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PRAA > SEC Filings for PRAA > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for PORTFOLIO RECOVERY ASSOCIATES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PORTFOLIO RECOVERY ASSOCIATES INC


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:
a prolonged economic recovery or a deterioration in the economic or inflationary environment in the United States or the European Union, particularly the United Kingdom, including the interest rate environment, may have an adverse effect on our collections, results of operations, revenue and stock price or on the stability of the financial system as a whole;

changes in the credit or capital markets, which affect our ability to borrow money or raise capital;

our ability to purchase defaulted consumer receivables at appropriate prices;

our ability to replace our defaulted consumer receivables with additional receivables portfolios;

our ability to obtain accurate and authentic account documents relating to accounts that we acquire and the possibility that documents that we provide could contain errors;

our ability to successfully acquire receivables of new asset types;

our ability to collect sufficient amounts on our defaulted consumer receivables;

changes in tax laws regarding earnings of our subsidiaries located outside of the United States;

changes in bankruptcy or collection laws that could negatively affect our business, including by causing an increase in certain types of bankruptcy filings involving liquidations, which may cause our collections to decrease;

changes in state or federal laws or the administrative practices of various bankruptcy courts, which may impact our ability to collect on our defaulted receivables;

our ability to collect and enforce our finance receivables may be limited under federal and state laws;

our ability to employ and retain qualified employees, especially collection personnel, and our senior management team;

our work force could become unionized in the future, which could adversely affect the stability of our production and increase our costs;

the degree, nature, and resources of our competition;

the possibility that we could incur goodwill or other intangible asset impairment charges;

our ability to retain existing clients and obtain new clients for our fee-for-service businesses;

our ability to comply with existing and new regulations of the collection industry, the failure of which could result in penalties, fines, litigation, damage to our reputation or the suspension or termination of our ability to conduct our business;

changes in governmental laws and regulations which could increase our costs and liabilities or impact our operations;

the possibility that new business acquisitions prove unsuccessful or strain or divert our resources;

our ability to maintain, renegotiate or replace our credit facility;

our ability to satisfy the restrictive covenants in our debt agreements;

our ability to manage risks associated with our international operations;

the possibility that compliance with foreign and U.S. laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions;

the imposition of additional taxes on us;

changes in interest or exchange rates, which could reduce our net income, and the possibility that future hedging strategies may not be successful, which could adversely affect our results of operations and financial condition, as could our failure to comply with hedge accounting principles and interpretations;

the possibility that we could incur significant allowance charges on our finance receivables;

our loss contingency accruals may not be adequate to cover actual losses;

our ability to manage growth successfully;

the possibility that we could incur business or technology disruptions or cyber incidents, or not adapt to technological advances;

the possibility that we or our industry could experience negative publicity or reputational attacks; and

the risk factors listed from time to time in our filings with the Securities and Exchange Commission (the "SEC").

You should assume that the information appearing in this quarterly report is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date.


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For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the following "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as the discussion of "Business" and "Risk Factors" described in our 2012 Annual Report on Form 10-K, filed on February 28, 2013.
Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Except as required by law, we assume no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not expect us to do so.
Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not, by policy, selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Definitions
We use the following terminology throughout this document:
"Allowance charges" refers to a reduction in income recognized on finance receivables on pools of finance receivables whose cash collection estimates are not received or projected to not be received.

"Amortization rate" refers to cash collections applied to principal on finance receivables as a percentage of total cash collections.

"Buybacks" refers to purchase price refunded by the seller due to the return of non-compliant accounts.

"Cash collections" refers to collections on our owned portfolios.

"Cash receipts" refers to collections on our owned portfolios plus fee income.

"Core" accounts or portfolios refer to accounts or portfolios that are defaulted consumer receivables and are not in a bankrupt status upon purchase. These accounts are aggregated separately from purchased bankruptcy accounts. Unless otherwise noted, Core accounts do not include the accounts we purchase in the United Kingdom.

"EBITDA" refers to earnings before interest, taxes, depreciation and amortization.

"Estimated remaining collections" or "ERC" refers to the sum of all future projected cash collections on our owned portfolios.

"Fee income" refers to revenues generated from our fee-for-service businesses.

"Income recognized on finance receivables" refers to income derived from our owned debt portfolios.

"Income recognized on finance receivables, net" refers to income derived from our owned debt portfolios and is shown net of allowance charges.

"Net finance receivable balance" is recorded on our balance sheet and refers to the purchase price less principal amortization and net allowance charges.

