PRA Group, Inc. (Portfolio Recovery Associates) — FY 2011 Form 10-K
Business context and reporting period
Reports the fiscal year ended December 31, 2011, with quarterly results including Q4 2011. PRA primarily buys and collects charged-off consumer receivables; it also provides vehicle-location and recovery, government revenue-administration, and class-action claims services. The filing reports one segment. Figures below are in U.S. dollars; “million” is abbreviated as “m.”
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $458.9m | $372.7m |
| Finance-receivable income, net | $401.9m | $309.7m |
| Fee income | $57.0m | $63.0m |
| Operating income | $178.0m | $129.9m |
| Net income attributable to PRA | $100.8m | $73.5m |
| Diluted EPS | $5.85 | $4.35 |
| Cash collections on owned portfolios | $705.5m | $529.3m |
| Cash receipts (collections plus fee income) | $762.5m | $592.4m |
| Operating cash flow | $173.0m | $143.6m |
- Revenue increased 23.1%; PRA-attributable net income rose 37.2%. Operating margin was 38.8% (34.8% in 2010), and net income was 22.0% of revenue (19.7% in 2010). Operating expenses rose 16.2% to $282.1m; expenses were 37% of cash receipts versus 41% in 2010.
- Net allowance charges on finance receivables declined to $10.2m from $25.2m. Finance-receivable purchases were $408.4m at cost, on $9.8b face value; estimated remaining collections were $1.95b at year-end.
- Investing activities used $104.8m, primarily reflecting portfolio acquisitions and capital spending; financing activities used $82.7m, including net line-of-credit repayments of $80m. Cash declined to $26.7m from $41.1m.
- At year-end, total assets were $1.07b, net finance receivables $926.7m, and stockholders’ equity $595.5m. Debt, including capital-lease obligations, was $221.2m; the line-of-credit balance was $220m. The $407.5m credit facility had $187.5m unused availability, subject to borrowing-base and covenant limits. PRA reported compliance with its covenants.
Material changes versus prior comparable periods
- Growth in portfolio collections drove the increase in finance-receivable income and overall earnings. Management cited improved scoring, dialer processes, and expanded internal legal-collection capabilities.
- Fee income fell 9.5%, mainly because of lower PRA Location Services activity amid weaker automobile financing and collateral recovery volumes; government-services revenue partly offset the decline.
- Legal collection fees and costs rose with portfolio growth and increased legal referrals. Interest expense increased 16.5%, principally as the average borrowing rate rose to 3.71% from 2.46%, partly offset by lower average variable-rate borrowings.
- Q4 2011 revenue was $118.1m versus $100.8m in Q4 2010; PRA-attributable net income was $26.6m versus $20.6m, and diluted EPS was $1.54 versus $1.20.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flow, cash on hand, and available credit were expected to fund operations, planned capital expenditures, committed portfolio purchases, and additional purchases over the next 12 months. The filing does not provide a numerical earnings or revenue forecast.
- On January 16, 2012, PRA acquired all of Mackenzie Hall Holdings, a UK debt-collection and purchasing business, for £33.5m (approximately $51.3m), financed with borrowings. The acquisition valuation was not complete when the filing was issued; UK operations add currency, regulatory, and integration risks.
- On February 2, 2012, the board authorized a share-repurchase program of up to $100m, subject to market conditions and the credit agreement. PRA paid no regular dividends in 2011 or 2010.
- The IRS disputed PRA’s use of the cost-recovery method for tax revenue recognition and the treatment of unused credit-facility fees for 2005–2007. PRA petitioned the U.S. Tax Court and recorded no reserve for these positions, asserting it was more likely than not to prevail. The IRS expanded its audit to 2008 and 2009. The related deferred tax liability was $195.3m; an adverse outcome could require tax, interest, and penalties.
- Five putative class actions alleging violations of the Telephone Consumer Protection Act were consolidated. Potential losses could not be estimated; the company said an adverse class outcome could be material. A separate Missouri Attorney General matter was concluded in PRA’s favor. Other than the TCPA matter, management estimated the high end of potential litigation losses above established liabilities at less than $1m.
- Key business risks include collection-estimate error and allowance charges, availability and pricing of receivable portfolios, consumer and economic conditions, changing collection regulation, documentation and litigation outcomes, staff turnover, competitive pressure, and credit-facility covenants and variable rates. A 200-basis-point rate increase was estimated to add $4.3m of 2011 interest expense, all else equal. No interest-rate hedges were in place at year-end.
- Auditor KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective disclosure controls and financial-reporting controls.
Important facts for investors to verify
- Whether collections and portfolio cash-flow estimates support the reported $1.95b of estimated remaining collections, and whether future allowance charges change materially.
- Outcomes and potential exposure from the IRS tax dispute and consolidated TCPA litigation, including any changes to reserves or disclosures.
- Funding, purchase-price allocation, integration progress, and foreign-exchange exposure for the Mackenzie Hall acquisition.
- Actual borrowing availability under the facility, covenant headroom, refinancing of the $50m fixed-rate loan due May 2012, and use of the authorized buyback.
- Whether fee-income weakness in vehicle services persists and whether rising legal-collection activity produces sufficient incremental net returns.