UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-50058
(Exact name of registrant as specified in its charter)
Delaware | 75-3078675 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
120 Corporate Boulevard, Norfolk, Virginia | 23502 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (888) 772-7326
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share | NASDAQ Global Select Market | |
(Title of Class) | (Name of Exchange on which registered) | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES þ NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. YES ¨ NO þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | þ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO þ
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2012 was $1,507,062,073 based on the $91.26 closing price as reported on the NASDAQ Global Select Market.
The number of shares of the registrant’s Common Stock outstanding as of February 19, 2013 was 16,930,872.
Documents incorporated by reference: Portions of the registrant’s definitive Proxy Statement for our 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
Table of Contents
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
Item 10. | ||
Item 11. | ||
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Item 12. | ||
Item 13. | ||
Item 14. | ||
Item 15. | ||
Signatures | ||
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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; |
• | 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; |
• | changes in the business practices of credit originators in terms of selling defaulted consumer receivables; |
• | our ability to collect sufficient amounts on our defaulted consumer receivables; |
• | changes in or interpretation of tax laws or adverse results of tax audits; |
• | 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; |
• | changes in the credit or capital markets, which affect our ability to borrow money or raise capital; |
• | 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; |
• | our ability to successfully operate and/or integrate new business acquisitions; |
• | 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 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; |
• | the sufficiency of our funds generated from operations, existing cash and available borrowings to finance our current operations; 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 annual 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.
For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the “Risk Factors” section beginning on page 17, as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section beginning on page 32 and the “Business” section beginning on page 5.
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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.
PART I
Item 1. | Business. |
General
Our business focuses upon the detection, collection, and processing of both unpaid and normal-course accounts receivable originally owed to credit grantors, governments, retailers and others. Our primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. These are the unpaid obligations of individuals to credit originators, which include banks, credit unions, consumer and auto finance companies and retail merchants. We also provide fee-based services, including vehicle location, skip tracing and collateral recovery services for auto lenders, governments and law enforcement via PRA Location Services, LLC (“PLS”), revenue administration, audit and debt discovery/recovery services for local government entities through PRA Government Services, LLC and MuniServices, LLC (collectively “PRA GS”) and class action claims recovery services and related payment processing via Claims Compensation Bureau, LLC (“CCB”). In addition, with the acquisition of 100% of the equity interest of Mackenzie Hall Holdings, Limited, and its subsidiaries (“MHH”) on January 16, 2012, we expanded our contingent collection and purchase of defaulted consumer receivables businesses to the United Kingdom. We also acquired certain finance receivables and certain operating assets of National Capital Management, LLC ("NCM"), on December 21, 2012. With this acquisition we expanded our ability to purchase and collect secured bankruptcy accounts. We believe that the strengths of our business are our sophisticated approach to portfolio pricing, segmentation and servicing, our emphasis on developing and retaining our collection personnel, our sophisticated processing systems and procedures and our relationships with many of the largest consumer lenders in the United States.
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. 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 subsidiaries. |
• | “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. |
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• | “Total estimated collections” refers to the actual cash collections, including cash sales, plus estimated remaining collections. |
• | “Total estimated collections to purchase price” refers to the total estimated collections divided by the purchase price. |
Our debt purchase business specializes in receivables that have been charged-off by the credit originator. Because the credit originator and/or other debt servicing companies have unsuccessfully attempted to collect these receivables, we are able to purchase them at a substantial discount to their face value. From our 1996 inception through December 31, 2012, we acquired 2,748 portfolios, representing more than 31 million customer accounts and aggregated into 145 pools for accounting purposes, with a face value of $70.8 billion for a total purchase price of $2.7 billion. The success of our business depends on our ability to purchase portfolios of defaulted consumer receivables at appropriate valuations and to collect on those receivables effectively and efficiently. We have one reportable segment, receivables management, based on similarities among the operating units including homogeneity of services, service delivery methods and use of technology.
We have achieved strong financial results over the past ten years, with cash collections growing from $79.3 million in 2002 to $908.7 million in 2012. Total revenue has grown from $55.8 million in 2002 to $592.8 million in 2012, a compound annual growth rate of 26.7%. Similarly, pro forma net income has grown from $11.4 million in 2002 to net income attributable to Portfolio Recovery Associates, Inc. (“PRA”) of $126.6 million in 2012.
We were initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability company, on March 20, 1996. In connection with our 2002 initial public offering (our “IPO”), all of the membership units of Portfolio Recovery Associates, L.L.C. were exchanged, simultaneously with the effectiveness of our registration statement, for a single class of PRA common stock, and a new Delaware corporation formed on August 7, 2002. Accordingly, the members of Portfolio Recovery Associates, L.L.C. became the common stockholders of PRA, which became the parent company of Portfolio Recovery Associates, L.L.C. and its subsidiaries.
Available Information
PRA maintains an Internet website at the following address: www.portfoliorecovery.com.
We make available on or through our website certain reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with or furnish it to the SEC. The information that is filed with the SEC may be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at: www.sec.gov.
Reports filed with or furnished to the SEC are also available free of charge upon request by contacting our corporate office at:
Portfolio Recovery Associates, Inc.
Attn: Corporate Communications
120 Corporate Boulevard, Suite 100
Norfolk, Virginia 23502
Competitive Strengths
We Offer a Compelling Alternative to Debt Owners and Governmental Entities
We offer debt owners the ability to immediately realize value for their charged-off receivables, from receivables that have only been processed internally by the debt owner to receivables that have been subject to multiple internal and external collection efforts, whether or not subject to bankruptcy proceedings. This flexibility helps us to meet the needs of debt owners and allows us to become a trusted resource. Also, through our government services business, we have the ability to service state and local government’s receivables in various ways. This includes such services as processing tax payments on behalf of the client and extends to more complicated tax audit and discovery work, as well as additional services that fill the needs of our clients.
Disciplined and Proprietary Underwriting Process
One of the key components of our growth has been our ability to price portfolio acquisitions at levels that have generated profitable returns on investment. Since inception, we have been able to consistently collect more than our purchase price over the collection life cycle of the defaulted consumer receivables portfolios we have acquired. In doing so, we have generated increasing
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profits and operational cash flow from these portfolio acquisitions, without relying on the resale of portfolios to achieve these results. We have not resold any of our purchased portfolios since 2002, and the portfolios we sold then were primarily in Chapter 13 bankruptcy proceedings. We stopped reselling these portfolios as we began the effort to build our own bankruptcy portfolio buying group which started purchasing bankrupt accounts in 2004.
By holding and collecting the accounts we purchase over the long-term, we create static pool history that we believe is unique among our peers. Our portfolio underwriting process utilizes the collection results, customer data, and account attributes held in our data warehouse. The warehouse contains data from more than 2,700 portfolios representing nearly 31 million accounts purchased over the last 16 years from large issuers and owners of consumer receivables. Our quantitative modeling continuously evolves as we incorporate new data and develop, test, and adopt new analysis tools that help us improve our underwriting accuracy.
The Core portfolio underwriting process includes both quantitative analytical modeling and qualitative judgment-based analysis that considers the effects of the origination, servicing, and collection history of the portfolios we price. The combination of our deep sample of purchase data, our sophisticated analytical modeling, and the underwriting judgment gained from underwriting thousands of portfolios affords PRA with a significant competitive advantage over our competition.
Ability to Hire, Develop and Retain Collection Staff
We place considerable focus on our ability to hire, develop, motivate and retain effective collection personnel. We offer our collection personnel competitive wages with the opportunity to receive incentive compensation based on performance, as well as an attractive benefits package, a comfortable working environment and the ability to work on a flexible schedule. We also provide a comprehensive training program for new collection staff employees.
Established Systems and Infrastructure
We have devoted significant effort to developing our systems, including statistical models, databases and reporting packages, to optimize our portfolio purchases and collection efforts. In addition, we believe that our technology infrastructure is flexible, secure, reliable and redundant, to protect the privacy of our sensitive data and to mitigate exposure to systems failure or unauthorized access. We take data security and collection compliance very seriously. We employ a staff of Quality Control and Compliance employees whose role it is to monitor calls and observe collection system entries as well as design, implement, monitor and test our daily activities. We monitor and research daily exception reports that track significant account status movements and account changes. To enhance this process, where permissible, we employ sophisticated call and work action recording systems which allow us to better monitor compliance and quality of our customer contacts. We believe that our systems and infrastructure give us meaningful advantages over our competitors. We have developed financial models and systems for pricing portfolio acquisitions, managing the collections process and monitoring operating results. We perform a static pool analysis monthly on each of our portfolios, inputting actual results back into our acquisition models, to enhance their accuracy. We monitor collection results continuously, seeking to identify and resolve negative trends immediately. In addition, we do not sell our purchased defaulted consumer receivables. Instead, we work them over the long-term enhancing our knowledge of a pool’s long-term performance. This combination of hardware, software and proprietary modeling and systems has been developed by our management team through years of experience in this industry and we believe provides us with an important competitive advantage from the acquisition process all the way through collection and payment operations.
Strong Relationships with Major Credit Originators
We have done business with most of the largest consumer lenders in the United States. We maintain an active marketing effort and our senior management team is in contact on a regular basis with existing and potential sellers of defaulted consumer receivables. We believe that we have earned a reputation as a reliable and compliant purchaser of defaulted consumer receivables portfolios and as responsible collectors. Furthermore, from the perspective of the selling credit originator, the failure to close on a negotiated sale of a portfolio consumes valuable time and expense and can have an adverse effect on pricing when the portfolio is re-marketed. Similarly, if a credit originator sells a portfolio to a debt buyer who has a reputation for violating industry standard collecting practices, the reputation of the credit originator can be damaged. We consistently attempt to negotiate reasonable and mutually acceptable contract terms, resulting in a confident and expeditious closing process for both parties. We go to great lengths to collect from consumers in a responsible, professional and legally compliant manner. We believe our strong relationships with major credit originators provide us with access to quality opportunities for portfolio purchases.
Experienced Management Team
We have an experienced management team with considerable expertise in the accounts receivable management industry. Prior to our formation, our founders played key roles in the development and management of a consumer receivables acquisition and divestiture operation of Household Recovery Services, a subsidiary of Household International, now owned by HSBC. As we
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have grown, the original management team has been expanded substantially to include a group of experienced, seasoned executives, many coming from the largest, most sophisticated lenders in the country.
Portfolio Acquisitions
Our portfolio of defaulted consumer receivables includes a diverse set of accounts that can be categorized by asset type, age and size of account, level of previous collection efforts and geography. To identify attractive buying opportunities, we maintain an extensive marketing effort with our senior officers contacting known and prospective sellers of defaulted consumer receivables. We have acquired receivables of Visa®, MasterCard®, private label and other credit cards, installment loans, lines of credit, bankrupt accounts, deficiency balances of various types, legal judgments, and trade payables, all from a variety of debt owners. These debt owners include major banks, credit unions, consumer finance companies, telecommunication providers, retailers, utilities, insurance companies, medical groups, hospitals, auto finance companies and other debt buyers. In addition, we make periodic visits to the operating sites of debt sellers and attend numerous industry events in an effort to develop account purchase opportunities. We also maintain active relationships with brokers of defaulted consumer receivables.
Portfolios by Type and Geography (Domestic Portfolio Only)
The following chart categorizes our life to date portfolio purchases as of December 31, 2012 into the major asset types represented (amounts in thousands):
Asset Type | No. of Accounts | % | Life to Date Purchased Face Value (1) | % | Original Purchase Price (2) | % | |||||||||||||
Major Credit Cards | 17,516 | 57 | % | $ | 49,295,499 | 70 | % | $ | 1,911,515 | 72 | % | ||||||||
Consumer Finance | 6,164 | 20 | 7,366,764 | 11 | 135,004 | 5 | |||||||||||||
Private Label Credit Cards | 6,617 | 21 | 9,158,131 | 13 | 560,462 | 21 | |||||||||||||
Auto Deficiency | 641 | 2 | 4,493,909 | 6 | 52,146 | 2 | |||||||||||||
Total: | 30,938 | 100 | % | $ | 70,314,303 | 100 | % | $ | 2,659,127 | 100 | % | ||||||||
(1) | “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has not been reduced by any adjustments, including payments and buybacks. |
(2) | “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables. |
Since our formation, we have purchased accounts from approximately 150 debt owners. We have acquired portfolios at various price levels, depending on the age of the portfolio, its geographic distribution, our historical experience with a certain asset type or credit originator and similar factors. A typical defaulted consumer receivables portfolio that we acquire ranges from $1 million to $150 million in face value and contains defaulted consumer receivables from diverse geographic locations with average initial individual account balances of $400 to $7,000.
