XNAS:PRAA Portfolio Recovery Associates Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 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

 

 

Portfolio Recovery Associates, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   75-3078675

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

120 Corporate Boulevard, Norfolk, Virginia   23502
(Address of principal executive offices)   (zip code)

(888) 772-7326

(Registrant’s telephone number, including area code)

 

 

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  x    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  x    NO  ¨

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,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    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  x

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding as of May 8, 2012

Common Stock, $0.01 par value   

17,105,510

 

 

 


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

INDEX

 

         Page(s)  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

     3   
 

Consolidated Balance Sheets (unaudited) as of March 31, 2012 and December 31, 2011

     3   
 

Consolidated Income Statements (unaudited) for the three months ended March 31, 2012 and 2011

     4   
 

Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2012 and 2011

     5   
 

Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the three months ended March 31, 2012

     6   
 

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2012 and 2011

     7   
 

Notes to Consolidated Financial Statements (unaudited)

     8-24   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25-51   

Item 3.

 

Quantitative and Qualitative Disclosure About Market Risk

     51   

Item 4.

 

Controls and Procedures

     52   

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     52   

Item 1A.

 

Risk Factors

     52   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     53   

Item 3.

 

Defaults Upon Senior Securities

     53   

Item 4.

 

Mine Safety Disclosure

     53   

Item 5.

 

Other Information

     53   

Item 6.

 

Exhibits

     53   

SIGNATURES

     54   

 

2


Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS

March 31, 2012 and December 31, 2011

(unaudited)

(Amounts in thousands, except per share amounts)

 

     March 31,
2012
     December 31,
2011
 
Assets      

Cash and cash equivalents

   $ 28,068       $ 26,697   

Finance receivables, net

     945,242         926,734   

Accounts receivable, net

     9,107         7,862   

Property and equipment, net

     26,369         25,727   

Goodwill

     97,480         61,678   

Intangible assets, net

     27,179         14,596   

Other assets

     8,581         7,829   
  

 

 

    

 

 

 

Total assets

   $ 1,142,026       $ 1,071,123   
  

 

 

    

 

 

 

Liabilities and Equity

     

Liabilities:

     

Accounts payable

   $ 10,915       $ 7,439   

Accrued expenses and other liabilities

     7,852         6,076   

Income taxes payable

     16,688         13,109   

Accrued payroll and bonuses

     6,854         16,036   

Net deferred tax liability

     194,286         193,898   

Line of credit

     265,000         220,000   

Long-term debt

     936         1,246   
  

 

 

    

 

 

 

Total liabilities

     502,531         457,804   
  

 

 

    

 

 

 

Commitments and contingencies (Note 13)

     

Redeemable noncontrolling interest

     18,783         17,831   
  

 

 

    

 

 

 

Stockholders’ equity:

     

Preferred stock, par value $0.01, authorized shares, 2,000, issued and outstanding shares - 0

     —           —     

Common stock, par value $0.01, 60,000 authorized shares, 17,175 issued and outstanding shares at March 31, 2012, and 17,134 issued and outstanding shares at December 31, 2011

     172         171   

Additional paid-in capital

     166,133         167,719   

Retained earnings

     453,060         427,598   

Accumulated other comprehensive income

     1,347         —     
  

 

 

    

 

 

 

Total stockholders’ equity

     620,712         595,488   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 1,142,026       $ 1,071,123   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED INCOME STATEMENTS

For the three months ended March 31, 2012 and 2011

(unaudited)

(Amounts in thousands, except per share amounts)

 

    

Three Months Ended

March 31,

 
     2012     2011  

Revenues:

    

Income recognized on finance receivables, net

   $ 124,226      $ 95,974   

Fee income

     15,920        15,803   
  

 

 

   

 

 

 

Total revenues

     140,146        111,777   
  

 

 

   

 

 

 

Operating expenses:

    

Compensation and employee services

     39,694        34,153   

Legal collection fees

     7,617        5,749   

Legal collection costs

     23,669        9,338   

Agent fees

     1,627        2,639   

Outside fees and services

     5,860        3,414   

Communications

     8,253        6,313   

Rent and occupancy

     1,611        1,398   

Depreciation and amortization

     3,656        3,216   

Other operating expenses

     3,738        2,852   
  

 

 

   

 

 

 

Total operating expenses

     95,725        69,072   
  

 

 

   

 

 

 

Income from operations

     44,421        42,705   

Other income and (expense):

    

Interest income

     1        —     

Interest expense

     (2,653     (2,867
  

 

 

   

 

 

 

Income before income taxes

     41,769        39,838   

Provision for income taxes

     16,580        16,129   
  

 

 

   

 

 

 

Net income

   $ 25,189      $ 23,709   

Adjustment for loss (income) attributable to redeemable noncontrolling interest

     273        (588
  

 

 

   

 

 

 

Net income attributable to Portfolio Recovery Associates, Inc.

   $ 25,462      $ 23,121   
  

 

 

   

 

 

 

Net income per common share attributable to Portfolio Recovery Associates, Inc:

    

Basic

   $ 1.48      $ 1.35   

Diluted

   $ 1.47      $ 1.34   

Weighted average number of shares outstanding:

    

Basic

     17,196        17,092   

Diluted

     17,267        17,199   

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three months ended March 31, 2012 and 2011

(unaudited)

(Amounts in thousands)

 

    

Three Months Ended

March 31,

 
     2012      2011  

Net income

   $ 25,189       $ 23,709   

Other comprehensive income:

     

Foreign currency translation adjustments

     1,347         —     
  

 

 

    

 

 

 

Total other comprehensive income

     1,347         —     
  

 

 

    

 

 

 

Comprehensive income

     26,536         23,709   

Comprehensive loss/(income) attributable to noncontrolling interest

     273         (588
  

 

 

    

 

 

 

Comprehensive income attributable to Portfolio Recovery Associates, Inc.

   $ 26,809       $ 23,121   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2012

(unaudited)

(Amounts in thousands)

 

                  Additional            Accumulated Other      Total  
     Common Stock      Paid-in     Retained      Comprehensive      Stockholders’  
     Shares     Amount      Capital     Earnings      Income      Equity  

Balance at December 31, 2011

     17,134      $ 171       $ 167,719      $ 427,598       $ —         $ 595,488   

Components of comprehensive income:

               

Net income attributable to Portfolio Recovery Associates, Inc.

     —          —           —          25,462            25,462   

Foreign currency translation adjustment

               1,347         1,347   

Vesting of nonvested shares

     72        1         (1     —              —     

Repurchase and cancellation of common stock

     (31        (2,081           (2,081

Amortization of share-based compensation

     —          —           2,347        —              2,347   

Income tax benefit from share-based compensation

     —          —           1,440        —              1,440   

Employee stock relinquished for payment of taxes

     —          —           (2,066     —              (2,066

Adjustment of the noncontrolling interest measurement amount

     —          —           (1,225     —              (1,225
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Balance at March 31, 2012

     17,175      $ 172       $ 166,133      $ 453,060       $ 1,347       $ 620,712   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 31, 2012 and 2011

(unaudited)

(Amounts in thousands)

 

     Three Months Ended  
     March 31,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 25,189      $ 23,709   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Amortization of share-based compensation

     2,347        2,614   

Depreciation and amortization

     3,656        3,216   

Deferred tax expense

     403        14,072   

Changes in operating assets and liabilities:

    

Other assets

     711        842   

Accounts receivable

     2,922        1,563   

Accounts payable

     (3,687     4,271   

Income taxes

     1,118        3,940   

Accrued expenses

     (3,419     (1,762

Accrued payroll and bonuses

     (9,181     (9,145
  

 

 

   

 

 

 

Net cash provided by operating activities

     20,059        43,320   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,152     (2,163

Acquisition of finance receivables, net of buybacks

     (108,176     (106,405

Collections applied to principal on finance receivables

     93,770        70,743   

Business acquisition, net of cash acquired

     (48,653     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (64,211     (37,825
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of options

     —          149   

Income tax benefit from share-based compensation

     1,440        294   

Proceeds from line of credit

     95,000        2,000   

Principal payments on line of credit

     (50,000     (12,000

Repurchases of common stock

     (2,081     —     

Distributions paid to noncontrolling interest

     —          (1,291

Principal payments on long-term debt

     (310     (298
  

 

 

   

 

 

 

Net cash provided by/(used in) financing activities

     44,049        (11,146
  

 

 

   

 

 

 

Effect of exchange rate on cash

     1,474        —     

Net increase/(decrease) in cash and cash equivalents

     1,371        (5,651

Cash and cash equivalents, beginning of year

     26,697        41,094   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 28,068      $ 35,443   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 2,557      $ 2,711   

Cash paid for income taxes

     12,497        15   

Noncash investing and financing activities:

    

Adjustment of the noncontrolling interest measurement amount

   $ (1,225   $ (985

Distributions payable relating to noncontrolling interest

     —          769   

Employee stock relinquished for payment of taxes

     (2,066     —     

The accompanying notes are an integral part of these consolidated financial statements.

 

7


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Organization and Business:

Portfolio Recovery Associates, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company”) is a specialized financial and business service company. Its primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. The Company also services receivables on behalf of clients on either a commission or transaction-fee basis as well as providing class action claims settlement recovery services and related payment processing to its corporate clients.

The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles and include the accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting” (“ASC 280”), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and therefore, it has one reportable segment, accounts receivable management, based on similarities among the operating units including homogeneity of services, service delivery methods and use of technology.

With the acquisition of Mackenzie Hall Holdings Limited and its subsidiaries (“MHH”) on January 16, 2012, the Company began doing business in the United Kingdom. The assets, liabilities and operations of its foreign subsidiary are recorded based on the functional currency of the entity. For MHH, the functional currency is the local currency which is the British Pound. Accordingly, the assets, liabilities and operations are translated, for consolidation purposes, from the local currency to the U.S. dollar reporting currency at period-end rates for assets and liabilities and generally at average rates for results of operations. The resulting unrealized gains or losses are reported as a component of accumulated other comprehensive income. Realized gains and losses resulting from foreign currency transactions are recorded in “Other operating expenses” in the consolidated income statements.

The following table shows the amount of revenue generated during the first quarter of 2012 and long-lived assets held at March 31, 2012 by geographical location (amounts in thousands):

 

     Revenues      Long-Lived
Assets
 

United States

   $ 135,508       $ 25,137   

United Kingdom

     4,638         1,232   
  

 

 

    

 

 

 

Total

   $ 140,146       $ 26,369   
  

 

 

    

 

 

 

Revenues are attributed to countries based on the location of the related operations and long-lived assets consist of net property and equipment. Prior to the acquisition of MHH on January 16, 2012, all revenue generated and long-lived assets held related to the Company’s United States operations.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheet as of March 31, 2012, its consolidated income statements and statements of comprehensive income for the three months ended March 31, 2012 and 2011, its consolidated statement of changes in stockholders’ equity for the three months ended March 31, 2012, and its consolidated statements of cash flows for the three months ended March 31, 2012 and 2011. The consolidated income statements of the Company for the three months ended March 31, 2012 may not be indicative of future results. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed for the year ended December 31, 2011.

