Business Context and Reporting Period
Portfolio Recovery Associates, Inc. (PRA) filed this Form 10-K for the fiscal year ended December 31, 2013. Its main business is purchasing and collecting charged-off consumer receivables; it also provides fee-based collection, government revenue administration, vehicle location and class-action claims services. PRA reports one receivables-management segment and operates primarily in the United States, with a UK business.
Financial Performance and Position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $735.1 million | $592.8 million | +24.0% |
| Income from operations | $297.5 million | $216.1 million | +37.7% |
| Net income attributable to PRA | $175.3 million | $126.6 million | +38.5% |
| Diluted EPS | $3.45 | $2.46 | +40.2% |
| Cash collections on owned portfolios | $1,142.4 million | $908.7 million | +25.7% |
| Operating cash flow | $225.1 million | $131.4 million | +71.4% |
Finance-receivable income, net, was $663.5 million; fee income was $71.6 million. Operating margin was 40.5% versus 36.5%, and net income attributable to PRA was 23.9% of revenue versus 21.4%. Operating expenses were 36.0% of cash receipts, down from 38.8%.
For Q4 2013, revenue was $184.9 million versus $154.3 million in Q4 2012; net income attributable to PRA was $45.8 million versus $35.8 million, and diluted EPS was $0.91 versus $0.70.
At year-end, cash and cash equivalents were $162.0 million, net finance receivables $1.239 billion, total assets $1.601 billion and borrowings $451.8 million. PRA had no revolving-credit borrowings and reported $435.5 million of revolving availability, subject to borrowing-base and covenant limits. Debt-to-equity was 52.0%, up from 46.2%. Investing activities used $175.6 million; cash increased by $129.3 million during the year.
Material Changes and Unusual Items
- Cash collections and finance-receivable income rose substantially, which management attributed partly to improved account scoring, collection productivity and legal-channel performance.
- Portfolio purchases increased to $656.8 million at cost, from $538.5 million; face value purchased was $7.86 billion, compared with $6.15 billion.
- Fee income grew 15.1%, primarily from government services and class-action claims work. One class-action settlement contributed approximately $9.3 million, making the year’s fee-income increase partly dependent on a large, non-recurring settlement.
- A $6.4 million non-cash goodwill impairment was recorded for PRA Location Services after declining revenue and profitability and the loss of a significant client.
- PRA issued $287.5 million of 3.00% convertible senior notes due 2020. Interest expense increased to $14.5 million from $9.0 million.
- PRA repurchased 1.20 million shares during 2013 for approximately $58.5 million. It paid no regular dividend.
Outlook, Risks and Contingencies
Management stated that operating cash generation, existing cash and available credit were expected to fund operations, planned capital expenditures, up to $90 million of remaining forward-flow purchases and normal-course portfolio buying for the next 12 months. The filing does not provide specific earnings or revenue guidance.
On February 19, 2014, after year-end, PRA agreed to acquire Aktiv Kapital for approximately $880 million plus assumption of about $435 million of debt, implying approximately $1.3 billion enterprise value. Closing was expected in Q2 2014, subject to customary conditions, including regulatory approval and financing. PRA projected total borrowings of approximately $1.8 billion after closing and identified integration, financing and international-operation risks.
Other material risks include regulatory scrutiny of debt collection, including CFPB supervision; changes in collection and bankruptcy laws; the ability to buy portfolios at attractive prices and collect forecast amounts; variable-rate debt and foreign-exchange exposure; and legal claims. PRA disclosed a pending IRS dispute over its tax cost-recovery method and certain credit-facility fees. It reported a $209.3 million deferred tax liability related to cost-recovery tax treatment, believed its positions were supportable and had not recorded a reserve for uncertain tax positions. An adverse outcome could require taxes, interest and penalties. The filing also describes TCPA class-action litigation; management stated that pending legal matters were not expected to have a material adverse impact, while noting outcomes remain uncertain.
Management and the independent auditor reported effective internal control over financial reporting at December 31, 2013. The auditor issued an unqualified opinion on the financial statements.
Important Facts for Investors to Verify
- Whether cash collections and estimated remaining collections support the carrying value and revenue forecasts for finance-receivable pools, including the $2.669 billion estimated remaining collections balance.
- The sustainability of improved operating margins and collection productivity, and the contribution of the $9.3 million settlement to fee income.
- The status and potential financial consequences of the IRS tax dispute, including possible interest and penalties.
- Aktiv acquisition closing, financing terms, post-acquisition leverage and integration progress; the transaction was pending at the filing date.
- Developments in CFPB oversight, TCPA litigation and other collection-related legal or regulatory matters.
- Compliance with credit-facility covenants and availability of borrowing capacity under applicable restrictions.