We refer to the groups of domestic charged-off (non-bankrupt) defaulted consumer receivables we purchase as Core portfolios. The age of a Core portfolio (the time since an account has been charged-off) is an important factor in determining the price at which we will purchase the portfolio. Generally, there is an inverse relationship between the age of a Core portfolio and the price at which we will purchase the portfolio. This relationship is due to the fact that older Core portfolio receivables typically liquidate at lower rates. The accounts receivables management industry places Core portfolio receivables into categories depending on the number of collection agencies that have previously attempted to collect on the receivables. Fresh accounts are typically past due 120 to 270 days, charged-off by the credit originator and are either being sold prior to any post-charge-off collection activity or are placed with a third-party for the first time. These accounts typically sell for the highest purchase price. Primary accounts are typically 360 to 450 days past due and charged-off, have been previously placed with one contingent fee servicer and receive a lower purchase price. Secondary and tertiary accounts are typically more than 660 days past due and charged-off, have been placed with two or three contingent fee servicers and receive even lower purchase prices. We also purchase portfolios of accounts previously worked by four or more agencies and these are typically two to three years or more past due and receive an even lower price. In addition, we purchase portfolios of accounts that are included in consumer bankruptcies. These bankrupt accounts are typically filed under Chapter 13 of the U.S. Bankruptcy Code and have an associated payment plan that can range from 3 to 5 years in duration. We purchase portfolios of bankrupt accounts in both forward flow and spot transactions and, consequently, they can be at any age in the bankruptcy plan life cycle.
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The following table summarizes our life to date portfolio purchases as of December 31, 2012, into the delinquency categories represented (amounts in thousands):
Account Type | No. of Accounts | % | Life to Date Purchased Face Value (1) | % | Original Purchase Price (2) | % | |||||||||||||
Fresh | 2,370 | 8 | % | $ | 6,072,477 | 8 | % | $ | 589,579 | 22 | % | ||||||||
Primary | 4,595 | 15 | 8,420,292 | 12 | 433,013 | 17 | |||||||||||||
Secondary | 5,456 | 17 | 8,323,896 | 12 | 326,288 | 12 | |||||||||||||
Tertiary | 4,044 | 13 | 5,434,509 | 8 | 76,378 | 3 | |||||||||||||
Bankruptcy Trustees | 4,365 | 14 | 19,682,872 | 28 | 1,095,485 | 41 | |||||||||||||
Other | 10,108 | 33 | 22,380,257 | 32 | 138,384 | 5 | |||||||||||||
Total: | 30,938 | 100 | % | $ | 70,314,303 | 100 | % | $ | 2,659,127 | 100 | % | ||||||||
(1) | “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has not been reduced by any adjustments, including payments and buybacks. |
(2) | “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables. |
We also review the geographic distribution of accounts within a portfolio because we have found that state specific laws and rules can have an effect on the collectability of accounts located there. In addition, economic factors and bankruptcy trends vary regionally and are factored into our purchase price equation.
The following table summarizes our life to date portfolio purchases as of December 31, 2012, by geographic location (amounts in thousands):
Geographic Distribution | No. of Accounts | % | Life to Date Purchased Face Value (1) | % | Original Purchase Price (2) | % | |||||||||||||
California | 3,260 | 11 | % | $ | 9,254,352 | 13 | % | $ | 344,442 | 13 | % | ||||||||
Texas | 4,485 | 14 | 7,828,181 | 11 | 232,081 | 9 | |||||||||||||
Florida | 2,440 | 8 | 6,676,604 | 9 | 242,625 | 9 | |||||||||||||
New York | 1,747 | 6 | 4,151,513 | 6 | 140,377 | 5 | |||||||||||||
Ohio | 1,494 | 5 | 2,635,188 | 4 | 112,059 | 4 | |||||||||||||
Pennsylvania | 1,101 | 4 | 2,570,572 | 4 | 95,785 | 4 | |||||||||||||
North Carolina | 1,103 | 4 | 2,465,985 | 4 | 92,306 | 3 | |||||||||||||
Illinois | 1,155 | 4 | 2,457,601 | 3 | 102,607 | 4 | |||||||||||||
Georgia | 1,000 | 3 | 2,339,521 | 3 | 104,756 | 4 | |||||||||||||
New Jersey | 706 | 2 | 1,894,274 | 3 | 75,174 | 3 | |||||||||||||
Michigan | 818 | 3 | 1,891,966 | 3 | 81,156 | 3 | |||||||||||||
Arizona | 548 | 2 | 1,507,856 | 2 | 56,595 | 2 | |||||||||||||
Virginia | 843 | 3 | 1,502,273 | 2 | 62,731 | 2 | |||||||||||||
Tennessee | 657 | 2 | 1,465,471 | 2 | 62,478 | 2 | |||||||||||||
Massachusetts | 525 | 2 | 1,290,669 | 2 | 47,549 | 2 | |||||||||||||
Indiana | 557 | 2 | 1,244,574 | 2 | 58,244 | 2 | |||||||||||||
Other(3) | 8,499 | 25 | 19,137,703 | 27 | 748,162 | 29 | |||||||||||||
Total: | 30,938 | 100 | % | $ | 70,314,303 | 100 | % | $ | 2,659,127 | 100 | % | ||||||||
(1) | “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has not been reduced by any adjustments, including payments and buybacks. |
(2) | “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables. |
(3) | Each state included in “Other” represents less than 2% of the face value of total defaulted consumer receivables. |
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Purchasing Process
We acquire portfolios from debt owners through auctions and negotiated sales. In an auction process, the seller will assemble a portfolio of receivables and will either broadly offer the portfolio to the market or seek purchase prices from specifically invited potential purchasers. In a privately negotiated sale process, the debt owner will contact known purchasers directly, take bids and negotiate the terms of sale. We also acquire accounts in forward flow contracts. Under a forward flow contract we agree to purchase defaulted consumer receivables from a debt owner on a periodic basis, at a set percentage of face value of the receivables over a specified time period, generally from three to twelve months. These agreements often contain a provision requiring that the attributes and selection criteria of the receivables to be sold will not significantly change each month. If this provision is not adhered to, the contract will typically allow for the early termination of the forward flow contract by the purchaser or other appropriate remedies as mutually agreed upon. Forward flow contracts provide receivable owners with a consistent source of value for defaulted accounts, and provide the debt buyer with a steady and reliable source of consumer receivables for its collection operation.
In a typical Core portfolio sale transaction, after signing a non-disclosure agreement, a debt owner typically distributes a computer data file containing ten to fifteen essential data fields on each receivables account in the portfolio offered for sale. Such fields typically include but are not limited to the customer's name, address, outstanding balance, date of charge-off, date of last payment and the date the account was opened. Information that is not typically provided includes the original underwriting documentation, charge and payment history prior to charge-off, and collection notations. We perform our initial due diligence on the portfolio by electronically cross-checking the data fields provided through secured delivery against the accounts in our owned portfolios and other databases. We compile a variety of portfolio level reports examining all available data.
In order to determine a purchase price for a Core portfolio, we use two separate internally developed computer models and one externally developed model. We analyze the portfolio using our proprietary multiple linear regression model, which analyzes the accounts of the portfolio using predictive variables and projects a portfolio liquidation rate. We also analyze the portfolio as a whole using an adjustment model, which uses an appropriate cash flow model that utilizes our collections results from similar portfolios we have previously purchased. We supplement the adjustment model with qualitative background information about the origination, servicing and collection history of the portfolio. Finally, we employ a model that creates statistically similar portfolios from our existing accounts across our purchased inventory and develops estimated collection curves that are used in our price modeling. From these models we derive our quantitative projections which are used to help price transactions. The multiple linear regression model is also used to prioritize collection work efforts subsequent to purchase. With respect to prospective forward flow contracts and other long-term relationships, we obtain a representative file that we use to determine the price of the forward flow agreement. Then each month during the flow term, we receive the actual monthly sale file to be funded, and compare it to the representative file noted above to determine if the delivered file meets the expectations of the initial pricing file. This process allows us to confirm that the accounts we are purchasing are materially consistent with the accounts we agreed to purchase under the forward flow arrangement. When purchasing bankrupt consumer receivables, we follow a similar analytical process but utilize completely separate, specifically designed pricing models.
We maintain a detailed static pool analysis on each portfolio that we have acquired, capturing demographic data and revenue and expense items for further analysis. We use the static pool analysis to refine the underwriting models that we use to price future portfolio purchases. The results of the static pool analysis are input back into our models, increasing the accuracy of the models as the data set increases with every portfolio purchase and each day’s collection efforts. Since we do not sell our purchased defaulted consumer receivables, we work them over the long-term, enhancing our knowledge of a pool’s long-term performance.
The quantitative and qualitative data derived in our due diligence is evaluated together with our knowledge of the current defaulted consumer receivables market and any subjective factors about the portfolio or the debt owner of which management may be aware. A portfolio acquisition approval memorandum is prepared for each prospective portfolio before a purchase price is submitted to the debt owner. This approval memorandum, which outlines the portfolio’s anticipated collectability and purchase structure, is distributed to members of our Investment Committee. The approval by the Investment Committee sets a maximum purchase price for the portfolio.
Once a portfolio purchase has been approved by our Investment Committee and the terms of the sale have been agreed to with the debt owner, the acquisition is documented in an agreement that contains customary terms and conditions. Provisions are typically incorporated for disputed, fraudulent, deceased, bankrupt (in the case of Core portfolio purchases), or other ineligible accounts and typically, the debt owner either agrees to repurchase these accounts or replace them with acceptable replacement accounts within certain time frames.
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Owned Portfolio Collection Operations
Call Center Operations – Core Portfolios
Our work flow management system places, recalls and prioritizes accounts, based on our analyses of our accounts and other demographic, credit and customer behavior attributes and prior collection work activities. We use this process to focus our work effort on those customers most likely to pay.
The collectability forecast for a newly acquired portfolio will help determine our initial collection strategy. Accounts that are initially determined to have the highest predicted collection probability will be worked immediately and with greater efforts. Less collectible accounts may be set aside to be worked with less frequency or with lower cost methods. After owning an account for a month we begin reassessing the collectability on a daily basis based on a set of observed account characteristics and behaviors. Some accounts may be worked using a letter and/or settlement strategy.
Our computer system allows each collector to view the scanned documents relating to the account that have been received from the seller, which can include the original account application, account statements, payment checks, customer correspondence and other documents.
On the initial contact call, a customer is given a standardized presentation regarding the benefits of resolving his or her account with us. Emphasis is placed on determining the reason for the customer’s default in order to better assess the customer’s situation and create a plan for repayment. The collectors work to obtain a repayment plan that is appropriate to the customer's ability to make a repayment. At times, when determined to be appropriate, and in many cases with management approval, a reduced lump-sum settlement may be agreed upon.
If a collector is unable to establish contact with a customer based on information received or stored, the system will supplement the account information by leveraging a series of automated skip tracing procedures. Skip tracing is the process of developing new phone, address, job or asset information on a customer, or verifying the accuracy of such information.
Legal Recovery – Core Portfolios
An important component of our collections effort involves our legal recovery department and the judicial collection of accounts of customers who we believe have the ability, but not the willingness, to resolve their obligations. Accounts for which the customer is not cooperative and for which we can establish garnishable wages or attachable assets are reviewed for legal action. Additionally, we review accounts using a proprietary scoring model and select those accounts reflecting a high propensity to pay in a legal environment. Depending on the balance of the defaulted consumer receivable and the applicable state collection laws, we determine whether to commence legal action to judicially collect on the receivable. The legal process can take an extended period of time, but it also generates cash collections that likely would not have been realized otherwise.