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

2. Finance Receivables, net:

The Company accounts for its investment in finance receivables under the guidance of ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). The Company acquires portfolios of accounts that have experienced deterioration of credit quality between origination and the Company’s acquisition of the accounts. The amount paid for a portfolio reflects the Company’s determination that it is probable the Company will be unable to collect all amounts due according to an account’s contractual terms. At acquisition, the Company reviews the accounts to determine whether there is evidence of deterioration of credit quality since origination, and if it is probable that the Company will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, the Company then determines whether each such account is to be accounted for individually or whether such accounts will be assembled into pools based on common risk characteristics. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows (expected at acquisition) for each acquired portfolio based on the Company’s proprietary models, and the Company subsequently aggregates portfolios of accounts into pools. The Company determines the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the pool’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining estimated life of the pool (accretable yield). ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows, based on the Company’s estimates derived from its proprietary collection models, not be recognized as an adjustment of revenue or expense or on the balance sheet.

Under ASC 310-30 static pools of accounts may be established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, payments applied to principal and loss provision. Once a static pool is established for a calendar quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310-30, utilizing the interest method, initially freezes the yield, estimated when the accounts are purchased as the basis for subsequent impairment testing. The yield is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. Income on finance receivables is accrued quarterly based on each static pool’s effective yield. Significant increases in expected future cash flows may be recognized prospectively, through an upward adjustment of the yield, over a pool’s remaining life. Any increase to the yield then becomes the new benchmark for impairment testing. Under ASC 310-30, rather than lowering the estimated yield if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current yield and is shown as a reduction in revenue in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheets. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. This reduction in carrying value is defined as payments applied to principal (also referred to as principal amortization). Likewise, cash flows that are less than the interest accrual will accrete the carrying balance. Generally, the Company does not record accretion in the first six to twelve months of the estimated life of the pool; accordingly, the Company utilizes either the cost recovery method or cash method when necessary to prevent accretion as permitted by ASC 310-30. Under the cash method, revenue is recognized as it would be under the interest method up to the amount of cash collections. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the pool. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, the Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. These cost recovery pools are not aggregated with other pools. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the pool, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above. At March 31, 2012 and 2011, the Company had unamortized purchased principal (purchase price) in pools accounted for under the cost recovery method of $0.8 million and $1.4 million, respectively.

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The Company establishes valuation allowances, if necessary, for acquired accounts subject to ASC 310-10. Valuation allowances are established only subsequent to acquisition of the accounts. At March 31, 2012 and 2011, the Company had a valuation allowance against its finance receivables of $87.1 million and $80.4 million, respectively. At December 31, 2011, the valuation allowance was $86.6 million.

The Company implements the accounting for income recognized on finance receivables under ASC 310-30 as follows. The Company creates each accounting pool using its projections of estimated cash flows and expected economic life. The Company then computes the effective yield that fully amortizes the pool to the end of its expected economic life based on the current projections of estimated cash flows. As actual cash flow results are recorded, the Company balances those results to the data contained in its proprietary models to ensure accuracy, then reviews each pool watching for trends, actual performance versus projections and curve shape (a graphical depiction of the timing of cash flows), sometimes re-forecasting future cash flows utilizing the Company’s statistical models. The review process is primarily performed by the Company’s finance staff; however, the Company’s operational and statistical staffs are also involved , providing updated statistical input and cash projections to the finance staff. To the extent there is overperformance, the Company will either increase the yield or release the allowance and consider increasing future cash projections, if persuasive evidence indicates that the overperformance is considered to be a significant betterment. If the overperformance is considered more of an acceleration of cash flows (a timing difference), the Company will adjust estimated future cash flows downward which effectively extends the amortization period, or take no action at all if the amortization period is reasonable and falls within the pools’ expected economic life. In either case, yield may or may not be increased due to the time value of money (accelerated cash collections). To the extent there is underperformance, the Company will record an allowance if the underperformance is significant and will also consider revising estimated future cash flows based on current period information, or take no action if the pool’s amortization period is reasonable and falls within the currently projected economic life.

Changes in finance receivables, net for the three months ended March 31, 2012 and 2011 were as follows (amounts in thousands):

 

     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 

Balance at beginning of period

   $ 926,734      $ 831,330   

Acquisitions of finance receivables, net of buybacks

     112,093        106,405   

Foreign currency translation adjustment

     185        —     

Cash collections

     (217,996     (166,717

Income recognized on finance receivables, net

     124,226        95,974   
  

 

 

   

 

 

 

Cash collections applied to principal

     (93,770     (70,743
  

 

 

   

 

 

 

Balance at end of period

   $ 945,242      $ 866,992   
  

 

 

   

 

 

 

At the time of acquisition, the life of each pool is generally estimated to be between 60 to 96 months based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, cash collections applied to principal on finance receivables as of March 31, 2012 are estimated to be as follows for the twelve months in the periods ending (amounts in thousands):

 

March, 31, 2013

   $ 323,163   

March, 31, 2014

     268,030   

March, 31, 2015

     192,704   

March, 31, 2016

     122,087   

March, 31, 2017

     38,862   

March, 31, 2018

     396   
  

 

 

 
   $ 945,242   
  

 

 

 

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

During the three months ended March 31, 2012 and 2011, the Company purchased approximately $1.46 billion and $1.49 billion, respectively, in face value of charged-off consumer receivables. At March 31, 2012, the estimated remaining collections (“ERC”) on the receivables purchased in the three months ended March 31, 2012 and 2011, were $203.6 million and $174.3 million, respectively.

Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield to be earned by the Company based on its proprietary buying models. Reclassifications from nonaccretable difference to accretable yield primarily result from the Company’s increase in its estimate of future cash flows. Reclassifications to nonaccretable difference from accretable yield result from the Company’s decrease in its estimates of future cash flows and allowance charges that exceed the Company’s increase in its estimate of future cash flows. Changes in accretable yield for the three months ended March 31, 2012 and 2011 were as follows (amounts in thousands):

 

     Three Months Ended
March 31, 2012
    Three Months Ended
March 31, 2011
 

Balance at beginning of period

   $ 1,026,614      $ 892,188   

Income recognized on finance receivables, net

     (124,226     (95,974

Additions

     99,552        109,502   

Reclassifications from nonaccretable difference

     86,638        20,562   

Foreign currency translation adjustment

     174        —     
  

 

 

   

 

 

 

Balance at end of period

   $ 1,088,752      $ 926,278   
  

 

 

   

 

 

 

A valuation allowance is recorded for significant decreases in expected cash flows or change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. In any given period, the Company may be required to record valuation allowances due to pools of receivables underperforming expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability of purchased pools of defaulted consumer receivables would include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relate to the collection and movement of accounts on both the collection floor of the Company and external channels), as well as decreases in productivity related to turnover and tenure of the Company’s collection staff.

The following is a summary of activity within the Company’s valuation allowance account, all of which relates to loans acquired with deteriorated credit quality, for the three months ended March 31, 2012 and 2011 (amounts in thousands):

 

     Three Months Ended
March 31, 2012
 
           Purchased Bankruptcy        
     Core Portfolio  (1)     Portfolio (2)     Total  

Valuation allowance - finance receivables:

      

Beginning balance

   $ 76,580      $ 9,991      $ 86,571   

Allowance charges

     1,350        1,100        2,450   

Reversal of previous recorded allowance charges

     (1,820     (136     (1,956
  

 

 

   

 

 

   

 

 

 

Net allowance charge

     (470     964        494   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 76,110      $ 10,955      $ 87,065   
  

 

 

   

 

 

   

 

 

 

Finance receivables, net (3) :

   $ 453,709      $ 486,137      $ 939,846   
  

 

 

   

 

 

   

 

 

 

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

     Three Months Ended
March 31, 2011
 
     Core Portfolio  (1)     Purchased Bankruptcy
Portfolio (2)
    Total  

Valuation allowance - finance receivables:

      

Beginning balance

   $ 70,030      $ 6,377      $ 76,407   

Allowance charges

     2,850        2,450        5,300   

Reversal of previous recorded allowance charges

     (1,050     (210     (1,260
  

 

 

   

 

 

   

 

 

 

Net allowance charge

     1,800        2,240        4,040   
  

 

 

   

 

 

   

 

 

 

Ending balance

   $ 71,830      $ 8,617      $ 80,447   
  

 

 

   

 

 

   

 

 

 

Finance receivables, net:

   $ 428,091      $ 438,901      $ 866,992   
  

 

 

   

 

 

   

 

 

 

 

(1) “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.
(2) “Purchased bankruptcy” accounts or portfolios refer to accounts or portfolios that are in bankruptcy status when purchased, and as such, are purchased as a pool of bankrupt accounts.
(3) At March 31, 2012, the MHH finance receivables balance was $5.4 million against which there was no valuation allowance recorded; therefore it is not included in this roll-forward.

 

3. Accounts Receivable, net:

Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, the current receivables aging, and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The balance of the allowance for doubtful accounts at both March 31, 2012 and December 31, 2011 was $2.1 million. The Company does not have any off balance sheet credit exposure related to its customers.

 

4. Line of Credit:

On December 20, 2010, the Company entered into a credit agreement with Bank of America, N.A., as administrative agent, and a syndicate of lenders named therein (the “Credit Agreement”). Under the terms of the Credit Agreement, the credit facility includes an aggregate principal amount available of $407.5 million (subject to the borrowing base and applicable debt covenants) which consists of a $50 million fixed rate loan that matures on May 4, 2012, which was transferred from the Company’s then existing credit agreement, and a $357.5 million revolving credit facility that matures on December 20, 2014. The revolving credit facility will be automatically increased by $50 million upon the maturity and repayment of the fixed rate loan. The fixed rate loan bears interest at a rate of 6.8% per annum, payable monthly in arrears. The revolving loans accrue interest, at the option of the Company, at either the base rate plus 1.75% per annum or the Eurodollar rate (as defined in the Credit Agreement) for the applicable term plus 2.75% per annum. The base rate is the highest of (a) the Federal Funds Rate plus 0.50%, (b) Bank of America’s prime rate, and (c) the Eurodollar rate plus 1.00%. Interest is payable on base rate loans quarterly in arrears and on Eurodollar loans in arrears on the last day of each interest period or, if such interest period exceeds three months, every three months. The Company’s revolving credit facility includes a $20 million swingline loan sublimit and a $20 million letter of credit sublimit. It also contains an accordion loan feature that allows the Company to request an increase of up to $142.5 million in the amount available for borrowing under the revolving credit facility, whether from existing or new lenders, subject to terms of the Credit Agreement. No existing lender is obligated to increase its commitment. On April 20, 2012, the Company closed a series of

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

transactions to exercise a portion of the accordion loan feature of its existing credit facility with its administrative agent and its syndicate of lenders, thereby increasing the lenders’ commitments by $50,950,000, resulting in $458,450,000 aggregate principal amount available under the Company’s line of credit. The Company’s existing lenders under the Credit Agreement provided $40,950,000 of this increase, and $10,000,000 was provided by a new lender, which is now a party to the Credit Agreement. The Company may request additional increases of up to $91,550,000 under its credit facility. The Credit Agreement is secured by a first priority lien on substantially all of the Company’s assets. The Credit Agreement contains restrictive covenants and events of default including the following:

 

   

borrowings may not exceed 30% of the ERC of all its domestic eligible asset pools plus 75% of its eligible accounts receivable;

 

   

the consolidated leverage ratio (as defined in the Credit Agreement) cannot exceed 2.0 to 1.0 as of the end of any fiscal quarter;

 

   

consolidated Tangible Net Worth (as defined in the Credit Agreement) must equal or exceed $309,452,000 plus 50% of positive consolidated net income for each fiscal quarter beginning December 31, 2010, plus 50% of the net proceeds of any equity offering;

 

   

capital expenditures during any fiscal year cannot exceed $20 million;

 

   

cash dividends and distributions during any fiscal year cannot exceed $20 million;

 

   

stock repurchases during the term of the agreement cannot exceed $100 million;

 

   

permitted acquisitions (as defined in the Credit Agreement) during any fiscal year cannot exceed $100 million;

 

   

the Company must maintain positive consolidated income from operations (as defined in the Credit Agreement) during any fiscal quarter; and

 

   

restrictions on changes in control.

