  5,222  3,096  2,769  14,731  128,258  
Portfolio ERC1,268,178  1,783,653  1,206,946  882,144  677,048  531,871  420,673  339,086  277,396  985,723  8,372,718  
REO ERC(5)
13,461  35,374  17,655  8,913  7,148  3,615  64  —  —  —  86,230  
Total ERC$1,281,639  $1,819,027  $1,224,601  $891,057  $684,196  $535,486  $420,737  $339,086  $277,396  $985,723  $8,458,948  
________________________
(1)As of March 31, 2020, ERC for Zero Basis Portfolios include approximately $156.7 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and other geographies was immaterial.
(2)Represents the expected remaining gross cash collections on purchased portfolios over a 180-month period. As of March 31, 2020, ERC from purchased receivables for 84-month and 120-month periods were:
84-Month ERC120-Month ERC
   United States$3,875,245  $4,072,425  
   Europe2,878,292  3,478,009  
   Other geographies108,446  116,744  
Total$6,861,983  $7,667,178  
46

Table of Contents
(3)2020 amount consists of nine months data from April 1, 2020 to December 31, 2020.
(4)Includes portfolios acquired in connection with certain business combinations.
(5)Real estate-owned assets ERC includes approximately $82.5 million and $3.7 million of estimated future cash flows for Europe and Other Geographies, respectively. As of December 31, 2019, estimated future cash flows for real estate-owned assets were approximately $88.0 million and $4.4 million, for Europe and Other Geographies, respectively.
Estimated Future Collections Applied to Principal
As of March 31, 2020, we had $3.2 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands):
Years Ending December 31,
United States

Europe

Other Geographies
Total
2020(1)
$262,775  $40,238  $9,895  $312,908  
2021532,398  195,560  15,337  743,295  
2022281,131  179,894  12,456  473,481  
2023166,963  151,215  7,899  326,077  
2024107,866  131,691  6,028  245,585  
202572,481  114,933  4,952  192,366  
202649,487  97,881  2,961  150,329  
202735,029  84,748  1,603  121,380  
202825,029  74,317  1,432  100,778  
202917,517  66,645  1,365  85,527  
203012,430  62,460  1,363  76,253  
20319,006  62,480  1,360  72,846  
20326,765  64,548  1,358  72,671  
20335,500  70,066  1,356  76,922  
20345,104  79,311  1,354  85,769  
2035725  26,264  2,842  29,831  
Total$1,590,206  $1,502,251  $73,561  $3,166,018  
________________________
(1)2020 amount consists of nine months data from April 1, 2020 to December 31, 2020.
47

Table of Contents
Headcount by Geographic Location and Function
The following table summarizes our headcount by geographic location and by function:
Headcount as of March 31,
20202019
United States:
General & Administrative1,137  1,097  
Account Manager416  495  
Subtotal1,553  1,592  
Europe:
General & Administrative1,079  1,049  
Account Manager2,234  2,111  
Subtotal3,313  3,160  
Other Geographies(1):
General & Administrative621  1,353  
Account Manager2,137  1,830  
Subtotal2,758  3,183  
Total7,624  7,935  
________________________
(1)Headcount as of March 31, 2019 includes 170 general and administrative and 361 account manager Baycorp employees.

Purchases by Quarter
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 ValuePurchase 
Price
Q1 2018973  $1,799,804  $276,762  
Q2 20181,031  2,870,456  359,580  
Q3 2018706  1,559,241  248,691  
Q4 2018766  2,272,113  246,865  
Q1 2019854  1,732,977  262,335  
Q2 2019778  2,307,711  242,697  
Q3 20191,255  5,313,092  259,910  
Q4 2019803  2,241,628  234,916  
Q1 2020943  1,703,021  214,113  

48

Table of Contents
Liquidity and Capital Resources
Liquidity
The following table summarizes our cash flow activities for the periods presented (in thousands):
 Three Months Ended March 31,
 20202019
(Unaudited)
Net cash provided by operating activities$70,805  $10,991  
Net cash used in investing activities(43,255) (69,514) 
Net cash (used in) provided by financing activities(21,762) 71,547  
Operating Cash Flows
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in expected future recoveries, allowance charges and stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.
Net cash provided by operating activities was $70.8 million and $11.0 million during the three months ended March 31, 2020 and 2019, respectively. Included in the net loss of $10.6 million during the three months ended March 31, 2020 was an adjustment of $98.7 million due to the changes in our expected current and future recoveries. After adjusting for this item, net cash provided by operating activities significantly increased. Additionally, prepaid income tax and income taxes payable provided $15.0 million and consumed $30.2 million of cash during the three months ended March 31, 2020 and 2019, respectively, while accounts payable, accrued liabilities and other liabilities consumed $46.5 million and $67.8 million during the three months ended March 31, 2020 and 2019, respectively.
Investing Cash Flows
Net cash used in investing activities was $43.3 million and $69.5 million during the three months ended March 31, 2020 and 2019, respectively. Cash used in investing activities is primarily affected by receivable portfolio purchases offset by collection proceeds applied to the principal of our receivable portfolios, net of the change in principal balance due to the change in expected future recoveries or allowance adjustments. Receivable portfolio purchases were $209.0 million and $258.6 million during the three months ended March 31, 2020 and 2019, respectively. Collection proceeds applied to the principal of our receivable portfolios, net, were $169.9 million and $202.7 million during the three months ended March 31, 2020 and 2019, respectively. Capital expenditures for fixed assets acquired with internal cash flows were $7.5 million and $10.2 million for the three months ended March 31, 2020 and 2019, respectively.
Financing Cash Flows
Net cash used in financing activities was $21.8 million during the three months ended March 31, 2020, and net cash provided by financing activities was $71.5 million during the three months ended March 31, 2019. Financing cash flows are generally affected by borrowings under our credit facilities and proceeds from various debt offerings, offset by repayments of amounts outstanding under our credit facilities and repayments of various notes. Borrowings under our credit facilities were $171.9 million and $196.3 million during the three months ended March 31, 2020 and 2019, respectively. Repayments of amounts outstanding under our credit facilities were $167.2 million and $119.9 million during the three months ended March 31, 2020 and 2019, respectively. Repayment of senior secured notes was $16.3 million during the three months ended March 31, 2020.
Capital Resources
Historically, we have met our cash requirements by utilizing our cash flows from operations, cash collections from our investment in receivable portfolios, bank borrowings, debt offerings, and equity offerings. Depending on the capital markets, we consider additional financings to fund our operations and acquisitions. We continue to explore possible synergies with respect to Cabot, including in connection with potential debt financing options. From time to time, we may repurchase outstanding debt or equity and/or restructure or refinance debt obligations. Our primary cash requirements have included the purchase of receivable portfolios, entity acquisitions, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes.
49