We use a combination of internal staff (attorney and support), as well as external attorneys, to pursue legal collections under certain circumstances. Over the past several years we have focused on developing our internal legal collection capability. We have the capability in all 50 states to initiate lawsuits in amounts up to the jurisdictional limits of the respective courts. Our legal recovery department, using external vendors, also collects claims against estates in cases involving deceased debtors having assets at the time of death. Our legal recovery department oversees our internal legal collections and coordinates a nationwide collections attorney network which is responsible for the preparation and filing of judicial collection proceedings in multiple jurisdictions, determining the suit criteria, and instituting wage garnishments to satisfy judgments. This network currently consists of approximately 50 law firms who work on a contingent fee basis. Legal cash collections generated by both our in house attorneys and outside independent contingent fee attorneys constituted approximately 28% of our total cash collections in 2012. As our portfolio matures, it is likely that a larger number of accounts will be directed to our legal recovery department for judicial collection; consequently, we anticipate that legal cash collections will grow commensurately and comprise a larger percentage of our total Core cash collections.
Bankruptcy Operations
Our bankruptcy department manages customer filings under the U.S. Bankruptcy Code on debtor accounts derived from three sources; (1) PRA’s Core purchased pools of charged off accounts that have filed for bankruptcy protection after being acquired by us, (2) our purchased pools of bankrupt accounts, and (3) our third party servicing client relationships. On PRA owned accounts, we file proofs of claim (“POCs”) or claim transfers and actively manage these accounts through the entire life cycle of the bankruptcy proceeding in order to substantiate our claims and ensure that we participate in any distributions to creditors. On accounts managed under a third party relationship, we work on either a full service contingency fee basis or a menu style fee-for-service basis; this is not a significant portion of our bankruptcy operations.
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We developed our proprietary Bankruptcy Management System (“BMS”) as a secure and highly automated platform for providing bankruptcy notification services, filing POCs and claim transfers, managing documents, administering our case load, posting and reconciling payments and providing customized reports. BMS is a robust system designed to manage claims processing and case management in a high volume environment. The system is highly flexible and its capacity is easily expanded. Daily processing volumes are managed to meet individual bar dates associated with each bankruptcy case and specific client turnaround times. BMS and its underlying business rules were developed with emphasis first on minimizing risks through strict compliance to the bankruptcy code, and then on maximizing recoveries from automated claim filing and case administration.
Each of our bankruptcy department employees goes through an entry level training program to familiarize them with BMS and the bankruptcy process, including a general overview of how we interact with the courts, debtors' attorneys and trustees. We also use a tiered process of cross training designed to familiarize advancing employees with a variety of operational assignments and analytical tasks. For example, we utilize specially trained employees to perform advanced data matching and analytics for clients, while others are tasked with resolving objections directly with attorneys and trustees. In rare circumstances, resolution of these objections may need to be effectuated by working through our network of local counsel.
Fee-for-Service Businesses
Through our subsidiaries, we provide fee-based services, including vehicle location, skip tracing and collateral recovery services for auto lenders, governments and law enforcement via our PLS subsidiary; revenue administration, audit, and debt discovery/recovery services for government entities through our PRA GS business; class action claims recovery services and related payment processing through our CCB subsidiary and contingent fees earned on the collection of finance receivables from our United Kingdom subsidiary.
PLS, through call center operations, performs national skip tracing, asset location and collateral recovery services, principally for auto finance companies, for a fee. In addition, PLS will monitor clients’ inventories with a fleet of cars equipped with license plate recognition cameras for a fee. The amount of fee earned is generally dependent on several different outcomes: whether the debtor was found and a resolution on the account occurred, if the collateral was repossessed or if payment was made by the debtor to the debt owner.
PRA GS primarily derives its revenue from servicing taxing authorities in several different ways, including processing their tax payments and tax forms, collecting delinquent taxes, identifying taxes that are not being paid and auditing tax payments. The processing and collection services are standard commission based billings or fee-for-service transactions. When audits are conducted, there are two components. The first is a charge for the hours incurred on conducting the audit, based on a contractual billing rate. The gross billing amount based on the aforementioned billing rate is a component of the line item “Fee income” while the salary expense is included in the line item “Compensation and employee services.” The second item is for expenses incurred while conducting the audit. Most jurisdictions will reimburse us for direct expenses incurred for the audit including such items as travel and meals. The billed amounts are included in the line item “Fee income” and the expense component is included in its appropriate expense category, generally, “Other operating expenses.”
We own a controlling interest of the membership units of CCB. CCB was founded in 1996 and is a leading provider of class action claims settlement recovery services and related payment processing to corporate clients. CCB’s process allows clients to maximize settlement recoveries, in many cases participating in settlements they would otherwise not know existed. CCB charges fees for its services and works with clients to identify, prepare and submit claims to class action administrators charged with disbursing class action settlement funds. In addition, PRA purchases the rights to existing and future class action claims identified by CCB.
MHH generates revenue from both purchased finance receivables which is accounted for similarly to our Core operations and also services finance receivables on a contingent fee basis. These portfolios are owned by our clients and placed under a contingent fee commission arrangement. Our subsidiary is paid to collect funds from the client's debtors and earns a commission generally expressed as a percentage of the gross collections amount. The "Fee income" line of our income statement reflects the contingent fee amount earned, and not the gross collection amount.
Competition
We face competition in both of the markets we serve - owned portfolio and fee-for-service receivables management - from new and existing providers of outsourced receivables management services, including other purchasers of defaulted consumer receivables portfolios, third-party contingent fee collection agencies and debt owners that manage their own defaulted consumer receivables rather than outsourcing them. The receivables management industry (owned portfolio and contingent fee) remains highly fragmented and competitive. There are few significant barriers for entry to new providers of contingent fee receivables management services and, consequently, the number of agencies serving the contingent fee market may continue to grow.
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Constrained investment capital, the need for portfolio evaluation expertise sufficient to price portfolios, and compliance with regulations effectively constitute significant barriers for successful entry to new purchased portfolio receivables companies.
We face bidding competition in our acquisition of defaulted consumer receivables and in obtaining placement of fee-for-service receivables. We also compete on the basis of reputation, industry experience and performance. Among the positive factors which we believe influence our ability to compete effectively in this market are our ability to bid on portfolios at appropriate prices, our reputation from previous transactions regarding our ability to close transactions in a timely fashion, our relationships with originators of defaulted consumer receivables, our team of well-trained collectors who provide quality customer service and compliance with applicable collections laws and our ability to efficiently and effectively collect on various asset types. Current or new competitors that have substantially greater financial, personnel and other resources, greater adaptability to changing market needs, longer operating histories, or more established relationships in our industry than we currently have, could influence our ability to compete effectively.
Information Technology
Technology Operating Systems and Server Platform
The architecture and design of our systems provides us with a technology system that is flexible, secure, reliable and redundant to provide for the protection of our sensitive data. We utilize Intel-based servers running Microsoft Windows 2003/2008 operating systems. Our desktop PCs run the Windows XP operating system. In addition, we utilize a blend of purchased and proprietary software systems tailored to the needs of our business. These systems are designed to eliminate inefficiencies in our collections and continue to meet business objectives in a changing environment.
Network Technology
To provide delivery of our applications, we employ server network architecture to support high-speed data transport. Our network system is designed to be scalable and meet expansion and inter-building bandwidth and quality of service demands.
Database and Software Systems
The ability to access and utilize data is essential to us being able to operate in a cost-effective manner. Our centralized computer-based information systems support the core processing functions of our business under a set of integrated databases and are designed to be scalable to accommodate our internal growth. This integrated approach helps to assure that data sources are processed efficiently. We use these systems for portfolio and client management, skip tracing, check taking, financial and management accounting, reporting, and planning and analysis. We use a combination of Microsoft and Oracle database software to manage our portfolios and financial, customer and sales data. PRA GS, PLS and CCB all maintain unique, proprietary software systems that manage the movement of data, accounts and information throughout these business units.
Redundancy, System Backup, Security and Disaster Recovery
Our data centers provide the infrastructure for collection services and uninterrupted support of data, applications and hardware for all of our business units. We believe our facilities and operations include sufficient redundancy, file back-up and security to ensure minimal exposure to systems failure or unauthorized access. The preparations in this area include the use of call centers in Virginia, Kansas, Alabama and Tennessee in order to help provide redundancy for data and processes should one site be completely disabled. We have a disaster recovery plan covering our business that is tested on a periodic basis. The combination of our locally distributed call control systems provides enterprise-wide call and data distribution between our call centers for efficient portfolio collection and business operations. In addition to data replication between the sites, differential backups of both software and databases are performed on a daily basis and a full system backup is performed weekly. Backup data tapes are stored at an off-site location along with copies of schedules and production control procedures, procedures for recovery using an off-site data center, and documentation and other critical information necessary for recovery and continued operation. Our Virginia headquarters has two separate telecommunications feeds, uninterruptible power supplies and natural gas and diesel-generators, all of which provide a level of redundancy should a power outage or interruption occur. We also have generators installed at each of our domestic call centers, as well as our subsidiary locations in Alabama, California and Nevada. We also employ rigorous physical and electronic security to protect our data. Our call centers have restricted card key access and appropriate additional physical security measures. Electronic protections include data encryption, firewalls and multi-level access controls.
Display Screens for Real Time Data Utilization
We utilize multiple plasma displays at most of our collection facilities to aid in recovery of portfolios. The displays provide real-time business-critical information to our collection personnel for efficient collection efforts such as telephone, production, employee status, goal trending, training and corporate information.
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Employees
As of December 31, 2012, we employed approximately 3,200 persons on a full-time basis in the United States and the United Kingdom. None of our employees are represented by a union or covered by a collective bargaining agreement. We believe that our relations with our employees are positive.
Collection Personnel
Our collectors are critical to the success of our debt collection business as a majority of our Core portfolio collection efforts occur as a result of telephone contact with customers. We have found that the tenure and productivity of our collectors are directly related. Therefore, attracting, hiring, training, retaining and motivating our collection personnel is a major focus for us. We pay our collectors competitive wages and offer employees a full benefits program. In addition to a base wage, we provide collectors with the opportunity to receive compensation through an incentive compensation program that pays bonuses above a set monthly base, based upon each collector’s collection and compliance results. This program is designed to ensure that employees are paid based not only on performance, but also on consistency and quality.
We believe that we offer a competitive and, in many cases, a higher base wage than many local employers and therefore have access to a large number of eligible personnel in each of our call center locations.
Collections Training
We provide a comprehensive multi-week training program for all new owned portfolio collectors. Our training program begins with lectures on collection techniques, local, state and federal collection laws, systems, negotiation skills, skip tracing and telephone use. These sessions are then followed by additional weeks of practical instruction, including conducting live calls with additional managerial supervision in order to provide employees with confidence and guidance while still contributing to our profitability. Each trainee must successfully pass a comprehensive examination before being assigned to the collection floor, as well as once a year thereafter. Where permissible, we employ sophisticated call and work action recording systems which allow us to better monitor compliance and quality of customer contacts. This, in turn, allows us to offer additional training in areas of deficiency to increase productivity and compliance.
Each of our bankruptcy department employees goes through an entry level training program to familiarize them with BMS and the bankruptcy process, including a general overview of how we interact with the courts, debtor’s attorneys and trustees. We also use a tiered process of cross training designed to familiarize advancing employees with a variety of operational assignments and analytical tasks. For example, we utilize specially trained employees to perform advanced data matching and analytics for clients, while others are tasked with resolving objections directly with attorneys and trustees. In rare circumstances, resolution of these objections may need to be effectuated by working through our network of local counsel.
Office of General Counsel
Our Office of General Counsel manages general corporate governance; litigation; insurance; corporate and commercial transactions; intellectual property; contract and document preparation and review; compliance with federal securities laws and other regulations and statutes; business acquisitions; and dispute and complaint resolution. As a part of its compliance functions, our Office of General Counsel works with our Director of Internal Audit in the implementation of our Code of Ethics. In that connection, we have implemented company-wide ethics training and have established a confidential telephone hotline and email and web-based portals to report suspected policy violations, fraud, embezzlement, deception in record keeping and reporting, accounting, auditing matters and other acts which are inappropriate, criminal and/or unethical. Our Code of Ethics is available at the Investor Relations page of our website at www.portfoliorecovery.com. Our Office of General Counsel also works with our Quality Control and Compliance Departments to advise our employees in relevant areas including the laws and regulations that govern the various industries and markets within which the Company conducts business. Our Office of General Counsel recommends guidelines and procedures for personnel to follow when carrying out their specific job responsibilities. This includes regularly researching and providing employees and our training department with summaries and updates of changes in federal and state statutes and relevant case law so that they are aware of and in compliance with changing laws and judicial decisions that may impact their job duties.