The revolving credit facility also bears an unused commitment fee of 0.375% per annum, payable quarterly in arrears.

The Company had $265.0 million and $220.0 million of borrowings outstanding on its credit facility as of March 31, 2012 and December 31, 2011, respectively, of which $50 million represented borrowing under the non-revolving fixed rate loan at both dates. At March 31, 2012, the Company’s borrowings under its revolving credit facility consisted of 30-day Eurodollar rate loans with a weighted average annual interest rate equal to 2.99%.

The Company was in compliance with all covenants of its credit facility as of March 31, 2012 and December 31, 2011.

 

5. Long-Term Debt:

On February 6, 2009, the Company entered into a commercial loan agreement to finance computer software and equipment purchases in the amount of approximately $2.0 million. The loan was collateralized by the related computer software and equipment. The loan was a three year loan with a fixed rate of 4.78% with monthly installments, including interest, of $60,823 beginning on March 31, 2009, and it matured on February 28, 2012.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

On December 15, 2010, the Company entered into a commercial loan agreement to finance computer software and equipment purchases in the amount of approximately $1.6 million. The loan is collateralized by the related computer software and equipment. The loan is a three year loan with a fixed rate of 3.69% with monthly installments, including interest, of $46,108 beginning on January 15, 2011, and it matures on December 15, 2013.

 

6. Property and Equipment, net:

Property and equipment, at cost, consisted of the following as of the dates indicated (amounts in thousands):

 

     March 31,
2012
    December 31,
2011
 

Software

   $ 27,126      $ 25,252   

Computer equipment

     13,036        12,221   

Furniture and fixtures

     6,748        6,501   

Equipment

     8,213        7,798   

Leasehold improvements

     6,418        6,117   

Building and improvements

     6,999        6,987   

Land

     1,269        1,269   

Accumulated depreciation and amortization

     (43,440     (40,418
  

 

 

   

 

 

 

Property and equipment, net

   $ 26,369      $ 25,727   
  

 

 

   

 

 

 

Depreciation and amortization expense relating to property and equipment, for the three months ended March 31, 2012 and 2011, was $2.2 million and $2.0 million, respectively.

The Company, in accordance with the guidance of FASB ASC Topic 350-40 “Internal-Use Software” (“ASC 350-40”), capitalizes qualifying computer software costs incurred during the application development stage and amortizes them over their estimated useful life of three to seven years on a straight-line basis beginning when the project is completed. Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. The Company’s policy provides for the capitalization of certain direct payroll costs for employees who are directly associated with internal use computer software projects, as well as external direct costs of services associated with developing or obtaining internal use software. Capitalizable personnel costs are limited to the time directly spent on such projects. As of March 31, 2012 and December 31, 2011, the Company has incurred and capitalized approximately $6.5 million and $6.1 million, respectively, of these direct payroll costs and external direct costs related to software developed for internal use. Of these costs, at March 31, 2012 and December 31, 2011, approximately $1.1 million and $1.3 million, respectively, is for projects that are in the development stage and, therefore are a component of “Other Assets.” Once the projects are completed, the costs will be transferred to Software and amortized over their estimated useful life of three to seven years. Amortization expense for the three months ended March 31, 2012 and 2011, was approximately $0.3 million and $0.2 million, respectively. The remaining unamortized costs relating to internally developed software at March 31, 2012 and 2011 were approximately $3.7 million and $3.0 million, respectively. The amount at December 31, 2011 was approximately $3.3 million.

 

7. Redeemable Noncontrolling Interest:

In accordance with ASC 810, the Company has consolidated all financial statement accounts of Claims Compensation Bureau, LLC (“CCB”) in its consolidated balance sheets as of March 31, 2012 and December 31, 2011, and its consolidated income statements for the three months ended March 31, 2012 and 2011. The redeemable noncontrolling interest amount is separately stated on the consolidated balance sheets and represents the 38% interest in CCB not owned by the Company. In addition, net income/loss attributable to the noncontrolling interest is stated separately in the consolidated income statements for the three months ended March 31, 2012 and 2011.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The Company applies the provisions of FASB ASC Topic 480-10-S99 “Distinguishing Liabilities from Equity” (“ASC 480-10-S99”), which provides guidance on the accounting for equity securities that are subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. The noncontrolling interest “put” arrangement is accounted for under ASC 480-10-S99, as redemption under the “put” arrangement is outside the control of the Company. As such, the redeemable noncontrolling interest is recorded outside of “permanent” equity. The Company measures the redeemable noncontrolling interest at the greater of its ASC 480-10-S99 measurement amount (estimated redemption value of the “put” option embedded in the noncontrolling interest) or its measurement amount under the guidance of ASC 810. The ASC 810 measurement amount includes adjustments for the noncontrolling interest’s pro-rata share of earnings, losses and distributions, pursuant to the limited liability company agreement of CCB. Adjustments to the measurement amount are recorded to stockholders’ equity. The Company used a present value calculation to estimate the redemption value of the “put” option as of the reporting date. As such, for the three months ended March 31, 2012 and 2011, the Company increased the redeemable noncontrolling interest by $1.2 million and $1.0 million, respectively, with a corresponding reduction of stockholders’ equity. If material, the Company adjusts the numerator of earnings per share calculations for the current period change in the excess of the noncontrolling interest’s ASC 480-10-S99 measurement amount over the greater of its ASC 810 measurement amount or the estimated fair value of the noncontrolling interest. Although the noncontrolling interest was redeemable by the Company as of the reporting date, it was not yet redeemable by the holder of the “put” option. The maximum estimated redemption value of the noncontrolling interest, as if it were currently redeemable by the holder of the put option under the terms of the put arrangement, was $22.8 million as of March 31, 2012 and December 31, 2011.

The following table represents the changes in the redeemable noncontrolling interest for the three months ended March 31, 2012 and 2011 (amounts in thousands):

 

     Three Months Ended     Three Months Ended  
     March 31, 2012     March 31, 2011  

Balance at beginning of period

   $ 17,831      $ 14,449   

Net (loss)/income attributable to redeemable noncontrolling interest

     (273     588   

Distributions paid or payable

     —          (769

Adjustment of the noncontrolling interest measurement amount

     1,225        985   
  

 

 

   

 

 

 

Balance at end of period

   $ 18,783      $ 15,253   
  

 

 

   

 

 

 

In accordance with the limited liability company agreement of CCB, distributions due to the members of the LLC are accrued each quarter and are payable as soon as reasonably possible subsequent to each quarter end.

 

8. Goodwill and Intangible Assets, net:

In connection with the Company’s previous business acquisitions, the Company purchased certain tangible and intangible assets. Intangible assets purchased included client and customer relationships, non-compete agreements, trademarks and goodwill. Pursuant to ASC 350, goodwill is not amortized but rather is reviewed at least annually for impairment. During the fourth quarter of 2011, the Company underwent its annual review of goodwill. Based upon the results of this review, which was conducted as of October 1, 2011, no impairment charges to goodwill or the other intangible assets were necessary as of the date of this review. The Company believes that nothing has occurred since the review was performed through March 31, 2012 that would indicate a triggering event and thereby necessitate an impairment charge to goodwill or the other intangible assets. Accordingly, there were no impairment losses during the three months ended March 31, 2012 and 2011. The Company expects to perform its next annual goodwill review during the fourth quarter of 2012. At March 31, 2012 and December 31, 2011, the carrying value of goodwill was $97.5 million and $61.7 million, respectively. See Note 9 for more information. The following table represents the changes in goodwill for the three months ended March 31, 2012 and 2011 (amounts in thousands):

 

     Three Months Ended      Three Months Ended  
     March 31, 2012      March 31, 2011  

Balance at beginning of period

   $ 61,678       $ 61,678   

Acquisition of MHH

     34,270         —     

Foreign currency translation adjustment

     1,532         —     
  

 

 

    

 

 

 

Balance at end of period

   $ 97,480       $ 61,678   
  

 

 

    

 

 

 

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Intangible assets, excluding goodwill, consist of the following at March 31, 2012 and December 31, 2011 (amounts in thousands):

 

     March 31, 2012      December 31, 2011  
     Gross Amount      Accumulated
Amortization
     Gross Amount      Accumulated
Amortization
 

Client and customer relationships

   $ 43,086       $ 19,077       $ 30,777       $ 17,950   

Non-compete agreements

     3,742         2,971         3,103         2,771   

Trademarks

     3,619         1,220         2,500         1,063   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 50,447       $ 23,268       $ 36,380       $ 21,784   
  

 

 

    

 

 

    

 

 

    

 

 

 

Increases in the gross amounts of intangible assets during the three months ended March 31, 2012 relate to the purchase of MHH on January 16, 2012. The combined original weighted average amortization period related to the acquired intangible assets of MHH is 13.4 years. In accordance with ASC 350, the Company is amortizing the intangible assets over the estimated useful lives as indicated:

 

     Acquisition Date    Customer Relationships    Non-Compete Agreements    Trademarks

MHH

   January 16, 2012    15 years    1 year    3 years

Total amortization expense for the three months ended March 31, 2012 and 2011 was $1.5 million and $1.3 million, respectively. The Company reviews these intangible assets at least annually for impairment.

 

9. Business Acquisition:

On January 16, 2012, the Company acquired 100% of the equity interest in MHH. The transaction was completed in cash at a price of £33.5 million (approximately $51.3 million). The Company financed the acquisition with borrowings under its existing line of credit. Based in Kilmarnock, Scotland, MHH employs approximately 170 people and offers outsourced and contingent consumer debt recovery on behalf of banks, credit providers and debt purchasers, as well as distressed and dormant niche portfolio purchasing. The acquisition of MHH expands the Company’s presence into new geographical markets outside the United States, further diversifying its revenues and available service offerings.

