PRA Group, Inc. (formerly Portfolio Recovery Associates, Inc.) — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
PRA primarily buys, collects and manages charged-off consumer receivables, and also provides collection and other fee-based services. It acquired U.K. debt purchaser and servicer Mackenzie Hall Holdings (MHH) in January 2012 and certain assets of bankruptcy debt buyer National Capital Management (NCM) in December 2012. The company reports one segment.
Financial results and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $592.8 | $458.9 | +29.2% |
| Net income attributable to PRA | $126.6 | $100.8 | +25.6% |
| Diluted EPS | $7.39 | $5.85 | +26.3% |
| Cash collections on owned portfolios | $908.7 | $705.5 | +28.8% |
| Cash receipts (collections plus fee income) | $970.9 | $762.5 | +27.3% |
| Operating cash flow | $131.4 | $173.0 | −24.1% |
| Operating margin | 36.4% | 38.8% | −2.4 percentage points |
| Net income margin | 21.3% | 22.0% | −0.7 percentage points |
Finance-receivable income, net of allowance charges, was $530.6 million, up 32.0%; fee income was $62.2 million, up 9.1%. Net allowance charges fell to $6.6 million from $10.2 million. Operating expenses rose 33.5% to $376.7 million, and operating expenses as a share of cash receipts increased to 38.8% from 37.0%. Management attributed higher costs particularly to expanded legal collection activity, larger staffing and acquisitions.
Fourth quarter: Revenue was $154.3 million versus $118.1 million in Q4 2011; net income attributable to PRA was $35.8 million versus $26.6 million; diluted EPS was $2.10 versus $1.54. Operating income was $60.0 million versus $46.0 million.
At year-end, cash was $32.7 million, net finance receivables were $1,079.0 million, total assets were $1,289.0 million and stockholders’ equity was $708.4 million. Debt was $327.5 million ($127.0 million revolving borrowings and $200.0 million term loan); unused revolving capacity was $273.0 million, subject to borrowing-base limits and covenants. Debt-to-equity was 46.3%, compared with 37.2% in 2011.
Material changes and management commentary
- Collections growth and improved scoring and collection operations drove higher finance-receivable income. Legal collections generated about 28% of total 2012 cash collections; expanded legal account selection also raised upfront court and related costs.
- MHH contributed to higher fee income, partly offset by declines at the vehicle-location and collateral-recovery business and class-action claims business. Management expected CCB fee income to improve in 2013, citing a potential large settlement that could generate approximately $4–$6 million or more in fees; this was an expectation, not guaranteed guidance.
- Portfolio purchases cost $538.5 million in 2012, excluding the initial MHH portfolio investment, compared with $408.4 million in 2011. Domestic estimated remaining collections were reported at approximately $2.3 billion.
- Investing activities used $205.6 million, including $149.0 million net cash paid for business acquisitions. Financing activities provided $80.7 million, including a net $107.0 million increase in credit-facility borrowings and $22.7 million of share repurchases.
Outlook, risks and contingencies
- Management said operating cash generation, cash on hand and available borrowing capacity should fund operations, planned capital expenditures, approximately $204.5 million of remaining forward-flow purchase commitments, and a material amount of additional portfolio purchases over the next 12 months. No quantified company-wide earnings or revenue guidance was provided.
- A new secured $600 million credit facility was entered into in December 2012, with a $200 million term loan and $400 million revolving facility, both maturing in 2017. It carries financial and operating covenants; PRA reported compliance at year-end. Borrowings have variable-rate exposure, and no interest-rate hedges were in place.
- The IRS disputes PRA’s use of the cost-recovery method for tax revenue recognition and treatment of unused line fees for tax years 2005–2007; the case was pending in U.S. Tax Court. Management believed its position was supportable. Deferred tax liability related to the revenue-recognition method was $190.1 million; an adverse outcome could require tax, interest and penalties.
- TCPA litigation remained pending, including a consolidated class action. A Ninth Circuit ruling affirmed a preliminary injunction restricting use of a dialer to call certain California cellular numbers obtained through skip tracing. The company said no final determination on the merits had been made.
- Other principal risks include collection estimates and potential allowance charges, access to attractively priced portfolios, regulation and compliance, consumer and economic conditions, staffing turnover, acquisition integration, foreign currency exposure, and litigation. Annual collector turnover among those completing training was reported at 58%–61%.
- The company reported no material goodwill or intangible impairment in 2012. Its auditor issued unqualified opinions on the financial statements and internal control; the internal-control assessment excluded MHH and NCM, together representing about 11% of total assets and 3% of revenue.
Important facts for investors to verify
- Whether portfolio collection performance supports the estimated remaining collections and whether future allowance charges rise or fall.
- Whether increased legal spending produces the expected incremental collections and how it affects operating margins.
- Progress and potential financial exposure from the IRS tax case and TCPA matters, including the dialer injunction.
- Post-acquisition performance and integration of MHH and NCM, including NCM’s earn-out liability, recorded at $7.0 million with a maximum of $15.0 million.
- Liquidity, borrowing-base availability, covenant headroom and sensitivity to variable interest rates as portfolio purchases and debt change.
- Whether management’s stated 2013 CCB settlement opportunity materializes; the filing provides no broader quantified outlook.