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PRAA > SEC Filings for PRAA > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for PORTFOLIO RECOVERY ASSOCIATES INC

Form 10-K for PORTFOLIO RECOVERY ASSOCIATES INC


28-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview

PRA 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 as well as providing class action claims settlement recovery services and related payment processing to our corporate clients.

PRA is headquartered in Norfolk, Virginia, and employs approximately 3,500 people. The shares of PRA are traded on the NASDAQ Global Select Market under the symbol "PRAA."

On February 19, 2014, we entered into an agreement to acquire the equity of Aktiv Kapital AS ("Aktiv"), a Norway-based company specializing in the acquisition and servicing of non-performing consumer loans throughout Europe and in Canada, for approximately $880 million, we also agreed to assume approximately $435 million of Aktiv's corporate debt, resulting in an acquisition of estimated total enterprise value of $1.3 billion. This acquisition will provide us entry into thirteen new markets, providing us additional geographical diversity in portfolio purchasing and collection, and with entry into new growth markets. We expect Aktiv's Chief Executive Officer and his executive team and the more than 400 Aktiv employees to join our workforce upon the closing of the transaction. The transaction is expected to close in the second quarter of 2014, upon successful completion of customary closing conditions, including approval of the transaction by applicable competition authorities and our ability to obtain the necessary financing to consummate the transaction.

We expect to finance this transaction with a combination of cash, $170 million of seller financing, $435 million from our domestic revolving credit facility, and by accessing an accordion feature on our credit facility of up to $214 million. We may choose to use other debt instruments to expand, replace or pay down any of these financing options. We anticipate transaction costs of approximately $15 million, which we expect to incur between both the first and second quarters of 2014. Our total borrowings are projected to be approximately $1.8 billion after closing, compared to PRA's total borrowings of $452 million at December 31, 2013.

A publicly traded company from 1997 until early 2012, Aktiv has developed a mixed in-house and outsourced collection strategy. It maintains in-house servicing platforms in eight markets, and owns portfolios in fifteen markets. Aktiv has more than 20 years of experience and data in a wide variety of consumer asset classes, across an extensive geographic background. Aktiv has acquired more than 2,000 portfolios, with a face value of more than $38 billion. In 2013, Aktiv collected $318 million on its portfolios and purchased $248 million in new portfolios, up from $222 million in 2012. Aktiv's total assets were approximately $900 million at December 31, 2013.

Earnings Summary

For the year ended December 31, 2013, net income attributable to PRA was $175.3 million, or $3.45 per diluted share, compared with $126.6 million, or $2.46 per diluted share, for the year ended December 31, 2012. Total revenues were $735.1 million for the year ended December 31, 2013, up 24.0% from the same year ago period. Revenues during the year ended December 31, 2013 consisted of $663.5 million in income recognized on finance receivables, net of allowance charges, and $71.6 million in fee income. Income recognized on finance receivables, net of allowance charges, for the year ended December 31, 2013 increased $132.9 million, or 25.1%, over 2012, primarily as a result of a significant increase in cash collections. Cash collections were $1,142.4 million during the year ended December 31, 2013, up 25.7% over $908.7 million in the year ended December 31, 2012. During the year ended December 31, 2013, PRA recorded $2.0 million in net allowance charge reversals, compared with $6.6 million in net allowance charges in the year ended December 31, 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 from $62.2 million for the year ended December 31, 2012 to $71.6 million in 2013, primarily due to an increase in revenues generated by CCB and our PGS business. The increase in revenue from CCB is due primarily to larger distributions of class action settlements in the year ended December 31, 2013 as compared to the year ended December 31, 2012. In particular, there was one large class action settlement which generated approximately $9.3 million in fee income. This was partially offset by declines in revenue at our PLS and PRA UK businesses. The decline from PLS is due primarily to the adverse impact of the economic slowdown on automobile financing and related collateral recovery activities. The decline in fee income from PRA UK is due primarily to a decline in the amount of contingent fee work provided to us by debt owners for the year ended December 31, 2013 as compared to the year ended December 31, 2012.