The Company accounted for this purchase in accordance with ASC Topic 805, “Business Combinations.” Under this guidance, an entity is required to recognize the assets acquired, liabilities assumed and the consideration given at their fair value on the acquisition date. The following tables summarize the fair value of the consideration given for MHH, as well as the fair value of the assets acquired and liabilities assumed as of the January 16, 2012 acquisition date.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Recognized amounts of identifiable assets and liabilities are as follows (amounts in thousands):

 

Purchase price

   $ 51,258   

Cash

     (2,606

Finance receivables, net

     (3,906

Accounts receivable

     (2,038

Prepaid expenses (included in other assets)

     (330

Customer relationships

     (11,782

Non-compete agreements

     (612

Trademarks

     (1,071

Fixed assets

     (814

Accounts payable

     3,501   

Accrued expenses

     1,461   

Income tax payable

     1,209   
  

 

 

 

Goodwill

   $ 34,270   
  

 

 

 

The Company is evaluating the purchase price allocations and at the time of the filing of this Form 10-Q, the valuation has not been completed. However, the Company has recorded provisional amounts for the assets acquired in its consolidated financial statements and will adjust the allocations relative to the fair value of the assets, as necessary, during the remainder of the one-year measurement period.

 

10. Share-Based Compensation:

The Company follows the provisions of FASB ASC Topic 718 “Compensation-Stock Compensation” (“ASC 718”) with respect to its stock plan. As of March 31, 2012, total future compensation costs related to nonvested awards of nonvested shares (not including nonvested shares granted under the Long-Term Incentive Program (“LTI”) is estimated to be $4.8 million with a weighted average remaining life for all nonvested shares of 2.2 years (not including nonvested shares granted under the LTI Programs). As of March 31, 2012, there are no future compensation costs related to stock options and there are no remaining vested stock options to be exercised. Based upon historical data, the Company used an annual forfeiture rate of 14% for stock options and 15-40% for nonvested shares for most of the employee grants. Grants made to key employees and directors of the Company were assumed to have no forfeiture rates associated with them due to the historically low turnover among this group.

Total share-based compensation expense was approximately $2.3 million and $2.6 million for the three months ended March 31, 2012 and 2011, respectively. Tax benefits resulting from tax deductions in excess of share-based compensation expense recognized under the provisions of ASC 718 (windfall tax benefits) are credited to additional paid-in capital in the Company’s Consolidated Balance Sheets. Realized tax shortfalls, if any, are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense. The total tax benefit realized from share-based compensation was approximately $2.7 million and $1.0 million for the three months ended March 31, 2012 and 2011, respectively.

Nonvested Shares

With the exception of the awards made pursuant to the LTI Program and a few employee and director grants, the nonvested shares generally vest ratably over three to five years and are expensed over their vesting period.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following summarizes all nonvested share transactions (excluding shares granted under the LTI Programs) from December 31, 2010 through March 31, 2012 (amounts in thousands, except per share amounts):

 

     Nonvested Shares
Outstanding
    Weighted-Average
Price at Grant Date
 

December 31, 2010

     91      $ 47.89   

Granted

     48        76.59   

Vested

     (53     55.97   

Cancelled

     (5     50.34   
  

 

 

   

 

 

 

December 31, 2011

     81        59.31   

Granted

     43        62.19   

Vested

     (22     56.62   
  

 

 

   

 

 

 

March 31, 2012

     102      $ 61.09   
  

 

 

   

 

 

 

The total grant date fair value of shares vested during the three months ended March 31, 2012 and 2011 was approximately $1.2 million and $1.7 million, respectively.

Long-Term Incentive Programs

Pursuant to the Amended Plan, on January 20, 2009, January 14, 2010, January 14, 2011 and January 9, 2012, the Compensation Committee approved the grant of 108,720, 53,656, 73,914, and 65,647 performance and market based nonvested shares, respectively. All shares granted under the LTI Programs were granted to key employees of the Company. The 2009 grant was performance based and cliff vested after the requisite service period if certain financial goals were met. The goals were based upon diluted earnings per share (“EPS”) totals for 2009, the return on owners’ equity for the three year period beginning on January 1, 2009 and ending December 31, 2011, and the relative total stockholder return as compared to a peer group for the same three year period. The Company expensed the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2009. The EPS component of the 2009 plan was not achieved and therefore no compensation expense was recognized relative to this component. The return on owners’ equity and relative total stockholder return components have been achieved at 98% and 145%, respectively, and the awards were paid to participants during the first quarter of 2012.

The 2010 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon diluted EPS totals for 2010, the return on owners’ equity for the three year period beginning on January 1, 2010 and ending December 31, 2012, and the relative total stockholder return as compared to a peer group for the same three year period. For each component, the number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The EPS component of the 2010 plan was achieved at 190% and these shares vested at 50% on December 31, 2011 and the remaining 50% will vest on December 31, 2012. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2010. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome.

The 2011 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) for 2011, the return on owners’ equity for the three year period beginning on January 1, 2011 and ending December 31, 2013, and the relative total stockholder return as compared to a peer group for the same three year period. For each component, the number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2011. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome. The EBITDA component of the 2011 plan was achieved at 200% and these shares will vest 50% on December 31, 2012 and December 31, 2013.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The 2012 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon the Company’s EBITDA for 2012, the return on owners’ equity for the three year period beginning on January 1, 2012 and ending December 31, 2014, and the relative total stockholder return as compared to a peer group for the same three year period. For each component, the number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2012. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome.

At March 31, 2012, total future compensation costs, assuming the current estimated levels are achieved, related to nonvested share awards granted under the 2010, 2011 and 2012 LTI Programs are estimated to be approximately $7.9 million. The Company assumed a 7.5% forfeiture rate for this grant and the remaining shares have a weighted average life of 1.66 years at March 31, 2012.

 

11. Income Taxes:

The Company follows the guidance of FASB ASC Topic 740 “Income Taxes” (“ASC 740”) as it relates to the provision for income taxes and uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. There were no unrecognized tax benefits at both March 31, 2012 and 2011.

The Company was notified on June 21, 2007 that it was being examined by the U.S. Internal Revenue Service (the “IRS”) for the 2005 calendar year. The IRS concluded the audit and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes, for tax years ended December 31, 2007, 2006 and 2005. The IRS 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. The Company believes it has sufficient support for the technical merits of its positions and that it is more likely than not these positions will ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary. On April 22, 2009, the Company filed a formal protest of the findings contained in the examination report prepared by the IRS. On August 26, 2011, the IRS issued a Notice of Deficiency for the tax years ended December 31, 2007, 2006, and 2005. There are three possible courses of action in response to a Notice of Deficiency: (1) pay the assessment and close the audit, (2) pay the assessed tax and interest and then file a refund suit in United States District Court, or (3) file a petition in United States Tax Court, which does not require a payment up front of the assessed tax and interest. The Company subsequently filed a petition in United States Tax Court to which the IRS responded on January 12, 2012. If the Company is unsuccessful in tax court, it can appeal to the federal Circuit Court of Appeals. Payment of the assessed taxes and interest could have an adverse affect on the Company’s financial condition, be material to the Company’s results of operations, and possibly require additional financing from other sources. In accordance with the U.S. Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), underpayments of federal tax accrue interest, compounded daily, at the applicable federal short term rate plus three percentage points. An additional two percentage points applies to large corporate underpayments of $100,000 or more to periods after the applicable date as defined in the Internal Revenue Code. The Company files taxes in multiple state jurisdictions; therefore, any underpayment of state tax will accrue interest in accordance with the respective state statute. In 2011, the IRS expanded the audit to include the tax years ended December 31, 2010, 2009 and 2008.

At March 31, 2012, the tax years subject to examination by the major taxing jurisdictions, including the IRS, are 2003, 2005 and subsequent years. The 2003 tax year remains open to examination because of a net operating loss that originated in that year but was not fully utilized until the 2005 tax year. The examination periods for the 2007, 2006 and 2005 tax years were extended through December 31, 2011; however, because the IRS issued the Notice of Deficiency prior to December 31, 2011, the period for assessment is suspended until a decision of the Tax Court becomes final.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

ASC 740 requires the recognition of interest, if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties, if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. No interest or penalties were accrued or reversed in the first three months ended March 31, 2012 or 2011.

 

12. Earnings per Share:

Basic EPS are computed by dividing net income available to common stockholders of PRA Inc. by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of stock options and nonvested share awards. Share-based awards that are contingent upon the attainment of performance goals are not included in the computation of diluted EPS until the performance goals have been attained. The dilutive effect of stock options and nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options and vesting of nonvested shares would be used to purchase common shares at the average market price for the period. The assumed proceeds include the windfall tax benefit that would be received upon assumed exercise. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the three months ended March 31, 2012 and 2011 (amounts in thousands, except per share amounts):

 

     For the three months ended March 31,  
     2012      2011  
     Net Income
attributable to Portfolio
Recovery Associates, Inc.
     Weighted Average
Common Shares
     EPS      Net Income
attributable to Portfolio
Recovery Associates, Inc.
     Weighted Average
Common Shares
     EPS  

Basic EPS

   $ 25,462         17,196       $ 1.48       $ 23,121         17,092       $ 1.35   

Dilutive effect of nonvested share awards

        71               107      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 25,462         17,267       $ 1.47       $ 23,121         17,199       $ 1.34   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no antidilutive options outstanding for the three months ended March 31, 2012 and 2011.

 

13. Commitments and Contingencies:

Employment Agreements:

The Company has employment agreements, most of which expire on December 31, 2014, with all of its executive officers and with several members of its senior management group. Such agreements provide for base salary payments as well as bonuses which are based on the attainment of specific management goals. Future compensation under these agreements is approximately $15.7 million. The agreements also contain confidentiality and non-compete provisions.

Leases:

The Company is party to various operating and capital leases with respect to its facilities and equipment. For further discussion of these leases please refer to the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed for the year ended December 31, 2011.

Forward Flow Agreements:

The Company is party to several forward flow agreements that allow for the purchase of defaulted consumer receivables at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at March 31, 2012 is approximately $212.5 million.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Redeemable Noncontrolling Interest:

In connection with the Company’s acquisition of 62% of the membership units of CCB on March 15, 2010, the Company acquired the right to purchase the remaining 38% of the membership units of CCB not held by the Company at a predetermined price within the next four years. Also, the owners of the noncontrolling interest can require the Company to purchase their respective interest during the period beginning on March 1, 2012 and ending on February 28, 2018. While the actual amount or timing of any future payment is unknown at this time, the maximum amount of consideration to be paid for the 38% interest is $22.8 million.

Litigation:

The Company is from time to time subject to routine legal claims and proceedings, most of which are incidental to the ordinary course of its business. The Company initiates lawsuits against customers and is 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 the Company in which they allege that the Company has 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 the Company.

The Company accrues 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. This determination is based upon currently available information for those proceedings in which the Company is involved, taking into account the Company’s best estimate of such losses for those cases for which such estimates can be made. The Company’s estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the number of unresolved issues in many of the proceedings (including issues regarding class certification and the scope of many of the claims), and the related uncertainty of the potential outcomes of these proceedings. In making determinations of the likely outcome of the pending litigation disclosed below, the Company considers many factors, including, but not limited to, the nature of the claims, the Company’s experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative mechanisms, the matter’s current status and the damages sought or demands made. Accordingly, the Company’s estimate will change from time to time, and actual losses may be more than the current estimate.

