PRA GROUP INC (PRAA) FY 2023 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Objective

This discussion is from the perspective of management and is intended to help the reader understand our financial condition, cash flows and other changes in financial condition and results of operations. It should be read in conjunction with the financial statements and notes thereto included in Item 8 of this Form 10-K.

Executive Overview

We are a global financial and business services company with operations based primarily in the Americas and Europe, and to a lesser extent, Australia. Our primary business is the purchase, collection and management of portfolios of nonperforming loans.

For the year ended December 31, 2023 we had:

•Total portfolio purchases of $1.2 billion.

•Total cash collections of $1.7 billion.

•Cash efficiency ratio of 58.0%.

•Diluted earnings per share of $(2.13).

As of December 31, 2023, we had estimated remaining collections ("ERC") of $6.4 billion.

In the U.S., in 2023, portfolio supply and pricing dynamics improved, and we expect them to remain healthy in 2024. There is a positive correlation between industry credit card charge-off rates and our U.S. portfolio purchases, and in 2023, we benefited from significant growth in portfolio supply within the U.S. Additionally, we are evaluating and implementing a number of strategic and operational initiatives in our U.S. business designed to improve profitability by increasing cash collections while reducing our marginal costs. These initiatives include customer contact strategies and legal collection processes. In Brazil, we benefited from higher recent purchasing levels, which generated a significant increase in cash collections during 2023.

The European debt sale market remains competitive. While credit normalization in Europe has been slower than the U.S., like the U.S., Europe has seen improved portfolio pricing. While we believe the cost of living in certain European markets, including the UK, has put pressure on consumers, resulting in fewer large one-time payments, the proportion of customers paying us has remained stable.

In 2023, net loss attributable to PRA Group of $83.5 million reflected a decrease from net income attributable to PRA Group of $117.1 million in 2022. Total portfolio revenue in 2023 was $786.3 million compared to $941.2 million in 2022, a decrease of $154.9 million. Total operating expenses increased from $680.7 million in 2022 to $702.1 million in 2023. Interest expense, net increased from $130.7 million in 2022 to $181.7 million in 2023, an increase of $51.0 million. Due to our net loss in 2023, we recorded an income tax benefit of $16.1 million in 2023 compared to income tax expense of $36.8 million in 2022.

Frequently Used Terms

We may use the following terminology throughout this Form 10-K:

•"Buybacks" refers to purchase price refunded by the seller due to the return of ineligible nonperforming loan accounts.

•"Cash collections" refers to collections on our nonperforming loan portfolios.

•"Cash receipts" refers to cash collections on our nonperforming loan portfolios, fees and revenue recognized from our class action claims recovery services.

•"Change in expected recoveries" refers to the differences of actual recoveries received when compared to expected recoveries and the net present value of changes in estimated remaining collections.

•"Core" accounts or portfolios refer to accounts or portfolios that are nonperforming loans and are not in an insolvent status upon acquisition. These accounts are aggregated separately from insolvency accounts.

•"Estimated remaining collections" or "ERC" refers to the sum of all future projected cash collections on our nonperforming loan portfolios.

•"Finance receivables" or "receivables" refers to the negative allowance for expected recoveries recorded on our balance sheet as an asset.

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•"Insolvency" accounts or portfolios refer to accounts or portfolios of nonperforming loans that are in an insolvent status when we purchase them and as such are purchased as a pool of insolvent accounts. These accounts include IVAs, Trust Deeds in the UK, Consumer Proposals in Canada and bankruptcy accounts in the U.S., Canada, Germany and the UK.

•"Negative Allowance" refers to the present value of cash flows expected to be collected on our finance receivables.

•"Portfolio acquisitions" refers to all nonperforming loan portfolios acquired as a result of a purchase or added as a result of a business acquisition.

•"Portfolio purchases" refers to all nonperforming loan portfolios purchased in the normal course of business and excludes those added as a result of business acquisitions.

•"Portfolio income" reflects revenue recorded due to the passage of time using the effective interest rate calculated based on the purchase price of nonperforming loan portfolios and estimated remaining collections.