A summary of how our revenue was generated during the year ended December 31, 2013, 2012 and 2011 is as follows:

(in thousands)                                    2013           2012          2011
Cash collections                              $ 1,142,437     $ 908,684     $ 705,490
Principal amortization                           (480,913 )    (371,497 )    (293,431 )
Net allowance reversals/(charges)                   2,022        (6,552 )     (10,164 )
Income recognized on finance receivables, net     663,546       530,635       401,895
Fee income                                         71,589        62,166        57,040
Total revenues                                $   735,135     $ 592,801     $ 458,935

Operating expenses were $437.6 million for the year ended December, 31, 2013, up 16.2% as compared to the year ended December 31, 2012, due primarily to increases in compensation expense, legal collection costs, legal collection fees, other operating expenses and impairment of goodwill. Compensation expense increased primarily as a result of larger staff sizes, as well as an increase in share-based compensation expense and incentive and other performance based compensation incurred as a result of the overall strong Company performance. Compensation and employee service expenses increased as total employees grew 10.0% to 3,543 as of December 31, 2013 from 3,221 as of December 31, 2012. Legal collection costs were $83.1 million for the year ended December 31, 2013 compared to $72.3 million for the year ended December 31, 2012, an increase of $10.8 million or 14.9%. This increase was the result of an increased portfolio size as well as a refinement of our internal scoring methodology that expanded our account selections for legal action. This strategy to expand the accounts brought into the legal collection process resulted in significant initial expenses, which may drive additional future cash collections and revenue. Legal collection fees increased from $34.4 million for the year ended December 31, 2012 to $41.5 million for the year ended December 31, 2013, an increase of $7.1 million or 20.6%. This increase was the result of an increase in cash collections from outside attorneys from $157.8 million in the year ended December 31, 2012 to $192.4 million for the year ended December 31, 2013, an increase of $34.6 million or 21.9%. Other operating expenses increased from $19.7 million for the year ended December 31, 2012 to $25.8 million for the year ended December 31, 2013, an increase of $6.1 million or 31.0%. Of the $6.1 million increase, $4.1 million is related to the additional expense incurred as a result of the earn-out provision of the asset purchase agreement entered into in connection with the acquisition of certain finance receivables and operating assets of National Capital Management ("NCM") in 2012 and $0.8 million is due to an increase in insurance expenses. None of the remaining $1.2 million increase was attributable to any significant identifiable items.
During the year ended December 31, 2013, we acquired finance receivables portfolios with an aggregate face value amount of $7.9 billion at a cost of $656.8 million. During the year ended December 31, 2012, excluding the initial investment in the PRA UK portfolio, we acquired finance receivable portfolios with an aggregate face value of $6.2 billion at a cost of $538.5 million. During the year ended December 31, 2011, we acquired finance receivable portfolios with an aggregate face value of $9.8 billion at a cost of $408.4 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. However, regardless of the average purchase price and for similar time frames, 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.


Results of Operations
The results of operations include the financial results of PRA and all of our subsidiaries, all of which are in the receivables management business. Under the guidance of the FASB ASC Topic 280 "Segment Reporting" ("ASC 280"), we have determined that we have several operating segments that meet the aggregation criteria of ASC 280, and therefore, we have one reportable segment, accounts receivables management, based on similarities among the operating units including homogeneity of services, service delivery methods and use of technology.
The following table sets forth certain operating data as a percentage of total revenues for the years indicated:

