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DEPRECIATION/AMORTIZATION
The Group’s depreciation/amortization for 2005 amounted to SEK 87.6 M
(99.3). Operating earnings before depreciation/amortization thereby amounted
to SEK 591.2 M (529.9).
EXPENSES FOR INCENTIVE PROGRAM
Operating earnings were charged with SEK 7.5 M (5.0) for warrants for the
Group’s Employee Stock Option Program 2003/2009. The expense does not
represent an actual disbursement by the company. The Employee Stock Option
Program comprises warrants to subscribe for 3,358,250 shares. The dilution
effect for 2005, calculated according to IAS 33 Earnings per share, corresponds
to 673,038 shares.
The Employee Stock Option Program did not dilute earnings for 2004 since
the share’s average market value was less than the present value of the option
premium. Most of the warrants were allotted in May 2004. In 2005 a limited
number of warrants were allotted in connection with new hires and promotions.
NET FINANCIAL ITEMS
Net fi nancial items amounted to SEK –31.4 M (–36.4), an improvement due to
low indebtedness and interest rates. During the fourth quarter indebtedness
rose, however, in connection with the share redemption and related increase in
interest expenses.
CASH FLOW AND INVESTMENTS
Cash fl ow from operating activities improved to SEK 527.0 M during the year,
compared to SEK 485.3 M in 2004. The improvement in cash fl ow is less than
the increase in working capital, which is partly due to tax payments. In 2004 a
one-time repayment of SEK 53.5 M was received for tax previously paid in the
UK for the years 2001–2003.
Investments in tangible fi xed assets amounted to SEK 34.7 M (37.1) and in
intangible fi xed assets other than goodwill SEK 62.2 M (34.5). The Group is not
engaged in any research and development other than the development of its IT
systems. Investments for the year largely pertain to hardware and software for IT
systems, mainly for production. Technological development is rapid and, if used
correctly, new technical solutions can improve effi ciency in receivables management.
At the same time, demands are growing for customized IT solutions, and
it is strategically important for Intrum Justitia to be able to continuously adapt to
changes in demand. Investments during the year mainly refer to the implementation
of a new production system in Norway and a discontinued project involving
a new production system in the UK.
For the full-year 2006 the Group anticipates investments in tangible and
intangible fi xed assets of SEK 100–120 M.
Payments for purchases of written off-receivables amounted to SEK 821.7 M
(266.8) during the year.
FINANCING
Net debt as of December 31, 2005 amounted to SEK 1,192.7 M, compared to
SEK 480.2 M at year-end 2004. The increase is mainly due to share redemptions
of SEK 590.5 M during the year.
Shareholders’ equity including the minority share amounted to SEK 1,316.1 M,
compared to SEK 1,531.0 M on December 31, 2004.
As of December 31, 2005 the Group had liquid assets of SEK 198.5 M,
compared to SEK 338.3 M a year earlier. On December 31, 2005 unutilized credit
facilities amounted to SEK 628.8 M. The corresponding fi gure on December 31,
2004 was SEK 385.8 M.
RISKS AND RISK MANAGEMENT
While not intended to be comprehensive, the following list presents a number
of risk factors that are considered especially important in determining Intrum
Justitia’s future.
OPERATIONAL RISKS
Operations in many countries
The international scope of Intrum Justitia’s business entails risks, mainly due to
differences in laws and regulations, various tax and accounting principles and
currency effects in the more than twenty countries where the Group is active.
There are major differences in legislation, culture, practices and market size
between countries. To succeed in CMS throughout Europe requires a local presence
and understanding of local conditions. Responsibility for managing and
developing operations must lie to a signifi cant extent with the Group’s regions
and national subsidiaries. The Group’s development is therefore dependent
on the knowledge, experience, integrity and commitment of local and regional
management as well as Group Management’s ability to oversee and control a
decentralized organization.
Expansion in different countries
Future expansion may give rise to strains on managerial, operational and fi nancial
resources stemming, for example, from the recruitment and training of new
employees and the management of additional offi ces, IT systems and client
contacts.
Opportunities to successfully complete acquisitions are dependent on Intrum
Justitia’s ability to identify and evaluate acquisition targets and to effectively integrate
them into existing operations. A potential acquisition may also depend on
the approval of a government authority or other third party.
Changes in the regulatory environment
The CMS industry is regulated by various national statutes and regulations, which
may also be affected by EU laws and directives. Changes in the regulatory
environment may curtail Intrum Justitia’s future operations or involve cost increases
in order to comply with regulations. Because of these risks, Intrum Justitia
continuously monitors the EU’s regulatory work in order to call attention to
potentially negative effects for European CMS companies and lobbies for
favorable rule changes.
Cyclicality
While certainly not unaffected by economic conditions, the CMS industry, in
Intrum Justitia’s experience, has historically been affected less by economic
fl uctuations than many other industries thanks to “stabilizing factors” during both
good times and bad. For Intrum Justitia, the effects of economic conditions in
individual markets are also mitigated by the Group’s geographic diversity.
During periods of economic growth the number of business transactions rises,
as does lending in general and thus the number of invoices in circulation. Payment
capacity also increases, and consequently the percentage of invoices that result in
overdue receivables and debt collection cases falls. In absolute terms, the number
of overdue receivables and collection cases usually rises, however, at the same
time that improved payment capacity leads to better opportunities to collect debt.
Conversely, during recession, the number of business transactions and
invoices decrease. Payment capacity is adversely affected, and consequently a
larger proportion of invoices lead to overdue receivables and collection cases.
The number of new cases decreases, while the number of debt surveillance
cases rises and opportunities to collect worsen.
FINANCIAL RISKS
Risks inherent in purchased debt
As part of its operations, Intrum Justitia acquires portfolios of written-off consumer
receivables and works actively to collect them. Unlike conventional collection
operations, where Intrum Justitia works on behalf of clients in return for commissions
and fees, in this case it assumes all the rights and risks associated with the
receivables. The portfolios are purchased at prices below their nominal value, and
Intrum Justitia retains the entire amount it collects, including interest and fees.
To minimize the risks in this business, Intrum Justitia exercises prudence in
its purchase decisions. The focus is on small and medium-sized portfolios with
relatively low average amounts, to help spread risks. Purchases are usually
made from clients with whom the Group has maintained long relationships, so
it is usually familiar with the receivables in question.
Intrum Justitia places high yield requirements on purchased portfolios. Before
every acquisition a careful assessment is made based on a projection of future
cash fl ows (collected amount) from the portfolio. In its calculations, Intrum Justitia
is aided by its long experience in collection management and its scoring
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