•"Purchase price" refers to the cash paid to a seller to acquire nonperforming loans.

•"Purchase price multiple" refers to the total estimated collections on our nonperforming loan portfolios divided by purchase price.

•"Recoveries" refers to cash collections plus buybacks and other adjustments.

•"Total estimated collections" or "TEC" refers to actual cash collections plus estimated remaining collections on our nonperforming loan portfolios.

Unless otherwise specified, references to 2023, 2022 and 2021 are for the years ended December 31, 2023, December 31, 2022 and December 31, 2021, respectively.

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Results of Operations

The following table sets forth Consolidated Income Statement amounts as a percentage of total revenues for the periods indicated (dollars in thousands). Certain prior year amounts have been reclassified for consistency with the current year presentation (fee income is now included within Other revenue on our Consolidated Income Statements).

(1) Calculated by dividing cash receipts less operating expenses by cash receipts.

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Year Ended December 31, 2023 Compared With Year Ended December 31, 2022

Cash Collections

Cash collections for the years indicated were as follows (amounts in millions):

(1) Cash collections adjusted refers to 2022 foreign currency cash collections remeasured at 2023 average U.S. dollar exchange rates.

Cash collections were $1.66 billion in 2023, a decrease of $68.6 million, or 4.0%, compared to $1.73 billion in 2022. The decrease was primarily due to a decline of $159.4 million, or 16.9%, in U.S. collections, largely due to the impact of lower purchasing levels in the years leading up to 2023 with higher levels of consumer liquidity driving a lower supply of nonperforming loan portfolios. This decrease was partially offset by higher cash collections in Brazil of $76.6 million, or 82.8%, due mainly to higher recent purchases, and an increase of $12.4 million, or 2.2%, in Europe Core collections.

Revenues

Revenues for the years indicated were as follows (amounts in thousands):

Total Portfolio Revenue

Total portfolio revenue was $786.3 million in 2023, a decrease of $154.9 million, or 16.5%, compared to $941.2 million in 2022. This was primarily due to the decrease in changes in expected recoveries, which was largely driven by lower levels of cash overperformance and a net increase to the ERC of certain pools during 2022 compared to a net decrease during 2023. Additionally, and primarily impacting the first quarter of 2023, the tax refund season was softer than we had anticipated, with U.S. collections lower than our expectations, which then prompted a reduction in ERC. This resulted in a negative $30.7 million net present value adjustment to our U.S. Core portfolio, with nearly half of this adjustment related to the 2021 U.S. Core vintage. The decrease in portfolio income was largely the result of higher levels of consumer liquidity driving a lower supply of nonperforming loan portfolios in the years leading up to 2023.

Other Revenue

Other revenue was $16.3 million in 2023, a decrease of $9.0 million, or 35.6%, compared to $25.3 million in 2022. The decrease was primarily due to the timing of settlements in CCB.

Operating Expenses

Total operating expenses were $702.1 million in 2023, an increase of $21.4 million, or 3.1%, compared to $680.7 million in 2022.

Compensation and Employee Services

Compensation and employee service expenses were $288.8 million in 2023, an increase of $3.3 million, or 1.2%, compared to $285.5 million in 2022. The increase mainly reflects higher severance expenses of $8.6 million, partially offset by decreases in temporary labor and healthcare and other benefit expenses.

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Legal Collection Fees

Legal collection fees of $38.1 million in 2023 were stable, decreasing slightly compared to $38.5 million in 2022. Legal collection fees represent contingent fees incurred for the cash collections generated by our third-party attorney network.

Legal Collection Costs

Legal collection costs were $89.1 million in 2023, an increase of $12.3 million, or 16.0%, compared to $76.8 million in 2022. Legal collection costs primarily consist of costs paid to courts where a lawsuit is filed for the purpose of attempting to collect on an account. The increase primarily reflects higher volumes of lawsuits filed in the U.S. during 2023.

Agency Fees

Agency fees were $74.7 million in 2023, an increase of $10.9 million, or 17.1%, compared to $63.8 million in 2022. Agency fees primarily represent third-party collection fees. The increase was mainly due to the increase in cash collections in Brazil.

