Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AACC > SEC Filings for AACC > Form 10-Q on 30-Oct-2012All Recent SEC Filings

Show all filings for ASSET ACCEPTANCE CAPITAL CORP

Form 10-Q for ASSET ACCEPTANCE CAPITAL CORP


30-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

We have been purchasing and collecting charged-off accounts receivable portfolios ("paper") from consumer credit originators since the formation of our predecessor company in 1962. Charged-off receivables are the unpaid obligations of individuals to credit originators, such as credit card issuers including private label card issuers, consumer finance companies, telecommunications and utility providers. Since these receivables are delinquent or past due, we purchase them at a substantial discount. Since January 1, 2002, we have purchased 1,305 consumer debt portfolios, with an original charged-off face value of $48.2 billion for an aggregate purchase price of $1.3 billion, or 2.77% of face value, net of buybacks. We purchase and collect charged-off consumer receivable portfolios for our own account as we believe this affords us the best opportunity to use long-term strategies to maximize our profits.

Macro-economic factors in the U.S. influence our operations positively and negatively. Factors such as reduced availability of credit for consumers, a depressed housing market, elevated unemployment rates, increased gasoline prices and other factors have a negative impact on us by making it more difficult to collect from consumers on the paper we acquire. Macro-economic factors also impact the availability of charged-off debt in the market and the prices at which it is available. While the supply of paper increased and prices dropped during 2009 and 2010, we have recently observed increased competition for available paper as well as a reduction in the supply of paper. These factors contributed to the higher pricing we experienced during 2011 and the first nine months of 2012. We expect macro-economic trends, supply of paper and competitive factors to continue to impact portfolio acquisition and collection results.

Our investment in purchased receivables of $23.9 million in the third quarter of 2012 was 37.5% lower than the same period of 2011. Lower purchasing was driven by higher prices and increased competition in the market for available paper. We only purchase paper when we believe we can achieve an acceptable return and do not pursue purchases when we believe the expected collections and related returns do not support the purchase price. While we expect a continuation of recently observed trends of higher pricing through the remainder of 2012, we expect to be able to purchase paper in sufficient quantities to support our business.

Collections have been positively impacted by an increase in collector productivity due to customized collection strategies by account type, improved channel management and an increase in legal collections as a result of our recent increased investment in this channel. As a result of these factors, cash collections of $89.2 million for the third quarter were $1.8 million, or 2.0%, higher than the same period in 2011. Although collections were higher, they did not achieve the same level of year over year growth as we saw in the first half of 2012. Third quarter collections growth was slowed by lower levels of purchasing in the second half of 2011 and early 2012 since collections are typically highest six to 18 months from the purchase date. In addition, while we expect an increase in investment in the legal channel to have a positive impact on collections over time, there is typically a delay in collections while the legal process is initiated.

Purchased receivable revenues of $54.4 million were 3.3% lower during the third quarter of 2012 compared to the same period in 2011. This decrease in revenue was primarily related to lower collections on fully amortized portfolios and lower net purchased receivable impairment reversals. Net impairment reversals in the third quarter of 2012 were $0.5 million, compared to net reversals of $2.7 million in the third quarter of 2011. Lower impairment reversals were driven by an impairment in the third quarter of $1.7 million to a portfolio from 2011. Certain portfolios in the 2006 to 2011 vintages continued to perform above expectations. This led us to increase yields on seven portfolios during the third quarter of 2012.

Operating expenses during the third quarter were up slightly compared to the same period of 2011, but were favorable as a percentage of cash collections at 54.5%, compared to 55.5% last year. The increase in operating expenses compared to prior year was driven by additional expenditures for up-front legal costs as a result of out decision to increase investment in the legal collection channel, restructuring charges due to closing the Tempe, Arizona office and additional expense related to the reinstatement of our 401(k) match in the third quarter of 2011. Investments in costs related to legal collections were $10.2 million during the third quarter of 2012, compared to $8.3 million in the same period of 2011. This increase in up-front legal costs had a negative impact on cost to collect for 2012. The increased investment in legal channel collections were partially offset by efficiencies gained through continued implementation of operational strategies and salaries and benefits savings as a result of office closings.


Table of Contents

In addition, third quarter 2011 operating expenses were unfavorably impacted by an additional accrual of $1.25 million for the FTC settlement, which was finalized in the first quarter of 2012.

Adjusted EBITDA for the third quarter of 2012 was $42.5 million, an increase of $0.8 million from the same period of 2011 as a result of higher collections, partially offset by higher operating expenses due to the increased investment in up-front legal costs discussed above. In addition, FTC related charges from the prior year were excluded from the calculation of Adjusted EBITDA. Although Adjusted EBITDA is not calculated in accordance with accounting principles generally accepted in the United States of America, it is used by analysts, investors and management as a measure of our performance. Refer to Adjusted EBITDA on page 43 for a reconciliation of net income to Adjusted EBITDA.

Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties and that are made in good faith pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements about future events or our future financial performance. In some cases, forward-looking statements can be identified by terminology such as "may", "will", "should", "expect", "anticipate", "intend", "plan", "believe", "estimate", "potential" or "continue", the negative of these terms or other comparable terminology. These statements involve a number of risks and uncertainties. Actual events or results may differ materially from any forward-looking statement as a result of various factors, including those we discuss in our annual report on Form 10-K for the year ended December 31, 2011 in the section titled "Risk Factors" and elsewhere in this report.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations. Factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include the following:

failure to comply with government regulation;

increased costs or a decrease in collections if changes in the way we conduct business or additional costs to conduct business result from supervision and regulation by the Consumer Financial Protection Bureau or unknown ramifications from the Dodd-Frank Wall Street Reform and Consumer Protection Act;

our ability to purchase charged-off receivable portfolios on acceptable terms and in sufficient amounts;

instability in the financial markets and continued economic weakness or recession impacting our ability to acquire and collect on charged-off receivable portfolios and our operating results;

our ability to maintain existing, and to secure additional financing on acceptable terms;

changes in relationships with third parties collecting on our behalf;

intense competition on bids for portfolio purchases that could impair our ability to achieve our goals;

ongoing risks of litigation in our litigious industry, including individual and class actions under consumer credit, collections and other laws;

concentration of a significant portion of our portfolio purchases during any period with a small number of sellers;

our ability to substantiate our application of tax rules against examinations and challenges made by tax authorities;

our ability to collect sufficient amounts from our purchases of charged-off receivable portfolios;

our ability to diversify beyond collecting on our purchased receivables portfolios into ancillary lines of business;

a decrease in collections as a result of negative attention or news regarding the debt collection industry and debtors' willingness to pay the debt we acquire;


Table of Contents
our ability to respond to technology downtime and changes in technology to remain competitive;

our ability to make reasonable estimates of the timing and amount of future cash receipts and assumptions underlying the calculation of the net impairment charges or IRR increases for purposes of recording purchased receivable revenues;

the costs, uncertainties and other effects of legal and administrative proceedings impacting our ability to collect on judgments in our favor;

our ability to successfully hire, train, integrate into our collections operations and retain in-house account representatives; and

other unanticipated events and conditions that may hinder our ability to compete.


Table of Contents

Results of Operations

The following table sets forth selected consolidated statement of operations
data expressed as a percentage of total revenues and as a percentage of cash
collections for the periods indicated:



                                                              Percent of Total Revenues                                   Percent of Cash Collections
                                                   Three Months Ended           Nine Months Ended               Three Months Ended           Nine Months Ended
                                                      September 30,               September 30,                    September 30,               September 30,
                                                   2012           2011          2012          2011              2012            2011         2012           2011
Revenues
Purchased receivable revenues, net                    99.5 %        99.4 %         99.6 %       99.4 %             61.0 %        64.4 %         61.8 %       60.0 %
Gain on sale of purchased receivables                  0.0           0.0            0.0          0.0                0.0           0.0            0.0          0.0
Other revenues, net                                    0.5           0.6            0.4          0.6                0.3           0.4            0.3          0.4

Total revenues                                       100.0         100.0          100.0        100.0               61.3          64.8           62.1         60.4

Expenses
Salaries and benefits                                 26.3          29.9           26.2         32.0               16.2          19.4           16.3         19.3
Collections expense                                   52.9          46.1           48.4         45.7               32.4          29.8           30.1         27.5
Occupancy                                              2.7           2.6            2.4          2.7                1.7           1.7            1.5          1.6
Administrative                                         4.3           5.6            3.7          4.4                2.6           3.6            2.3          2.7
Depreciation and amortization                          2.1           1.7            2.1          1.8                1.3           1.1            1.3          1.1
Restructuring charges                                  0.5           0.0            0.2          0.0                0.3           0.0            0.1          0.0
Gain on disposal of equipment and other assets         0.0          (0.2 )         (0.1 )       (0.1 )              0.0          (0.1 )         (0.1 )        0.0

Total operating expenses                              88.8          85.7           82.9         86.5               54.5          55.5           51.5         52.2

Income from operations                                11.2          14.3           17.1         13.5                6.8           9.3           10.6          8.2
Other income (expense)
Interest expense                                      (9.4 )        (4.6 )         (9.0 )       (4.9 )             (5.7 )        (3.0 )         (5.6 )       (3.0 )
Interest income                                        0.0           0.0            0.0          0.0                0.0           0.0            0.0          0.0
Other                                                  0.0           0.0            0.0          0.0                0.0           0.0            0.0          0.0

Income before income taxes                             1.8           9.7            8.1          8.6                1.1           6.3            5.0          5.2
Income tax (benefit) expense                          (1.0 )         4.3            2.0          3.8               (0.6 )         2.8            1.2          2.3

Net income                                             2.8 %         5.4 %          6.1 %        4.8 %              1.7 %         3.5 %          3.8 %        2.9 %

Three Months Ended September 30, 2012 Compared To Three Months Ended September 30, 2011

Revenue

We generate substantially all of our revenue from our main line of business, the purchase and collection of charged-off consumer receivables. We refer to revenue generated from this line of business as purchased receivable revenues. Purchased receivable revenues are the difference between cash collections and amortization of purchased receivables.