Regulation
Federal and state statutes establish specific guidelines and procedures which debt collectors must follow when collecting customer accounts. It is our policy to comply with the provisions of all applicable federal laws and corresponding state statutes in all of our recovery activities. Our failure to comply with these laws could have a material adverse effect on us in the event and to the extent that they apply to some or all of our recovery activities. Federal and state consumer protection, privacy and related laws and regulations extensively regulate the relationship between debt collectors and debtors, and the relationship between
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customers and credit card issuers. Significant federal laws and regulations applicable to our business as a debt collector include the following:
Fair Debt Collection Practices Act. This act imposes certain obligations and restrictions on the practices of debt collectors, including specific restrictions regarding communications with customers, including the time, place and manner of the communications. This act also gives consumers certain rights, including the right to dispute the validity of their obligations and a right to sue debt collectors who fail to comply with its provisions, including the right to recover their attorney fees.
Fair Credit Reporting Act. This act places certain requirements on credit information providers regarding the verification of the accuracy of information provided to credit reporting agencies and investigating consumer disputes concerning the accuracy of such information. We provide information concerning our accounts to the three major credit reporting agencies, and it is our practice to correctly report this information and to investigate credit reporting disputes. The Fair and Accurate Credit Transactions Act amended the Fair Credit Reporting Act to include additional duties applicable to data furnishers with respect to information in the consumer's credit file that the consumer identifies as resulting from identity theft, and requires that data furnishers have procedures in place to prevent such information from being furnished to credit reporting agencies.
Gramm-Leach-Bliley Act. This act requires that certain financial institutions, including collection agencies, develop policies to protect the privacy of consumers' private financial information and provide notices to consumers advising them of their privacy policies. This act also requires that if private personal information concerning a consumer is shared with another unrelated institution, the consumer must be given an opportunity to opt out of having such information shared. Since we do not share consumer information with non-related entities, except as required by law, or except as needed to collect on the receivables, our consumers are not entitled to any opt-out rights under this act. This act is enforced by the Federal Trade Commission, which has retained exclusive jurisdiction over its enforcement, and does not afford a private cause of action to consumers who may wish to pursue legal action against a financial institution for violations of this act.
Electronic Funds Transfer Act. This act regulates the use of the Automated Clearing House ("ACH") system to make electronic funds transfers. All ACH transactions must comply with the rules of the National Automated Check Clearing House Association ("NACHA") and Uniform Commercial Code §3-402. This act, the NACHA regulations and the Uniform Commercial Code give the consumer, among other things, certain privacy rights with respect to electronic fund transfer transactions, the right to stop payments on a pre-approved fund transfer, and the right to receive certain documentation of the transaction. This act also gives consumers a right to sue institutions which cause financial damages as a result of their failure to comply with its provisions.
Telephone Consumer Protection Act. In the process of collecting accounts, we use a variety of methods to communicate with our customers. This act and similar state laws place certain restrictions on users of certain automated dialing equipment and pre-recorded messages that place telephone calls to consumers.
Servicemembers Civil Relief Act. The Soldiers' and Sailors' Civil Relief Act of 1940 was amended in December 2003 as the Servicemembers Civil Relief Act (“SCRA”). The SCRA gives U.S. military service personnel relief from credit obligations they may have incurred prior to entering military service, and may also apply in certain circumstances to obligations and liabilities incurred by a servicemember while serving on active duty. The SCRA prohibits creditors from taking specified actions to collect the defaulted accounts of servicemembers. The SCRA impacts many different types of credit obligations, including installment contracts and court proceedings, and tolls the statute of limitations during the time that the servicemember is engaged in active military service. The SCRA also places a cap on interest bearing obligations of servicemembers to an amount not greater than 6% per year, inclusive of all related charges and fees.
Health Insurance Portability and Accountability Act. The Health Insurance Portability and Accountability Act (“HIPAA”) provides standards to protect the confidentiality of patients' personal healthcare and financial information. Pursuant to HIPAA, business associates of health care providers, such as agencies which collect healthcare receivables, must comply with certain privacy and security standards established by HIPAA to ensure that the information provided will be safeguarded from misuse. This act is enforced by the Department of Health and Human Services and does not afford a private cause of action to consumers who may wish to pursue legal action against an institution for violations of this act.
U.S. Bankruptcy Code. In order to prevent any collection activity with bankrupt debtors by creditors and collection agencies, the U.S. Bankruptcy Code provides for an automatic stay, which prohibits certain contacts with consumers after the filing of bankruptcy petitions. The U.S. Bankruptcy Code also dictates what types of claims will or will not be allowed in a bankruptcy proceeding and how such claims may be discharged.
Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law, and along with it, the unfair, deceptive, or abusive acts or practices (“UDAAP”) provisions included therein. The Dodd-Frank Act restructured the regulation and supervision of the financial services industry and created the Consumer Financial Protection Bureau (the "CFPB”), with rulemaking, supervisory, and enforcement
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authority over larger consumer debt collectors. The Dodd-Frank Act also provides for the CFPB to have the authority to adopt rules describing specified acts and practices as being “unfair,” “deceptive,” or “abusive,” and hence unlawful. The ultimate impact of the Dodd-Frank Act on our business cannot be determined at this time.
U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. Our operations outside the United States are subject to the United States Foreign Corrupt Practices Act (FCPA), which prohibits United States companies and their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in order to obtain an unfair advantage, to help, obtain or retain business. Violations of these laws and related rules and regulations can result in the imposition of significant civil and criminal fines, penalties and sanctions.
Additionally, there are some state statutes and regulations comparable to the above federal laws, and specific licensing requirements which affect our operations. State laws may also limit credit account interest rates and fees, as well as limit the time frame in which judicial and non-judicial actions may be initiated to collect consumer accounts.
Although we are not a credit originator, some of the following laws, which apply principally to credit originators, may occasionally affect our operations because our receivables were originated through credit transactions:
• Truth in Lending Act;
• Fair Credit Billing Act; and
• Equal Credit Opportunity Act.
Federal laws which regulate credit originators require, among other things, that credit card issuers disclose to consumers the interest rates, fees, grace periods and balance calculation methods associated with their credit card accounts. Consumers are entitled under current laws to have payments and credits applied to their accounts promptly, to receive prescribed notices and to require billing errors to be resolved promptly. Some laws prohibit discriminatory practices in connection with the extension of credit. Federal statutes further provide that, in some cases, consumers cannot be held liable for, or their liability is limited with respect to, charges to the credit card account that were a result of an unauthorized use of the credit card. These laws, among others, may give consumers a legal cause of action against us, or may limit our ability to recover amounts owing with respect to the receivables, whether or not we committed any wrongful act or omission in connection with the account. If the credit originator fails to comply with applicable statutes, rules and regulations, it could create claims and rights for consumers that could reduce or eliminate their obligations to repay the account and have a possible material adverse effect on us.
Accordingly, when we acquire defaulted consumer receivables, typically we contractually require credit originators to indemnify us against any losses caused by their failure to comply with applicable statutes, rules and regulations relating to the receivables before they are sold to us.
The U.S. Congress and several states have enacted legislation concerning identity theft. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement of and recovery on consumer credit card or installment accounts. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to recover the receivables. In addition, our failure to comply with these requirements could adversely affect our ability to enforce the receivables.
We cannot assure you that some of our receivables were not established as a result of identity theft or unauthorized use of a credit card. In the event that a receivable was established as a result of identity theft or unauthorized use, we could not recover the amount of the defaulted consumer receivables. As a purchaser of defaulted consumer receivables, we may acquire receivables subject to legitimate defenses on the part of the consumer. Typically our account purchase contracts allow us to return to the debt owners certain defaulted consumer receivables that may not be collectible, due to these and other circumstances. Upon return, the debt owners are required to replace the receivables with similar receivables or repurchase the receivables. These provisions limit to some extent our losses on such accounts.
In addition to our obligation to comply with applicable federal, state and local laws and regulations, we are also obligated to comply with judicial decisions reached in court cases involving legislation passed by any such governmental bodies.
With Portfolio Recovery Associates, Inc.'s acquisition of MHH and its subsidiaries, Mackenzie Hall Limited, Mackenzie Hall Debt Purchase Limited and Meritforce Limited, came Portfolio Recovery Associates, Inc.'s first presence in the United Kingdom and subsequent regulation by the Office of Fair Trading (the “OFT”). As part of its regulatory role, the OFT issues guidance for those seeking to recover debts arising from consumer credit or consumer hire agreements. The United Kingdom has a number of laws with which collection agencies and debt purchasers must comply, among them, The Consumer Credit Act of 1974, The Data Protection Act of 1998 as well as guidance statements issued by the OFT and licensure requirements. The Office of General Counsel works closely with its United Kingdom counterparts to ensure that debt collection activities abroad are carried out in compliance with applicable rules and regulations.
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Item 1A. Risk Factors.
The following are risks related to our business.
A prolonged economic recovery or a deterioration in the economic or inflationary environment in the United States or the European Union, particularly in the United Kingdom, may have an adverse effect on our collections, results of operations, revenue and stock price.
Our performance may be affected by economic or inflationary conditions in the United States and the European Union, particularly in the United Kingdom. Economic conditions in the United States and the European Union may be impacted by domestic conditions or by global political and economic conditions such as the recent sovereign debt crises experienced in several European countries. There are currently concerns regarding the action or inaction of the United States government relating to the federal debt ceiling, the federal deficit and government spending cuts. For example, the United States domestic economy may be negatively impacted if the Congress does not pass legislation in early 2013 to raise the federal debt ceiling or fails to reach agreement on government spending cuts relating to the “fiscal cliff” that was avoided at the end of 2012. Deterioration in economic conditions, a prolonged economic recovery, or a significant rise in inflation could cause personal bankruptcy filings to increase, and the ability of consumers to pay their debts could be adversely affected. This may in turn adversely impact our financial condition, results of operations, revenue and stock price. Deteriorating economic conditions or a prolonged recovery could also adversely impact businesses and governmental entities to which we provide fee-based services, which could reduce our fee income and cash flow and thereby adversely impact our financial condition, results of operations, and stock price. Other factors associated with the economy that could influence our performance include the financial stability of the lenders on our line of credit, our access to capital and credit, and financial factors affecting consumers.
The financial turmoil which affected the banking system and financial markets in recent years has resulted in a tightening in credit markets. There could be a number of follow-on effects from the financial turmoil on our business, including a decrease in the value of our financial investments and the insolvency of lending institutions, including the lenders on our line of credit, resulting in our inability to obtain credit. These and other economic factors could have a material adverse effect on our financial condition and results of operations.
We may not be able to purchase defaulted consumer receivables at appropriate prices, and a decrease in our ability to purchase portfolios of receivables could adversely affect our ability to generate revenue.
If we are unable to purchase defaulted receivables from debt owners at appropriate prices, or one or more debt owners stop selling defaulted receivables to us, we could lose a potential source of cash flow and revenue, and our business may be harmed. The availability of receivables portfolios at prices which generate an appropriate return on our investment depends on a number of factors both within and outside of our control, including the following:
• | the continuation of high levels of consumer debt obligations; |
• | sales of defaulted receivables portfolios by debt owners; and |
• | competitive factors affecting potential purchasers and credit originators of receivables. |
Moreover, there can be no assurance that our existing or potential clients will continue to sell their defaulted consumer receivables at recent levels or at all, or that we will be able to continue to offer competitive bids for defaulted consumer receivables portfolios. If we are unable to expand our business or adapt to changing market needs as well as our current or future competitors, we may experience reduced access to defaulted consumer receivables portfolios at appropriate prices and reduced profitability.
Because of the length of time involved in collecting defaulted consumer receivables on acquired portfolios and the variability in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely manner.
We may not be able to continually replace our defaulted consumer receivables with additional receivables portfolios sufficient to operate efficiently and profitably.
To operate profitably, we must acquire and service a sufficient amount of defaulted consumer receivables to generate revenue that exceeds our expenses. Fixed costs such as salaries and lease or other facility costs constitute a significant portion of our overhead and, if we do not replace the defaulted consumer receivables portfolios we service with additional portfolios, we may have to reduce the number of our collection personnel. We would then have to rehire collection staff as we obtain additional defaulted consumer receivables portfolios. These practices could lead to:
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• | low employee morale; |
• | fewer experienced employees; |
• | higher training costs; |
• | disruptions in our operations; |
• | loss of efficiency; and |
• | excess costs associated with unused space in our facilities. |
Furthermore, heightened regulation of the credit card and consumer lending industry or changing credit origination strategies may result in decreased availability of credit to consumers, potentially leading to a future reduction in defaulted consumer receivables available for purchase from debt owners. We cannot predict how our ability to identify and purchase receivables and the quality of those receivables would be affected if there were a shift in consumer lending practices, whether caused by changes in the regulations or accounting practices applicable to debt owners, a sustained economic downturn or otherwise.