Outside Fees and Services

Outside fees and services expenses were $82.6 million in 2023, a decrease of $9.8 million, or 10.6%, compared to $92.4 million in 2022. The decrease reflects lower litigation costs and consulting fees.

Communication

Communication expenses were $40.4 million in 2023, an increase of $1.2 million, or 3.1%, compared to $39.2 million in 2022. Communication expenses primarily relate to correspondence, network and telephony costs associated with our revenue generating activities. The small increase was mainly due to higher business volumes related to customer contact strategies.

Impairment of Real Estate

Impairment of real estate was $5.2 million in 2023 due to an impairment charge associated with our decision to cease call center operations at one of our owned regional offices in the U.S., which is being marketed for sale or lease. No impairment was recorded in 2022.

Interest Expense, Net

Interest expense, net was $181.7 million in 2023, an increase of $51.0 million, or 39.1%, compared to $130.7 million in 2022, primarily reflecting increased interest rates and higher average debt balances. Interest income increased $10.7 million primarily due to the cash we received and invested from the issuance of our 2028 Notes in the first quarter of 2023, substantially all of the net proceeds of which we used to retire our Convertible Senior Notes due 2023 ("2023 Notes") in the second quarter of 2023, in addition to higher interest rates earned on our investments and bank account balances.

Interest expense, net for the years indicated was as follows (amounts in thousands):

Income Tax Expense/(Benefit)

Income tax benefit was $16.1 million in 2023 compared to income tax expense of $36.8 million in 2022. The change in income tax expense/(benefit) was primarily due to the loss before income taxes in 2023 compared to income before income taxes in 2022. In 2023, our effective tax benefit rate was 19.5%, compared to an effective tax rate of 23.8% in 2022. This was mainly due to changes in the mix of income from different taxing jurisdictions.

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Noncontrolling interests

In Brazil, we purchase nonperforming loan portfolios through investment funds in which we hold a majority interest. The portion of our Net income/(loss) attributable to noncontrolling interests is reflected in Adjustment of net income attributable to noncontrolling interests, which was $16.7 million in 2023 compared to $0.9 million in 2022. The increase was due to the strong performance of our investment funds, where we benefited from a significant increase in cash collections during 2023 due to higher recent purchasing levels.

Year Ended December 31, 2022 Compared To Year Ended December 31, 2021

Refer to Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our 2022 Form 10-K for a discussion of our 2022 results compared to our 2021 results.

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Supplemental Performance Data

Finance Receivables Portfolio Performance

We purchase portfolios of nonperforming loans from a variety of credit originators or acquire portfolios through strategic acquisitions and segregate them into two main portfolio segments: Core or Insolvency, based on the status of the account upon acquisition. In addition, the accounts are segregated into geographical regions based upon where the account was acquired. Ultimately, accounts are aggregated into annual pools based on portfolio segment, geography and year of acquisition. Portfolios of accounts that were in an insolvency status at the time of acquisition are represented in the Insolvency tables below. All other acquisitions of portfolios of accounts are included in our Core portfolio tables as represented below. Once an account is initially segregated, it is not later transferred from an Insolvency pool to a Core pool or vice versa and the account continues to be accounted for as originally segregated regardless of any future changes in operational status. Specifically, if a Core account files for bankruptcy or insolvency protection after acquisition, we adjust our collection practices to comply with any respective bankruptcy or insolvency rules or policies; however, for accounting purposes, the account remains in the Core pool. In the event an insolvency account is dismissed from its bankruptcy or insolvency status whether voluntarily or involuntarily, we are typically free to pursue alternative collection activities; however, the account remains in the Insolvency pool.

The purchase price multiple represents our estimate of total cash collections over the original purchase price of the portfolio. Purchase price multiples can vary over time due to a variety of factors, including pricing competition, supply levels, paper type, age of the accounts acquired, mix of portfolios purchased, costs to collect, expected returns and changes in operational efficiency. For example, increased pricing due to elevated levels of competition or supply constraints negatively impacts purchase price multiples as we pay more to buy similar portfolios of nonperforming loans.