                                        2013                      2012                      2011
Revenues:
Income recognized on finance
receivables, net               $ 663,546       90.3  %   $ 530,635       89.5  %   $ 401,895       87.6  %
Fee income                        71,589        9.7         62,166       10.5         57,040       12.4
Total revenues                   735,135      100.0        592,801      100.0        458,935      100.0
Operating expenses:
Compensation and employee
services                         192,474       26.2        168,356       28.4        138,202       30.1
Legal collection fees             41,488        5.6         34,393        5.8         23,621        5.1
Legal collection costs            83,063       11.3         72,325       12.2         38,659        8.4
Agent fees                         5,901        0.8          5,906        1.0          7,653        1.7
Outside fees and services         31,615        4.3         28,867        4.9         19,310        4.2
Communications                    28,936        3.9         25,943        4.4         23,372        5.1
Rent and occupancy                 7,536        1.0          6,781        1.1          5,891        1.3
Depreciation and amortization     14,385        2.0         14,515        2.4         12,943        2.8
Other operating expenses          25,809        3.5         19,651        3.3         12,416        2.7
Impairment of goodwill             6,397        0.9              -          -              -          -
Total operating expenses         437,604       59.5        376,737       63.5        282,067       61.4
Gain on sale of property               -          -              -          -          1,157        0.3
Income from operations           297,531       40.5        216,064       36.5        178,025       38.9
Interest income                        3        0.0             10        0.0              7        0.0
Interest expense                 (14,469 )     (2.0 )       (9,041 )     (1.5 )      (10,569 )     (2.3 )
Income before income taxes       283,065       38.5        207,033       35.0        167,463       36.6
Provision for income taxes       106,146       14.4         80,934       13.7         66,319       14.5
Net income                       176,919       24.1  %     126,099       21.3  %     101,144       22.1  %
Adjustment for net
(income)/loss attributable to
redeemable noncontrolling
interest                          (1,605 )     (0.2 )          494        0.1           (353 )     (0.1 )
Net income attributable to
Portfolio Recovery Associates,
Inc.                           $ 175,314       23.9  %   $ 126,593       21.4  %   $ 100,791       22.0  %


Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 Revenues
Total revenues were $735.1 million for the year ended December 31, 2013, an increase of $142.3 million or 24.0% compared to total revenues of $592.8 million for the year ended December 31, 2012.
Income Recognized on Finance Receivables, net Income recognized on finance receivables, net, was $663.5 million for the year ended December 31, 2013, an increase of $132.9 million or 25.1% compared to income recognized on finance receivables, net, of $530.6 million for the year ended December 31, 2012. The increase was primarily due to an increase in cash collections on our owned finance receivables to $1,142.4 million for the year ended December 31, 2013 compared to $908.7 million for the year ended December 31, 2012, an increase of $233.7 million or 25.7%. Our finance receivables amortization rate, including net allowance charges, was 41.9% for the year ended December 31, 2013 compared to 41.6% for the year ended December 31, 2012.
Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield, on portfolios purchased during the period, to be earned by the Company based on its proprietary buying models. Net reclassifications from nonaccretable difference to accretable yield primarily result from the Company's increase in its estimate of future cash flows. Increases in future cash flows may occur as portfolios age and actual cash collections exceed those originally expected. If those cash flows are determined to be incremental to the portfolio's original forecast, future projections of cash flows are generally increased resulting in higher expected revenue and hence increases in accretable yield. During the years ended December 31, 2013 and 2012, the Company reclassified amounts from nonaccretable difference to accretable yield due primarily to increased cash collection forecasts relating to pools acquired from 2009-2011. When applicable, net reclassifications to nonaccretable difference from accretable yield result from the Company's decrease in its estimates of future cash flows and allowance charges that exceed the Company's increase in its estimate of future cash flows. 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 would otherwise require a reduction in the stated yield on a pool of accounts. For the year ended December 31, 2013, we recorded net allowance charge reversals of $2.0 million, which consisted of net allowance charge reversals of $8.9 million on our Core portfolios, mainly on pools purchased between 2005 and 2008, offset by allowance charges of $6.9 million on purchased bankruptcy portfolios acquired mainly in 2007 and 2008. For the year ended December 31, 2012, we recorded net allowance charges of $6.6 million, $8.6 million of which related to purchased bankruptcy portfolios acquired mainly in 2007 and 2008, offset by a net reversal of $2.0 million on Core portfolios. In any given period, we may be required to record valuation allowances due to pools of receivables underperforming our previous 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 was $71.6 million for the year ended December 31, 2013, an increase of $9.4 million or 15.1% compared to fee income of $62.2 million for the year ended December 31, 2012. Fee income increased primarily due to an increase in revenues generated by CCB and our PGS business. The increase in revenue from CCB is due primarily to larger distributions of class action settlements in the year ended December 31, 2013 as compared to the year ended December 31, 2012. In particular, there was one large class action settlement which generated approximately $9.3 million in fee income. This was partially offset by declines in revenue at our PLS and PRA UK businesses. The decline from PLS is due primarily to the adverse impact of the economic slowdown on automobile financing and related collateral recovery activities. The decline in fee income from PRA UK is due primarily to a decline in the amount of contingent fee work provided to us by debt owners for the year ended December 31, 2013 as compared to the year ended December 31, 2012.


