PRA Group, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011; comparisons are with the three and nine months ended September 30, 2010 unless noted. Financial amounts below are in millions of dollars unless stated otherwise. The company purchases and collects defaulted consumer receivables and also earns fee income from receivables-management services.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $114.3 | $95.5 | $340.8 | $272.0 |
| Finance receivable income, net | $102.9 | $80.0 | $299.2 | $224.9 |
| Fee income | $11.4 | $15.5 | $41.7 | $47.1 |
| Operating expenses | $70.4 | $62.7 | $209.9 | $178.4 |
| Operating income | $43.8 | $32.8 | $132.1 | $93.6 |
| Net income attributable to PRA | $25.5 | $18.5 | $74.2 | $52.8 |
| Diluted EPS | $1.48 | $1.08 | $4.31 | $3.15 |
| Operating margin | 38.5% | 34.4% | 38.6% | 34.5% |
- Revenue increased 19.6% in Q3 and 25.3% year to date. Finance receivable income growth reflected higher collections; owned-portfolio cash collections rose 32.6% in Q3 to $182.2 million and 36.4% year to date to $525.2 million.
- Fee income fell 26.5% in Q3 and 11.5% year to date, primarily reflecting weakness in PRA Location Services and claims processing, partly offset year to date by government-services and CCB contributions.
- Operating expenses rose more slowly than revenue, and the operating margin improved. Management attributed collection performance to operational efficiencies, dialer technology, account-scoring analytics, and expanded internal legal collections. Nine-month net allowance charges were $7.1 million, down from $19.7 million.
- Net cash from operating activities was $123.2 million for the first nine months, versus $103.4 million. Investing activities used $91.7 million, including $314.2 million of net finance-receivable acquisitions, offset in part by $226.0 million of principal collections. Financing activities used $42.5 million; cash declined $11.1 million to $30.0 million.
Balance sheet, debt, and liquidity
- At September 30, 2011, total assets were $1,064.1 million, including net finance receivables of $919.5 million; total liabilities were $478.9 million and stockholders’ equity was $568.3 million.
- Credit-facility borrowings were $260.0 million, down from $300.0 million at December 31, 2010; unused availability was $147.5 million, subject to borrowing-base limits and covenants. The facility’s total stated availability was $407.5 million. The company reported covenant compliance.
- The revolving facility matures in December 2014; a $50 million fixed-rate tranche matures in May 2012. Borrowings are secured by substantially all assets. The reported weighted-average rate on revolving borrowings at quarter-end was 3.12%; management reported a 3.69% average borrowing rate for the nine-month period.
- Forward-flow purchase commitments were approximately $116.2 million. Management said operating cash, existing cash, and available borrowings should fund operations, planned capital expenditures, these commitments, and a material amount of additional portfolio purchases over the next 12 months. No earnings or revenue guidance was provided.
Material changes, outlook, and risks
- Portfolio purchases were $319.5 million for the nine months, versus $281.9 million; purchased face value increased 74% to $8.6 billion. Estimated remaining collections were $1,925.3 million, 15% above the prior-year comparison cited by the company.
- Management noted that increased competition and portfolio pricing can reduce purchase multiples and yields, potentially increasing amortization rates and reducing margins and profitability. Portfolio earnings also depend on estimated collections, timing, and valuation-allowance judgments. The allowance balance was $83.5 million at September 30, 2011, versus $71.0 million a year earlier.
- The IRS issued a notice of deficiency in August 2011 for tax years 2005–2007, challenging the company’s cost-recovery revenue-recognition method for tax purposes and treatment of unused credit-facility fees. The company said it intended to petition the U.S. Tax Court in Q4 2011 and believed its positions were supportable; payment of assessed taxes and interest could require additional financing. The IRS also expanded its audit to tax years 2008 and 2009.
- Five putative class actions allege violations of the Telephone Consumer Protection Act involving calls to cellular phones without prior express consent; a motion to consolidate was scheduled for hearing in December 2011. Missouri’s rehearing or transfer request remained pending after an appellate court affirmed dismissal of the state’s enforcement action. Management said pending litigation was not expected to materially affect financial condition, while acknowledging an unfavorable outcome could materially affect a particular period.
- Other risks identified include economic weakness, changes in collection or bankruptcy laws, portfolio supply and pricing, access to credit, interest-rate increases, staffing and productivity, regulatory compliance, and collection-estimate revisions. A 200-basis-point rate increase was estimated to add $1.0 million to Q3 interest expense, all else equal.
Key facts for investors to verify
- Whether strong cash collections and estimated remaining collections translate into realized portfolio returns, and whether purchase pricing remains profitable as competition and portfolio mix change.
- How portfolio performance and collection forecasts affect future allowance charges, finance-receivable income, and carrying values.
- Developments and potential financial exposure in the IRS dispute, including any tax-court filing, and in the TCPA class actions and Missouri matter.
- Available borrowing capacity after borrowing-base and covenant requirements, and the company’s ability to finance planned purchases while managing interest-rate exposure.
- Whether fee-based businesses stabilize or continue to decline, and whether higher legal, communications, and other operating costs remain proportionate to collections.