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JGW > SEC Filings for JGW > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for JGWPT HOLDINGS INC.

Form 10-K for JGWPT HOLDINGS INC.


31-Mar-2014

Annual Report


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

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" and the "Special Note Regarding Forward-Looking Statements" sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a leading direct response marketer that provides liquidity to our customers by purchasing structured settlement, annuity and lottery payment streams and interests in the proceeds of legal claims in the United States. We securitize or sell the payment streams that we purchase in transactions that are structured to generate cash proceeds to us that exceed the purchase price we paid for those payment streams. We have developed our market leading position as a purchaser of structured settlement payments through our highly recognizable brands and multi-channel direct response marketing platform.

Structured settlements are financial tools used by insurance companies to settle claims on behalf of their customers. They are contractual arrangements under which an insurance company agrees to make periodic payments to an individual as compensation for a claim typically arising out of a personal injury. The structured settlement payments we purchase have long average lives of more than ten years and cannot be prepaid.

We serve the liquidity needs of structured settlement payment holders by providing our customers with cash in exchange for a certain number of fixed scheduled future payments. Customers desire liquidity for a variety of reasons, including debt reduction, housing, automotive, business opportunities, education and healthcare costs. Since 1995, we have purchased over $9.6 billion of undiscounted structured settlement payment streams and have completed 37 asset-backed securitizations totaling over $5.0 billion in discounted cash flow streams.

For each of the historical periods presented herein, revenues by our major products are described below.

Revenue generated from our structured settlement payment purchasing business was $402.1million, $416.0 million, and $248.0 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Revenue generated from our annuity payment purchasing business was $11.2 million, $10.0 million and $6.0 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Revenue generated from our lottery payment purchasing business was $34.3 million, $27.0 million, and ($8.0) million for the years ended December 31, 2013, 2012, and 2011, respectively.

Revenue from our pre-settlement funding business was $12.0 million, $14.0 million, and $7.0 million for the years ended December 31, 2013, 2012, and 2011, respectively.

We act as an intermediary that identifies, underwrites and purchases individual payment streams from our customers, aggregates the payment streams and then finances them in the institutional market at financing rates that are below our cost to purchase the payment streams. We purchase future payment streams from our customers for a single up-front cash payment. Such payment is based upon a discount rate that is negotiated with each of our customers. We fund our purchases of payment streams with short and long-term non-recourse financing. We initially fund our purchase of structured settlement payments and annuities through committed warehouse lines. Our guaranteed structured settlement and annuity warehouse facilities totaled $750 million at December 31, 2013. We intend to undertake a sale or securitization of these assets approximately three times per year, subject to our discretion, in transactions that generate excess cash proceeds over the purchase price we paid for those assets and the amount of warehouse financing used to fund that purchase price. We finance the purchase of other payment streams using a combination of other committed financing sources and our operating cash flow.


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Because our purchase and financing of periodic payment streams is undertaken on a positive cash flow basis, we view our ability to purchase payment streams as key to our business model. Another key feature of our business model is our ability to aggregate payment streams from many individuals and from a well-diversified base of payment counterparties. We continuously monitor the efficiency of marketing expenses and the hiring and training of personnel engaged in the purchasing process.

On November 14, 2013, we consummated our IPO whereby 11,212,500 of our Class A Shares were sold to the public (inclusive of 1,462,500 Class A Shares sold pursuant to the full exercise of an overallotment option granted to the underwriters which was consummated on December 11, 2013). The aggregate net proceeds received from our IPO were $141.3 million, after deducting underwriting discounts and offering expenses. We used the aggregate net proceeds to purchase 11,212,500 Common Interests of the newly formed JGWPT Holdings, LLC, representing 37.9% of the then outstanding Common Interests of JGWPT Holdings,
LLC. JGWPT Holdings, LLC used a portion of the net proceeds of our IPO to repay a portion of our senior secured term loan, with the remainder used for general corporate purposes.


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Results of Operations

                                                         Years Ended December 31,
                                                2013                2012               2011

                                                          (Dollars in thousands)
REVENUES

Interest income                              $    172,423         $   177,748        $  142,697
Unrealized gains on VIE and other
finance receivables, long-term debt and
derivatives                                       252,801             270,787           127,008
Gain (loss) on swap terminations, net                 200              (2,326 )         (11,728 )
Servicing, broker, and other fees                   5,276               9,303             7,425
Other                                               1,209                (856 )             816
Realized loss on notes receivable, at
fair value                                         (1,862 )                 -                 -
Gain on extinguishment of debt, net                14,217                   -                 -
Realized and unrealized gains (losses)
on marketable securities, net                      15,299              12,741           (12,953 )
Total Revenue                                $    459,563         $   467,397        $  253,265