Further, there is a direct relationship between the price we pay for a portfolio, the purchase price multiple and the effective interest rate of the pool. When we pay more for a portfolio, the purchase price multiple and effective interest rates are generally lower. The opposite tends to occur when we pay less for a portfolio. Certain types of accounts have lower collection costs, and we generally pay more for these types of accounts, resulting in a lower purchase price multiple but similar net income margins when compared with other portfolio purchases. Within a given portfolio type, when lower purchase price multiples are the result of more competitive pricing, this generally leads to lower profitability. As portfolio pricing becomes more favorable, our profitability will tend to increase. Profitability within given Core portfolio types may also be impacted by the age and quality of the accounts, which impact the cost to collect those accounts. Fresher accounts, for example, typically carry lower associated collection costs, while older accounts and lower balance accounts typically carry higher costs and, as a result, require higher purchase price multiples to achieve the same net profitability as fresher paper.

Revenue recognition is driven by estimates of the amount and timing of future cash collections. We record new portfolio acquisitions at the purchase price, which reflects the amount we expect to collect discounted at an effective interest rate. During the year of acquisition, portfolios are aggregated into annual pools, and the blended effective interest rate will change to reflect new buying and new cash flow estimates until the end of the year. At that time, the purchase price amount is fixed at the aggregated amounts paid to acquire the portfolio, the effective interest rate is fixed at the amount we expect to collect, discounted at the rate to equate purchase price to the recovery estimate, and the currency rates are fixed for purposes of comparability in future periods. Depending on the level of performance and expected future impacts from our operations, we may update ERC and TEC levels based on the results of our cash forecasting with a correlating adjustment to the purchase price multiple. We follow an established process to evaluate ERC, and we typically do not adjust our ERC and TEC until we gain sufficient collection experience and confidence with a pool of accounts. Over time, our TEC has often increased as pools have aged resulting in the ratio of TEC to purchase price for any given year of buying to gradually increase.

The numbers presented in the following tables represent gross cash collections and do not reflect any costs to collect; therefore, they may not represent relative profitability. Due to all of the factors described above, readers should be cautious when making comparisons of purchase price multiples among periods and between types of categories of portfolio segments and related geographies.

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(1)Includes finance receivables portfolios that were acquired through the acquisition of Aktiv Kapital AS in 2014.

(2)Includes the acquisition date finance receivables portfolios that were acquired through our business acquisitions.

(3)Non-U.S. amounts are presented at the exchange rate at the end of the year in which the portfolio was purchased. In addition, any purchase price adjustments that occur throughout the life of the portfolio are presented at the year-end exchange rate for the respective year of purchase.

(4)Non-U.S. amounts are presented at the year-end exchange rate for the respective year of purchase.

(5)Non-U.S. amounts are presented at the December 31, 2023 exchange rate.

(6)The Original Purchase Price Multiple represents the purchase price multiple at the end of the year of acquisition.

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(1)Includes finance receivables portfolios that were acquired through the acquisition of Aktiv Kapital AS in 2014.

(2)Non-U.S. amounts are presented using the average exchange rates during the current reporting period.

(3)Non-U.S. amounts are presented at the December 31, 2023 exchange rate.

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(1)Non-U.S. amounts are presented using the average exchange rates during the cash collection period.

(2)Includes finance receivables portfolios that were acquired through the acquisition of Aktiv Kapital AS in 2014.

(3)Includes the nonperforming loan portfolios that were acquired through our business acquisitions.

(4)Non-U.S. amounts are presented at the exchange rate at the end of the year in which the portfolios were purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the year-end exchange rate for the respective year of purchase.

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Estimated Remaining Collections

The following chart shows our ERC of $6.4 billion as of December 31, 2023 by geographical region (amounts in millions):

The following chart shows our ERC by year and geography as of December 31, 2023. These amounts reflect current estimates of how much we expect to collect on our portfolios and, where applicable, are converted to U.S. dollars at the December 31, 2023 exchange rate.