Operating Expenses
Total operating expenses were $437.6 million for the year ended December 31, 2013, an increase of $60.9 million or 16.2% compared to total operating expenses of $376.7 million for the year ended December 31, 2012. Total operating expenses were 36.0% of cash receipts for the year ended December 31, 2013 compared with 38.8% for the year ended December 31, 2012. Compensation and Employee Services
Compensation and employee service expenses were $192.5 million for the year ended December 31, 2013, an increase of $24.1 million or 14.3% compared to compensation and employee service expenses of $168.4 million for the year ended December 31, 2012. Compensation expense increased primarily as a result of larger staff sizes, as well as an increase in share-based compensation expense and incentive and other performance based compensation incurred as a result of the overall strong Company performance. Total employees grew 10.0% to 3,543 as of December 31, 2013 from 3,221 as of December 31, 2012. Additionally, some existing employees received appropriate salary increases based on performance. Compensation and employee service expenses as a percentage of cash receipts decreased to 15.9% for the year ended December 31, 2013 from 17.3% of cash receipts for the year ended December 31, 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 $41.5 million for the year ended December 31, 2013, an increase of $7.1 million, or 20.6%, compared to legal collection fees of $34.4 million for the year ended December 31, 2012. This increase was the result of an increase in our external legal collections which increased $34.6 million or 21.9%, from $157.8 million for the year ended December 31, 2012 to $192.4 million for the year ended December 31, 2013. Legal collection fees for the year ended December 31, 2013 were 3.4% of cash receipts, compared to 3.5% for the year ended December 31, 2012.
Legal Collection Costs
Legal collection costs consist of costs paid to courts where a lawsuit is filed and the cost of documents paid to sellers of defaulted consumer receivables. Legal collection costs were $83.1 million for the year ended December 31, 2013, an increase of $10.8 million, or 14.9%, compared to legal collection costs of $72.3 million for the year ended December 31, 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 in significant initial expenses, which may continue to drive additional future cash collections and revenue. These legal collection costs represent 6.8% and 7.4% of cash receipts for the years ended December 31, 2013 and 2012, respectively. Agent Fees
Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $5.9 million for both the years ended December 31, 2013, and 2012, respectively.
Outside Fees and Services
Outside fees and services expenses were $31.6 million for the year ended December 31, 2013, an increase of $2.7 million or 9.3% compared to outside fees and services expenses of $28.9 million for the year ended December 31, 2012. Of the $2.7 million increase, $1.8 million was attributable to an increase in corporate legal expenses and the remaining $0.9 million increase was attributable to other outside fees and services including increases in non-capitalized software development costs. Communications
Communications expenses were $28.9 million for the year ended December 31, 2013, an increase of $3.0 million or 11.6% compared to communications expenses of $25.9 million for the year ended December 31, 2012. The increase was primarily due to additional postage expense resulting from an increase in special letter campaigns. The remaining increase was mainly attributable to increased telephone expenses. Expenses related to customer mailings were responsible for 66.7% or $2.0 million of this increase, while the remaining 33.3% or $1.0 million was attributable to increased telephone and telecommunication related expenses. Rent and Occupancy
Rent and occupancy expenses were $7.5 million for the year ended December 31, 2013, an increase of $0.7 million or 10.3% compared to rent and occupancy expenses of $6.8 million for the year ended December 31, 2012. The increase was primarily due to the additional space leased at our Norfolk headquarters, the addition of NCM in December of 2012 as well as increased utility charges.