EXPENSES

Advertising                                  $     70,304         $    73,307        $   56,706
Interest expense                                  193,035             158,631           123,015
Compensation and benefits                          42,595              43,584            34,635
General and administrative                         20,179              14,613            12,934
Professional and consulting                        18,820              15,874            14,589
Debt prepayment and termination                         -                   -             9,140
Debt issuance                                       8,930               9,124             6,230
Securitization debt maintenance                     6,091               5,208             4,760
Provision for losses on finance
receivables                                         5,695               3,805               727
Depreciation and amortization                       5,703               6,385             3,908
Installment obligations expense
(income), net                                      19,647              17,321            (9,778 )
Loss on disposal/impairment of fixed
assets                                              4,200                 300                 9
Total Expenses                               $    395,199         $   348,152        $  256,875
Income (loss) before income taxes                  64,364             119,245            (3,610 )
Provision (benefit) for income taxes                2,546                (227 )            (345 )
Net income (loss)                                  61,818             119,472            (3,265 )
Less noncontrolling interest in
earnings of affiliate                                   -               2,731               660
Net income (loss) attributable to J.G.
Wentworth, LLC                                     61,818           $ 116,741        $   (3,925 )
Less net income attributable to
non-controlling interests                          67,395
Net loss attributable to JGWPT Holdings
Inc.                                         $     (5,577 )

Comparison of Consolidated Results for the Years Ended December 31, 2013 and 2012

Revenues

Revenues for the year ended December 31, 2013 were $459.6 million, a decrease of $7.8 million, or 1.7%, from revenues of $467.4 million for the year ended December 31, 2012. The $7.8 million decrease was primarily attributable to an $18.0 million decrease in unrealized gains on VIE and other finance receivables, long term debt and derivatives, partially offset by a $14.2 million gain on extinguishment of debt, net. Interest income for the year


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ended December 31, 2013 was $172.4 million, a decrease of $5.3 million, or 3.0%, from $177.7 million for the year ended December 31, 2012, due to a reduction in interest income on finance receivables and pre-settlement funding transactions.

Unrealized gains on VIE and other finance receivables, long-term debt, and derivatives was $252.8 million for the year ended December 31, 2013, a decrease of $18.0 million from $270.8 million for the year ended December 31, 2012, due to the increasing interest rate environment (which impacts the fair value of our VIE and other finance receivables, long-term debt, and derivatives) that was partially offset by a 5.2% increase in total receivables purchased in the year ended December 31, 2013 over the prior year.

Realized and unrealized gain on marketable securities, net, was $15.3 million for the year ended December 31, 2013, an increase of $2.6 million from a $12.7 million gain for the year ended December 31, 2012. This increase is primarily offset by a corresponding decrease in installment obligations expense, net. These amounts relate to the marketable securities and installment obligations payable items on our consolidated balance sheet. The marketable securities are owned by us, but are held to fully offset our installment obligations liability. Therefore, increases or decreases in gain on marketable securities do not impact our net income.

In connection with our 2013-3 securitization, we repaid approximately $64.0 million of long term debt issued by a permanent financing VIE, and recorded a one-time gain on debt extinguishment of $22.1 million in the year ended December 31, 2013 that was reduced by a debt prepayment penalty and hedge breakage costs totaling $7.9 million in aggregate. The $14.2 million net gain is reflected as gain on debt extinguishment, net in our consolidated statements of operations.

Operating Expenses

Total expenses for the year ended December 31, 2013 were $395.2 million, an increase of $47.0 million, or 13.5%, from $348.2 million for the year ended December 31, 2012.

Advertising expense, which consists of our marketing costs including direct mail, television, internet, and other related expenses, decreased 4.1% to $70.3 million for the year ended December 31, 2013, from $73.3 million for the year ended December 31, 2012, primarily due to the timing of our advertising initiatives.

Interest expense, which includes interest on our securitization debt, warehouse facilities and credit facility, increased 21.7% to $193.0 million for the year ended December 31, 2013, from $158.6 million for the year ended December 31, 2012, due primarily to the increase in the principal amount of our term loan in early 2013.

Compensation and benefits expense was largely unchanged at $42.6 million for the year ended December 31, 2013, compared to $43.6 million for the year ended December 31, 2012, due to employee severance cost offsetting cost savings associated with the downsizing of the Boynton Beach office.

General and administrative costs increased $5.6 million to $20.2 million for the year ended December 31, 2013, from $14.6 million for the year ended December 31, 2012, and professional and consulting costs increased $2.9 million to $18.8 million for the year ended December 31, 2013 from $15.9 million for the year ended December 31, 2012. These increases are related to additional promotional expenses, outside legal fees associated with the term loan modification in December 2013 and litigation costs, and costs associated with the expansion of our office space, such as rent expense.