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The following table displays our ERC by year and geography as of December 31, 2023 (amounts in thousands):

Cash Collections

The following table displays our cash collections by geography and portfolio type for the years indicated (amounts in thousands):

The following table displays the composition of our Core cash collections for the years indicated (amounts in thousands):

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Portfolio Acquisitions

The following chart shows the purchase price of our nonperforming loan portfolios by year since 2013, including portfolios acquired through our business acquisitions:

* 2014 includes portfolios acquired in connection with the acquisition of Aktiv Kapital AS in 2014.

The following table displays our portfolio acquisitions for the years indicated (amounts in thousands):

Portfolio Acquisitions (U.S. Only)

The following tables categorize our U.S. portfolio acquisitions for the years indicated by major asset type and delinquency category. Since our inception in 1996, we have acquired more than 62.5 million customer accounts in our U.S. portfolio (amounts in thousands).

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(1) Fresh accounts are typically past due 120 to 270 days, charged-off by the credit originator and sold prior to any post-charge-off collection activity.

(2) Primary accounts are typically 240 to 450 days past due, charged-off and have been previously placed with one contingent fee servicer.

(3) Secondary accounts are typically 360 to 630 days past due, charged-off and have been previously placed with two contingent fee servicers.

(4) Other accounts are 480 days or more past due, charged-off and have previously been worked by three or more contingent fee servicers.

Non-GAAP Financial Measures

We report our financial results in accordance with U.S. generally accepted accounting principles ("GAAP"). However, our management uses certain non-GAAP financial measures, including adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), to evaluate our operating and financial performance as well as to set performance goals. We present Adjusted EBITDA because we consider it an important supplemental measure of operations and financial performance. Our management believes Adjusted EBITDA helps provide enhanced period to period comparability of operations and financial performance, as it excludes certain items whose fluctuations from period to period do not necessarily correspond to changes in the operations of our business, and is useful to investors as other companies in the industry report similar financial measures. Adjusted EBITDA should not be considered as an alternative to net income determined in accordance with GAAP. In addition, our calculation of Adjusted EBITDA may not be comparable to the calculation of similarly titled measures presented by other companies.

Adjusted EBITDA is calculated starting with our GAAP financial measure, Net income/(loss) attributable to PRA Group, Inc. and is adjusted for:

•income tax expense (or less income tax benefit);

•foreign exchange loss (or less foreign exchange gain);

•interest expense, net (or less interest income, net);

•other expense (or less other income);

•depreciation and amortization;

•impairment of real estate;

•net income attributable to noncontrolling interests; and

•recoveries applied to negative allowance less changes in expected recoveries.

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The following table provides a reconciliation of Net income/(loss) attributable to PRA Group, Inc., as reported in accordance with GAAP, to Adjusted EBITDA for the years indicated (amounts in thousands):

(1) Other expense/(income) reflects non-operating related activity.

Additionally, we evaluate our business using certain ratios that use Adjusted EBITDA, including Debt to Adjusted EBITDA, which is calculated by dividing Borrowings by Adjusted EBITDA. The following table displays our Debt to Adjusted EBITDA ratio as of December 31, 2023 and 2022 (dollars in thousands):

Liquidity and Capital Resources

We actively manage our liquidity to meet our business needs and financial obligations.

Sources of Liquidity

Cash and cash equivalents. As of December 31, 2023, cash and cash equivalents totaled $112.5 million, of which $76.5 million related to our international operations with indefinitely reinvested earnings. Refer to Note 13 to our Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information regarding the unremitted earnings of our international subsidiaries.

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Borrowings. As of December 31, 2023, we had the following committed amounts, amounts outstanding and availability under our credit facilities (amounts in thousands):

(1) Includes the North American and Colombian revolving credit facilities.

(2) Available borrowings after calculation of current borrowing base, which may be used for general corporate purposes, including portfolio purchases.

(3) Subject to debt covenants, including advance rates ranging from 35-55% of applicable ERC.

On June 1, 2023, we used substantially all of the net proceeds received from the 2028 Notes to retire the 2023 Notes. We used the remainder of the net proceeds to repay a portion of the outstanding borrowings under the domestic revolving credit facility under our North America Credit Agreement.

