PRA Group, Inc. (Portfolio Recovery Associates) — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports results for the quarter ended December 31, 2010. All dollar amounts below are U.S. dollars.
Business context
PRA primarily purchases and collects defaulted consumer receivables, with additional fee-based services in collateral location, government revenue administration and class-action claims recovery. The company reports one segment. In March 2010, it acquired a 62% interest in Claims Compensation Bureau (CCB); it also acquired substantially all assets of Tax Return, Inc. in June.
Financial and operating metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenue | $372.7 million | $281.1 million |
| Income on finance receivables, net | $309.7 million | $215.6 million |
| Fee income | $63.0 million | $65.5 million |
| Operating expenses | $242.8 million | $200.5 million |
| Operating income / margin | $129.9 million / 34.8% | $80.6 million / 28.7% |
| Net income attributable to PRA | $73.5 million | $44.3 million |
| Diluted EPS attributable to PRA | $4.35 | $2.87 |
| Cash collections on owned portfolios | $529.3 million | $368.0 million |
| Cash receipts (collections plus fee income) | $592.4 million | $433.5 million |
| Net allowance charges | $25.2 million | $27.6 million |
| Operating cash flow | $143.6 million | $85.3 million |
For Q4 2010, revenue was $100.8 million, operating income was $36.3 million, net income attributable to PRA was $20.6 million, and diluted EPS was $1.20. Q4 2009 comparables were $73.2 million, $22.1 million, $12.4 million, and $0.80, respectively.
At December 31, cash was $41.1 million, net finance receivables were $831.3 million, total assets were $995.9 million, total liabilities were $490.9 million, and stockholders’ equity was $490.5 million. Line-of-credit borrowings were $300.0 million; total debt including long-term debt was $302.4 million. The $407.5 million credit facility had $107.5 million available. The company reported compliance with its debt covenants.
Changes versus the prior comparable period
- Revenue rose 32.6%, PRA-attributable net income rose from $44.3 million to $73.5 million, and diluted EPS increased from $2.87 to $4.35.
- Owned-portfolio cash collections increased 43.8%. Management attributed growth to higher portfolio acquisitions and collection efficiencies, including improvements to dialer technology, account scoring and internal legal collections.
- Operating expenses increased 21.1%, slower than revenue growth; operating expenses declined to 41.0% of cash receipts from 46.3%. Compensation and legal costs were the largest increases.
- Fee income declined 3.8%, reflecting weaker IGS and MuniServices activity, partly offset by CCB revenue. Management cited lower automotive financing, reduced California sales and use tax volumes, and municipal budget cuts.
- Portfolio purchases cost $367.4 million in 2010 versus $288.9 million in 2009, although purchased face value fell to $6.8 billion from $8.1 billion. Bankrupt portfolios were 59% of 2010 purchase spending.
- Cash increased to $41.1 million from $20.3 million, while line-of-credit borrowings declined to $300.0 million from $319.3 million. A February 2010 equity offering generated $71.7 million in net proceeds.
Outlook, risks and unusual items
- Outlook: No specific earnings or revenue guidance is provided. Management said operating cash generation, existing cash and available credit were expected to fund operations, capital expenditures, approximately $234.4 million of forward-flow purchase commitments, and a material amount of additional portfolio purchases over the next 12 months.
- Portfolio estimates: Estimated remaining collections (ERC) were $1.724 billion, including $749.4 million from purchased bankruptcy portfolios. PRA’s revenue and asset values depend on forecasts of collection amounts and timing; the $76.4 million allowance at year-end was up from $51.3 million.
- Portfolio mix and timing: Bankruptcy purchases offer lower collection costs but may yield delayed receipts; management noted that unsecured bankruptcy claims can take 12–18 months to generate meaningful collections. The company also cautioned that more competitive pricing and lower purchase multiples may reduce yields and margins.
- Debt and interest rates: The new facility, entered into in December 2010, matures in 2014 for the revolving portion and is secured by substantially all assets. Revolving borrowings were variable-rate; management estimated a 200-basis-point rate increase would have raised 2010 interest expense by about $5.0 million. The company terminated its $50 million interest-rate swap in November 2010 and paid $416,000.
- Acquisition obligation: CCB’s 38% noncontrolling interest had an estimated redemption value of $22.8 million. The holder’s put right begins in March 2012; the company’s maximum stated purchase obligation is $22.8 million.
- Legal and tax matters: A Missouri Attorney General enforcement action was dismissed with prejudice in 2010 but remained on appeal; potential loss was not estimable. The IRS disputed PRA’s tax cost-recovery method and treatment of unused credit-line fees for tax years 2005–2007. PRA contested the findings and recorded no reserve, but an adverse outcome could require tax and interest payments.
- Other risks: Results are exposed to consumer economic conditions, portfolio supply and pricing, collection performance, account-document availability, employee turnover, extensive debt-collection regulation, competition, and technology or operating disruptions. Collector turnover, excluding trainees who did not complete training, was 39% in 2010.
- Reporting and controls: The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded CCB, which represented less than 5% of consolidated assets and revenue.
Most important facts for investors to verify
- Whether actual collections support the $1.724 billion ERC forecast, particularly for newer bankruptcy portfolios, and how future allowance charges may change.
- Whether portfolio acquisition pricing and the 59% bankruptcy purchase mix produce the targeted returns as the new portfolios mature.
- Whether fee-service businesses stabilize after the 2010 decline, and whether CCB meets integration and performance expectations.
- Available credit, covenant headroom, variable-rate exposure, and funding needs for the forward-flow commitments and additional purchases.
- Developments in the Missouri appeal and IRS tax dispute, including any resulting financial exposure.
- The terms and eventual cost of the CCB noncontrolling-interest put, and the status of CCB’s internal controls following its exclusion from the 2010 control assessment.