Provision for losses on finance receivables for the year ended December 31, 2013 was $5.7 million, an increase of $1.9 million, or 49.7%, from $3.8 million for the year ended December 31, 2012. The increase is primarily attributable to increases in the provision for losses on pre-settlement funding transactions.

Loss on disposal/impairment of fixed assets for the year ended December 31, 2013 was $4.2 million, an increase of $3.9 million from the $0.3 million reported for the year ended December 31, 2012. The increase is attributable to the $4.0 million loss associated with the impairment of fixed assets in the fourth quarter of 2013. During the latter part of the fourth quarter of 2013, we completed an evaluation of a project to develop a new software application to manage our structured settlement business and made a decision to discontinue the project. We determined the approximately $4.0 million of costs that had been capitalized in conjunction with the software development project were no longer recoverable and wrote them down to their fair value of zero.

Restructuring Expense

In April 2013, we announced our intention to restructure our Boynton Beach office. In connection with the announcement, we recorded a restructure charge of $3.6 million for, primarily, severance and related expenses. The $3.6 million charge for the year ended December31, 2013 was recorded in the following consolidated statement of operations line items: compensation and benefits, $2.9 million, and general and administrative, $0.7 million.


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Income Before Taxes

For the year ended December 31, 2013, we earned income before taxes of $64.4 million, a decrease of $54.9 million, or 46.0%, from $119.2 million for the year ended December 31, 2012, primarily due to an increase in interest expense resulting from the increase in the principal amount of our term loan, an increase in general and administrative costs for the reasons noted above, and an increase in provision for losses on pre-settlement funding transactions.

Income Taxes

Until the time of our IPO in November 2013, we and the majority of our subsidiaries operated in the U.S. as non-income tax paying entities, and were treated as pass-through entities for U.S. federal and state income tax purposes and generally as corporate entities in non-U.S. jurisdictions. In addition, certain of our wholly owned subsidiaries are operating as corporations within the U.S. and subject to U.S. federal and state income tax. As non-income tax paying entities, the majority of our net income or loss is attributable to the members of Common Interests in JGWPT Holdings, LLC. In connection with our IPO, JGWPT Holdings Inc. was created to act as a holding company, holding an ownership interest in JGWPT Holdings, LLC, our partnership. Following this structural change, we recorded an income tax provision/benefit relating to our share of JGWPT Holdings, LLC, and therefore the share of its earnings, held by the public. The increase in our tax provision from 2012 to 2013 relates primarily to additional income at our income tax paying subsidiaries during 2013 as well as a valuation allowance recorded against a portion of the Company's deferred tax assets.

Net Income

Net income for the year ended December 31, 2013 was $61.8 million, a decrease of $57.6 million, or 48.3%, from $119.5 million for the year ended December 31, 2012, primarily due to an increase in interest expense primarily due to the increase in the principal amount of our term loan, an increase in general and administrative costs for the reasons noted above, a loss on disposal/impairment of fixed assets, and an increase in provision for losses on pre-settlement funding transactions.

Comparison of Consolidated Results for the Years Ended December 31, 2012 and 2011

Our results of operations for the year ended December 31, 2011 include the results of operations from our July 2011 merger with Orchard Acquisition Company, LLC and its subsidiaries, which we refer to as the Peachtree Merger, from July 12, 2011, which was the date of consummation of the merger. Our results of operations for the year ended December 31, 2012 include the results of operations from the Peachtree Merger for the full period.

Revenues

Revenues increased by $214.1 million, or 84.5%, to $467.4 million for the year ended December 31, 2012 from $253.3 million for the year ended December 31, 2011, due primarily to the Peachtree Merger and a lower interest rate environment. The average interest rate of our securitizations was 5.12% for the year ended December 31, 2011, versus 4.45% for the year ended December 31, 2012.

Unrealized gains on finance receivables, long-term debt, and derivatives was $270.8 million for the year ended December 31, 2012, an increase of $143.8 million, or 113.2%, from $127.0 million for the year ended December 31, 2011 due to the Peachtree Merger (approximately 56%), as well as funding volume increases
(approximately 5%) and a lower interest rate environment (approximately 39%)
which increased the net carrying value of our VIE and other finance receivables, long-term debt and derivatives at fair market value.

Interest income increased $35.1 million, or 24.6%, to $177.7 million for the year ended December 31, 2012, from $142.7 million for the year ended December 31, 2011, mainly as a result of increased accretion income on securitized assets from the Peachtree Merger as well as additional interest accretion from 2012 payment stream purchases. Servicing, broker, and other fees revenue increased 25.3% to $9.3 million for the year ended December 31, 2012, from $7.4 million for the year ended December 31, 2011, resulting mainly from the Peachtree Merger.

