Encore Capital Group Sees Earnings Slip on Impairment; Announces Large Acquisition

Debt buyer Encore Capital Group late Wednesday reported financial results for the first quarter of 2012 marked by a decline in net income driven by one-time impairments, but significant increases in revenue and cash collections.

San Diego-based Encore Capital Group, Inc. (NASDAQ: ECPG) reported net income of $11.4 million, or $0.44 per share, for the first quarter of 2012, down 17 percent from the same quarter of 2011. But the company noted that excluding non-cash impairment charges of $10.3 million, earnings per fully diluted share would have been $0.69 (in Q1 2012), or 28 percent higher than the prior year.

Gross collections in the first quarter of 2012 were $231 million, a 21 percent increase from the same period of the prior year. Total revenue increased 18 percent to $130.2 million.

Encore took a one-time, pre-tax impairment charge for goodwill and identifiable intangible assets of $10.3 million, or $0.25 per share for its Ascension bankruptcy servicing business.

The company said that uncertainty surrounding a material client’s contract renewal with Ascension, its bankruptcy servicing unit, over technology improvements led to Encore’s eventual decision to sell the unit, which the Board of Directors approved May 7. The company disclosed in an SEC filing that it had reached an agreement in principle to sell Ascension to an undisclosed third party.

Encore also separately announced the acquisition of Texas-based Propel Financial Services, LLC, a leader in the tax lien acquisition industry. Encore acquired Propel at a purchase price of $187 million, and will pay for it with a new $160 million credit facility and existing cash and credit facilities. The acquisition is expected to be accretive to 2012 earnings. With seven total locations, the company employs 70 people.

Propel’s core business – tax lien transfers – assists property owners who are delinquent on their property taxes by acquiring tax obligations from local municipalities and working with property owners to create mutually agreeable payment plans. By assisting property owners with their tax obligations, tax lien transfers provide important revenue to municipal governments. Encore said that Propel will retain its trade name and Texas operations.

In the first quarter of 2012, Encore’s investments in receivable portfolios was $130.5 million, to purchase $2.9 billion in face value of debt, up from the debt buying activity a year ago.

Encore’s owned debt collection sites accounted for $109.9 million in cash collections in Q1 2012, up 24 percent from Q1 2011. The legal collection channel also saw cash collections increase 24 percent to $109.6 million. The company’s collection agency outsourcing channel declined 17 percent in the quarter to $11.6 million.