A portion of our collections depends on success in individual lawsuits. Additionally, in pursuing legal collections, we may be unable to obtain accurate and authentic account documents for accounts that we purchase, and despite our quality control measures, we cannot be certain that all of the documents we provide are error free.
A portion of our collections on accounts is achieved through the legal channel. Accordingly, a percentage of our future collections is dependent on success in individual lawsuits, and a portion of those are dependent on the success of third party attorney firms. In addition, when we collect accounts judicially, courts in certain jurisdictions require that a copy of certain account documents be attached to the pleadings in order to obtain a judgment against the account debtors. If we are unable to produce accurate and authentic account documents, these courts will deny our claims. We rely on the seller of accounts that we purchase to fulfill its contractual obligation, if applicable, to provide account documents to us in an accurate and timely fashion. Additionally, we rely on our employees to produce accurate and authentic documents. Our inability to obtain these documents from the seller, or our own errors in producing account documents, may negatively impact the liquidation rate on such accounts that are subject to judicial collections. Additionally, our ability to collect non-judicially may be negatively impacted by state laws which require that certain types of account documentation be in our possession prior to the institution of any collection activities.
We may not be able to collect sufficient amounts on our defaulted consumer receivables to fund our operations.
Our business primarily consists of acquiring and liquidating receivables that consumers have failed to pay and that the credit originator has deemed uncollectible and has charged-off. The debt owners have typically made numerous attempts to recover on their defaulted consumer receivables, often using a combination of in-house recovery efforts and third-party collection agencies. These defaulted consumer receivables are difficult to collect and we may not collect a sufficient amount to cover our investment associated with purchasing the defaulted consumer receivables and the costs of running our business.
We may not be successful at acquiring receivables of new asset types.
We may pursue the acquisition of receivables portfolios of asset types in which we have little current experience. We may not be successful in completing any acquisitions of receivables of these asset types and our limited experience in these asset types may impair our ability to collect on these receivables. This may cause us to pay too much for these receivables and, consequently, we may not generate a profit from these receivables portfolio acquisitions.
Our collections may decrease if certain types of bankruptcy filings involving liquidations increase.
Various economic trends and potential changes to existing legislation may contribute to an increase in the amount of personal bankruptcy filings. Under certain bankruptcy filings a debtor's assets may be sold to repay creditors, but because the defaulted consumer receivables we service are generally unsecured we often would not be able to collect on those receivables. We cannot ensure that our collections would not decline with an increase in personal bankruptcy filings or a change in bankruptcy regulations or practices. If our actual collection experience with respect to a defaulted bankrupt consumer receivables portfolio is significantly lower than we projected when we purchased the portfolio, our financial condition and results of operations could deteriorate.
Our ability to collect on portfolios of bankrupt consumer receivables may be impacted by changes in federal laws or changes in the administrative practices of the various bankruptcy courts.
We file claims in bankruptcy courts on consumer receivables in which consumers have filed for bankruptcy protection under available U.S. bankruptcy laws. We receive payments from the courts on consumer receivables which become bankrupt after we acquire them, and we also purchase accounts that are currently in bankruptcy proceedings. Our ability to collect on portfolios of
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bankrupt consumer receivables may be impacted by changes in federal laws or changes in administrative practices of the various bankruptcy courts.
Our ability to collect and enforce our finance receivables may be limited under federal and state laws.
The businesses conducted by PRA's operating subsidiaries are subject to licensing and regulation by governmental and regulatory bodies in the many jurisdictions in which we operate and conduct our business. Federal and state laws may limit our ability to collect and enforce our defaulted consumer receivables regardless of any act or omission on our part. Some laws and regulations applicable to credit issuers may preclude us from collecting on defaulted consumer receivables we purchase if the credit issuer previously failed to comply with applicable laws in generating or servicing those receivables. Collection laws and regulations also directly apply to our business. Such laws and regulations are extensive and subject to change. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement of and collection on consumer credit receivables. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to collect on our defaulted consumer receivables and may harm our business. In addition, federal, state and local governmental bodies are considering, and may consider in the future, legislative proposals that would regulate the collection of our defaulted consumer receivables. Further, certain tax laws could negatively impact our ability to collect or cause us to incur additional expenses. Although we cannot predict if or how any future legislation would impact our business, our failure to comply with any current or future laws or regulations applicable to us could limit our ability to collect on our defaulted consumer receivables, which could reduce our profitability and harm our business.
Failure to comply with existing and new government regulation of the collections industry could result in penalties, fines, litigation, damage to our reputation or the suspension or termination of our ability to conduct our business.
The collections industry is governed by various U.S. federal, state and local laws and regulations, as well as by laws and regulations in the U.K. Many states regulate our business and require us to be a licensed debt collector. Our industry is also at times investigated by regulators and offices of state attorneys general, which could lead to enforcement actions, fines and penalties, or the assertion of private claims and law suits against us. The Federal Trade Commission has the authority to investigate consumer complaints against debt collection companies and to recommend enforcement actions and seek monetary penalties. If we fail to comply with applicable laws and regulations, such failure could result in penalties, litigation losses and expenses, damage to our reputation, or the suspension or termination of our ability to conduct collections, which would materially adversely affect our results of operations, financial condition and stock price. In addition, new federal and state or local laws or regulations or changes in the ways that existing rules or laws are interpreted or enforced could limit our activities in the future or significantly increase the cost of compliance. Furthermore, judges or regulatory bodies could interpret current rules or laws differently than the way we do, leading to such adverse consequences described above. The resolution of such matters may require considerable time and expense, and if not resolved in our favor, may result in fines or damages, and possibly result in an adverse effect on our financial condition.
Changes in governmental laws and regulations could increase our costs and liabilities or impact our operations.
Changes in laws and regulations or the manner in which they are interpreted or applied may alter our business environment. This could affect our results of operations or increase our liabilities. These negative impacts could result from changes in collection laws, laws related to credit reporting, laws related to consumer bankruptcy, accounting standards, taxation requirements, employment laws and communications laws, among others. For example, we know that federal and state governments are currently reviewing existing laws related to debt collection, in order to determine if any changes are needed. Additionally, in July 2010, the Dodd-Frank Act became law. The Dodd-Frank Act restructures the regulation and supervision of the financial services industry. The Dodd-Frank Act created a new independent regulator, the CFPB, with rulemaking, supervisory, and enforcement authority over larger consumer debt collectors, as a result of which, we may become subject to examination, the frequency and scope of which are unknown. The Dodd-Frank Act also provides for the CFPB to have the authority to adopt rules describing specified acts and practices as being “unfair,” “deceptive,” or “abusive,” and hence unlawful. If we become subject to additional costs or liabilities in the future resulting from our supervision or examination by the CFPB, or by changes in, or additions to laws and regulations, that could adversely affect our results of operations and financial condition.
We may make business acquisitions that prove unsuccessful or strain or divert our resources.
Through acquisitions, we may enter markets in which we have no or limited experience. Further, acquisitions may place additional constraints on our resources by diverting the attention of our management team from other business concerns. Moreover, any acquisition may result in a potentially dilutive issuance of equity securities or may result in the incurrence of additional debt and amortization expenses of related intangible assets, which could reduce our profitability and harm our business.
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We intend to consider acquisitions of companies that could complement our business, including the acquisition of entities offering greater access and expertise in other asset types and markets that are related but that we do not currently serve. We may not be able to successfully operate future acquired entities, or integrate these businesses with our own, and we may be unable to maintain our standards, controls and policies.
Our international operations expose us to additional risks which could harm our business, operating results, and financial condition.
In 2012, we acquired MHH, a United Kingdom debt collection and purchase group, and we may expand our international operations in the future. We have limited operating experience in international markets. In addition to risks described elsewhere in this section, our international operations expose us to numerous risks and uncertainties, including the following:
• | Changes in local political, economic, social and labor conditions in the European Union, particularly in the United Kingdom, |
• | Foreign exchange controls that might prevent us from repatriating cash earned in countries outside the United States, |
• | Currency exchange rate fluctuations and our ability to manage these fluctuations through a foreign exchange risk management program, |
• | Different employee/employer relationships, laws and regulations and existence of employment tribunals, |
• | Laws and regulations imposed by foreign governments, including those relating to governing data security, sharing and transfer, |
• | Potentially adverse tax consequences resulting from changes in tax laws in the foreign jurisdictions in which we operate; and |
• | Logistical, communications and other challenges caused by distance and cultural differences, making it harder to do business in certain jurisdictions. |
Any one of these factors could materially adversely affect our business, results of operations and financial condition.
Compliance with complex foreign and U.S. laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions.
Compliance with complex foreign and U.S. laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions. These laws and regulations include anti-corruption laws such as the Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act of 2010 and other local laws prohibiting corrupt payments to governmental officials, and those related to taxation. The FCPA, and similar antibribery laws in other jurisdictions generally prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. The U.K. Bribery Act 2010 prohibits certain entities from making improper payments to governmental officials and to commercial entities. Violations of these laws and regulations could result in fines and penalties; criminal sanctions against us, our officers, or our employees; prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors or agents will not violate our policies.
Exchange rate fluctuations could adversely affect our results of operations and financial position.
Because we conduct business in currencies other than U.S. dollars but report our financial results in U.S. dollars, we face exposure to fluctuations in currency exchange rates. As a result, significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our net income. We may or may not implement a hedging program related to currency exchange rate fluctuations. Additionally, if implemented, such hedging programs could expose us to additional risks that could adversely affect our financial condition and results of operations.
Goodwill or other intangible asset impairment could negatively impact our net income and stockholders' equity.
Goodwill is not amortized, but is tested for impairment at the reporting unit level. Goodwill is required to be tested for impairment annually and between annual tests if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. There are numerous risks that may cause the fair value of a reporting unit to fall below its carrying amount, which could lead to the recognition of goodwill impairment. These risks include, but are not limited to, adverse changes in macroeconomic conditions, the business climate, or the market for the entity's products or services; significant
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variances between actual and expected financial results; lowered expectations of future results; failure to realize anticipated synergies from acquisitions; a more likely-than-not expectation of selling or disposing all or a portion of a reporting unit; the loss of key personnel; a sustained decline in the Company's market capitalization; and an adverse action or assessment by a regulator.
Other intangible assets, such as client and customer relationships, non-compete agreements and trademarks, are amortized. Risks, such as those that could lead to the recognition of goodwill impairment, could also lead to the recognition of other intangible asset impairment.
The loss of customers in our fee-for-service businesses could negatively affect our operations.
Our fee-for-service customers, in general, may terminate their relationship with us on 30 to 90 days' prior notice. In the event a customer or customers terminate or significantly cut back any relationship with us, it could reduce our profitability and harm our business. Additionally, with respect to the acquisitions of our fee businesses a significant portion of the valuation of such business was attributed to existing client and customer relationships. Therefore, a loss of customers in these businesses could give rise to an impairment charge related to intangible assets specifically ascribed to existing client and customer relationships.
Our senior management team is important to our continued success and the loss of one or more members of senior management could negatively affect our operations.
The loss of the services of one or more of our key executive officers or key employees could disrupt our operations. We have employment agreements with Steve Fredrickson, our president, chief executive officer and chairman of our board of directors, Kevin Stevenson, our executive vice president and chief financial and administrative officer, and several of our other senior executives. The current agreements contain non-compete provisions that survive termination of employment. However, these agreements do not and will not assure the continued services of these officers and we cannot ensure that the non-compete provisions will be enforceable. Our success depends on the continued service and performance of our key executive officers, and we cannot guarantee that we will be able to retain those individuals.
Our work force could become unionized in the future, which could adversely affect the stability of our operations and increase our costs.
Currently, none of our employees are represented by unions. However, our U.S. employees have the right at any time under the National Labor Relations Act to form or affiliate with a union. If some or all of our workforce were to become unionized and the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could adversely affect the stability of our work force and increase our costs.
We experience high employee turnover rates and we may not be able to hire and retain enough sufficiently trained employees to support our operations.