Depreciation and Amortization
Depreciation and amortization expenses were $14.4 million for the year ended December 31, 2013, a decrease of $0.1 million or 1.0% compared to depreciation and amortization expenses of $14.5 million for the year ended December 31, 2012. Other Operating Expenses
Other operating expenses were $25.8 million for the year ended December 31, 2013, an increase of $6.1 million or 31.0% compared to other operating expenses of $19.7 million for the year ended December 31, 2012. Of the $6.1 million increase, $4.1 million is related to the additional expense incurred as a result of the earn-out provision of the NCM purchase agreement and $0.8 million is due to an increase in insurance expenses. None of the remaining $1.2 million increase was attributable to any significant identifiable items. Impairment of Goodwill
Impairment of goodwill expense was $6.4 million for the year ended December 31, 2013, compared to $0 for the year ended December 31, 2012. During the third quarter of 2013, we evaluated the goodwill associated with our PLS reporting unit, 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 PLS. All other intangible assets related to PLS were fully amortized as of September 30, 2013. Interest Expense
Interest expense was $14.5 million for the year ended December 31, 2013, an increase of $5.5 million or 61.1% compared to interest expense of $9.0 million for the year ended December 31, 2012. The increase was primarily due to the completion on August 13, 2013, through a private offering of $287.5 million in aggregate principal amount of our 3.00% Convertible Senior Notes due 2020, as well as an increase in average borrowings under our credit facility for the year ended December 31, 2013, compared to the year ended December 31, 2012. The average borrowings on our credit facility were $309.7 million and $258.0 million for the years ended December 31, 2013 and 2012, respectively. Provision for Income Taxes
Income tax expense was $106.1 million for the year ended December 31, 2013, an increase of $25.2 million or 31.2% compared to income tax expense of $80.9 million for the year ended December 31, 2012. The increase was mainly due to an increase of 36.7% in income before taxes for the year ended December 31, 2013 when compared to the year ended December 31, 2012. This was partially offset by a decrease in the effective tax rate to 37.5% for the year ended December 31, 2013 compared to 39.1% for the year ended December 31, 2012. The decrease in the effective tax rate is primarily attributable to state revenue apportionment changes and tax credits.
We intend for predominantly all foreign earnings to be permanently reinvested in our foreign operations. If foreign earnings were repatriated, we would need to accrue and pay taxes; however, foreign tax credits would be available to partially reduce U.S. income taxes. The amount of cash on hand related to foreign operations with permanently reinvested earnings is $5.4 million as of December, 31, 2013.


Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Revenues
Total revenues were $592.8 million for the year ended December 31, 2012, an increase of $133.9 million or 29.2% compared to total revenues of $458.9 million for the year ended December 31, 2011.
Income Recognized on Finance Receivables, net Income recognized on finance receivables, net, was $530.6 million for the year ended December 31, 2012, an increase of $128.7 million or 32.0% compared to income recognized on finance receivables, net, of $401.9 million for the year ended December 31, 2011. The increase was primarily due to an increase in cash collections on our owned finance receivables to $908.7 million for the year ended December 31, 2012 compared to $705.5 million for the year ended December 31, 2011, an increase of $203.2 million or 28.8%. Our finance receivables amortization rate, including net allowance charges, was 41.6% for the year ended December 31, 2012 compared to 43.0% for the year ended December 31, 2011. During the year ended December 31, 2012, excluding the initial investment in the PRA UK portfolio, we acquired finance receivables . . .

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