Interest-bearing deposits. Under our European credit facility, our interest-bearing deposit funding is limited to SEK 1.2 billion (the equivalent of approximately $118.9 million as of December 31, 2023), and as of December 31, 2023, our interest-bearing deposits were $115.6 million.

Furthermore, we have the ability to slow the purchase of nonperforming loans if necessary, and use the net cash flow generated from cash collections from our portfolio of existing nonperforming loans to temporarily service our debt and fund existing operations. We invested $1.2 billion in portfolio acquisitions in 2023, which generated $171.9 million of cash collections, representing 10.4% of our total 2023 cash collections.

Uses of Liquidity and Material Cash Requirements

Forward Flows. We enter into forward flow agreements for the purchase of nonperforming loans. These agreements typically have terms ranging from three to 12 months and establish purchase prices and specific criteria for the accounts to be purchased. Some of the agreements establish a volume reference for the contract term in the form of a target or maximum, however, very few agreements establish a minimum contractual obligation, and many of the contracts contain early termination provisions allowing either party to cancel the agreements in accordance with a specified notice period.

As of December 31, 2023, we have forward flow agreements in place with an estimated purchase price of approximately $550.0 million over the next 12 months. This total is comprised of $400.0 million for the Americas and Australia and $150.0 million for Europe. These amounts represent our estimated forward flow purchases over the next 12 months based on projections and other factors, including sellers' estimates of future flows sales, and are dependent on actual delivery by the sellers. Accordingly, amounts purchased under these agreements may vary significantly. We may also enter into new or renewed forward flow commitments and/or close on spot purchase transactions in addition to the current forward flow agreements.

Borrowings. Of our $2.9 billion in borrowings as of December 31, 2023, estimated interest, unused fees and principal payments for the next 12 months are $202.4 million, of which $12.5 million relates to principal on the term loan under our North American Credit Agreement. Beyond 12 months, as of December 31, 2023, principal payments on our debt are due from between one and six years. Many of our financing arrangements include covenants with which we must comply, and as of December 31, 2023, we determined that we were in compliance with these covenants. For more information, see Note 7 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.

Share Repurchases. On February 25, 2022, we completed our $230.0 million share repurchase program. Also on February 25, 2022, our Board of Directors approved a new share repurchase program under which we are authorized to repurchase up to $150.0 million of our outstanding common stock. Repurchases are subject to restrictive covenants contained in

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our credit facilities and indentures that govern our Senior Notes. Considering these covenants, during 2022, we repurchased approximately 2.3 million shares of our common stock for $99.4 million, and there were no repurchases during 2023.

The share repurchase program has no stated expiration date and does not obligate us to repurchase any specified amount of shares, remains subject to the discretion of our Board of Directors and, subject to compliance with applicable laws, may be modified, suspended or discontinued at any time. Repurchases may be made from time-to-time in open market transactions, through privately negotiated transactions, in block transactions, through purchases made in accordance with trading plans adopted under Rule 10b5-1 of the Exchange Act, or other methods, subject to market and/or other conditions and applicable regulatory requirements. As of December 31, 2023, we had $67.7 million remaining for share repurchases under the program.

Leases. Our leases have remaining lease terms from one to 12 years. As of December 31, 2023, we had $50.3 million in lease liabilities, of which $10.0 million is due within the next 12 months. For more information, see Note 5 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.

Derivatives. We enter into derivative financial instruments to reduce our exposure to fluctuations in interest rates on variable rate debt and foreign currency exchange rates. As of December 31, 2023, we had $20.4 million of derivative liabilities, $8.8 million of which mature within the next 12 months. The remaining $11.6 million matures in 2028. For more information, see Note 8 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.

Investments. As of December 31, 2023, we held $59.5 million in Swedish treasury securities to meet the liquidity requirements of the Swedish Financial Services Authority for our banking subsidiary, AK Nordic AB.

We believe that funds generated from operations and cash collections on nonperforming loan portfolios, together with existing cash, available borrowings under our revolving credit facilities and access to the capital markets, will be sufficient to finance our operations, planned capital expenditures, forward flow purchase commitments, debt maturities and additional portfolio purchases during the next 12 months and beyond. Market conditions permitting, we may seek to access the debt or equity capital markets as we deem appropriate. Business acquisitions or higher than expected levels of portfolio purchasing could require additional financing from other sources. We may also, from time to time, repurchase Senior Notes in the open market or otherwise.

