Debt Buyer Encore Capital Reports Huge Q4 and 2010; Discusses Lawsuit Settlement

Debt purchasing and collection firm Encore Capital Group, Inc. late Monday reported results for the fourth quarter and full year 2010 marked by record net income and portfolio purchasing activity levels not seen in five years. The company also disclosed a recent large lawsuit settlement and its impact on results.

San Diego-based Encore (Nasdaq: ECPG) reported net income for the full year 2010 of $49.1 million, or $1.95 per fully diluted share, compared to net income of $33 million, or $1.37 per fully diluted share, in 2009. Net income in the fourth quarter of 2010 was $14.2 million, or $0.56 per share, up 69 percent from the same period in 2009.

Stock analysts polled by Thompson Reuters on average predicted per share earnings of $0.47 for the fourth quarter.

Total revenue for 2010 was $381.3 million, a 21 percent increase over 2009. Revenue in the fourth quarter was $81.5 million, up 22 percent from the same quarter in 2009. Gross collections for the year increased 24 percent to $604.6 million.

The largest quarterly increase was around debt portfolio purchasing activity. Encore said it invested $119.1 million to purchase $3.9 billion in face value of debt in Q4 2010, compared to $41 million to purchase $1 billion in face value of debt in the same period of the prior year. For the year, Encore paid $362 million, to purchase $10.9 billion in face value of debt, compared to $256.6 million, to purchase $6.5 billion in face value of debt in 2009.

Brandon Black, President and Chief Executive Officer said in a statement, “Encore’s fourth quarter performance represented an exceptional conclusion to a strong 2010. The quarter was highlighted by record-setting net income, as well as the deployment of capital in what was our best purchasing quarter since 2005. Encore’s key differentiators were at work in the fourth quarter and full-year, and we believe they will continue to be key drivers in 2011.”

Discussion of Legal Issues

Encore said in its earnings press release that on February 10, 2011, it reached an agreement in principal to settle a lawsuit on a national class basis, subject to entering into a definitive settlement agreement and obtaining court approval after notice to the class. Encore has accrued its portion of the settlement, which decreased net income by approximately $1 million and fully diluted earnings per share by $0.04 for the fourth quarter and year ended December 31, 2010.

In its annual report filing (10-K) with the SEC, Encore noted that the total settlement fund is $5.2 million, the bulk of which will be covered by insurance. The company said that the total settlement could increase to an amount not to exceed $5.7 million.

In addition, the company noted that it was the subject of two investigations at the state level. The attorneys general of Texas and California have launched separate enquires into the company, with the Texas action commencing on January 12, 2011. Encore said it was fully cooperating in both investigations.

Additional Operational Detail

Encore revealed a shift in collection strategy in 2010. For the first time in at least three years, gross collections from the company’s debt collection sites was were higher than the totals from the legal collections channel. Collection sites accounted for $268.2 million in 2010, up 44 percent from 2009, while legal collections accounted for $266.7 million, up 14.6 percent. External collection agency forwarding accounted for $68 million in gross collections, an increase of 9 percent from 2009.

The company explained that the increase in gross collections was due primarily to a spike in portfolio purchasing activity. The rise in results in the collection site channel corresponded with a large increase in employee headcount, especially among front-line collectors, at the company’s facility in India. Total employment in India increased 36 percent in 2010 to 1,213 while total employment in the U.S. increased 7.3 percent to 678.

Encore said in its SEC filing, that “due to the continued strong performance of our team in India and our ability to reduce our overall site cost- to-collect through the expansion of our offshore collection efforts, we have entered into a lease for additional space in India.”

Of the $362 million the company invested in new debt portfolios in 2010, $342 million was spent on credit card portfolios, $12.2 million on consumer bankruptcy accounts, and $7.8 million on telecom accounts.