Business context and reporting period
Portfolio Recovery Associates, Inc. (PRA Group) filed this unaudited Form 10-Q for the quarter ended September 30, 2010. The company primarily purchases and collects charged-off consumer receivables and also provides fee-based receivables, government-services and claims-processing services. Results include Claims Compensation Bureau (CCB) from its March 15, 2010 acquisition; the company reports one segment.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data. Prior-period comparisons are year over year.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $95.5 | $68.6 | $272.0 | $207.9 |
| Operating income | $32.8 | $18.8 | $93.6 | $58.5 |
| Net income attributable to PRA | $18.5 | $10.1 | $52.8 | $31.9 |
| Diluted EPS | $1.08 | $0.65 | $3.15 | $2.07 |
| Operating margin | 34.4% | 27.3% | 34.5% | 28.1% |
- Q3 finance-receivable income, net of allowance charges, was $80.0 million; fee income was $15.5 million. Owned-portfolio cash collections were $137.4 million, up 48.7%.
- Nine-month operating cash flow was $103.4 million, versus $64.2 million. Investing used $143.0 million and financing provided $39.7 million; cash increased $0.03 million to $20.3 million.
- At September 30, finance receivables, net were $807.2 million, with a $71.0 million valuation allowance; estimated remaining collections were $1.67 billion.
- Line-of-credit borrowings were $288.5 million against a $365 million facility, with stated availability of $76.5 million. The company also had $1.0 million of long-term debt. Total liabilities were $464.8 million and stockholders’ equity was $468.4 million; redeemable noncontrolling interest was $14.5 million.
- Net proceeds from a 2010 equity offering were $71.7 million. The company said it was in compliance with credit-facility covenants.
Material changes versus the prior comparable period
- Q3 revenue rose 39.2% and PRA-attributable net income rose about 83%; nine-month revenue rose 30.8% and attributable net income rose about 66%.
- Growth was led by higher portfolio collections and finance-receivable income. Q3 net allowance charges were $6.5 million, down from $8.0 million; nine-month net charges were $19.7 million, up from $18.2 million.
- Operating expenses increased 25.9% in Q3 and 19.4% for the nine months, but operating expenses as a share of revenue fell to 65.6% from 72.7% in Q3 and to 65.5% from 71.9% year to date.
- Legal and agency costs increased to $16.7 million in Q3 and $43.6 million year to date, reflecting larger portfolios, expanded legal collection activity and broader account selection for legal action.
- Fee income increased 9.2% in Q3, primarily due to CCB. Excluding CCB, fee income declined slightly in the quarter; nine-month fee income declined 2.3%, with weakness in government services and IGS partly offset by CCB.
- CCB acquisition contributed to goodwill rising to $61.7 million from $29.3 million at year-end 2009 and introduced redeemable noncontrolling interest. PRA acquired 62% for stated consideration of $25 million, including deferred consideration.
Outlook, commentary, risks and contingencies
- Management said operating cash generation, cash on hand and available borrowings should fund operations, planned capital spending, existing forward-flow commitments and a material amount of additional portfolio purchases over the next 12 months. This is not earnings guidance.
- The current facility’s $315 million revolving portion expires May 2, 2011. PRA was seeking a new syndicated facility of approximately $400–$450 million, targeted for Q4 2010 or before current-facility expiration. Management expected a higher borrowing spread: initial indications were LIBOR plus about 2.75%, versus LIBOR plus 1.40% currently.
- Forward-flow purchase commitments had a maximum remaining amount of approximately $104.8 million. Portfolio buying and returns depend on purchase pricing, collection outcomes, consumer payment capacity, operating execution and regulatory conditions.
- Management cited improved collection processes, including automated dialing, account-scoring analytics and expanded internal legal resources. It also warned that economic weakness could hurt collections and fee-based businesses; collection estimates and allowances require significant judgment.
- Interest-rate exposure remains: a 200-basis-point increase was estimated to raise quarterly interest expense by $1.2 million, all else equal. The $50 million term portion is fixed-rate; the remaining facility is floating-rate.
- The IRS disputed PRA’s cost-recovery tax revenue recognition and treatment of unused credit-line fees for tax years 2005–2007. PRA contested the findings and recorded no uncertain-tax-position reserve; an adverse outcome could require deferred taxes and interest.
- Material legal matters include the pending Barkwell purported class action concerning debt-arbitration practices, the Missouri Attorney General’s appeal after dismissal of an enforcement action, and a North Carolina class action the court indicated would be dismissed pending an order. PRA said losses in Barkwell could not yet be estimated.
- CCB’s remaining 38% interest carries a put right beginning in 2012; the stated maximum purchase consideration is $22.8 million. The Dodd-Frank Act’s ultimate impact was undetermined. Management reported no material change in internal control over financial reporting and said disclosure controls were effective.
Important facts for investors to verify
- Whether collection performance and estimated remaining collections support the carrying value of receivables, and how allowance charges develop, particularly for older portfolios.
- Completion, timing, capacity, pricing and covenant terms of the replacement credit facility before the existing revolving facility expires.
- CCB’s results, the measurement and timing of the put/call rights, and potential cash needs for the remaining ownership interest.
- Developments in the IRS dispute and the Barkwell and Missouri proceedings, including any change in potential exposure.
- Cash available after portfolio purchases, capital spending and contractual commitments, including the $104.8 million forward-flow amount.