The Company believes, based upon its current knowledge and after consultation with counsel, that the legal proceedings currently pending against it should not, either individually or in the aggregate, have a material adverse impact on the Company’s financial condition. However, it is possible, in light of the uncertainties involved in such proceedings or due to unexpected future developments, that an unfavorable resolution of a legal proceeding or claim could occur which may be material to the Company’s results of operations for a particular period. The matters described below fall outside of the normal parameters of the Company’s routine legal proceedings.

The Company has been named as defendant in the following five putative class action cases, each of which alleges that it violated the Telephone Consumer Protection Act (“TCPA”) by calling consumers’ cellular telephones without their prior express consent: Allen v. Portfolio Recovery Associates, Inc., Case No. 10-cv-2658, instituted in the United States District Court for the Southern District of California on December 23, 2010; Meyer v. Portfolio Recovery Associates, LLC, Case No. 37-2011-00083047, instituted in the Superior Court of California, San Diego County on January 3, 2011; Frydman v. Portfolio Recovery Associates, LLC, Case No. 11-cv-524, instituted in the United States District Court for the Northern District of Illinois on January 31, 2011; Bartlett v. Portfolio Recovery Associates, LLC, Case No. 11-cv-0624, instituted in the United States District Court for the Northern District of Georgia on March 1, 2011; and Harvey v. Portfolio Recovery Associates, LLC, Case No. 11-cv-00582, instituted in the United States District Court for the Middle District of Florida on April 8, 2011. Each of the foregoing complaints allege violations of the TCPA, and seek damages, injunctive relief and attorneys’ fees. On December 21, 2011, the United States District Panel on Multi-District Litigation entered an order transferring these matters into one consolidated proceeding in the United States District Court for the Southern District of California, case No. 11-md-02295.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

These matters have only recently been consolidated, no litigation has proceeded on whether or not to certify a class or on the merits of the allegations, and no demand has been made. Further, even if a class is ultimately certified, further discovery must take place in order to determine its size. Therefore; any potential loss for these and other similar TCPA matters, cannot be estimated at this time; however, in the event that a class is eventually certified and it neither settles nor prevails on these matters, our damages, when aggregated, could potentially fall within a range which could be in excess of its established liability, and could be material to the Company’s financial condition, results of operations or cash flows for any particular reporting period.

Excluding the above TCPA matter and other matters, the high end of the range of potential litigation losses in excess of the Company’s established liability is currently estimated by management to be less than $1,000,000. Notwithstanding our attempt to estimate a range of possible losses in excess of the Company’s established liability based on current information, actual future losses may exceed both the Company’s established liability and the range of potential litigation losses disclosed in this item.

 

14. Fair Value Measurements and Disclosures:

In accordance with the disclosure requirements of FASB ASC Topic 825, “Financial Instruments” (“ASC 825”), the table below summarizes fair value estimates for the Company’s financial instruments. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company. The carrying amounts in the table are recorded in the consolidated balance sheet under the indicated captions (amounts in thousands):

 

     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial assets:

           

Cash and cash equivalents

   $ 28,068       $ 28,068       $ 26,697       $ 26,697   

Finance receivables, net

     945,242         1,297,822         926,734         1,269,277   

Financial liabilities:

           

Line of credit

   $ 265,000       $ 265,000       $ 220,000       $ 220,000   

Long-term debt

     936         936         1,246         1,246   

As of March 31, 2012, and December 31, 2011, the Company did not account for any financial assets or financial liabilities at fair value. As defined by FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values. Those levels of input are summarized as follows:

 

   

Level 1 – Quoted prices in active markets for identical assets and liabilities.

 

   

Level 2 – Observable inputs other than Level 1 quoted prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

   

Level 3 – Unobservable inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments:

Cash and cash equivalents: The carrying amount approximates fair value and quoted prices for identical assets can be found in active markets. Accordingly, the Company estimates the fair value of cash and cash equivalents using level 1 inputs.

Finance receivables, net: The Company records purchased receivables at cost, which represents a significant discount from the contractual receivable balances due. The Company computed the estimated fair value of these receivables using proprietary pricing models that the Company utilizes to make portfolio purchase decisions. Accordingly, the Company’s fair value estimates use level 3 inputs as there is little observable market data available and management is required to use significant judgment in its estimates.

Line of credit: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.

Long-term debt: The carrying amount approximates fair value, as the interest rates approximate the rate currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers. Accordingly, the Company uses Level 2 inputs for its fair value estimates.

 

15. Stockholders’ Equity:

On February 2, 2012, the Board of Directors of the Company authorized a share repurchase program of up to $100 million of the Company’s outstanding shares of common stock. The program is administered by a special committee of the Company’s Board of Directors. Repurchases would depend on prevailing market conditions and other factors. The repurchase program may be suspended or discontinued at any time. During the first quarter of 2012, the Company repurchased and retired 30,600 shares at an average price of $68.02 (including acquisition costs).

 

16. Recent Accounting Pronouncements:

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The amendments in ASU 2011-04 generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). The provisions of ASU 2011-04 are effective prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is prohibited. The Company adopted ASU 2011-04 on January 1, 2012, and has included the required disclosures in its notes to its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income” (Topic 220) to amend its accounting guidance on the presentation of other comprehensive income (“OCI”) in an entity’s financial statements. The amended guidance eliminates the option to present the components of OCI as part of the statement of changes in stockholders’ equity and provides two options for presenting OCI: in a statement included in the statements of comprehensive income or in a separate statement immediately following the statements of comprehensive income. The amendments do not change the guidance for the items that have to be reported in OCI or when an item of OCI has to be moved into net income. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted ASU 2011-05 on January 1, 2012, and has included the required disclosures in its consolidated financial statements.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

In September 2011, the FASB issued ASU 2011-08, “Intangibles-Goodwill and Other” (Topic 350): “Testing Goodwill for Impairment” to amend the accounting guidance on goodwill impairment testing. The amended guidance reduces the complexity and costs of goodwill impairment testing by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amended guidance also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company adopted ASU 2011-08 on January 1, 2012 which had no material impact on its consolidated financial statements.

 

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

Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:

This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:

 

   

a prolonged economic recovery or a deterioration in the economic or inflationary environment in the United States or the United Kingdom, including the interest rate environment, that 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;

 

   

changes in government regulations that affect 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;

 

   

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 and nature of our competition;

 

   

the possibility that we could incur goodwill impairment charges;

 

   

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

 

   

our ability to comply with regulations of the collection industry;

 

   

our ability to successfully operate and/or integrate new business acquisitions;

 

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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 acquired on January 16, 2012;

 

   

the imposition of additional taxes on us;

 

   

changes in interest 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 ability to manage growth successfully;

 

   

the possibility that we could incur business or technology disruptions, 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 SEC.

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

For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the discussion of “Business” and “Risk Factors” described in our 2011 Annual Report on Form 10-K, filed on February 28, 2012.

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. We have 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.

Overview

The Company is a specialized financial and business services company. Our primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. We also service receivables on behalf of clients on either a commission or transaction-fee basis as well as providing class action claims settlement recovery services and related payment processing to our corporate clients.

The Company is headquartered in Norfolk, Virginia, and employs approximately 3,000 team members. The Company’s shares of common stock are traded on the NASDAQ Global Select Market under the symbol “PRAA.”

 

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On January 16, 2012, we acquired 100% of the equity interest in MHH. Based in Kilmarnock, Scotland, MHH employs approximately 170 people and offers outsourced and contingent consumer debt recovery on behalf of banks, credit providers and debt purchasers, as well as distressed and dormant niche portfolio purchasing.

Earnings Summary

During the first quarter of 2012, net income attributable to the Company was $25.5 million, or $1.47 per diluted share, compared with $23.1 million, or $1.34 per diluted share, in the first quarter of 2011. Total revenue was $140.1 million in the first quarter of 2012, up 25.4% from the same quarter one year earlier. Revenues in the recently completed quarter consisted of $124.2 million in income recognized on finance receivables, net of allowance charges, and $15.9 million in fee income. Income recognized on finance receivables, net of allowance charges, increased $28.2 million, or 29.4%, over the same period in 2011, primarily as a result of a significant increase in cash collections. Cash collections were $218.0 million in the first quarter of 2012, up 30.8% or $51.3 million as compared to the first quarter of 2011. During the quarter, we recorded $0.5 million in net allowance charges, compared with $4.0 million in the comparable quarter of 2011. Our performance has been positively impacted by operational efficiencies surrounding the cash collections process, including the continued refinement of dialer technology and account scoring analytics as it relates to both legal and non-legal collection channels. Additionally, we have continued to develop our internal legal collection staff resources, which enables us to place accounts into that channel that otherwise would have been prohibitively expensive for legal action and to collect these accounts more efficiently and profitably.

Fee income increased from $15.8 million in the first quarter of 2011 to $15.9 million in the first quarter of 2012 primarily due to the acquisition of MHH in the first quarter of 2012 as well as increased revenue generated by our PRA Government Services (“PRA GS”) business offset by declines in fee income generated by our PRA Location Services (“PLS”) business and our claims processing business. The decline from PLS is due primarily to the adverse impact of the economic slowdown on automobile financing and related collateral recovery activities.

A summary of how our income was generated during the three months ended March 31, 2012 and 2011 is as follows:

 

     For the Three Months Ended
March 31,
 
($ in thousands)    2012     2011  

Cash collections

   $ 217,996      $ 166,717   

Amortization of finance receivables

     (93,276     (66,703

Allowance charges

     (494     (4,040
  

 

 

   

 

 

 

Finance receivable income

     124,226        95,974   

Fee income

     15,920        15,803   
  

 

 

   

 

 

 

Total revenue

   $ 140,146      $ 111,777   
  

 

 

   

 

 

 

Operating expenses were $95.7 million in the first quarter of 2012, up 38.6% over the first quarter of 2011, due primarily to increases in compensation expense, legal collection costs, legal collection fees, outside fees and services and communications expense. Compensation expense increased primarily as a result of larger staff sizes, including the acquisition of MHH on January 16, 2012. Compensation and employee services expenses increased as total employees grew 21.4% to 3,014 as of March 31, 2012, from 2,482 as of March 31, 2011. Legal collection costs were $23.7 million for the three months ended March 31, 2012 compared to $9.3 million for the three months ended March 31, 2011, an increase of $14.4 million or 154.8%. This increase was the result of an increased portfolio size as well as a refinement of our internal scoring methodology that expanded our account selections for legal action. This strategy to expand the accounts brought into the legal collection process resulted in significant initial expenses, which is expected to help drive additional future cash collections and revenue. Legal collection fees increased from $5.7 million in the first quarter of 2011 to $7.6 million in the first quarter of 2012, an increase of $1.9 million or 33.3%. This increase was the result of an increase in cash collections from outside attorneys from $25.4 million in the three months ended March 31, 2011 to $34.9 million for the three months ended March 31, 2012, an increase of $9.5 million or 37.4%. Outside fees and services increased primarily as a result of legal related expenses as well as increases in costs related to software development. Communication expenses increased primarily due to a growth in mailings resulting from an increase in special letter campaigns and a greater number of finance receivables to work.

