PRA Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The company purchases and collects defaulted consumer receivables, provides receivables servicing, and offers claims-settlement services. It acquired UK-based Mackenzie Hall Holdings Limited (MHH) on January 16, 2012, expanding operations outside the United States.
Financial performance and position
Amounts below are in millions except per-share data. Comparisons are with the corresponding 2011 period unless noted.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $147.9 | $114.8 | $288.0 | $226.6 |
| Operating income | $54.6 | $45.5 | $99.0 | $88.2 |
| Operating margin | 36.9% | 39.7% | 34.4% | 38.9% |
| Net income attributable to PRA | $32.0 | $25.6 | $57.5 | $48.7 |
| Diluted EPS | $1.87 | $1.48 | $3.34 | $2.83 |
| Cash collections on owned portfolios | $232.4 | $176.3 | $450.4 | $343.0 |
| Net interest expense | $2.4 | $2.6 | $5.0 | $5.5 |
- Q2 revenue increased 28.8%; finance-receivable income rose 32.2% to $132.6 million. Fee income was $15.3 million. Six-month revenue increased 27.1%, led by a 30.8% rise in finance-receivable income.
- Operating expenses increased 32.5% in Q2 and 35.5% for the first half, outpacing revenue growth. Legal collection costs rose 83.8% in Q2 and 118.2% for the first half, reflecting expanded legal account placements and larger portfolios. Operating margin declined year over year in both periods.
- Net allowance charges on finance receivables were $2.2 million in Q2 and $2.7 million for the first half. The period-end allowance was $89.3 million, versus $82.7 million at June 30, 2011.
- Six-month operating cash flow was $54.2 million, down from $87.0 million. Investing used $87.4 million, including the MHH acquisition; financing provided $50.3 million, chiefly reflecting net credit-line borrowings, partly offset by share repurchases. Cash increased to $42.6 million from $26.7 million at year-end 2011.
- At June 30, total assets were $1.174 billion, finance receivables net were $966.5 million, total liabilities were $520.9 million, and stockholders’ equity was $633.4 million. Credit-line borrowings were $292.0 million, up from $220.0 million at December 31, 2011; long-term debt was $0.8 million.
Changes, outlook, and risks
- Acquisition and expansion: MHH was acquired for approximately $51.3 million in cash, financed with credit-line borrowings. The preliminary allocation included $37.3 million of goodwill; the purchase-price allocation remained provisional. MHH contributed UK revenue, including $4.5 million in Q2 and $9.2 million for the first half.
- Portfolio investment: First-half purchases of finance receivables, net of buybacks, were $229.4 million in cash-flow reporting; domestic purchase price was $232.0 million in the portfolio metrics. Estimated remaining collections on domestic portfolios were approximately $2.108 billion. Management noted that competitive pricing can reduce purchase multiples, yields, margins, and profitability.
- Liquidity and outlook: The credit facility’s total commitment was increased to $458.45 million in April, with $166.45 million unused at quarter-end, subject to borrowing-base limits and covenants. The company said cash, operating collections, and available borrowings should fund operations, planned capital expenditures, committed forward-flow purchases, and a material amount of additional portfolio buying over the next 12 months. No specific earnings or revenue guidance was provided. Forward-flow purchase commitments were approximately $238.3 million.
- Debt and market risk: Revolver borrowings carried a weighted-average annual rate of 3.12%; the facility matures in December 2014 and is secured by substantially all assets. The company reported compliance with covenants. A 200-basis-point rate increase was estimated to add $1.2 million of quarterly interest expense at Q2 average borrowings. The company had no interest-rate hedge in place. MHH also adds exposure to Pound Sterling currency fluctuations.
- Legal and tax contingencies: A consolidated putative class action alleges violations of the Telephone Consumer Protection Act; potential loss could not be estimated. An IRS tax dispute over revenue-recognition and credit-facility-fee treatment was pending in Tax Court; the company recorded no reserve and said an adverse outcome could be material and require additional financing. The IRS had expanded its audit to include 2008–2010. Subsequent to quarter-end, a regulator indicated interest in resolving an investigation; the company had not evaluated the proposed resolution or its potential materiality. Management estimated other litigation losses above established liabilities at less than $1 million.
- Other considerations: The company cited economic conditions, collection laws and regulation, portfolio-purchase pricing and availability, collection-model estimates, staffing, acquisition integration, and access to credit as risks. It reported no goodwill impairment in the period. The Q2 and six-month results may not indicate future results.
Important facts for investors to verify
- Whether the expanded legal-collection strategy generates enough incremental cash collections to justify sharply higher legal costs and support margins.
- Actual performance of purchased portfolios against estimated collections, especially the bankruptcy portfolios that drove most of the first-half net allowance charges.
- MHH’s integration, contribution to fee income and profitability, final purchase-price allocation, and foreign-exchange exposure.
- Liquidity under the borrowing base and covenants as portfolio purchases, acquisition needs, and the $238.3 million forward-flow commitments are funded.
- Developments and potential financial impact of the TCPA litigation, IRS Tax Court case, and regulator investigation.
- Whether first-half operating cash flow, which declined despite higher net income, improves as deferred-tax and working-capital effects change.