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Asset Acceptance Capital Corp. Reports Operating Results (10-Q)

October 30, 2012 | About:
10qk

10qk

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Asset Acceptance Capital Corp. (AACC) filed Quarterly Report for the period ended 2012-09-30.

Asset Acceptance Capital Corporation has a market cap of $204.4 million; its shares were traded at around $6.65 with a P/E ratio of 11.1 and P/S ratio of 0.9.

Highlight of Business Operations:

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.

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.

The amortization rate of 38.2% for the nine months ended September 30, 2012 was 180 basis points lower than the amortization rate of 40.0% for the same period of 2011. The decline in the amortization rate for 2012 was primarily a result of higher net purchased receivable impairment reversals. Higher net impairment reversals impacted weighted-average yields in the first nine months of 2012. Net impairment reversals in 2012 were $9.4 million, compared to net reversals of $3.7 million in 2011. Impairment reversals were recorded in the 2005, 2006, 2007 and 2009 vintage years, and were partially offset by a $3.4 million impairment to a portfolio in the 2011 vintage. In addition, during the first nine months of the year, we increased assigned yields on 14 portfolios from the 2006 to 2011 vintages. Refer to Supplemental Performance Data on Page 34 for a summary of purchased receivable revenues and amortization rates by year of purchase (vintage) and an analysis of the components of collections and amortization on Page 35. Cash collections included collections from fully amortized portfolios of $35.8 million and $38.9 million for the first nine months 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.

Court and process server costs increased in the first nine months of 2012 from the same period in 2011 as a result of higher legal activity driven by higher purchasing in recent periods and an increase in the number of accounts selected for legal action. In early 2012, we performed an analysis of our inventory of accounts using a newly developed legal suit selection model. The model identified accounts eligible for suit that were not already in our legal collection channel. During the second and third quarters, we began placing a selection of those accounts in our legal channel and initiating suit. This increase in volume helped drive the 19% increase in these costs because the legal collection model requires an up-front investment in court costs and other fees, which we expense as incurred. There generally is a delay between incurring these costs and generating collections on the accounts in the legal process, which can cause a change in court costs that is disproportionate to the change in legal collections. Even though 2012 expense and profitability were negatively impacted by these investments, we believe the overall return on investment is higher in the legal collection channel than in the call center channel.

Collections, other revenues and operating expenses, net of the adjustment items, are the primary drivers of Adjusted EBITDA. During the third quarter of 2012, Adjusted EBITDA was $0.8 million higher than the same period of 2011. The net increase was a result of an increase in cash collections of $1.7 million offset by an increase in applicable operating expenses of $0.9 million. During the first nine months of 2012, Adjusted EBITDA was $8.0 million higher than in the same period of 2011. The net increase was a result of an increase in cash collections of $14.3 million offset in part by an increase in applicable operating expenses of $6.1 million. The primary driver of the increase in operating expenses in each period is the incremental investment in court and process server costs. The investment in these legal channel costs increased to $10.2 million in the third quarter of 2012 from $8.3 million in the same period of 2011. For the first nine months of 2012, these costs increased to $25.7 million from $21.5 million in the same period of 2011.

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