"Principal amortization" refers to cash collections applied to principal on finance receivables.

"Purchase price" refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain capitalized costs, less buybacks.

"Purchase price multiple" refers to the total estimated collections on owned debt portfolios divided by purchase price.

"Purchased bankruptcy" accounts or portfolios refer to accounts or portfolios that are in bankruptcy when we purchase them and as such are purchased as a pool of bankrupt accounts.

"Total estimated collections" refers to the actual cash collections, including cash sales, plus estimated remaining collections.

Overview
The Company is a financial and business services company. Our primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. We also service receivables on behalf of clients on either a commission or transaction-fee basis and provide class action claims settlement recovery services and related payment processing to corporate clients. The Company is headquartered in Norfolk, Virginia, and employs approximately 3,223 team members. The Company's shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA." Earnings Summary
During the third quarter of 2013, net income attributable to the Company was $47.3 million, or $0.93 per diluted share, compared with $33.3 million, or $0.65 per diluted share, in the third quarter of 2012. Total revenue was $197.8 million in the third quarter of 2013, up 31.4% from the third quarter of 2012. Revenues in the recently completed quarter consisted of $171.5 million in income recognized on finance receivables, net of allowance charges, and $26.3 million in fee income. Income recognized on


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finance receivables, net of allowance charges, in the third quarter of 2013 increased $35.7 million, or 26.3%, over the third quarter of 2012, primarily as a result of a significant increase in cash collections. Cash collections, which drives our finance receivable income, were $291.7 million in the third quarter of 2013, up 27.3%, or $62.6 million, as compared to the third quarter of 2012. During the third quarter of 2013, $2.6 million in net allowance charge reversals were incurred, compared with $1.6 million of net allowance charges in the third quarter of 2012. Our performance has been positively impacted by operational efficiencies surrounding the cash collections process, including the continued refinement of account scoring analytics as it relates to both legal and non-legal collection channels. Additionally, we have continued to develop our internal legal collection staff resources, which enables us to place accounts into that channel that otherwise would have been prohibitively expensive for legal action and to collect these accounts more efficiently and profitably. Fee income increased to $26.3 million in the third quarter of 2013 from $14.8 million in the third quarter of 2012, primarily due to higher fee income generated by Claims Compensation Bureau, LLC ("CCB") largely related to income from a single case. This was partially offset by lower fee income generated in the third quarter of 2013 by Mackenzie Hall Holdings, Limited, ("MHH") and PRA Location Services ("PLS") when compared to the prior year period. A summary of how our income was generated during the three months ended September 30, 2013 and 2012 is as follows:

                                       For the Three Months Ended
                                             September 30,
($ in thousands)                          2013              2012
Cash collections                    $     291,651       $  229,052
Amortization of finance receivables      (122,776 )        (91,735 )
Net allowance reversals/(charges)           2,581           (1,563 )
Finance receivable income                 171,456          135,754
Fee income                                 26,306           14,765
Total revenue                       $     197,762       $  150,519

Operating expenses were $118.3 million in the third quarter of 2013, up 26.6% over the third quarter of 2012, due primarily to increases in compensation expense, legal collection fees and costs, other operating expenses and impairment of goodwill. Compensation expense increased primarily as a result of larger staff sizes in addition to increases in incentive and share based compensation. Compensation and employee services expenses increased as total employees grew 3.9% to 3,223 as of September 30, 2013, from 3,103 as of September 30, 2012. Legal collection costs increased from $15.8 million in the third quarter of 2012 to $19.8 million in the third quarter of 2013, an increase of $4.0 million, or 25.3%. This increase was the result of our continued expansion of the accounts brought into the legal collection process. Legal collection fees increased from $8.6 million in the third quarter of 2012 to $10.2 million in the third quarter of 2013, an increase of $1.6 million, or 18.6%. This increase was the result of an increase in cash collections from outside attorneys from $39.9 million in the third quarter of 2012 to $48.3 million for the third quarter of 2013, an increase of $8.4 million, or 21.1%. Other operating expenses increased primarily as a result of an increase in accrued estimated contingent payments related to a previous acquisition. During the three months ended September 30, 2013, we further evaluated the goodwill associated with one of our reporting units, which had experienced a revenue and profitability decline, recent net losses and the loss of a significant client during the quarter. Based on this evaluation, we recorded a $6.4 million impairment of goodwill in the third quarter of 2013. This non-cash charge represents the full amount of goodwill previously recorded for our subsidiary PLS.
During the three months ended September 30, 2013, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $1.79 billion at a cost of $141.9 million. During the three months ended September 30, 2012, excluding the initial investment in the MHH portfolio, we acquired defaulted consumer receivable portfolios with an aggregate face value of $1.26 billion at a cost of $103.0 million. During the nine months ended September 30, 2013, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $6.83 billion at a cost of $557.3 million. During the nine months ended September 30, 2012, excluding the initial investment in the MHH portfolio, we acquired defaulted consumer receivable portfolios with an aggregate face value of $4.25 billion at a cost of $339.4 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. Regardless of the average purchase price and for similar time frames, however, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to the estimated profitability of a period's buying.