 

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Results of Operations

The results of operations include the financial results of Portfolio Recovery Associates, Inc. and all of our subsidiaries, all of which are in the receivables management business. Under the guidance of the FASB ASC Topic 280 “Segment Reporting” (“ASC 280”), we have determined that we have several operating segments that meet the aggregation criteria of ASC 280, and therefore, we have one reportable segment, accounts receivable management, based on similarities among the operating units including homogeneity of services, service delivery methods and use of technology.

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

 

    

For the Three Months

Ended March 31,

 
     2012     2011  

Revenues:

    

Income recognized on finance receivables, net

     88.6     85.9

Fee income

     11.4     14.1
  

 

 

   

 

 

 

Total revenues

     100.0     100.0

Operating expenses:

    

Compensation and employee services

     28.3     30.6

Legal collection fees

     5.4     5.1

Legal collection costs

     16.9     8.4

Agent fees

     1.2     2.4

Outside fees and services

     4.2     3.1

Communication expenses

     5.9     5.6

Rent and occupancy

     1.1     1.3

Depreciation and amortization

     2.6     2.9

Other operating expenses

     2.7     2.6
  

 

 

   

 

 

 

Total operating expenses

     68.3     62.0

Income from operations

     31.7     38.0

Other income and (expense):

    

Interest income

     0.0     0.0

Interest expense

     (1.9 %)      (2.6 %) 
  

 

 

   

 

 

 

Income before income taxes

     29.8     35.4

Provision for income taxes

     11.8     14.4
  

 

 

   

 

 

 

Net income

     18.0     21.0

Less net loss/(income) attributable to redeemable noncontrolling interest

     0.2     (0.5 %) 
  

 

 

   

 

 

 

Net income attributable to Portfolio Recovery Associates, Inc.

     18.2     20.5
  

 

 

   

 

 

 

We use the following terminology throughout our reports:

 

 

“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 from customers on our owned portfolios.

 

 

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

 

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“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” 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.

 

 

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

 

 

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

 

 

“Total estimated collections to purchase price” refers to the total estimated collections divided by the purchase price.

Three Months Ended March 31, 2012 Compared To Three Months Ended March 31, 2011

Revenues

Total revenues were $140.1 million for the three months ended March 31, 2012, an increase of $28.3 million, or 25.3%, compared to total revenues of $111.8 million for the three months ended March 31, 2011.

Income Recognized on Finance Receivables, net

Income recognized on finance receivables, net was $124.2 million for the three months ended March 31, 2012, an increase of $28.2 million, or 29.4%, compared to income recognized on finance receivables, net of $96.0 million for the three months ended March 31, 2011. The increase was primarily due to an increase in cash collections on our finance receivables to $218.0 million for the three months ended March 31, 2012, from $166.7 million for the three months ended March 31, 2011, an increase of $51.3 million or 30.8%. During the three months ended March 31, 2012, excluding the initial investment in the MHH portfolio, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $1.46 billion at a cost of $111.4 million. During the three months ended March 31, 2011, we acquired defaulted consumer receivable portfolios with an aggregate face value of $1.49 billion at a cost of $107.9 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average purchase price and for similar time frames, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to the estimated profitability of a period’s buying.

 

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Income recognized on finance receivables, net is shown net of changes in valuation allowances recognized under FASB ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), which requires that a valuation allowance be recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the three months ended March 31, 2012, we recorded net allowance charges of $0.5 million, of which $1.0 million related to purchased bankruptcy portfolios primarily purchased in 2008, offset by a net allowance reversal of $0.5 million on Core portfolios. In any given period, we may be required to record valuation allowances due to pools of receivables underperforming our expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability, of purchased pools of defaulted consumer receivables include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability, of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relates to the collection and movement of accounts on both our collection floor and external channels), as well as decreases in productivity related to turnover and tenure of our collection staff.

Fee Income

Fee income was $15.9 million for the three months ended March 31, 2012, an increase of $0.1 million, or 0.6%, compared to fee income of $15.8 million for the three months ended March 31, 2011. Fee income increased due to the addition of MHH in the first quarter of 2012 as well as increased revenue generated by our PRA GS business offset by declines in fee income generated by our PLS business and our claims processing business. The decline associated with PLS is due primarily to the adverse impact of the economic slowdown on automobile financing and related collateral recovery activities, while the decline in our claims processing fee income relates to the variable nature in which claim filings are settled.

Operating Expenses

Total operating expenses were $95.7 million for the three months ended March 31, 2012, an increase of $26.6 million or 38.5% compared to total operating expenses of $69.1 million for the three months ended March 31, 2011. Total operating expenses were 40.9% of cash receipts for the three months ended March 31, 2012 compared to 37.8% for the same period in 2011.

Compensation and Employee Services

Compensation and employee services expenses were $39.7 million for the three months ended March 31, 2012, an increase of $5.5 million, or 16.1%, compared to compensation and employee services expenses of $34.2 million for the three months ended March 31, 2011. Compensation expense increased primarily as a result of larger staff sizes, including the addition of new employees as a result of the acquisition of MHH on January 16, 2012. Compensation and employee services expenses increased as total employees grew 21.4% to 3,014 as of March 31, 2012, from 2,482 as of March 31, 2011. Compensation and employee services expenses as a percentage of cash receipts decreased to 17.0% for the three months ended March 31, 2012, from 18.7% of cash receipts for the same period in 2011.

Legal Collection Fees

Legal collection fees represent the contingent fees for the cash collections generated by our independent third party attorney network. Legal collection fees were $7.6 million for the three months ended March 31, 2012, an increase of $1.9 million, or 33.3%, compared to legal collection fees of $5.7 million for the three months ended March 31, 2011. This increase was the result of an increase in our external legal collections which increased $9.5 million or 37.4%, from $25.4 million for the three months ended March 31, 2011 to $34.9 million for the three months ended March 31, 2012. Legal collection fees for the three months ended March 31, 2012 were 3.3% of cash receipts, compared to 3.1% for the three months ended March 31, 2011.

 

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Legal Collection Costs

Legal collection costs are costs paid to courts where a lawsuit is filed. It also includes the cost of documents received from sellers of defaulted consumer receivables. Legal collection costs were $23.7 million for the three months ended March 31, 2012, an increase of $14.4 million, or 154.8%, compared to legal collection costs of $9.3 million for the three months ended March 31, 2011. This increase was the result of an increased portfolio size as well as a refinement of our internal scoring methodology that expanded our account selections for legal action. This strategy to expand the accounts brought into the legal collection process resulted in significant initial expenses, which is expected to help drive additional future cash collections and revenue. These legal collection costs represent 10.1% and 5.1% of cash receipts for the three month periods ended March 31, 2012 and 2011, respectively.

Agent Fees

Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $1.6 million for the three months ended March 31, 2012, a decrease of $1.0 million, or 38.5%, compared to agent fees of $2.6 million for the three months ended March 31, 2011. The decrease was primarily due to a decline in agent fees related to reduced business activity associated with PRA LS.

Outside Fees and Services

Outside fees and services expenses were $5.9 million for the three months ended March 31, 2012, an increase of $2.5 million or 73.5% compared to outside fees and services expenses of $3.4 million for the three months ended March 31, 2011. Of the $2.5 million increase, $1.1 million increase was attributable to an increase in corporate legal expense and the remaining $1.4 million increase was attributable to other outside fees and services including increases in non-capitalized software development costs.

Communication Expenses

Communication expenses were $8.3 million for the three months ended March 31, 2012, an increase of $2.0 million, or 31.7%, compared to communications expenses of $6.3 million for the three months ended March 31, 2011. The increase was primarily due to additional postage expense resulting from an increase in special letter campaigns. The remaining increase was attributable to higher telephone expenses driven by a greater number of finance receivables to work, as well as a significant expansion of our dialer capacity and a resulting increase in the number of calls generated by the dialer. Mailings were responsible for 95.0% or $1.9 million of this increase, while the remaining 5.0% or $0.1 million was attributable to increased call volumes.

Rent and Occupancy

Rent and occupancy expenses were $1.6 million for the three months ended March 31, 2012, an increase of $0.2 million, or 14.3%, compared to rent and occupancy expenses of $1.4 million for the three months ended March 31, 2011. The increase was primarily due to the additional space leased for our Birmingham call center operations, the addition of our MHH foreign operations as well as increased utility charges.

Depreciation and Amortization

Depreciation and amortization expenses were $3.7 million for the three months ended March 31, 2012, an increase of $0.5 million or 15.6% compared to depreciation and amortization expenses of $3.2 million for the three months ended March 31, 2011. The increase was primarily due to the additional depreciation and amortization expense incurred as a result of the acquisition of the tangible and intangible assets of MHH.

Other Operating Expenses

Other operating expenses were $3.7 million for the three months ended March 31, 2012, an increase of $0.8 million or 27.6% compared to other operating expenses of $2.9 million for the three months ended March 31, 2011. Of the $0.8 million increase, $0.5 increase was primarily attributable to additional taxes, fees and licenses and other operating expenses incurred by our MHH. The majority of the remaining $0.3 million increase is attributable to increases in gross receipts taxes incurred as a result of a growth in our revenues.

 

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Interest Income

Interest income was $1,000 and $0 for the three months ended March 31, 2012 and 2011, respectively.

Interest Expense

Interest expense was $2.7 million for the three months ended March 31, 2012, a decrease of $0.2 million compared to interest expense of $2.9 million for the three months ended March 31, 2011. The decrease was primarily due to a decrease in our average borrowings under our revolving credit facility for the three months ended March 31, 2012 compared to the same period in 2011 partially offset by an increase in our weighted average interest rate, which increased to 3.8% for the three months ended March 31, 2012, compared to 3.6% for the three months ended March 31, 2011.

Provision for Income Taxes

Income tax expense was $16.6 million for the three months ended March 31, 2012, an increase of $0.5 million, or 3.1%, compared to income tax expense of $16.1 million for the three months ended March 31, 2011. The increase is primarily due to an increase of 4.8% in income before taxes for the three months ended March 31, 2012, compared to the same period in 2011, offset by a decrease in the effective tax rate to 39.7% for the three months ended March 31, 2012, compared to an effective tax rate of 40.5% for the same period in 2011. The decrease in the effective tax rate is primarily attributable to a decrease in the state effective tax rate due to a change in the mix of income apportionment between various states.

 

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Below are certain key financial data and ratios for the periods indicated:

FINANCIAL HIGHLIGHTS

 

     Three Months Ended        
     March 31,     %  
     2012     2011     Change  

EARNINGS (in thousands)

      

Income recognized on finance receivables, net

   $ 124,226      $ 95,974        29

Fee income

     15,920        15,803        1

Total revenues

     140,146        111,777        25

Operating expenses

     95,725        69,072        39

Income from operations

     44,421        42,705        4

Net interest expense

     2,652        2,867        -7

Net income

     25,189        23,709        6

Net income attributable to Portfolio Recovery Associates, Inc.