The following table summarizes our purchased receivable revenues including cash collections and amortization:

                                                                                                         Percentage of Cash  Collections
                                                 Three Months Ended September 30,                       Three Months Ended September 30,
                                                                                 Percentage
($ in millions)                        2012          2011         Change           Change                2012                      2011
Cash collections                      $  89.2       $  87.4       $   1.8                2.0 %                100.0 %                   100.0 %
Purchased receivable amortization       (34.8 )       (31.1 )        (3.7 )            (11.5 )                (39.0 )                   (35.6 )

Purchased receivable revenues, net    $  54.4       $  56.3       $  (1.9 )             (3.3 )%                61.0 %                    64.4 %

The 2.0% increase in cash collections during the third quarter of 2012 was primarily the result of improvements in account representative productivity, enhanced analytics used to customize collection strategies by account type and increased investment in the legal collections channel. Account representative productivity improved as a result of additional improvements in inventory and channel management strategies, which led to a reduction in the number of in-house associates. The year over year increase in total collections was driven by a $5.8 million, or 14.8%, increase in legal channel collections, partially offset by collections which were $4.1 million, or 8.5%, lower in the call center channel. Although total collections were higher, they did not achieve the same level of year over year growth as we saw in the first two quarters of 2012. Third quarter collections growth was slowed by lower levels of purchasing in the second half of 2011 and early 2012 since collections are typically highest six to 18 months from the purchase date. In addition, while we expect an increase in investment in the legal channel to have a positive impact on collections over time, there is typically a delay in collections while the legal process is initiated.


Table of Contents

The amortization rate of 39.0% for the three months ended September 30, 2012 was 340 basis points higher than the amortization rate of 35.6% for the same period of 2011. The increase in the amortization rate for the quarter was a result of lower weighted-average yields on new purchases, lower net purchased receivable impairment reversals and lower zero basis collections compared to the prior year. Lower net impairment reversals impacted weighted-average yields in the third quarter of 2012. Net impairment reversals in the third quarter of 2012 were $0.5 million, compared to net reversals of $2.7 million in the third quarter of 2011. Current quarter net impairment reversals were primarily a result of increased expectations for future collections on certain portfolios from the 2005, 2006 and 2007 vintages, and resulted in $2.2 million of impairment reversals, which were partially offset by a $1.7 million impairment to a portfolio in the 2011 vintage. During the third quarter, we increased assigned yields on seven portfolios from the 2006 to 2011 vintages, which results in a higher percentage of cash collections being applied to purchased receivable revenue and less to amortization. Refer to "Supplemental Performance Data" on Page 34 for a summary of purchased receivable revenues and amortization rates by year of purchase and an analysis of the components of collections and amortization on Page 35. Cash collections included collections from fully amortized portfolios of $10.9 million and $12.6 million for the third quarter of 2012 and 2011, respectively, of which 100% were reported as revenue. Collections from fully amortized portfolios decline over time absent any new portfolios that become fully amortized.

Revenues on portfolios purchased from our top three sellers were $18.7 million and $22.3 million during the quarter ended September 30, 2012 and 2011, respectively. All of the top three sellers were the same in both periods.

Investments in Purchased Receivables

We generate revenue from our investments in portfolios of charged-off consumer accounts receivable. Ongoing investments in purchased receivables are critical to continued generation of revenues. The time since charge off, paper types, and other account characteristics of our purchased receivables vary from period to period. As a result, the cost of our purchases, as a percent of face value, may fluctuate from one period to the next. In addition, the amount of paper we purchase in a period may be limited by market factors beyond our control, most importantly, the price, volume and mix of paper offered for sale in a period. Total purchases consisted of the following:

                                                         Three Months Ended September 30,
                                                                                            Percentage
($ in millions, net of buybacks)            2012            2011            Change            Change
Acquisitions of purchased receivables,
at cost                                    $  23.9        $    38.3        $  (14.4 )             (37.5 %)
Acquisitions of purchased receivables,
at face value                              $ 766.2        $ 1,317.1        $ (550.9 )             (41.8 %)
Percentage of face value                      3.13 %           2.91 %
Percentage of forward flow purchases,
at cost of total purchasing                   27.3 %           36.0 %
Percentage of forward flow purchases,
at face value of total purchasing             24.6 %           26.4 %