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Results of Operations
The results of operations include the financial results of the Company and all
of our subsidiaries.

The following table sets forth certain operating data as a percentage of total
revenues for the periods indicated:

                                         For the Three Months Ended
                                               September 30,                For the Nine Months Ended September 30,
                                         2013                2012                2013                    2012
Revenues:
Income recognized on finance
receivables, net                          86.7 %            90.2  %                 89.9 %                 89.5  %
Fee income                                13.3 %             9.8  %                 10.1 %                 10.5  %
Total revenues                           100.0 %           100.0  %                100.0 %                100.0  %
Operating expenses:
Compensation and employee services        26.7 %            27.5  %                 26.5 %                 28.2  %
Legal collection fees                      5.2 %             5.7  %                  5.7 %                  5.8  %
Legal collection costs                    10.0 %            10.5  %                 11.5 %                 13.2  %
Agent fees                                 0.7 %             1.0  %                  0.8 %                  1.0  %
Outside fees and services                  4.4 %             6.7  %                  4.5 %                  4.9  %
Communication expenses                     3.9 %             4.5  %                  4.4 %                  5.0  %
Rent and occupancy                         1.0 %             1.2  %                  1.0 %                  1.2  %
Depreciation and amortization              1.9 %             2.4  %                  1.9 %                  2.5  %
Other operating expenses                   2.7 %             2.5  %                  2.7 %                  2.7  %
Impairment of goodwill                     3.2 %               -  %                  1.2 %                    -  %
Total operating expenses                  59.7 %            62.0  %                 60.2 %                 64.5  %
Income from operations                    40.2 %            38.0  %                 39.8 %                 35.5  %
Other expense:
Interest expense                           2.0 %             1.5  %                  1.7 %                  1.6  %
Income before income taxes                38.2 %            36.5  %                 38.1 %                 33.9  %
Provision for income taxes                13.3 %            14.4  %                 14.3 %                 13.3  %
Net income                                24.9 %            22.1  %                 23.8 %                 20.6  %
Adjustment for income/(loss)
attributable to redeemable
noncontrolling interest                    0.9 %            (0.1 )%                  0.3 %                 (0.1 )%
Net income attributable to Portfolio
Recovery Associates, Inc.                 23.9 %            22.2  %                 23.5 %                 20.7  %

Three Months Ended September 30, 2013 Compared To Three Months Ended September 30, 2012
Revenues
Total revenues were $197.8 million for the three months ended September 30, 2013, an increase of $47.3 million, or 31.4%, compared to total revenues of $150.5 million for the three months ended September 30, 2012. Income Recognized on Finance Receivables, net Income recognized on finance receivables, net was $171.5 million for the three months ended September 30, 2013, an increase of $35.7 million, or 26.3%, compared to income recognized on finance receivables, net of $135.8 million for the three months ended September 30, 2012. The increase was primarily due to an increase in cash collections on our finance receivables to $291.7 million for the three months ended September 30, 2013, from $229.1 million for the three months ended September 30, 2012, an increase of $62.6 million, or 27.3%. Our finance receivables amortization rate, including net allowance charges, was 41.2% for the three months ended September 30, 2013 compared to 40.7% for the three months ended September 30, 2012.
Income recognized on finance receivables, net, is shown net of changes in valuation allowances recognized under FASB ASC Topic 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"), which requires that a valuation allowance be recorded for significant decreases in expected cash flows or a change in timing of cash flows which