     25,462        23,121        10

PERIOD-END BALANCES (in thousands)

      

Cash and cash equivalents

   $ 28,068      $ 35,443        -21

Finance receivables, net

     945,242        866,992        9

Goodwill and intangible assets, net

     124,659        78,893        58

Total assets

     1,142,026        1,020,099        12

Line of credit

     265,000        290,000        -9

Total liabilities

     502,531        489,136        3

Total equity

     620,712        515,710        20

FINANCE RECEIVABLE COLLECTIONS (dollars in thousands)

      

Cash collections

   $ 217,996      $ 166,717        31

Principal amortization without allowance charges

     93,276        66,703        40

Principal amortization with allowance charges

     93,770        70,743        33

Principal amortization w/ allowance charges as % of cash collections:

      

Including fully amortized pools

     43.0     42.4     1

Excluding fully amortized pools

     44.8     45.3     -1

ALLOWANCE FOR FINANCE RECEIVABLES (dollars in thousands)

      

Balance at period-end

   $ 87,065      $ 80,447        8

Allowance charge

     494        4,040        -88

Allowance charge to period-end net finance receivables

     0.05     0.47     -89

Allowance charge to net finance receivable income

     0.40     4.21     -91

Allowance charge to cash collections

     0.23     2.42     -91

PURCHASES OF FINANCE RECEIVABLES (1) (dollars in thousands)

      

Purchase price - core

   $ 52,104      $ 61,294        -15

Face value - core

     972,268        1,008,758        -4

Purchase price - bankruptcy

     56,892        46,607        22

Face value - bankruptcy

     368,447        482,941        -24

Purchase price - total

     108,996        107,901        1

Face value - total

     1,340,715        1,491,699        -10

Number of portfolios - total

     82        79        4

ESTIMATED REMAINING COLLECTIONS (1) (in thousands)

      

Estimated remaining collections - core

   $ 1,226,292      $ 1,040,140        18

Estimated remaining collections - bankruptcy

     796,161        753,130        6

Estimated remaining collections - total

     2,022,453        1,793,270        13

SHARE DATA (share amounts in thousands)

      

Net income per common share - diluted

   $ 1.47      $ 1.34        10

Weighted average number of shares outstanding - diluted

     17,267        17,199        0

Shares repurchased

     30,600        —          100

Average price paid per share repurchased (including acquisitions costs)

   $ 68.02        —          100

Closing market price

   $ 71.72      $ 85.13        -16

RATIOS AND OTHER DATA (dollars in thousands)

      

Return on average equity (2)

     16.70     18.25     -8

Return on revenue (3)

     17.97     21.21     -15

Operating margin (4)

     31.70     38.21     -17

Operating expense to cash receipts (5)

     40.92     37.84     8

Debt to equity (6)

     42.84     56.64     -24

Number of collectors

     1,934        1,486        30

Number of employees

     3,014        2,482        21

Cash receipts (5)

   $ 233,916      $ 182,520        28

Line of credit - unused portion at period end

     142,500        117,500        21

 

(1) Domestic portfolio only
(2) Calculated as annualized net income divided by average equity for the period
(3) Calculated as net income divided by total revenues
(4) Calculated as income from operations divided by total revenues
(5) “Cash receipts” is defined as cash collections plus fee income
(6) For purposes of this ratio, “debt” equals the line of credit balance plus long-term debt

 

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FINANCIAL HIGHLIGHTS

 

     For the Quarter Ended  
     March 31
2012
    December 31
2011
    September 30
2011
    June 30
2011
    March 31
2011
 

EARNINGS (in thousands)

          

Income recognized on finance receivables, net

   $ 124,226      $ 102,743      $ 102,875      $ 100,303      $ 95,974   

Fee income

     15,920        15,344        11,401        14,492        15,803   

Total revenues

     140,146        118,087        114,276        114,795        111,777   

Operating expenses

     95,725        72,134        70,447        70,415        69,072   

Income from operations

     44,421        45,953        43,830        45,536        42,705   

Net interest expense

     2,652        2,512        2,548        2,635        2,867   

Net income

     25,189        26,666        25,193        25,575        23,709   

Net income attributable to Portfolio Recovery Associates, Inc.

     25,462        26,590        25,506        25,574        23,121   

PERIOD-END BALANCES (in thousands)

          

Cash and cash equivalents

   $ 28,068      $ 26,697      $ 30,035      $ 25,481      $ 35,443   

Finance receivables, net

     945,242        926,734        919,478        879,515        866,992   

Goodwill and intangible assets, net

     124,659        76,274        76,426        77,643        78,893   

Total assets

     1,142,026        1,071,123        1,064,104        1,021,617        1,020,099   

Line of credit

     265,000        220,000        260,000        250,000        290,000   

Total liabilities

     502,531        457,804        478,915        463,153        489,136   

Total equity

     620,712        595,488        568,305        542,396        515,710   

FINANCE RECEIVABLE COLLECTIONS (dollars in thousands)

          

Cash collections

   $ 217,996      $ 180,324      $ 182,168      $ 176,281      $ 166,717   

Principal amortization without allowance charges

     93,276        74,481        78,552        73,695        66,703   

Principal amortization with allowance charges

     93,770        77,581        79,293        75,978        70,743   

Principal amortization w/ allowance charges as % of cash collections:

          

Including fully amortized pools

     43.0     43.0     43.5     43.1     42.4

Excluding fully amortized pools

     44.8     44.9     45.7     45.7     45.3

ALLOWANCE FOR FINANCE RECEIVABLES (dollars in thousands)

          

Balance at period-end

   $ 87,065      $ 86,571      $ 83,471      $ 82,730      $ 80,447   

Allowance charge

     494        3,100        741        2,283        4,040   

Allowance charge to period-end net finance receivables

     0.05     0.33     0.08     0.26     0.47

Allowance charge to net finance receivable income

     0.40     3.02     0.72     2.28     4.21

Allowance charge to cash collections

     0.23     1.72     0.41     1.30     2.42

PURCHASES OF FINANCE RECEIVABLES (1) (dollars in thousands)

          

Purchase price - core

   $ 52,104      $ 42,532      $ 57,240      $ 52,323      $ 61,294   

Face value - core

     972,268        829,232        5,027,874        1,034,898        1,008,758   

Purchase price - bankruptcy

     56,892        46,360        64,848        37,204        46,607   

Face value - bankruptcy

     368,447        376,094        654,508        378,051        482,941   

Purchase price - total

     108,996        88,892        122,088        89,527        107,901   

Face value - total

     1,340,715        1,205,326        5,682,382        1,412,949        1,491,699   

Number of portfolios - total

     82        83        95        76        79   

ESTIMATED REMAINING COLLECTIONS (1) (in thousands)

          

Estimated remaining collections - core

   $ 1,226,292      $ 1,159,086      $ 1,154,406      $ 1,072,777      $ 1,040,140   

Estimated remaining collections - bankruptcy

     796,161        794,262        770,886        743,228        753,130   

Estimated remaining collections - total

     2,022,453        1,953,348        1,925,292        1,816,005        1,793,270   

SHARE DATA (share amounts in thousands)

          

Net income per common share - diluted

   $ 1.47      $ 1.54      $ 1.48      $ 1.48      $ 1.34   

Weighted average number of shares outstanding - diluted

     17,267        17,269        17,228        17,225        17,199   

Shares repurchased

     30,600        —          —          —          —     

Average price paid per share repurchased (including acquisitions costs)

   $ 68.02        —          —          —          —     

Closing market price

   $ 71.72      $ 67.52      $ 62.22      $ 84.79      $ 85.13   

RATIOS AND OTHER DATA (dollars in thousands)

          

Return on average equity (2)

     16.70     18.18     18.27     19.20     18.25

Return on revenue (3)

     17.97     22.58     22.05     22.28     21.21

Operating margin (4)

     31.70     38.91     38.35     39.67     38.21

Operating expense to cash receipts (5)

     40.92     36.87     36.39     36.91     37.84

Debt to equity (6)

     42.84     37.15     46.02     46.43     56.64

Number of collectors

     1,934        1,658        1,520        1,517        1,486   

Number of employees

     3,014        2,641        2,504        2,504        2,482   

Cash receipts (5)

   $ 233,916      $ 195,668      $ 193,569      $ 190,773      $ 182,520   

Line of credit - unused portion at period end

     142,500        187,500        147,500        157,500        117,500   

 

(1) Domestic portfolio only
(2) Calculated as annualized net income divided by average equity for the period
(3) Calculated as net income divided by total revenues
(4) Calculated as income from operations divided by total revenues
(5) “Cash receipts” is defined as cash collections plus fee income
(6) For purposes of this ratio, “debt” equals the line of credit balance plus long-term debt

 

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Supplemental Performance Data

Domestic Owned Portfolio Performance:

The following tables show certain data related to our domestic owned portfolio. These tables describe the purchase price, actual cash collections and future estimates of cash collections, income recognized on finance receivables (gross and net of allowance charges), principal amortization, allowance charges, net finance receivable balances and related multiples. Further, these tables disclose our entire domestic portfolio, as well as its subsets: the portfolio of purchased bankrupt accounts and our Core portfolio which are further broken down into year-to-date and life-to-date tables. The accounts represented in the purchased bankruptcy tables are those portfolios of accounts that were bankrupt at the time of purchase. This contrasts with accounts that file for bankruptcy after we purchase them, which continue to be tracked in their corresponding Core portfolio. Our United Kingdom portfolio is not significant and is therefore not included in these tables.

Core customers sometimes file for bankruptcy protection subsequent to our purchase of the related Core portfolio. When this occurs, we adjust our collection practices accordingly to comply with bankruptcy procedures; however, for accounting purposes, these accounts remain in the related Core portfolio. Conversely, bankrupt accounts may be dismissed voluntarily or involuntarily subsequent to our purchase of the related bankrupt portfolio. Dismissal occurs when the terms of the bankruptcy are not met by the petitioner. When this occurs, we are typically free to pursue collection outside of bankruptcy procedures; however, for accounting purposes, these accounts remain in the related bankruptcy pool.

The purchase price multiples (the ratio of total estimated collections to purchase price) from 2005 through the first quarter of 2012 described in the tables below are lower than multiples in previous years. This trend is primarily, but not entirely, related to pricing competition. When competition increases, and/or supply decreases so that pricing becomes negatively impacted on a relative basis (total lifetime collections in relation to purchase price), yields tend to trend lower. The opposite occurs when pricing trends are favorable.

To the extent that lower purchase price multiples are the ultimate result of more competitive pricing and lower yields, this will generally lead to higher amortization rates (payments applied to principal as a percentage of cash collections), lower operating margins and ultimately lower profitability. As portfolio pricing becomes more favorable on a relative basis, our profitability will tend to increase. It is important to consider, however, that to the extent we can improve our collection operations by collecting additional cash from a discreet quantity and quality of accounts, and/or by collecting cash at a lower cost structure, we can positively impact the collection to purchase price ratio and operating margins. We continue to make significant enhancements to our analytical abilities, management personnel and capabilities, all with the intent to collect more cash at lower cost.

