PRA Group, Inc. (Portfolio Recovery Associates) — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. The company purchases and collects defaulted consumer receivables and also provides receivables servicing and claims-settlement services. It reports one segment.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $183.0 million | $147.9 million | $352.5 million | $288.0 million |
| Operating income | $73.8 million | $54.6 million | $139.7 million | $99.0 million |
| Operating margin | 40.4% | 36.9% | 39.6% | 34.4% |
| Net income attributable to PRA | $43.6 million | $32.0 million | $82.2 million | $57.5 million |
| Diluted EPS | $0.85 | $0.62 | $1.60 | $1.11 |
Q2 income from finance receivables rose 27.1% to $168.6 million; fee income declined 5.9% to $14.4 million. Q2 cash collections increased 27.5% to $296.4 million. For the first half, collections rose 27.0% to $571.9 million, while net finance-receivable income increased 25.9% to $323.4 million and fee income fell 6.6% to $29.2 million.
Six-month operating cash flow was $97.3 million, versus $54.2 million a year earlier. Investing used $165.5 million, primarily reflecting $407.3 million of portfolio purchases, partly offset by $248.5 million of collections applied to principal. Financing provided $79.2 million, including net credit-facility borrowings. Cash increased $10.8 million to $43.5 million.
Balance sheet and liquidity
At June 30, 2013, total assets were $1.457 billion, including net finance receivables of $1.237 billion. Total liabilities were $655.0 million and stockholders’ equity was $791.9 million. Debt under the credit facility totaled approximately $413.5 million: $216.0 million drawn on the revolving facility and $197.5 million on the term loan. Cash was $43.5 million, with $184.0 million of stated revolver availability, subject to borrowing-base limits and covenants. The company reported compliance with its debt covenants.
Material changes and management commentary
- Revenue and earnings growth reflected higher collections and improved operating efficiency, particularly in core collection operations. Management cited refined account-scoring analytics and expanded internal legal collections.
- Operating expenses increased 16.9% in Q2, below revenue growth, but legal collection costs, compensation and outside fees rose. Outside fees included higher legal-reserve accruals and corporate legal expenses.
- Portfolio purchases totaled $415.4 million in the first half, up 75.7% from $236.5 million in the comparable period; face value purchased was $5.04 billion versus $2.98 billion. Net finance receivables increased 28% year over year to $1.237 billion. Estimated remaining collections were $2.636 billion, up 24% year over year.
- Finance-receivable valuation depends on proprietary estimates of collection amounts and timing. The allowance was $94.1 million at quarter-end; first-half net allowance charges were $1.0 million, with charges on bankruptcy portfolios partly offset by reversals on core portfolios.
- Management stated that operating cash flows, collections, existing cash and available borrowings should fund operations, planned capital expenditures, forward-flow commitments and normal-course portfolio purchases for the next 12 months. Acquisitions or unusually high portfolio purchasing could require additional financing. No specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- The company has variable-rate debt and no interest-rate hedging program. It estimated that a 200-basis-point rate increase would raise Q2 interest expense by $2.0 million, all else equal. Foreign-exchange movements also affect its UK subsidiary.
- An IRS dispute concerns the company’s cost-recovery tax method and treatment of unused credit-line fees for tax years 2005–2007; the matter is in Tax Court. The company believes its positions are supportable and recorded no reserve, but an adverse outcome could require taxes, interest and penalties and potentially additional financing.
- Putative Telephone Consumer Protection Act class actions remain pending. A related California injunction limits certain dialer calls to cellular numbers obtained through skip-tracing; the Supreme Court denied the company’s certiorari petition in May 2013. No final merits determination was reported.
- Management identified a reporting unit with declining revenue, profitability and recent losses. It concluded fair value exceeded carrying value at June 30, but warned continued deterioration could result in impairment; $6.4 million of goodwill was assigned to that unit. No impairment charge was recorded.
- The remaining 19% interest in Claims Compensation Bureau is subject to put/call provisions; maximum stated redemption value was $11.4 million. The NCM acquisition earn-out liability was recorded at $8.3 million, with a contractual maximum of $15.0 million.
- The board declared a three-for-one stock split, distributed August 1, 2013. Per-share and share data in the filing are retroactively adjusted for the split.
Important facts for investors to verify
- Whether cash collections and portfolio-level performance continue to support the company’s $2.636 billion estimated remaining collections and carrying values.
- Portfolio purchase volumes, pricing, mix and returns, particularly the substantial increase in bankruptcy receivable acquisitions.
- Debt growth, borrowing-base availability, covenant headroom and exposure to higher interest rates.
- Developments in the IRS Tax Court dispute, TCPA litigation and the California calling restrictions.
- Performance of the underperforming reporting unit and any future goodwill impairment assessment.
- Whether reported operating cash flow remains sufficient to fund portfolio purchases and other commitments without materially higher borrowing.