The receivables management industry is very labor intensive and, similar to other companies in our industry, we typically experience a high rate of employee turnover. We experience higher productivity with more seasoned collectors. Our annual turnover rate for the past several years for collectors who complete our multi-week training program has ranged between 58% and 61%. We compete for qualified personnel with companies in our industry and in other industries. Our growth requires that we continually hire and train new collectors. A higher turnover rate among our collectors will increase our recruiting and training costs and limit the number of experienced collection personnel available to service our Core defaulted consumer receivables. If this were to occur, we would not be able to service our Core defaulted consumer receivables effectively and this would reduce our ability to continue our growth and operate profitably.
We may not be able to retain, renegotiate or replace our existing credit facility.
Our credit facility includes an aggregate principal amount available of $600.0 million which consists of a $200.0 variable rate term loan and a $400.0 million revolving facility that both mature on December 19, 2017. If we are unable to retain, renegotiate or replace our credit facility, our growth could be adversely affected, which could negatively impact liquidity, our business operations and the price of our common stock.
We may not be able to continue to satisfy the restrictive covenants in our debt agreements.
Our debt agreements impose a number of covenants, including restrictive covenants on how we operate our business. Failure to satisfy any one of these covenants could result in negative consequences including the following, each of which could have a material adverse effect on our liquidity and our ability to conduct business:
• | acceleration of outstanding indebtedness; |
• | exercise by our lenders of rights with respect to the collateral pledged under certain of our outstanding indebtedness; |
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• | our inability to continue to purchase receivables needed to operate our business; or |
• | our inability to secure alternative financing on favorable terms, if at all. |
Changes in interest rates could increase our interest expense and reduce our net income. Our future hedging strategies may not be successful in mitigating our risks associated with changes in interest rates and could adversely affect our results of operations and financial condition, as could our failure to comply with hedge accounting principles and interpretations.
Our revolving credit facility bears interest at a variable rate. Increases in interest rates could increase our interest expense which would, in turn, lower our earnings. From time to time, we may enter into hedging transactions to mitigate our interest rate risk on a portion of our credit facility. Our hedging strategies rely on assumptions and projections. If these assumptions and projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, we may experience volatility in our earnings that could adversely affect our results of operations and financial condition. We had no interest rate hedge contracts at December 31, 2012.
In addition, hedge accounting in accordance with FASB ASC Topic 815 “Derivatives and Hedging” requires the application of significant subjective judgments to a body of accounting concepts that is complex and for which the interpretations have continued to evolve within the accounting profession and among the standard-setting bodies. Our failure to comply with hedge accounting principles and interpretations in the future could result in the loss of the applicability of hedge accounting which could adversely affect our results of operations and financial condition.
Additional taxes levied on us could harm our financial results.
PRA is subject to taxes in the U.S. and the United Kingdom. PRA's future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. Any of these changes could have a material adverse effect on PRA's profitability. The determination of the worldwide provision for income taxes and other tax liabilities requires significant judgment. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
Our tax filings are subject to audit by domestic and foreign tax authorities. These audits may result in assessments of additional taxes, adjustments to the timing of taxable income or deductions or allocations of income among tax jurisdictions. If any such challenges are made and are not resolved in our favor, they could have an adverse effect on our financial condition and results of operations.
We file domestic income tax returns using the cost recovery method for tax revenue recognition as it relates to our debt purchasing business. The Internal Revenue Service (“IRS”) has audited and issued a Notice of Deficiency for the tax years ended December 31, 2007, 2006 and 2005. It has asserted that cost recovery for tax revenue recognition does not clearly reflect taxable income and that unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction. We have filed a petition in the United States Tax Court and believe we have sufficient support for the technical merits of our positions and that it is more-likely-than-not that they will ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary. If we are unsuccessful in the United States Tax Court, we can appeal to the federal Circuit Court of Appeals. If judicial appeals prove unsuccessful, we may ultimately be required to pay the related deferred taxes, any potential interest, and penalties, possibly requiring additional financing from other sources. The deferred tax liability related to revenue recognition on our debt purchasing business is $190.1 million at December 31, 2012. On June 30, 2011, we were notified by the IRS that the audit period was expanded to include the tax years ended December 31, 2009 and 2008. The statute of limitations for the 2010, 2009 and 2008 tax years has been extended to September 26, 2014.
Changes in the United States tax laws regarding earnings of our subsidiaries located outside the United States could materially affect our future results.
There have been proposals to change United States tax laws that would significantly impact how United States corporations are taxed on foreign earnings. We earn a portion of our income in foreign countries. Although we cannot predict whether or in what form any of these proposals might be enacted into law, if adopted they could have a material adverse impact on our liquidity, results of operations, financial condition and cash flows.
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For financial reporting purposes, we utilize the interest method of revenue recognition for determining our income recognized on finance receivables, which is based on an analysis of projected cash flows that may prove to be less than anticipated and could lead to reductions in future revenues or the incurrence of allowance charges.
We utilize the interest method to determine income recognized on finance receivables under the guidance of Financial Accounting Standards Board Accounting Standards Codification 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Under this method, static pools of receivables we acquire are modeled upon their projected cash flows. A yield is then established which, when applied to the unamortized purchase price of the receivables, results in the recognition of income at a constant yield relative to the remaining balance in the pool. Each static pool is analyzed regularly to assess the actual performance compared to that expected by the model. Significant increases in actual or projected future cash flows are recognized prospectively, through an upward adjustment of the yield, over a pool's estimated remaining life. If a valuation allowance had been previously recognized for that pool, the allowance is reversed before recording any prospective yield adjustments. Any increase to the yield then becomes the new benchmark for future impairment testing for the pool. Under ASC 310-30, rather than lowering the estimated yield for significant decreases in actual or projected future cash flows, an allowance charge is recorded to reduce the carrying value of a pool to maintain the then current yield and is shown as a reduction in revenues in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheets. As a result, if the accuracy of the modeling process deteriorates or there is a significant decline in anticipated future cash flows, we could incur reductions in future revenues resulting from additional allowance charges, which could reduce our profitability in a given period and negatively impact our stock price.
Our loss contingency accruals may not be adequate to cover actual losses.
We are involved in judicial, regulatory, and arbitration proceedings or investigations concerning matters arising from our business activities. Although we believe we have meritorious defenses in all material litigation pending against us, there can be no assurance as to the ultimate outcome. We establish accruals for potential liability arising from legal proceedings when it is probable that such liability has been incurred and the amount of the loss can be reasonably estimated. We may still incur legal costs for a matter even if we have not accrued a liability. In addition, actual losses may be higher than the amount accrued for a certain matter, or in the aggregate. An unfavorable resolution of a legal proceeding or claim could materially adversely impact our financial condition, results of operations, or cash flows. For more information, refer to the “Litigation” section of Note 16 (Commitments and Contingencies).
We may not be able to successfully anticipate, manage or adopt technological advances within our industry.
Our business relies on computer and telecommunications technologies and our ability to integrate these technologies into our business is essential to our competitive position and our success. Computer and telecommunications technologies are evolving rapidly and are characterized by short product life cycles. We may not be successful in anticipating, managing or adopting technological changes on a timely basis, which could reduce our profitability or disrupt our operations and harm our business.
While we believe that our existing information systems are sufficient to meet our current demands and continued expansion, our future growth may require additional investment in these systems. We depend on having the capital resources necessary to invest in new technologies to acquire and service defaulted consumer receivables. We cannot ensure that adequate capital resources will be available to us at the appropriate time.
We rely on our systems, including our telecommunications and computers systems, and employees, and certain failures or disruptions could adversely affect the continuity of our business operations.
We may be subject to disruptions of our operating systems arising from events that are not entirely within our control. Those events may include, for example, terrorist attacks, war and the outcome of war and threats of attacks; computer viruses; electrical or telecommunications outages; natural disasters; computer hacking attacks; malicious employee acts; other intentional destructive human acts; and disease pandemics. We could be subject to both private and public legal actions if consumer information stored in our systems is lost or misappropriated, as we are subject to extensive laws and regulations concerning the use and safeguarding of this information. Any or all of these occurrences could have a material adverse effect on our results of operations, financial condition and stock price.
Additionally, our success depends in large part on sophisticated telecommunications and computer systems. The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty or operating malfunction, could disrupt our operations. In the normal course of our business, we must record and process significant amounts of data quickly and accurately to access, maintain and expand the databases we use for our collection activities. Any failure of our information systems or software and our backup systems would interrupt our business operations and harm our business. Our headquarters are located in a region that is susceptible to hurricane damage, which may increase the risk of disruption of information systems and telephone service for sustained periods.
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Further, our business depends heavily on services provided by various local and long distance telephone companies. A significant increase in telephone service costs or any significant interruption in telephone services could reduce our profitability or disrupt our operations and harm our business.
The occurrence of cyber incidents, or a deficiency in our cyber-security, could negatively impact our business by causing a disruption in our operations, a compromise or corruption of our confidential information or damage to our Company's image, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. More specifically, a cyber incident is an intentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident are operational interruption, damage to our image, and private data exposure. We have implemented solutions, processes, and procedures to help mitigate this risk, but these measures, as well as our organization's increased awareness of our risk of a cyber incident, do not guarantee that our financial results will not be negatively impacted by such an incident.
We serve markets that are highly competitive, and we may be unable to compete with businesses that may have greater resources than us.
We face competition in the markets we serve from new and existing providers of outsourced receivables management services, including other purchasers of defaulted consumer receivables portfolios, contingent fee businesses and debt owners that manage their own defaulted consumer receivables rather than outsourcing them. The receivables management industry is highly fragmented and competitive, consisting of thousands of consumer and commercial agencies, most of which compete in the contingent fee business.
We face bidding competition in our acquisition of defaulted consumer receivables and in our placement of fee based receivables, and we also compete on the basis of reputation, industry experience and performance. Some of our current competitors and possible new competitors may have substantially greater financial, personnel and other resources, greater adaptability to changing market needs, longer operating histories and more established relationships in our industry than we currently have. In the future, we may not have the resources or ability to compete successfully. As there are few significant barriers for entry to new providers of fee based receivables management services, there can be no assurance that additional competitors with greater resources than ours will not enter the market.
We may not be able to manage our growth effectively.
We have expanded significantly since our formation and we intend to maintain our focus on growth. However, our growth will place additional demands on our resources and we cannot ensure that we will be able to manage our growth effectively. In order to successfully manage our growth, we may need to:
• | expand and enhance our administrative infrastructure; |
• | continue to improve our management, financial and information systems and controls; and |
• | recruit, train, manage and retain our employees effectively. |
Continued growth could place a strain on our management, operations and financial resources. We cannot ensure that our infrastructure, facilities and personnel will be adequate to support our future operations or to effectively adapt to future growth. If we cannot manage our growth effectively, our results of operations may be adversely affected.
The market price of our shares of common stock could fluctuate significantly.
Wide fluctuations in the trading price or volume of our shares of common stock could be caused by many factors, including factors relating to our company or to investor perception of our company (including changes in financial estimates and recommendations by research analysts), but also factors relating to (or relating to investor perception of) the receivables management industry or the economy in general.
Negative publicity or reputational attacks could damage our reputation.
From time to time there are negative news stories about our industry or company, especially with respect to alleged conduct in collecting debt from customers. Negative public opinion about our alleged or actual debt collection practices or about the debt collection industry, including those expressed via television, newspapers, radio, or social media such as blogs, websites or newsletters, could adversely impact our stock price and our ability to retain and attract customers and employees.
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Our certificate of incorporation, by-laws and Delaware law contain provisions that may prevent or delay a change of control or that may otherwise be in the best interest of our stockholders.
