PRA Group, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance sheet comparisons are to December 31, 2011 unless otherwise noted. Unaudited consolidated results. The company purchases and collects defaulted consumer receivables and also provides fee-based services.
Financial performance
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $140.1 million | $111.8 million; up 25.4% |
| Finance receivable income, net | $124.2 million | $96.0 million; up 29.4% |
| Fee income | $15.9 million | $15.8 million; up 0.6% |
| Operating expenses | $95.7 million | $69.1 million; up 38.6% |
| Operating income / margin | $44.4 million / 31.7% | $42.7 million / about 38.2% |
| Net income attributable to PRA | $25.5 million | $23.1 million; up 10.1% |
| Diluted EPS attributable to PRA | $1.47 | $1.34 |
| Cash collections on owned portfolios | $218.0 million | $166.7 million; up 30.8% |
| Net cash from operations | $20.1 million | $43.3 million |
| Cash and cash equivalents | $28.1 million | $26.7 million at year-end |
| Finance receivables, net | $945.2 million | $926.7 million at year-end |
| Line of credit borrowings | $265.0 million | $220.0 million at year-end |
Net allowance charges were $0.5 million, compared with $4.0 million in Q1 2011. The effective tax rate was 39.7%, versus 40.5%. Operating expenses rose faster than revenue, driven notably by legal collection costs, which increased to $23.7 million from $9.3 million. Management said expanded legal placements created significant initial costs intended to support future collections.
Business developments and material changes
- On January 16, 2012, PRA acquired all of Mackenzie Hall Holdings Limited (MHH), a Scotland-based receivables recovery and portfolio purchasing business, for approximately $51.3 million. The acquisition expanded PRA into the United Kingdom. Purchase-price allocations remained provisional at filing; $34.3 million of goodwill was recorded.
- Q1 revenue growth was primarily associated with higher portfolio collections. Management cited improved collection operations, including dialer technology, account scoring and expanded internal legal capabilities.
- Fee income was nearly flat: MHH and PRA Government Services growth was offset by lower PRA Location Services and claims-processing revenue. The company attributed the Location Services decline partly to weaker automobile financing and collateral recovery activity.
- Domestic portfolio purchases cost approximately $109.0 million for portfolios with $1.34 billion face value, compared with $107.9 million for $1.49 billion face value in Q1 2011. Bankruptcy portfolios represented 52% of Q1 2012 purchases.
- Goodwill and intangible assets increased substantially with the MHH acquisition. Foreign currency translation contributed $1.3 million to other comprehensive income.
Cash flow, debt and liquidity
- Operating cash flow fell to $20.1 million from $43.3 million, principally because deferred tax expense was $0.4 million versus $14.1 million in the prior-year quarter, alongside working-capital movements.
- Investing activities used $64.2 million, including $48.7 million net cash paid for MHH and $108.2 million of net finance receivable acquisitions, partly offset by $93.8 million of collections applied to principal.
- Financing activities provided $44.0 million, primarily reflecting $45.0 million of net credit-line borrowings. Cash increased by $1.4 million to $28.1 million.
- At March 31, the facility had $407.5 million of stated aggregate capacity, subject to borrowing-base limits and covenants; management reported $142.5 million of unused capacity in its highlights. On April 20, after quarter-end, PRA increased commitments by $51.0 million to $458.45 million. The filing later describes $193.5 million of availability against that expanded facility, subject to borrowing-base and covenant restrictions.
- The credit agreement is secured by substantially all company assets and includes leverage, tangible-net-worth, borrowing-base and other covenants. PRA reported compliance at March 31. Management believed operating cash flows, cash and available borrowings would fund operations, planned capital expenditures, committed purchases and additional portfolio acquisitions over the next 12 months.
Outlook, risks and contingencies
- No quantitative earnings or revenue guidance was provided. Management cautioned that Q1 results may not indicate future results and emphasized that portfolio buying, pricing and collection outcomes can vary.
- Management described increased legal-collection spending as an investment expected to generate additional future cash collections and revenue; this expected benefit is not assured.
- The IRS disputes PRA’s cost-recovery method for tax revenue recognition and treatment of unused credit-line fees for tax years 2005–2007. PRA petitioned the U.S. Tax Court and believes its positions are supportable. An adverse outcome could materially affect results and financial condition and could require additional financing. The IRS expanded its audit to include 2008–2010. The deferred tax liability related to debt-purchase revenue recognition was $195.3 million at March 31.
- Five putative class actions alleging Telephone Consumer Protection Act violations were consolidated. Potential losses could not be estimated; the filing says damages could be material if a class is certified and the matters do not settle or PRA does not prevail. For other litigation, management estimated the high end of potential losses above established liabilities at less than $1 million.
- Other principal risks include collection-estimate and allowance uncertainty, regulation and changes in collection or bankruptcy law, portfolio availability and purchase pricing, competition, staffing, acquisition integration, credit-market access, interest rates, and the new UK operation and currency exposure.
- Forward-flow commitments were approximately $212.5 million. The company also disclosed a potential maximum $22.8 million payment to acquire the remaining 38% of Claims Compensation Bureau (CCB), subject to the applicable call and put arrangements.
- The Board authorized a $100 million share repurchase program in February; PRA repurchased 30,600 shares in Q1 for an average $68.02 per share. The company reported no material change in internal control over financial reporting and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether collection growth and portfolio performance sustain the estimates underlying finance receivable income, estimated remaining collections and the $87.1 million valuation allowance.
- Whether expanded legal collections deliver the expected future cash flows and whether the sharp increase in legal collection costs persists.
- The Tax Court outcome, potential assessments, interest and penalties, and the status and scope of the IRS’s expanded examination.
- Developments in the consolidated TCPA litigation, including class certification and any basis to estimate potential exposure.
- Final MHH purchase-price allocation, integration performance, and the effects of UK operations and foreign exchange movements.
- Actual borrowing availability under borrowing-base and covenant restrictions, alongside the April 20 facility increase and the company’s portfolio purchase commitments.