HORSHAM, PA – NCO Group, Inc. (“NCO” or the “Company”) (Nasdaq: NCOG), a leading provider of business process outsourcing services, announced today that during the fourth quarter of 2004, it reported net income of $12.2 million, or $0.36 per diluted share, as compared to net income of $10.3 million, or $0.37 per diluted share, in the fourth quarter of 2003. The results for the fourth quarter of 2004 include the reduction in revenue from a correction of one of the Company’s revenue recognition policies. The correction resulted in a reduction of diluted earnings per share of approximately $0.03 for the fourth quarter of 2004.
The correction related to the previously announced change in the timing of revenue recognition on certain cash receipts for contingency revenues. The Company previously recognized contingency fee revenue attributable to payments postmarked prior to the end of the period and received in the mail from consumers on the first business day after such period as applicable to the prior reporting period. The Company changed its policy in order to recognize contingency fee revenue when physically received. The impact of this correction was a $2.7 million reduction in revenues and a $947,000 reduction in net income, or $0.03 per diluted share, during the fourth quarter of 2004. No restatement of prior period financial statements is required for this correction.
Revenue in the fourth quarter of 2004 was $237.3 million, an increase of 26.5%, or $49.7 million, from revenue of $187.6 million in the fourth quarter of 2003.
NCO’s operations are organized into four market specific divisions that include: Accounts Receivable Management North America (“ARM North America”), Customer Relationship Management (“CRM”), Portfolio Management, and Accounts Receivable Management International (“ARM International”). For the fourth quarter of 2004, these divisions accounted for $176.8 million, $46.8 million, $26.0 million, and $3.1 million of revenue, respectively. Included in ARM North America’s revenue was $15.4 million of intercompany revenue from Portfolio Management and included in ARM International’s revenue was $86,000 of intercompany revenue from Portfolio Management. All intercompany revenue is eliminated in consolidation.
For the fourth quarter of 2003, the ARM North America, Portfolio Management and ARM International divisions accounted for $176.6 million, $20.3 million and $3.4 million of the revenue, respectively. Included in ARM North America’s revenue was $12.6 million of intercompany revenue from Portfolio Management and included in ARM International’s revenue was $101,000 of intercompany revenue from Portfolio Management. The CRM division was created in the second quarter of 2004 in connection with the acquisition of RMH Teleservices, Inc. (“RMH”) on April 2, 2004 and, accordingly, is not included in the results for 2003. All intercompany revenue is eliminated in consolidation.
NCO’s payroll and related expenses as a percentage of revenue increased to 52.2% for the fourth quarter of 2004 as compared to 45.8% for the same period in the prior year. The increase in payroll and related expenses as a percentage of revenue was primarily attributable to the CRM division. The CRM division has a more significant amount of payroll and related expenses as compared to the ARM business. The increase was also attributable to the additional revenue recorded in the fourth quarter of 2003 as a result of the amendment to the long-term collection contact since no expenses were incurred in that quarter in connection with the recognition of that revenue.
NCO’s selling, general and administrative expenses as a percentage of revenue decreased to 33.3% for the fourth quarter of 2004 as compared to 38.4% for the same period in the prior year. The decrease was primarily attributable to the difference in CRM’s expense structure discussed above.
In comparing the fourth quarter of 2004 to the fourth quarter of 2003, there are several additional factors to consider. In 2003, the Company amended a long-term contract, which resulted in additional revenue of $6.9 million. Because there were no related expenses, this amendment reduced selling, general and administrative expense as a percentage of revenue.
In the fourth quarter of 2004, the Company was able to resolve several outstanding matters. These included the settlement of two customer contracts, the negotiation of a settlement of an outstanding claim with a vendor, and the resolution of certain matters with other customers. The net result of these matters was a decrease in selling, general and administrative expenses of $3.0 million.
NCO also announced that it expects earnings per share to be approximately $1.70 to $1.80 per diluted share for 2005. This guidance does not include the potential impact from the adoption of FASB Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) on July 1, 2005. SFAS 123R requires that the cost of all share-based payments to employees, including stock option grants, be recognized in the financial statements based on their fair values, as currently permitted but not required under SFAS 123. We are currently evaluating the requirements of SFAS 123R and will update investors on the impact once we determine the method of adoption.
Commenting on the quarter, Michael J. Barrist, Chairman and Chief Executive Officer, stated, “2004 represented both a challenging and opportunistic year for NCO. During 2004 we began to once again see growth in our earnings as a result of our tactical efforts in business development and operational efficiency. More importantly, we began the strategic transition of NCO into a global provider of Business Process Outsourcing. Over the next few years this ongoing transition, including our expansion during 2004 into CRM, will allow us to meet our longer term goal of providing our investors with consistent growth in both revenue and earnings with enough diversity in services and geography to minimize the future effects of the types of challenges we have dealt with over the last few years.”