Our certificate of incorporation and by-laws contain provisions that may make it more difficult, expensive or otherwise discourage a tender offer or a change in control or takeover attempt by a third-party, even if such a transaction would be beneficial to our stockholders. The existence of these provisions may have a negative impact on the price of our common stock by discouraging third-party investors from purchasing our common stock. In particular, our certificate of incorporation and by-laws include provisions that:
• | classify our board of directors into three groups, each of which will serve for staggered three-year terms; |
• | permit a majority of the stockholders to remove our directors only for cause; |
• | permit our directors, and not our stockholders, to fill vacancies on our board of directors; |
• | require stockholders to give us advance notice to nominate candidates for election to our board of directors or to make stockholder proposals at a stockholders’ meeting; |
• | permit a special meeting of our stockholders to be called only by approval of a majority of the directors, the chairman of the board of directors, the chief executive officer, the president or the written request of holders owning at least 30% of our common stock; |
• | permit our board of directors to issue, without approval of our stockholders, preferred stock with such terms as our board of directors may determine; |
• | permit the authorized number of directors to be changed only by a resolution of the board of directors; and |
• | require the vote of the holders of a majority of our voting shares for stockholder amendments to our by-laws. |
In addition, we are subject to Section 203 of the Delaware General Corporation Law which provides certain restrictions on business combinations between us and any party acquiring a 15% or greater interest in our voting stock other than in a transaction approved by our board of directors and, in certain cases, by our stockholders. These provisions of our certificate of incorporation, our by-laws and Delaware law could delay or prevent a change in control, even if our stockholders support such proposals. Moreover, these provisions could diminish the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above the then-current market value of our common stock, and may also inhibit increases in the trading price of our common stock that could result from takeover attempts or speculation.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters and primary operations facility are located in Norfolk, Virginia. In addition, we have operational centers, all of which are leased except the facilities in Kansas and in Tennessee, in the following locations in the United States:
- Birmingham, Alabama - Jackson, Tennessee
- Conshohocken, Pennsylvania - Lake Forest, California
- Fresno, California - Las Vegas, Nevada, and
- Hampton, Virginia - Rosemont, Illinois.
- Hutchinson, Kansas
Our leased MHH subsidiary facility, which we acquired on January 16, 2012 is located in Kilmarnock, Scotland.
We do not consider any specific leased or owned facility to be material to our operations. We believe that equally suitable alternative facilities are available in all areas where we currently do business.
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Item 3. Legal Proceedings.
We are from time to time subject to routine legal claims and proceedings, most of which are incidental to the ordinary course of our business. We initiate lawsuits against customers and are occasionally countersued by them in such actions. Also, customers, either individually, as members of a class action, or through a governmental entity on behalf of customers, may initiate litigation against us in which they allege that we have violated a state or federal law in the process of collecting on an account. From time to time, other types of lawsuits are brought against us.
No legal proceedings were commenced during the period covered by this report that the Company believes could reasonably be expected to have a material adverse effect on its financial condition, results of operations and cash flows. Refer to Note 16 “Commitments and Contingencies” of our Consolidated Financial Statements (Part II, Item 8 of this Form 10-K) for information regarding legal proceedings in which we are involved.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Price Range of Common Stock
The Company's common stock is traded on the NASDAQ Global Select Market under the symbol “PRAA.” The following table sets forth the high and low sales price for the Company's common stock, as reported by the NASDAQ Global Select Market, for the periods indicated.
2011 | High | Low | |
Quarter ended March 31, 2011 | $86.89 | $68.29 | |
Quarter ended June 30, 2011 | $90.95 | $77.64 | |
Quarter ended September 30, 2011 | $89.67 | $56.76 | |
Quarter ended December 31, 2011 | $73.63 | $58.29 | |
2012 | High | Low | |
Quarter ended March 31, 2012 | $74.08 | $60.12 | |
Quarter ended June 30, 2012 | $91.36 | $64.90 | |
Quarter ended September 30, 2012 | $106.18 | $80.19 | |
Quarter ended December 31, 2012 | $107.01 | $91.89 | |
As of February 7, 2013, there were 59 holders of record of the Company's common stock. Based on information provided by our transfer agent and registrar, we believe that there are approximately 30,340 beneficial owners of the Company's common stock as of January 18, 2013.
Stock Performance
The following graph compares from December 31, 2007 to December 31, 2012, the cumulative stockholder returns assuming an initial investment of $100 in the Company's common stock at the beginning of the period, the stocks comprising the NASDAQ Global Market Composite Index, the NASDAQ Market Index (U.S.) and the stocks comprising a peer group index consisting of six peers which includes Encore Capital Group, Inc., Asset Acceptance Capital Corp., Asta Funding, Inc., Compucredit Holdings Corporation, FTI Consulting Inc. and EPIQ Systems Inc. Any dividends paid during the five year period are assumed to be reinvested.
26
As of December 31, | |||||||||||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | ||||||||||||||||||
Portfolio Recovery Associates, Inc. | $ | 100 | $ | 85 | $ | 113 | $ | 190 | $ | 170 | $ | 269 | |||||||||||
NASDAQ Market Index (U.S.) | $ | 100 | $ | 59 | $ | 85 | $ | 99 | $ | 99 | $ | 118 | |||||||||||
NASDAQ Global Market Composite Index | $ | 100 | $ | 49 | $ | 71 | $ | 85 | $ | 73 | $ | 85 | |||||||||||
Custom Peer Group | $ | 100 | $ | 67 | $ | 73 | $ | 69 | $ | 68 | $ | 66 | |||||||||||
The comparisons of stock performance shown above are not intended to forecast or be indicative of possible future performance of PRA’s common stock. PRA does not make or endorse any predictions as to its future stock performance.
Dividend Policy
Our board of directors sets our dividend policy. We do not currently pay regular dividends on our common stock and did not pay dividends in 2012 or 2011; however, our board of directors may determine in the future to declare or pay dividends on our common stock. Under the terms of our credit facility, cash dividends may not exceed $20 million in any fiscal year without the consent of our lenders. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors may consider relevant.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under equity compensation plans see Note 12 "Share-Based Compensation" of our Consolidated Financial Statements.
Share Repurchase Program
On February 2, 2012, the Company's board of directors authorized a share repurchase program to purchase up to $100,000,000 of the Company's outstanding shares of common stock on the open market. The following table provides information about the Company's common stock purchased during the fourth quarter of 2012.
Month Ended | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Remaining Purchase Price for Share Repurchases Under the Plan | |||||
November 30, 2012 | 100 | $ | 93.02 | $ | 77,264,947 | |||
Total | 100 | $ | 93.02 | $ | 77,264,947 | |||
27
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section below, the audited consolidated financial statements and the notes to the audited consolidated financial statements.
Years Ended December 31, | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
INCOME STATEMENT DATA: | |||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||
Revenues: | |||||||||||||||||||
Income recognized on finance receivables, net | $ | 530,635 | $ | 401,895 | $ | 309,680 | $ | 215,612 | $ | 206,486 | |||||||||
Fee income | 62,166 | 57,040 | 63,026 | 65,479 | 56,789 | ||||||||||||||
Total revenues | 592,801 | 458,935 | 372,706 | 281,091 | 263,275 | ||||||||||||||
Operating expenses: | |||||||||||||||||||
Compensation and employee services | 168,356 | 138,202 | 124,077 | 106,388 | 88,073 | ||||||||||||||
Legal collection fees | 34,393 | 23,621 | 17,599 | 14,872 | 20,610 | ||||||||||||||
Legal collection costs | 72,325 | 38,659 | 31,330 | 16,462 | 16,194 | ||||||||||||||
Agent fees | 5,906 | 7,653 | 12,012 | 15,644 | 16,065 | ||||||||||||||
Outside fees and services | 28,867 | 19,310 | 12,554 | 9,570 | 8,883 | ||||||||||||||
Communications | 29,110 | 23,372 | 17,226 | 14,773 | 10,304 | ||||||||||||||
Rent and occupancy | 6,781 | 5,891 | 5,313 | 4,761 | 3,908 | ||||||||||||||
Depreciation and amortization | 14,515 | 12,943 | 12,437 | 9,213 | 7,424 | ||||||||||||||
Other operating expenses | 16,484 | 12,416 | 10,296 | 8,799 | 6,977 | ||||||||||||||
Total operating expenses | 376,737 | 282,067 | 242,844 | 200,482 | 178,438 | ||||||||||||||
Gain on sale of property | — | 1,157 | — | — | — | ||||||||||||||
Income from operations | 216,064 | 178,025 | 129,862 | 80,609 | 84,837 | ||||||||||||||
Interest income | 10 | 7 | 65 | 3 | 60 | ||||||||||||||
Interest expense | (9,041 | ) | (10,569 | ) | (9,052 | ) | (7,909 | ) | (11,151 | ) | |||||||||
Income before income taxes | 207,033 | 167,463 | 120,875 | 72,703 | 73,746 | ||||||||||||||
Provision for income taxes | 80,934 | 66,319 | 47,004 | 28,397 | 28,384 | ||||||||||||||
Net income | $ | 126,099 | $ | 101,144 | $ | 73,871 | $ | 44,306 | $ | 45,362 | |||||||||
Adjustment for net loss/(income) attributable to redeemable noncontrolling interest | 494 | (353 | ) | (417 | ) | — | — | ||||||||||||
Net income attributable to Portfolio Recovery Associates, Inc. | $ | 126,593 | $ | 100,791 | $ | 73,454 | $ | 44,306 | $ | 45,362 | |||||||||
Net income per share attributable to Portfolio Recovery Associates, Inc: | |||||||||||||||||||
Basic | $7.45 | $5.89 | $4.37 | $2.87 | $2.98 | ||||||||||||||
Diluted | $7.39 | $5.85 | $4.35 | $2.87 | $2.97 | ||||||||||||||
Weighted average number of shares outstanding: | |||||||||||||||||||
Basic | 16,997 | 17,110 | 16,820 | 15,420 | 15,229 | ||||||||||||||
Diluted | 17,123 | 17,230 | 16,885 | 15,454 | 15,292 | ||||||||||||||
OPERATING AND OTHER FINANCIAL DATA: | |||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
Cash receipts | $ | 970,852 | $ | 762,530 | $ | 592,368 | $ | 433,482 | $ | 383,488 | |||||||||
Operating expenses to cash receipts | 39 | % | 37 | % | 41 | % | 46 | % | 47 | % | |||||||||
Return on equity (1) | 20 | % | 19 | % | 17 | % | 14 | % | 17 | % | |||||||||
Acquisitions of finance receivables, at cost (2) | $ | 538,501 | $ | 408,408 | $ | 367,443 | $ | 288,889 | $ | 280,336 | |||||||||