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would otherwise require a reduction in the stated yield on a pool of accounts. For the three months ended September 30, 2013, we recorded net allowance charge reversals of $2.6 million, of which a net charge of $1.4 million related to purchased bankruptcy portfolios primarily purchased in 2008, offset by reversals of $4.0 million related to Core portfolios purchased between 2005 and 2008. In any given period, we may be required to record valuation allowances due to pools of receivables underperforming our expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability, of purchased pools of defaulted consumer receivables include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability, of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (relating to the collection and movement of accounts on both our collection floor and external channels), and decreases in productivity related to turnover of our collection staff. Fee Income
Fee income increased to $26.3 million for the three months ended September 30, 2013, from $14.8 million for the three months ended September 30, 2012, primarily due to higher fee income generated by CCB largely related to income from a single case. This was partially offset by lower fee income generated in the three months ended September 30, 2013 by MHH and PLS when compared to the prior year period.
Income from Operations
Income from operations was $79.5 million for the three months ended September 30, 2013, an increase of $22.4 million or 39.2% compared to income from operations of $57.1 million for the three months ended September 30, 2012. Income from operations was 40.2% of total revenue for the three months ended September 30, 2013 compared to 37.9% for the three months ended September 30, 2012.
Operating Expenses
Total operating expenses were $118.3 million for the three months ended September 30, 2013, an increase of $24.8 million or 26.5% compared to total operating expenses of $93.5 million for the three months ended September 30, 2012. Total operating expenses were 37.2% of cash receipts for the three months ended September 30, 2013 compared to 38.3% for the three months ended September 30, 2012.
Compensation and Employee Services
Compensation and employee services expenses were $52.9 million for the three months ended September 30, 2013, an increase of $11.6 million, or 28.1%, compared to compensation and employee services expenses of $41.3 million for the three months ended September 30, 2012. Compensation expense increased primarily as a result of larger staff sizes in addition to increases in incentive and share based compensation. Compensation and employee services expenses increased as total employees grew 3.9% to 3,223 as of September 30, 2013, from 3,103 as of September 30, 2012. Compensation and employee services expenses as a percentage of cash receipts decreased to 16.6% for the three months ended September 30, 2013, from 17.0% of cash receipts for the three months ended September 30, 2012. Legal Collection Fees
Legal collection fees represent contingent fees incurred for the cash collections generated by our independent third party attorney network. Legal collection fees were $10.2 million for the three months ended September 30, 2013, an increase of $1.6 million, or 18.6%, compared to legal collection fees of $8.6 million for the three months ended September 30, 2012. This increase was the result of an increase in cash collections from outside attorneys from $39.9 million in the three months ended September 30, 2012 to $48.3 million for the three months ended September 30, 2013, an increase of $8.4 million, or 21.1%. Legal collection fees for the three months ended September 30, 2013 were 3.2% of cash receipts, compared to 3.5% for the three months ended September 30, 2012.
Legal Collection Costs
Legal collection costs consist of costs paid to courts where a lawsuit is filed and the cost of documents received from sellers of defaulted consumer receivables. Legal collection costs were $19.8 million for the three months ended September 30, 2013, an increase of $4.0 million, or 25.3%, compared to legal collection costs of $15.8 million for the three months ended September 30, 2012. Beginning in early 2012 and continuing into 2013, as a result of the refinement of our internal scoring methodology that expanded our account selections for legal action, we expanded the accounts brought into the legal collection process which resulted


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in significant initial expenses, which may continue to drive additional future cash collections and revenue. Legal collection costs for the three months ended September 30, 2013 were 6.2% of cash receipts, compared to 6.5% for the three months ended September 30, 2012.
Agent Fees
Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $1.4 million and $1.5 million for the three months ended September 30, 2013 and 2012, respectively. Outside Fees and Services
Outside fees and services expenses were $8.7 million for the three months ended September 30, 2013, a decrease of $1.4 million, or 13.9%, compared to outside fees and services expenses of $10.1 million for the three months ended September 30, 2012. The decrease of $1.4 million was mainly attributable to a decrease in legal reserve accruals and corporate legal expenses. Communication Expenses
Communication expenses were $7.8 million for the three months ended September 30, 2013, an increase of $1.0 million, or 14.7%, compared to communications expenses of $6.8 million for the three months ended September 30, 2012. The increase was primarily due to additional postage expense resulting from an increase in special collection letter campaigns as well as a larger customer base. The remaining increase was attributable to higher telephone expenses. Expenses related to customer mailings were responsible for 70.0%, or $0.7 million, of this increase, and the remaining 30.0%, or $0.3 million, was attributable to increases in telephone related charges. Rent and Occupancy
Rent and occupancy expenses were $2.0 million for the three months ended September 30, 2013, an increase of $0.2 million, or 11.1%, compared to rent and occupancy expenses of $1.8 million for the three months ended September 30, 2012.
Depreciation and Amortization
Depreciation and amortization expenses were $3.8 million for the three months . . .

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