Our investment in purchased receivables decreased in the third quarter of 2012 as compared to the same period of 2011 because less paper was available at attractive pricing, and we saw increased competition for the paper that was available. The increase in the average cost of purchases this quarter compared to the third quarter of 2011 was a result of higher prices for certain asset types and from certain sellers, and is indicative of generally higher prices in the market. As a result of fluctuations in the mix of purchases of receivables, the cost of our purchases, as a percent of face value, fluctuate from one period to the next and are not always indicative of our estimates of total return. Included in third quarter results is a purchase of $8.2 million, funded during the second quarter, that was not included in second quarter purchasing results or disclosure of estimated remaining collections, because we did not obtain title to the paper until July.

Forward flow contracts commit a debt seller to sell a steady flow of charged-off receivables to us for a fixed percentage of the face value over a specified time period. Purchases from forward flows in the third quarter of 2012 included 10 portfolios from six forward flow contracts. Purchases from forward flows in the third quarter of 2011 included 24 portfolios from 11 forward flow contracts. We bid on forward flow contracts based on their availability in the market and our evaluation of the relative value of the accounts. As a result, our investment in purchased receivables through these agreements fluctuates from period to period.


Table of Contents

Operating Expenses

Operating expenses are traditionally measured in relation to revenues; however, we measure operating expenses in relation to cash collections. We believe this is appropriate because amortization rates, the difference between cash collections and revenues recognized, vary from period to period. Amortization rates vary due to seasonality of collections, impairments, impairment reversals and other factors and can distort the analysis of operating expenses when measured against revenues. Additionally, we believe a substantial portion of our operating expenses are variable in relation to cash collections.

The following table summarizes the significant components of our operating expenses:

                                                                                                      Percentage of Cash  Collections
                                               Three Months Ended September 30,                      Three Months Ended September 30,
                                                                               Percentage
($ in millions)                        2012          2011       Change           Change                2012                     2011
Salaries and benefits                $   14.4       $ 16.9      $  (2.5 )            (15.1 )%               16.2 %                   19.4 %
Collections expense                      28.9         26.1          2.8               10.9                  32.4                     29.8
Occupancy                                 1.5          1.5           -                 0.1                   1.7                      1.7
Administrative                            2.3          3.2         (0.9 )            (26.0 )                 2.6                      3.6
Restructuring charges                     0.3           -           0.3                 -                    0.3                       -
Other                                     1.2          0.8          0.4               36.9                   1.3                      1.0

Total operating expenses             $   48.6       $ 48.5      $   0.1                0.1 %                54.5 %                   55.5 %

Salaries and Benefits. The following table summarizes the significant components of our salaries and benefits expense:

                                                                                                      Percentage of Cash  Collections
                                               Three Months Ended September 30,                      Three Months Ended September 30,
                                                                               Percentage
($ in millions)                        2012          2011       Change           Change                2012                     2011
Compensation - revenue generating    $    7.7       $  9.0      $  (1.3 )            (14.7 )%                8.6 %                   10.3 %
Compensation - administrative             4.3          4.5         (0.2 )             (3.6 )                 4.8                      5.1
Benefits and other                        2.4          3.4         (1.0 )            (31.0 )                 2.8                      4.0

Total salaries and benefits          $   14.4       $ 16.9      $  (2.5 )            (15.1 )%               16.2 %                   19.4 %

Compensation for our revenue generating departments was lower in the third quarter of 2012 due to lower average headcount for in-house account representatives. We reduced headcount for our collection operations as a result of the closure of the San Antonio collection office in January. We also reduced headcount in our legal channel compared to the prior year in connection with our shift to a preferred third party relationship, which also had the effect of increasing agency fees included in collections expense. In addition, we continued to utilize and refine our analytics and inventory management to shift inventory between internal and third party collection channels, both onshore and offshore, which has allowed us to more efficiently utilize our personnel resources and reduce headcount. During the third quarter of 2012, we had an average of 449 in-house account representatives, including supervisors, compared to 648 in the same period of 2011. Lower expenses for benefits and other compensation were primarily related to lower expenses for our self-insured employee medical plan.

Collections Expense. The following table summarizes the significant components of collections expense:

                                                                                                       Percentage of Cash  Collections
                                                 Three Months Ended September 30,                     Three Months Ended September 30,
                                                                                 Percentage
($ in millions)                          2012          2011       Change           Change               2012                     2011
Forwarding fees                        $   13.5       $ 11.8      $   1.7               14.2 %               15.3 %                   13.5 %
Court and process server costs             10.2          8.6          1.6               18.6                 11.5                      9.9
Lettering campaign and
. . .
  Add AACC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AACC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.