PRA Group, Inc. — Q2 2010 Form 10-Q
Business and period: Portfolio Recovery Associates, Inc. (PRA) purchases and collects defaulted consumer receivables and provides receivables-management services. The unaudited filing covers the quarter and six months ended June 30, 2010, compared with the same 2009 periods. PRA reports one segment. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | H1 2010 | H1 2009 |
|---|---|---|---|---|
| Total revenue | $93.0 | $71.1 | $176.4 | $139.3 |
| Operating income | $34.3 | $21.2 | $60.8 | $39.7 |
| Net income attributable to PRA | $19.5 | $11.7 | $34.3 | $21.8 |
| Diluted EPS | $1.14 | $0.76 | $2.06 | $1.42 |
| Operating margin | 36.9% | 29.9% | 34.4% | 28.5% |
| Net margin attributable to PRA | 21.0% | 16.7% | 19.4% | 15.7% |
- Revenue rose 30.8% in Q2 and 26.6% in H1. Finance-receivable income increased 42.4% and 37.6%, respectively, while fee income declined 5.8% in Q2 and 7.4% in H1.
- Operating expenses increased more slowly than revenue: 17.6% in Q2 and 16.1% in H1. Management cited higher collection staffing, legal costs, technology and acquisition-related amortization; expenses as a share of cash receipts decreased year over year.
- Owned-portfolio cash collections were $128.4 million in Q2 and $247.6 million in H1, versus $90.5 million and $180.4 million, respectively, in 2009. Net allowance charges against finance-receivable income were $6.3 million for Q2 and $13.2 million for H1, compared with $3.9 million and $10.1 million.
- H1 operating cash flow was $67.3 million, up from $39.8 million. Investing used $110.0 million, chiefly for receivable purchases and acquisitions; financing provided $40.7 million, including $71.7 million net proceeds from an equity offering. Cash declined $2.0 million to $18.3 million.
- At June 30, finance receivables, net were $775.6 million, including a $64.4 million valuation allowance; estimated remaining collections were $1.612 billion. Total assets were $915.0 million and stockholders’ equity was $448.7 million.
- Line-of-credit borrowings were $289.5 million against a stated $365 million facility, or $75.5 million gross availability. The agreement also limits monthly borrowings to 30% of eligible estimated remaining collections. The company reported covenant compliance. The $315 million revolving portion expires May 2, 2011; a $50 million fixed-rate portion expires May 4, 2012. Long-term debt was $1.2 million.
Material changes and management outlook
- On March 15, PRA acquired 62% of Claims Compensation Bureau (CCB) for $23 million cash plus $2 million contingent consideration. CCB adds class-action claims recovery and payment processing. The remaining 38% is subject to purchase rights and a holder put; the maximum stated consideration is $22.8 million. PRA also acquired substantially all assets of Tax Return, Inc. for $0.5 million.
- H1 receivable-purchase cost increased to $184.9 million from $135.8 million, while face value purchased decreased to $3.56 billion from $4.35 billion. Management said acquisition pricing and portfolio quality vary and that competitive pricing can reduce yields and profitability.
- No formal earnings or revenue guidance is provided. Management believed operating cash flow, cash on hand and available borrowing capacity would fund operations, planned capital expenditures, committed forward-flow purchases of approximately $167.7 million, and a material amount of additional portfolio buying over the next 12 months. PRA was pursuing a larger syndicated credit facility for the second half of 2010, no later than the current facility’s expiration, and retained up to $74.5 million of unused shelf-registration capacity after the February equity issuance.
- Risks include collection performance and economic conditions, portfolio pricing and availability, staffing and productivity, regulatory changes, and financing access. Cash collections are seasonal, generally higher in the first half. A 200-basis-point rate increase was estimated to raise quarterly interest expense by $1.2 million at Q2 2010 borrowing levels.
- The IRS disputes PRA’s use of the cost-recovery method for tax revenue recognition and its treatment of unused line fees. PRA appealed and believed its positions would prevail; an adverse outcome could require near-term tax and interest payments and additional financing. The filing gives no clear estimate of potential exposure.
- Two purported class-action counterclaims concerning PRA’s arbitration practices remained unresolved; potential loss could not be estimated. A Missouri Attorney General enforcement action was dismissed June 25, 2010, and the Attorney General filed an appeal July 26. The company said disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether collection growth and the estimated remaining collections underlying finance-receivable income are sustained, and how allowance charges and portfolio forecasts evolve.
- Actual availability under the credit facility after ERC-based borrowing limits, and completion and terms of the planned refinancing before the revolving line expires in May 2011.
- CCB’s contribution to results, deferred purchase consideration, and the timing and economics of any purchase or put of its remaining interest.
- Outcome and possible financial impact of the IRS tax dispute and the arbitration-related class-action counterclaims; monitor the Missouri appeal.
- How the mix shift toward finance-receivable income, acquisition pricing, seasonality and higher legal costs affect margins and cash generation.