Acquisitions of finance receivables, at face value (2) | $ | 6,153,987 | $ | 9,792,356 | $ | 6,804,952 | $ | 8,109,694 | $ | 4,588,234 | |||||||||
Employees at period end | 3,221 | 2,641 | 2,473 | 2,213 | 2,032 | ||||||||||||||
(1) | Calculated by dividing net income for each year by average monthly stockholders’ equity for the same year. |
(2) | Represents cash paid for finance receivables. It does not include certain capitalized costs or buybacks. It also does not include the finance receivables acquired as part of the initial acquisition of MHH. |
28
Below are listed certain key balance sheet data for the periods presented:
As of December 31, | |||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
BALANCE SHEET DATA: | |||||||||||||||||||
Cash and cash equivalents | $ | 32,687 | $ | 26,697 | $ | 41,094 | $ | 20,265 | $ | 13,901 | |||||||||
Finance receivables, net | 1,078,951 | 926,734 | 831,330 | 693,462 | 563,830 | ||||||||||||||
Total assets | 1,288,956 | 1,071,123 | 995,908 | 794,433 | 657,840 | ||||||||||||||
Long-term debt | 200,542 | 1,246 | 2,396 | 1,499 | — | ||||||||||||||
Total debt, including obligations under capital lease and line of credit | 327,542 | 221,246 | 320,396 | 320,799 | 268,305 | ||||||||||||||
Total stockholders’ equity | 708,427 | 595,488 | 490,516 | 335,480 | 283,863 | ||||||||||||||
Below are listed the quarterly consolidated income statements for the years ended December 31, 2012 and 2011:
For the Quarter Ended | |||||||||||||||||||||||||||||||
Dec. 31, 2012 | Sept. 30, 2012 | June 30, 2012 | Mar. 31, 2012 | Dec. 31, 2011 | Sept. 30, 2011 | June 30, 2011 | Mar. 31, 2011 | ||||||||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||||||||||||
INCOME STATEMENT DATA: | |||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||
Income recognized on finance receivables, net | $ | 138,068 | $ | 135,754 | $ | 132,587 | $ | 124,226 | $ | 102,743 | $ | 102,875 | $ | 100,303 | $ | 95,974 | |||||||||||||||
Fee income | 16,183 | 14,765 | 15,298 | 15,920 | 15,344 | 11,401 | 14,492 | 15,803 | |||||||||||||||||||||||
Total revenues | 154,251 | 150,519 | 147,885 | 140,146 | 118,087 | 114,276 | 114,795 | 111,777 | |||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||||
Compensation and employee services | 44,849 | 41,334 | 42,479 | 39,694 | 35,759 | 33,475 | 34,815 | 34,153 | |||||||||||||||||||||||
Legal collection fees | 9,153 | 8,635 | 8,988 | 7,617 | 5,940 | 5,962 | 5,970 | 5,749 | |||||||||||||||||||||||
Legal collection costs | 14,619 | 15,810 | 18,227 | 23,669 | 9,711 | 9,731 | 9,879 | 9,338 | |||||||||||||||||||||||
Agent fees | 1,411 | 1,545 | 1,323 | 1,627 | 1,647 | 1,643 | 1,724 | 2,639 | |||||||||||||||||||||||
Outside fees and services | 7,292 | 10,131 | 5,584 | 5,860 | 5,608 | 6,222 | 4,066 | 3,414 | |||||||||||||||||||||||
Communications | 7,073 | 6,777 | 7,007 | 8,253 | 5,488 | 5,865 | 5,706 | 6,313 | |||||||||||||||||||||||
Rent and occupancy | 1,728 | 1,786 | 1,656 | 1,611 | 1,538 | 1,517 | 1,438 | 1,398 | |||||||||||||||||||||||
Depreciation and amortization | 3,681 | 3,623 | 3,555 | 3,656 | 3,188 | 3,223 | 3,316 | 3,216 | |||||||||||||||||||||||
Other operating expenses | 4,456 | 3,820 | 4,470 | 3,738 | 3,255 | 2,808 | 3,501 | 2,852 | |||||||||||||||||||||||
Total operating expenses | 94,262 | 93,461 | 93,289 | 95,725 | 72,134 | 70,446 | 70,415 | 69,072 | |||||||||||||||||||||||
Gain on sale of property | — | — | — | — | — | — | 1,157 | — | |||||||||||||||||||||||
Income from operations | 59,989 | 57,058 | 54,596 | 44,421 | 45,953 | 43,830 | 45,537 | 42,705 | |||||||||||||||||||||||
Interest income | 2 | — | 7 | 1 | — | 7 | — | — | |||||||||||||||||||||||
Interest expense | (1,818 | ) | (2,189 | ) | (2,381 | ) | (2,653 | ) | (2,512 | ) | (2,555 | ) | (2,635 | ) | (2,867 | ) | |||||||||||||||
Income before income taxes | 58,173 | 54,869 | 52,222 | 41,769 | 43,441 | 41,282 | 42,902 | 39,838 | |||||||||||||||||||||||
Provision for income taxes | 22,441 | 21,742 | 20,171 | 16,580 | 16,775 | 16,089 | 17,326 | 16,129 | |||||||||||||||||||||||
Net income | 35,732 | 33,127 | 32,051 | 25,189 | 26,666 | 25,193 | 25,576 | 23,709 | |||||||||||||||||||||||
Adjustment for net loss/(income) attributable to redeemable noncontrolling interest | 70 | 187 | (36 | ) | 273 | (76 | ) | 313 | (2 | ) | (588 | ) | |||||||||||||||||||
Net income attributable to Portfolio Recovery Associates, Inc. | $ | 35,802 | $ | 33,314 | $ | 32,015 | $ | 25,462 | $ | 26,590 | $ | 25,506 | $ | 25,574 | $ | 23,121 | |||||||||||||||
Net income per share attributable to Portfolio Recovery Associates, Inc: | |||||||||||||||||||||||||||||||
Basic | $ | 2.12 | $ | 1.97 | $ | 1.88 | $ | 1.48 | $ | 1.55 | $ | 1.49 | $ | 1.49 | $ | 1.35 | |||||||||||||||
Diluted | $ | 2.10 | $ | 1.96 | $ | 1.87 | $ | 1.47 | $ | 1.54 | $ | 1.48 | $ | 1.48 | $ | 1.34 | |||||||||||||||
Weighted average number of shares outstanding: | |||||||||||||||||||||||||||||||
Basic | 16,883 | 16,881 | 17,027 | 17,196 | 17,121 | 17,117 | 17,108 | 17,092 | |||||||||||||||||||||||
Diluted | 17,072 | 17,022 | 17,133 | 17,267 | 17,269 | 17,228 | 17,225 | 17,199 | |||||||||||||||||||||||
29
Below are listed the quarterly consolidated balance sheets for the years ended December 31, 2012 and 2011:
Quarter Ended as of: | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Dec. 31, 2012 | Sept. 30, 2012 | June 30, 2012 | Mar. 31, 2012 | Dec. 31, 2011 | Sept. 30, 2011 | June 30, 2011 | Mar. 31, 2011 | |||||||||||||||||||||||
BALANCE SHEET DATA: | |||||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 32,687 | $ | 31,488 | $ | 42,621 | $ | 28,068 | $ | 26,697 | $ | 30,035 | $ | 25,481 | $ | 35,443 | |||||||||||||||
Finance receivables, net | 1,078,951 | 973,594 | 966,508 | 945,242 | 926,734 | 919,478 | 879,515 | 866,992 | |||||||||||||||||||||||
Accounts receivable, net | 10,486 | 8,417 | 8,580 | 9,107 | 7,862 | 6,462 | 6,683 | 7,369 | |||||||||||||||||||||||
Property and equipment, net | 25,312 | 25,506 | 26,016 | 26,369 | 25,727 | 22,975 | 23,810 | 24,469 | |||||||||||||||||||||||
Goodwill | 109,488 | 100,456 | 99,384 | 97,480 | 61,678 | 61,678 | 61,678 | 61,678 | |||||||||||||||||||||||
Intangible assets, net | 20,364 | 21,167 | 22,364 | 27,179 | 14,596 | 14,748 | 15,965 | 17,215 | |||||||||||||||||||||||
Other assets | 11,668 | 9,070 | 8,265 | 8,581 | 7,829 | 8,728 | 8,485 | 6,933 | |||||||||||||||||||||||
Total assets | $ | 1,288,956 | $ | 1,169,698 | $ | 1,173,738 | $ | 1,142,026 | $ | 1,071,123 | $ | 1,064,104 | $ | 1,021,617 | $ | 1,020,099 | |||||||||||||||
Liabilities and Equity | |||||||||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||
Accounts payable | $ | 12,155 | $ | 10,234 | $ | 10,508 | $ | 10,915 | $ | 7,439 | $ | 5,148 | $ | 5,326 | $ | 7,498 | |||||||||||||||
Accrued expenses | 18,953 | 11,197 | 6,859 | 7,852 | 6,076 | 5,856 | 4,389 | 2,620 | |||||||||||||||||||||||
Income taxes payable | 3,125 | 7,359 | 8,468 | 16,688 | 13,109 | 2,651 | 2,877 | 1,577 | |||||||||||||||||||||||
Accrued compensation | 12,804 | 13,241 | 11,588 | 6,854 | 16,036 | 11,409 | 10,563 | 6,300 | |||||||||||||||||||||||
Net deferred tax liability | 185,277 | 186,506 | 190,639 | 194,286 | 193,898 | 192,298 | 188,142 | 179,043 | |||||||||||||||||||||||
Line of credit | 127,000 | 250,000 | 292,000 | 265,000 | 220,000 | 260,000 | 250,000 | 290,000 | |||||||||||||||||||||||
Long-term debt | 200,542 | 674 | 849 | 936 | 1,246 | 1,553 | 1,856 | 2,098 | |||||||||||||||||||||||
Total liabilities | 559,856 | 479,211 | 520,911 | 502,531 | 457,804 | 478,915 | 463,153 | 489,136 | |||||||||||||||||||||||
Redeemable noncontrolling interest | 20,673 | 19,998 | 19,381 | 18,783 | 17,831 | 16,884 | 16,068 | 15,253 | |||||||||||||||||||||||
Stockholders’ equity | |||||||||||||||||||||||||||||||
Common stock | 169 | 169 | 169 | 172 | 171 | 171 | 171 | 171 | |||||||||||||||||||||||
Additional paid in capital | 151,216 | 149,818 | 147,881 | 166,133 | 167,719 | 167,126 | 166,723 | 165,611 | |||||||||||||||||||||||
Retained earnings | 554,191 | 518,389 | 485,075 | 453,060 | 427,598 | 401,008 | 375,502 | 349,928 | |||||||||||||||||||||||
Accumulated other comprehensive income | 2,851 | 2,113 | 321 | 1,347 | — | — | — | — | |||||||||||||||||||||||
Total stockholders’ equity | 708,427 | 670,489 | 633,446 | 620,712 | 595,488 | 568,305 | 542,396 | 515,710 | |||||||||||||||||||||||
Total liabilities and equity | $ | 1,288,956 | $ | 1,169,698 | $ | 1,173,738 | $ | 1,142,026 | $ | 1,071,123 | $ | 1,064,104 | $ | 1,021,617 | $ | 1,020,099 | |||||||||||||||
30
Below are certain key financial data and ratios as of and for the years ended December 31, 2012, 2011 and 2010:
FINANCIAL HIGHLIGHTS
2012 | 2011 | 2010 | |||||||||
EARNINGS (in thousands) | |||||||||||
Income recognized on finance receivables, net | $ | 530,635 | $ | 401,895 | $ | 309,680 | |||||
Fee income | 62,166 | 57,040 | 63,026 | ||||||||
Total revenues | 592,801 | 458,935 | 372,706 | ||||||||
Operating expenses | 376,737 | 282,067 | 242,844 | ||||||||
Income from operations | 216,064 | 178,025 | 129,862 | ||||||||
Net interest expense | 9,031 | 10,562 | 8,987 | ||||||||
Net income | 126,099 | 101,144 | 73,871 | ||||||||
Net income attributable to Portfolio Recovery Associates, Inc. | 126,593 | 100,791 | 73,454 | ||||||||
PERIOD-END BALANCES (in thousands) | |||||||||||
Cash and cash equivalents | $ | 32,687 | $ | 26,697 | $ | 41,094 | |||||
Finance receivables, net | 1,078,951 | 926,734 | 831,330 | ||||||||
Goodwill and intangible assets, net | 129,852 | 76,274 | 80,144 | ||||||||
Total assets | 1,288,956 | 1,071,123 | 995,908 | ||||||||
Line of credit and long-term debt | 327,542 | 221,246 | 302,396 | ||||||||
Total liabilities | 559,856 | 457,804 | 490,943 | ||||||||
Total equity | 708,427 | 595,488 | 490,516 | ||||||||
FINANCE RECEIVABLE COLLECTIONS (dollars in thousands) | |||||||||||
Cash collections | $ | 908,684 | $ | 705,490 | $ | 529,342 | |||||
Principal amortization without allowance charges | 371,497 | 293,431 | 194,510 | ||||||||
Principal amortization with allowance charges | 378,049 | 303,595 | 219,662 | ||||||||
Principal amortization w/ allowance charges as % of cash collections: | |||||||||||
Including fully amortized pools | 41.6 | % | 43.0 | % | 41.5 | % | |||||
Excluding fully amortized pools | 43.0 | % | 45.4 | % | 44.8 | % | |||||
ALLOWANCE FOR FINANCE RECEIVABLES (dollars in thousands) | |||||||||||
Balance at period-end | $ | 93,123 | $ | 86,571 | $ | 76,407 | |||||
Allowance charge | 6,552 | 10,164 | 25,152 | ||||||||
Allowance charge to period-end net finance receivables | 0.61 | % | 1.10 | % | 3.03 | % | |||||
Allowance charge to net finance receivable income | 1.23 | % | 2.53 | % | 8.12 | % | |||||
Allowance charge to cash collections | 0.72 | % | 1.44 | % | 4.75 | % | |||||
PURCHASES OF FINANCE RECEIVABLES (1) (dollars in thousands) | |||||||||||
Purchase price—core | $ | 259,795 | $ | 213,389 | $ | 149,998 | |||||
Face value—core | 3,581,246 | 7,900,762 | 3,424,313 | ||||||||
Purchase price—bankruptcy | 262,630 | 195,019 | 217,445 | ||||||||
Face value—bankruptcy | 2,104,977 | 1,891,595 | 3,380,639 | ||||||||
Purchase price—total | 522,425 | 408,408 | 367,443 | ||||||||
Face value—total | 5,686,223 | 9,792,356 | 6,804,952 | ||||||||
Number of portfolios—total | 376 | 333 | 305 | ||||||||
ESTIMATED REMAINING COLLECTIONS (1) (in thousands) | |||||||||||
Estimated remaining collections—core | $ | 1,387,711 | $ | 1,159,086 | |||||||