Realized and unrealized gains on marketable securities, net, increased $25.7 million from a loss of $13.0 million for the year ended December 31, 2011, to a gain of $12.7 million for the year ended December 31, 2012. This increase was offset by a corresponding increase in installment obligations expense, net. These amounts relate to the marketable securities and installment obligations payable items on our consolidated balance sheet. The


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marketable securities are owned by us, but are held to fully offset our installment obligation liability and therefore increases or decreases in marketable securities will have no impact on our net income.

Operating Expenses

Total expenses for the year ended December 31, 2012 were $348.2 million, an increase of $91.3 million, or 35.5%, from $256.9 million for the year ended December 31, 2011, due primarily to the Peachtree Merger, partially offset by decreases from synergies realized through the Peachtree Merger, such as reductions in compensation and general and administrative expense.

Advertising expenses, including direct mail, television, internet, radio, and other related expenses, increased 29.3% to $73.3 million for the year ended December 31, 2012, from $56.7 million for the year ended December 31, 2011, as a result of the Peachtree Merger as well as continued investment to increase awareness of our core product offerings.

Interest expense, which includes interest on our securitization debt, warehouse facilities, and credit facility, increased 29.0% to $158.6 million for the year ended December 31, 2012, from $123.0 million for the year ended December 31, 2011. This increase was driven by the additional securitizations and term loan debt acquired in the Peachtree Merger and an increase in our warehouse facility capacity during 2012, offset in part by decreases in rates on the securitizations completed during 2012.

Compensation and benefits increased 25.8% to $43.6 million for the year ended December 31, 2012, compared to $34.6 million for the year ended December 31, 2011, driven by increased costs related to retained employees from the Peachtree Merger, as well as an increase in costs to accommodate our growth and transaction volumes.

General and administrative costs increased $1.7 million, or 13.0%, to $14.6 million for the year ended December 31, 2012, from $12.9 million for the year ended December 31, 2011, and professional and consulting costs increased $1.3 million, or 8.8%, to $15.9 million for the year ended December 31, 2012, from $14.6 million for the year ended December 31, 2011, due primarily to the impact of a full year of the Peachtree Merger.

Installment obligations expense, net, increased $27.1 million to $17.3 million for the year ended December 31, 2012, from a gain of $9.8 million for the year ended December 31, 2011, offsetting the increase in realized and unrealized gains on marketable securities, net, which is included in revenues.

Income (Loss) Before Taxes

Income before taxes for the year ended December 31, 2012 was $119.2 million, compared to a loss of ($3.6) million for the year ended December 31, 2011. This includes the benefit of a lower interest rate environment and a full year of results of operations from the Peachtree Merger, as compared to the period from July 12, 2011 (the date of the consummation of the Peachtree Merger) to December 31, 2011.

Income Taxes

We and the majority of our subsidiaries operated in the U.S. as non-income tax paying entities, and were treated as pass-through entities for U.S. federal and state income tax purposes and generally as corporate entities in non-U.S. jurisdictions. In addition, certain of our wholly owned subsidiaries are operating as corporations within the U.S. and subject to U.S. federal and state income tax. As non-income tax paying entities, the majority of our net income or loss is attributable to the members of JGWPT Holdings, LLC and included in the tax returns of its members.

Net Income (Loss)

Net income (loss) for the year ended December 31, 2012 was $119.5 million, an increase of $122.8 million from a loss of ($3.3) million for the year ended December 31, 2011. The primary drivers were due to a lower interest rate environment impacting the value of our finance receivables as well as the results from the Peachtree Merger. See explanation under "Income (loss) before taxes" above.


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Quarterly Financial Data (Unaudited)





                                                     For the Year Ended December 31, 2013
                                    Fourth Quarter     Third Quarter    Second Quarter     First Quarter
                                             (Dollars in thousands, except for per share data)

Total revenue                       $       106,556   $       103,138   $        66,661   $       183,208
Income (loss) before income
taxes                                        (4,117 )            (739 )         (21,116 )          90,336
Net income (loss)                            (5,362 )            (885 )         (21,640 )          89,705
Net income (loss) attributable
to J.G. Wentworth, LLC                       (5,362 )            (885 )         (21,640 )          89,705
Net income (loss) attributable
to non-controlling interests                 67,395                 -                 -                 -
Net income (loss) attributable
to JGWPT Holdings Inc.                       (5,577 )               -                 -                 -

Net loss per Class A common
stock of JGWPT Holdings Inc.
Basic                               $         (0.54 )
Diluted                             $         (0.54 )




                                                     For the Year Ended December 31, 2012
                                    Fourth Quarter     Third Quarter    Second Quarter     First Quarter
                                             (Dollars in thousands, except for per share data)

Total revenue                       $       126,202   $       108,280   $        97,083   $       135,832
Net income before income taxes               38,733            20,958            20,208            39,346
Net income                                   38,607            21,227            20,436            39,202
Net income attributable to J.G.
Wentworth, LLC                               38,607            21,231            20,562            36,341


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