Encore Capital Group Shuts Our Mouths, re: Quarterly Earnings

Perhaps we spoke too soon.

Earlier this week, we ooo’d and ahh’d over Portfolio Recovery Associates’ massive cash collections number for the second quarter and Asset Acceptance’s huge spike in debt buying activity during the same quarter.

But debt buyer Encore Capital Group kind of put both to shame late Thursday with their Q2 2012 earnings release. Not only did it report higher cash collections, but it bought more debt than the other two companies combined.

San Diego-based Encore Capital Group, Inc. (NASDAQ: ECPG) reported net income for the second quarter of 2012 of $16.6 million ($0.64 per share), up 12 percent over the same period a year ago. But Encore noted that it discontinued some operations in the quarter, altering the company’s net income. Income from continuing operations was $19 million, or $0.74 per share, up more than 28 percent from Q2 2011. And excluding the one-time charges associated with an acquisition in the quarter, earnings were $0.82 per share.

On May 8, 2012, Encore completed the acquisition of Propel Financial Services, LLC, a Texas-based tax lien transfer company. Encore acquired Propel at a purchase price of approximately $187 million, utilizing Propel’s new $160 million credit facility and Encore’s existing cash and credit facilities. During the second quarter of 2012, Encore said it incurred approximately $3.8 million in accounting, consulting, and legal expenses related to the acquisition of Propel.

A week later, Encore completed the sale of substantially all of the assets and certain liabilities of its bankruptcy servicing subsidiary Ascension Capital Group, Inc. to a subsidiary of American InfoSource, L.P. As part of the sale, Encore agreed to fund normal operating losses in the first year of ownership, not to exceed $4 million. If the business grows and becomes profitable, Encore will be paid an earn-out equal to 30 to 40 percent of the EBITDA of the Ascension business for the first five years after closing.

“For the quarter, we delivered strong financial results, while making investments designed to provide long-term strategic advantages and further strengthen our industry-leading debt purchasing and recovery platform,” said Brandon Black, Encore’s President and CEO.

Total revenues in the second quarter increased 27 percent to $141 million. Excluding the impact of recognized revenues from Propel, total revenues increased 25 percent in the quarter. Gross collections from the portfolio purchasing and recovery business were $240.6 million, a 23 percent increase over the same period of the prior year.

All of Encore’s collection channels saw increases in the second quarter, with the legal channel growing 17 percent to $114.9 million. Collection sites accounted for $111.6 million, up 32 percent from a year ago and forwarding to third party collection agencies increased 13 percent to $14 million.

Over the course of the second quarter of 2012, Encore’s domestic headcount fell 3 percent to 736, compared to headcount in the second quarter of 2011. The company’s international headcount grew 39 percent to 1,942 over the same period.

Encore’s investment in receivable portfolios in the portfolio purchasing and recovery business was $231 million, to purchase $6 billion in face value of debt, compared to $93.7 million, to purchase $3 billion in face value of debt in the same period of the prior year. The company spent 87.5 percent of that total on credit card accounts and the remaining 12.5 percent on telecom portfolios.