Cash Flow Analysis

The following table summarizes our cash flow activity for the years ended December 31, 2023 and 2022 (amounts in thousands):

Operating Activities

Net cash provided by/(used in) operating activities mainly reflects cash collections recognized as revenue and cash paid for operating expenses, interest and income taxes. To calculate net cash provided by/(used in) operating activities, net income/(loss) was adjusted for (i) non-cash items included in net income such as unrealized foreign currency transaction (gains)/losses, changes in expected recoveries, depreciation and amortization, deferred taxes, fair value changes in equity securities, and stock-based compensation, as well as (ii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of business due to the amount and timing of payments.

Net cash used in operating activities was $97.5 million in 2023 compared to net cash provided by operating activities of $21.6 million in 2022. The change was primarily driven by lower cash collections recognized as income, higher cash paid for interest and the impact of unrealized foreign currency transaction (gains)/losses.

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Investing Activities

Net cash used in investing activities increased by $355.3 million in 2023, primarily driven by an increase of $316.0 million in purchases of nonperforming loan portfolios and a decrease of $57.8 million in recoveries applied to the negative allowance. This activity was partially offset by a decrease of $10.4 million in purchases of property and equipment.

Financing Activities

Net cash provided by financing activities increased by $476.6 million in 2023, primarily driven by proceeds from the issuance of our 2028 Notes in aggregate principal amount of $400.0 million, a $326.0 million increase from net payments on our lines of credit in 2022 to net draws on our lines of credit in 2023 and a decrease in repurchases of our common stock of $111.4 million. These items were partially offset by the retirement of $345.0 million in aggregate principal amount of our 2023 Notes.

Effect of Exchange Rates on Cash

The net effect of exchange rates on cash increased $31.0 million in 2023, primarily due to foreign currency remeasurement differences on our intercompany loans.

Recent Accounting Pronouncements

For a summary of recent accounting pronouncements and the anticipated effects on our Consolidated Financial Statements, see Note 1 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.

Critical Accounting Estimates

Our Consolidated Financial Statements have been prepared in accordance with GAAP. Some of our significant accounting policies require that we use estimates, assumptions and judgments that affect the reported amounts of revenues, expenses, assets and liabilities. For a discussion of our significant accounting policies, refer to Note 1 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.

We consider accounting estimates to be critical if they (1) involve a significant level of estimation uncertainty and (2) have had or are reasonably likely to have a material impact on our financial condition or results of operations. We base our estimates on historical experience, current trends and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ significantly from actual results, the impact on our Consolidated Financial Statements may be material. We have determined that the following accounting policies involve critical estimates:

Revenue Recognition - Finance Receivables

Revenue recognition for finance receivables involves the use of estimates and the exercise of judgment on the part of management. These estimates include projections of the amount and timing of cash collections we expect to receive from our pools of accounts. We review individual pools for trends, actual performance versus projections and curve shape (a graphical depiction of the amount and timing of cash collections). We then project ERC and apply a discounted cash flow methodology to our ERC. Adjustments to ERC may include adjustments reflecting recent collection trends, our view of current and future economic conditions, changes in collection assumptions or other timing related adjustments.

Significant changes in our cash flow estimates could result in increased or decreased revenue as we immediately recognize the discounted value of such changes using the constant effective interest rate of the pool. Generally, adjustments to cash forecasts result in an adjustment to revenue at an amount less than the impact of the performance in the period due to the effects of discounting. Additionally, cash collection forecast increases will result in more revenue being recognized and cash collection forecast decreases in less revenue being recognized over the life of the pool.

Goodwill

In accordance with Financial Accounting Standards Board ("FASB") ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), we evaluate goodwill for impairment annually as of October 1, and more frequently if circumstances indicate that it is more-likely-than-not that the fair value of a reporting unit is below its carrying value.