Additionally, however, the processes we employ to initially book newly acquired pools of accounts and forecast future estimated collections for any given portfolio of accounts has evolved over the years due to a number of factors including economic conditions. Our revenue recognition under ASC 310-30 is driven by estimates of the ultimate magnitude of estimated lifetime collections as well as the timing of those collections. We have progressed towards booking new portfolio purchases using a higher confidence level for both estimated collection amounts and timing. Subsequent to the initial booking, as we gain collection experience and comfort with a pool of accounts, we continuously update ERC. These processes, along with the aforementioned operational enhancements, have tended to cause the ratio of collections, including ERC, to purchase price for any given year of buying to gradually increase over time. As a result, our estimate of lifetime collections to purchase price has generally, but not always, shown relatively steady increases as pools have aged. Thus, all factors being equal in terms of pricing, one would typically tend to see a higher collection to purchase price ratio from a pool of accounts that was six years from purchase than say a pool that was just two years from purchase.

 

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Domestic Portfolio Data - Life-to-Date

Entire Portfolio

 

          Inception through March 31, 2012     As of March 31, 2012  
($ in thousands)     Actual Cash     Income                 Income                          

Purchase Period

  Purchase
Price
    Collections
Including Cash
Sales
    Recognized
on Finance
Receivables
    Principal
Amortization
    Allowance
Charges
    Recognized
on Finance
Receivables, Net
    Net Finance
Receivables
Balance
    Estimated
Remaining
Collections
    Total
Estimated
Collections
    Total Estimated
Collections to
Purchase Price
 

1996

  $ 3,080      $ 10,152      $ 7,029      $ 3,123      $ 0      $ 7,029      $ 0      $ 82      $ 10,234        332

1997

    7,685        25,340        17,236        8,104        0        17,236        0        202        25,542        332

1998

    11,089        36,990        26,003        10,987        0        26,003        0        424        37,414        337

1999

    18,898        68,379        49,205        19,174        0        49,205        0        1,317        69,696        369

2000

    25,020        113,991        88,795        25,196        0        88,795        0        3,520        117,511        470

2001

    33,481        171,380        137,027        34,353        0        137,027        0        4,958        176,338        527

2002

    42,325        191,646        149,321        42,325        0        149,321        0        8,168        199,814        472

2003

    61,448        254,623        193,175        61,448        0        193,175        0        13,781        268,404        437

2004

    59,176        189,039        131,061        57,978        1,200        129,861        0        12,982        202,021        341

2005

    143,169        291,628        175,602        116,026        16,590        159,012        10,553        19,619        311,247        217

2006

    107,693        190,961        119,449        71,512        20,315        99,134        15,865        27,090        218,051        202

2007

    258,392        416,948        231,857        185,091        19,565        212,292        53,731        95,339        512,287        198

2008

    275,160        379,407        223,469        155,938        29,395        194,074        89,792        145,637        525,044        191

2009

    281,446        468,207        302,090        166,117        0        302,090        115,329        323,285        791,492        281

2010

    358,166        364,189        208,658        155,531        0        208,658        202,659        471,352        835,541        233

2011

    399,462        133,533        77,750        55,783        0        77,750        343,679        701,469        835,002        209

2012

    109,104        3,543        2,690        853        0        2,690        108,238        193,228        196,771        180
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,194,794      $ 3,309,956      $ 2,140,417      $ 1,169,539      $ 87,065      $ 2,053,352      $ 939,846      $ 2,022,453      $ 5,332,409        243
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased Bankruptcy Portfolio

 

  

           
          Inception through March 31, 2012     As of March 31, 2012  
($ in thousands)     Actual Cash     Income                 Income                          

Purchase Period

  Purchase
Price
    Collections
Including Cash
Sales
    Recognized
on Finance
Receivables
    Principal
Amortization
    Allowance
Charges
    Recognized
on Finance
Receivables, Net
    Net Finance
Receivables
Balance
    Estimated
Remaining
Collections
    Total
Estimated
Collections
    Total Estimated
Collections to
Purchase Price
 

1996-2003

  $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0        0

2004

    7,468        14,325        8,056        6,269        1,200        6,856        0        154        14,479        194

2005

    29,301        43,289        14,682        28,607        645        14,037        50        123        43,412        148

2006

    17,645        30,700        14,266        16,434        1,100        13,166        111        614        31,314        177

2007

    78,547        98,127        34,576        63,551        5,710        28,866        9,286        11,104        109,231        139

2008

    108,609        131,477        63,582        67,895        2,300        61,282        38,414        50,637        182,114        168

2009

    156,057        227,414        146,024        81,390        0        146,024        74,667        166,390        393,804        252

2010

    209,231        173,170        95,051        78,119        0        95,051        131,112        224,544        397,714        190

2011

    186,184        27,767        17,634        10,133        0        17,634        176,051        263,966        291,733        157

2012

    56,889        1,075        633        442        0        633        56,446        78,629        79,704        140
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 849,931      $ 747,344      $ 394,504      $ 352,840      $ 10,955      $ 383,549      $ 486,137      $ 796,161      $ 1,543,505        182
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core Portfolio

 

          Inception through March 31, 2012     As of March 31, 2012  
($ in thousands)     Actual Cash     Income                 Income                          

Purchase Period

  Purchase
Price
    Collections
Including Cash
Sales
    Recognized
on Finance
Receivables
    Principal
Amortization
    Allowance
Charges
    Recognized
on Finance
Receivables, Net
    Net Finance
Receivables
Balance
    Estimated
Remaining
Collections
    Total
Estimated
Collections
    Total Estimated
Collections to
Purchase Price
 

1996

  $ 3,080      $ 10,152      $ 7,029      $ 3,123      $ 0      $ 7,029      $ 0      $ 82      $ 10,234        332

1997

    7,685        25,340        17,236        8,104        0        17,236        0        202        25,542        332

1998

    11,089        36,990        26,003        10,987        0        26,003        0        424        37,414        337

1999

    18,898        68,379        49,205        19,174        0        49,205        0        1,317        69,696        369

2000

    25,020        113,991        88,795        25,196        0        88,795        0        3,520        117,511        470

2001

    33,481        171,380        137,027        34,353        0        137,027        0        4,958        176,338        527

2002

    42,325        191,646        149,321        42,325        0        149,321        0        8,168        199,814        472

2003

    61,448        254,623        193,175        61,448        0        193,175        0        13,781        268,404        437

2004

    51,708        174,714        123,005        51,709        0        123,005        0        12,828        187,542        363

2005

    113,868        248,339        160,920        87,419        15,945        144,975        10,503        19,496        267,835        235

2006

    90,048        160,261        105,183        55,078        19,215        85,968        15,754        26,476        186,737        207

2007

    179,845        318,821        197,281        121,540        13,855        183,426        44,445        84,235        403,056        224

2008

    166,551        247,930        159,887        88,043        27,095        132,792        51,378        95,000        342,930        206

2009

    125,389        240,793        156,066        84,727        0        156,066        40,662        156,895        397,688        317

2010

    148,935        191,019        113,607        77,412        0        113,607        71,547        246,808        437,827        294

2011

    213,278        105,766        60,116        45,650        0        60,116        167,628        437,503        543,269        255

2012

    52,215        2,468        2,057        411        0        2,057        51,792        114,599        117,067        224
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,344,863      $ 2,562,612      $ 1,745,913      $ 816,699      $ 76,110      $ 1,669,803      $ 453,709      $ 1,226,292      $ 3,788,904        282
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents

Domestic Portfolio Data - Quarter-to-Date

Entire Portfolio

 

          Quarter to Date March 31, 2012     As of March 31, 2012  
($ in thousands)     Actual Cash     Income                 Income                          

Purchase Period

  Purchase
Price
    Collections
Including Cash
Sales
    Recognized
on Finance
Receivables
    Principal
Amortization
    Allowance
Charges
    Recognized
on Finance
Receivables, Net
    Net Finance
Receivables
Balance
    Estimated
Remaining
Collections
    Total
Estimated
Collections
    Total Estimated
Collections to
Purchase Price
 

1996

  $ 3,080      $ 8      $ 8      $ 0      $ 0      $ 8      $ 0      $ 82      $ 10,234        332

1997

    7,685        30        30        0        0        30        0        202        25,542        332

1998

    11,089        52        52        0        0        52        0        424        37,414        337

1999

    18,898        217        217        0        0        217        0        1,317        69,696        369

2000

    25,020        603        603        0        0        603        0        3,520        117,511        470

2001

    33,481        916        916        0        0        916        0        4,958        176,338        527

2002

    42,325        1,369        1,369        0        0        1,369        0        8,168        199,814        472

2003

    61,448        2,226        2,226        0        0        2,226        0        13,781        268,404        437

2004

    59,176        1,889        1,889        0        0        1,889        0        12,982        202,021        341

2005

    143,169        3,744        1,676        2,068        (1,356     3,032        10,553        19,619        311,247        217

2006

    107,693        3,805        2,070        1,735        (100     2,170        15,865        27,090        218,051        202

2007

    258,392        14,721        6,347        8,374        100        6,247        53,731        95,339        512,287        198

2008

    275,160        20,475        8,603        11,872        1,850        6,753        89,792        145,637        525,044        191

2009

    281,446        46,343        29,962        16,381        0        29,962        115,329        323,285        791,492        281

2010

    358,166        59,575        33,242        26,333        0        33,242        202,659        471,352        835,541        233

2011

    399,462        56,344        31,805        24,539        0        31,805        343,679        701,469        835,002        209

2012

    109,104        3,543        2,690        853        0        2,690        108,238        193,228        196,771        180
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,194,794      $ 215,860      $ 123,705      $ 92,155      $ 494      $ 123,211      $ 939,846      $ 2,022,453      $ 5,332,409        243
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased Bankruptcy Portfolio

 

          Quarter to Date March 31, 2012     As of March 31, 2012  
($ in thousands)     Actual Cash     Income                 Income                          

Purchase Period

  Purchase
Price
    Collections
Including Cash
Sales
    Recognized
on Finance
Receivables
    Principal
Amortization
    Allowance
Charges
    Recognized
on Finance
Receivables, Net
    Net Finance
Receivables
Balance
    Estimated
Remaining
Collections
    Total
Estimated
Collections
    Total Estimated
Collections to
Purchase Price
 

1996-2003

  $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0        0

2004

    7,468        31        31        0        0        31        0        154        14,479        194

2005

    29,301        67        13        54        (36     49        50        123        43,412        148

2006

    17,645        219        147        72        (100     247        111        614        31,314        177

2007

    78,547        2,753        529        2,224        600        (71     9,286        11,104        109,231        139

2008

    108,609        7,895        2,637        5,258        500        2,137        38,414        50,637        182,114        168

2009

    156,057        26,219        15,660        10,559        0        15,660        74,667        166,390        393,804        252

2010

    209,231        29,186        13,717        15,469        0        13,717     <