PRA Group, Inc. (then Portfolio Recovery Associates, Inc.) — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; balance-sheet figures are as of September 30, 2012. Dollar amounts below are in millions unless noted. The company purchases and collects defaulted consumer receivables and also provides receivables-management and related services. Its January 2012 acquisition of UK-based Mackenzie Hall Holdings (MHH) expanded operations internationally.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $150.5 | $114.3 | $438.5 | $340.8 |
| Income from operations | $57.1 | $43.8 | $156.1 | $132.1 |
| Net income attributable to PRA | $33.3 | $25.5 | $90.8 | $74.2 |
| Diluted EPS | $1.96 | $1.48 | $5.30 | $4.31 |
| Operating margin | 37.9% | 38.4% | 35.6% | 38.8% |
- Q3 revenue increased 31.7% year over year; net income attributable to PRA increased 31%. Nine-month revenue increased 28.7%, and attributable net income increased 22%.
- Finance-receivable income, net, was $135.8 million in Q3 and $392.6 million year to date. Fee income was $14.8 million and $46.0 million, respectively. Q3 owned-portfolio cash collections rose 25.7% to $229.1 million; nine-month collections rose 29.4% to $679.5 million.
- Operating expenses increased 32.8% in Q3 and 34.6% year to date. Legal collection costs rose 62.9% in Q3 and nearly doubled year to date, reflecting expanded legal account placements and related upfront costs. Operating expenses as a share of cash receipts rose to 38.3% in Q3 from 36.4%, and to 38.9% year to date from 37.0%.
- At September 30, finance receivables, net, were $973.6 million; the related valuation allowance was $90.8 million, versus $83.5 million a year earlier. Estimated remaining collections on domestic portfolios were about $2.1 billion.
- Nine-month operating cash flow was $93.7 million, down from $123.2 million. Investing cash outflow was $96.6 million, including $48.7 million net cash paid for MHH; financing provided $8.2 million. Cash increased to $31.5 million from $26.7 million at year-end 2011.
- At quarter end, borrowings under the credit facility were $250.0 million, with $214.5 million of reported unused capacity under the $464.5 million facility, subject to borrowing-base and covenant limits. Revolving borrowings carried a 2.97% weighted-average annual rate. The company reported compliance with its covenants.
- Total assets were $1.170 billion, total liabilities $479.2 million, and stockholders’ equity $670.5 million. The company repurchased 331,449 shares for $22.7 million during the first nine months under a $100 million authorization.
Material changes versus comparable periods
- Collections and finance-receivable revenue grew strongly, which management attributed partly to collection-process efficiencies, refined account-scoring analytics, and expanded internal legal-collection capabilities.
- Revenue growth outpaced attributable earnings growth year to date, while operating margin declined from 38.8% to 35.6%. Higher legal collection costs and legal-related outside expenses were significant pressures.
- Fee income growth reflected MHH and PRA Government Services, partly offset by weaker PRA Location Services activity, which management linked to the economic slowdown in automobile financing and collateral recovery. Nine-month fee income also faced a comparison with larger class-action settlements at CCB in 2011.
- Debt purchases were lower by face value year to date: $3.84 billion versus $8.59 billion in 2011, while purchase cost was $325.9 million versus $319.5 million. Management noted that portfolio mix, pricing, and estimated returns vary by period.
- The MHH acquisition added UK revenue and assets; goodwill increased to $100.5 million from $61.7 million at year-end 2011. The purchase-price allocation remained provisional.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided. Management said operating cash generation, existing cash, and available credit were expected to fund operations, planned capital expenditures, forward-flow commitments, and a material amount of additional portfolio purchases over the next 12 months.
- Forward-flow purchase commitments were approximately $166.3 million. The credit facility matures in December 2014, is secured by substantially all company assets, and contains financial and operating covenants. Contractual obligations totaled approximately $505.6 million, including debt, leases, purchase commitments, and employment agreements.
- Collection outcomes and finance-receivable income depend on estimated future cash flows and timing, assessed using proprietary models. Underperformance may require valuation allowances; key sensitivities include economic conditions, collection laws and regulations, model estimates, operational effectiveness, and collector retention. Management described competitive portfolio pricing as a potential source of lower yields and profitability.
- The IRS disputed the company’s tax treatment for 2005–2007, including use of cost recovery for tax revenue recognition. The company is contesting the matter in U.S. Tax Court and recorded no uncertain-tax-position reserve, stating it believes its position will be sustained. An adverse outcome could require significant tax, interest, and possibly additional financing. The reported deferred tax liability associated with book-tax differences was $191.4 million.
- TCPA putative class actions were consolidated in federal court. A separate California-related preliminary injunction restricting certain autodialer calls to cellular phones was affirmed by the Ninth Circuit; the company sought rehearing. The matters remained unresolved as of the filing. Management said other pending proceedings were not expected to have a material adverse effect, but acknowledged outcomes could be material.
- Other risks include variable-rate debt exposure (a 200-basis-point rate increase was estimated to add $1.3 million to quarterly interest expense), pound-sterling exchange-rate exposure following MHH, acquisition integration, goodwill impairment, and regulatory or reputational risks. No interest-rate hedges were in place.
Investor facts to verify
- Whether cash collections and estimated remaining collections support the carrying value of the receivables portfolio, and how allowance levels evolve.
- Whether expanded legal collection activity produces enough future collections to offset higher legal costs and the observed margin pressure.
- How MHH performs and whether its provisional purchase-price allocation or integration assumptions change.
- Developments in the IRS Tax Court dispute, TCPA litigation, and the California autodialer injunction.
- Available borrowing capacity under the borrowing base and covenants, and the company’s ability to fund committed and additional portfolio purchases while maintaining liquidity.