PRA Group, Inc. — Q1 2011 Form 10-Q Summary
Business context and reporting period
For the three months ended March 31, 2011, PRA Group (then Portfolio Recovery Associates, Inc.) operated in receivables management, primarily buying and collecting defaulted consumer debt, with additional fee-based services. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted. The statements are unaudited.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenue | $111.8 | $83.4; up 34.1% |
| Income from operations | $42.7 | $26.4; up 61.5% |
| Operating margin | 38.2% | 31.7% |
| Net income | $23.7 | $14.8; up 60.1% |
| Net income attributable to PRA | $23.1 | $14.8; up 56.2% |
| Diluted EPS | $1.34 | $0.91 |
| Net cash from operating activities | $43.3 | $27.5 |
| Cash collections on owned portfolios | $166.7 | $119.2; up about 40% |
Finance-receivable income was $96.0 million, up 41.2%; fee income was $15.8 million, up 2.6%. Operating expenses rose 21.4% to $69.1 million. Total operating expenses were 37.8% of cash receipts, down from 42.3%. Interest expense was $2.9 million versus $2.2 million; the effective tax rate was 40.5% versus 39.1%.
At March 31, 2011, cash was $35.4 million, net finance receivables were $867.0 million, and total assets were $1.020 billion. The company had $290.0 million outstanding under its credit facility, including a $50 million fixed-rate loan, and $2.1 million of other long-term debt. Reported unused facility availability was $117.5 million. Total liabilities were $489.1 million and stockholders’ equity was $515.7 million. Cash decreased $5.7 million during the quarter. Investing activities used $37.8 million, including $106.4 million of receivable purchases and $70.7 million of principal collections; financing activities used $11.1 million.
Material changes versus the prior comparable period
- Collections growth and operational improvements, including dialer technology, account scoring and expanded in-house legal collections, supported higher receivable income and profitability.
- Net valuation allowance charges fell to $4.0 million from $6.9 million, although the ending allowance increased to $80.4 million from $58.1 million a year earlier and equaled 9.28% of net receivables, versus 7.83%.
- Fee income included additional CCB revenue following PRA’s 2010 acquisition of a 62% interest. Excluding CCB, fee income declined, primarily reflecting weaker general business growth and government tax revenues.
- Portfolio purchase cost increased to $107.9 million from $102.6 million, while purchased face value declined 21% to $1.49 billion. Bankruptcy portfolios represented 43% of first-quarter purchases, compared with 59% for full-year 2010.
- Operating costs increased, particularly legal and agency costs, which rose 33.1%, and compensation, which rose 15.5%. The company attributed increases to portfolio growth, staffing and broader use of legal collection channels.
- Average borrowing costs rose: the reported weighted average interest rate for the quarter was 3.64%, versus 2.35% a year earlier. Debt-to-equity declined to 56.64% from 70.40% in the year-ago comparison.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management said operating cash generation, existing cash and available credit were expected to fund operations, planned capital expenditures, approximately $148.9 million of remaining forward-flow purchases and a material amount of additional portfolio buying over the next 12 months.
- The company was in compliance with its credit covenants at quarter-end. The $407.5 million facility is secured by substantially all company assets and includes leverage and other financial and operating restrictions.
- Collection results depend on portfolio pricing and recoveries, economic conditions, collection laws and regulation, account documentation, staff productivity and retention, and access to capital. Lower portfolio purchase multiples may pressure yields and margins; collection estimates and related allowances require significant judgment.
- The IRS had challenged the company’s tax revenue-recognition method and treatment of unused credit-line fees for specified tax years. The company reported no reserve for these positions and believed they would be sustained; on April 6, 2011, the IRS verbally notified the company that its examination would expand to include 2008 and 2009. An unfavorable outcome could require payment of taxes and interest; the filing does not provide a clear estimate of potential exposure.
- Five putative class actions alleged violations of the Telephone Consumer Protection Act relating to calls to cellular phones without prior express consent. The company said it would defend the cases; possible losses could not be estimated. Missouri’s appeal of a dismissed enforcement action was also pending further appellate action.
- The noncontrolling owner of CCB may put its 38% interest to PRA beginning in 2012; maximum consideration was stated as $22.8 million. The filing also disclosed approximately $10.0 million of future compensation under employment agreements and $148.9 million of remaining forward-flow purchase commitments.
- The company reported no material goodwill impairment indicators, no off-balance-sheet arrangements, and effective disclosure controls. It cautioned that first-quarter results may not indicate future results.
Important facts for investors to verify
- Whether portfolio cash collections and estimated remaining collections continue to support the carrying value of finance receivables, including trends in cohort-level performance and valuation allowances.
- Whether the improvement in collection productivity and operating margins is sustainable as legal, staffing and communications expenses rise.
- Credit-facility availability, covenant headroom, borrowing costs and funding capacity for planned portfolio purchases.
- Developments in the expanded IRS examination, including any quantified exposure, and the outcomes of the TCPA and Missouri proceedings.
- Performance of fee-based businesses excluding CCB, and the timing and potential cost of any CCB noncontrolling-interest redemption.