Table of Contents
Currently, all of our portfolio purchases are funded with cash from operations, cash collections from our investment in receivable portfolios, and our bank borrowings.
We are in material compliance with all covenants under our financing arrangements. See “Note 8: Borrowings” to our consolidated financial statements for a further discussion of our debt.
Our cash and cash equivalents as of March 31, 2020 consisted of $55.7 million held by U.S.-based entities and $132.5 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that our U.S. sources of cash and liquidity are sufficient to meet our business needs in the United States.
Included in cash and cash equivalents is cash that was collected on behalf of, and remains payable to, third-party clients. The balance of cash held for clients was $19.4 million as of March 31, 2020.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from our consumers, and other risks detailed in Risk Factors. However, we believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, cash collections from our investment in receivable portfolios, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and businesses.
50

Table of Contents
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Rates. As of March 31, 2020, 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, 2019.
Interest Rates. As of March 31, 2020, 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, 2019.
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 March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On January 1, 2020, we adopted the new accounting standard for Financial Instruments - Credit Losses (“CECL”). As a result, we implemented changes to policies, processes, systems, and controls over estimating the allowance for credit losses.
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.
51

Table of Contents
PART II – OTHER INFORMATION

Item 1 – Legal Proceedings
Information with respect to this item may be found in “Note 11, Commitments and Contingencies,” to the consolidated financial statements.
Item 1A – Risk Factors
Except for the additional risk factor set forth below, there is no material change in the information reported under “Part I-Item 1A-Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
The impact of the COVID-19 pandemic and the measures implemented to contain the spread of the virus have had, and are expected to continue to have, a material adverse impact on our business and results of operations.
The COVID-19 pandemic and resulting containment measures have caused economic and financial disruptions that have adversely affected, and could continue to materially adversely affect, our business and results of operations. The extent to which the pandemic will continue to materially adversely affect our business and results of operations will depend on future developments that we are not able to predict, including the duration, spread and severity of the outbreak; the nature, extent and effectiveness of containment measures; the extent and duration of the effect on the economy; and how quickly and to what extent normal economic and operating conditions can resume. It is also possible that any adverse impacts of the pandemic and containment measures may continue once the pandemic is controlled and the containment measures are lifted.

The COVID-19 pandemic and resulting containment measures have contributed to among other things:
Adverse impacts on our daily business operations and our ability to perform necessary business functions, including as a result of illness or as a result of restrictions on movement, which has caused expected delays in collections;
Widespread changes to financial and economic conditions of consumers, which has reduced our ability to collect on our consumer receivable portfolios;
Uncertainty in certain jurisdictions with respect to near-term availability of receivable portfolios that meet our purchasing standards;
Governmental actions discussed, proposed or taken to provide forms of relief, such as limiting debt collections efforts and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees;
Impacts on the court system and the legal process, which has impacted our ability to collect through the litigation process;
Adverse impacts on third-party service providers;
Adverse impacts on capital and credit market conditions, which may limit our access to funding, increase our cost of capital, and affect our ability to meet liquidity needs;
Increased spending on business continuity efforts and readiness efforts for returning to our offices, which may in turn require that we cut costs and investments in other areas; and
An increased risk of an information or cyber-security incident, fraud or a failure in the effectiveness of our compliance programs due to, among other things, an increase in remote work.

On January 1, 2020 we adopted CECL. Our ability to accurately forecast future losses under CECL may be impaired by the significant uncertainty surrounding the COVID-19 pandemic and containment measures and the lack of comparable precedent.
We do not yet know the full extent of how COVID-19 and the resulting containment measures will affect our business, results of operations and financial condition. However, the effects are likely to have a material impact on our business and results of operations and heighten many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019.

52

Table of Contents
Item 6 – Exhibits
Number  Description
3.1.1  
3.1.2  
3.1.3  
3.3  
10.1  
10.2+  
31.1  
31.2  
32.1  
101.INS  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)
101.SCH  XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB  XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104  Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101

+ Management contract or compensatory plan or arrangement.
53

Table of Contents
SIGNATURES

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.
 
ENCORE CAPITAL GROUP, INC.
By: /s/ Jonathan C. Clark
 Jonathan C. Clark
 Executive Vice President,
 Chief Financial Officer and Treasurer
Date: May 11, 2020

54