We determine the fair value of a reporting unit by applying certain approaches prescribed under ASC Topic 820 "Fair Value Measurements and Disclosures": the income approach and the market approach. Under the income approach, we estimate

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the fair value of a reporting unit based on the present value of estimated future cash flows and a residual terminal value. Cash flow projections are based on management's estimates of a variety of factors, including growth rates and operating margins, which take into consideration industry and market conditions. Under the market approach, we estimate fair value based on market trading multiples and other relevant market transactions involving comparable publicly traded companies with operating and investment characteristics similar to the reporting unit. Depending on the availability of public data and suitable comparable transaction data, we may give more weight to the income approach than the market approach. We also assess the reasonableness of the aggregate estimated fair value of our reporting units by comparison to our market capitalization over a reasonable period, considering historic control premiums in the financial services industry and the current market environment.

Based on the annual October 1 impairment test, we concluded that the goodwill of our reporting units was not impaired. However, we estimated that our Debt Buying and Collection ("DBC") reporting unit’s fair value exceeded its carrying value by 6%, and therefore, the reporting unit may be at-risk for future impairment if our cash flow projections are not met or if market factors utilized in the impairment test deteriorate, including adverse changes in the debt sales market that impact our estimated purchasing volumes and purchase price multiples, and/or an increase in the discount rate. We estimated the fair value of the DBC reporting unit based on the income approach, and as an assessment for reasonableness, also applied the market approach. As of December 31, 2023, the DBC reporting unit’s carrying amount included goodwill of $404.7 million.

Key inputs to the DBC reporting unit’s fair value under the income approach included our forecasted financial results and the discount rate. Forecasted financial results were developed considering several inputs and assumptions, including portfolio purchasing volume, purchase price multiples, operating expenses and the projected impact of certain strategic and operational initiatives. Based on purchasing volume estimates, the forecasted financial results reflect an expected long-term growth rate of 3.3%. Purchase price multiples related to our existing portfolios were based on historical growth rates, while purchase price multiples on future portfolio purchases were based on recent and expected future purchasing metrics. We are implementing a number of strategic and operational initiatives in our U.S. business designed to increase cash collections while reducing our marginal costs. The estimated net cash flows from certain of these initiatives were incorporated in our goodwill evaluation, reflecting an assessment of our ability to execute such initiatives.

The discount rate used was based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics, including assumptions related to the reporting unit's ability to execute on the projected cash flows. The discount rate utilized for the DBC reporting unit was 10.0% as of October 1, 2023. The market interest rate inherent in the discount rate calculation decreased after October 1, 2023, and as a result, the fair value of the DBC reporting unit has since become less sensitive to this input.

Our goodwill evaluation is dependent on a number of factors, both internal and external. The assumptions used in estimating the DBC reporting unit’s fair value were based on currently available data and involved the exercise of judgment. There are inherent uncertainties related to the assumptions used in our evaluation and to our application of those assumptions. If market factors deteriorate, or if estimates used in our quantitative assessment prove to be inaccurate, we may have to record impairment charges in future periods.

Income Taxes

We are subject to income taxes in the U.S. and in numerous international jurisdictions. These tax laws are complex and are subject to different interpretations by the taxpayer and the relevant government taxing authorities. When determining our domestic and non-U.S. income tax expense, we make judgments about the application of these inherently complex laws.

We record a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is estimated using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.

We exercise significant judgment in estimating the potential exposure to unresolved tax matters and apply a more likely than not criteria approach for recording tax benefits related to uncertain tax positions in the application of the complex tax laws. While actual results could vary, we believe we have adequate tax accruals with respect to the ultimate outcome of such unresolved tax matters. We record interest and penalties related to unresolved tax matters as a component of income tax expense when the more likely than not standards are not met.

If all or part of the deferred tax assets are determined not to be realizable in the future, we would establish a valuation allowance and charge the impact to earnings in the period such a determination is made. If we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a

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positive adjustment to earnings. The establishment or release of a valuation allowance does not have an impact on cash, nor does such an allowance preclude the use of loss carryforwards or other deferred tax assets in future periods. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position. For further information regarding our uncertain tax positions, refer to Note 13 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.