for success
10
Years of Growing Shareholder Value
Portfolio recovery AssociAtes, inc.
2012 Annual Report
16 yeArs of Growth
10 yeArs As A PUblic comPAny
Portfolio recovery Associates, Inc. (PrA) is a financial and business services company operating in the U.S. and the U.K.
Since 1996, PrA has grown to become a leader in the U.S. debt buying industry, returning capital to banks and other
creditors to help expand financial services for consumers.
During the past 16 years, PrA has returned $2.7 billion to U.S. creditors by acquiring 2,748 portfolios of charged-off
consumer debt and bankruptcy court claims—more than 31 million accounts—with a face value of more than $70 billion.
PrA collaborates with its customers to create realistic, affordable, debt repayment plans.
Since the company’s shares began trading on NASDAQ under the symbol “PrAA” in 2002, PrA has further diversified,
providing fee-based services to local governments and law enforcement, U.S. businesses, institutional investors, global
hedge funds, and U.K. banks and creditors.
cAsh receiPts
cash collections
plus fee income,
U.s. and U.K.
2002
$81
2012
$971
fee income
from services
to clients,
U.s. and U.K.
2002
$2
2012
$62
net finAnce
receivAbles
Portfolios purchased less principal
amortization and net
allowance charges,
U.s. and U.K.
2002
$66
2012
$1,079
(all figures are in millions)
net income
revenUes
2002
$11
2012
$126
2002
$56
2012
$593
stocKholders’
eqUity
2002
$81
2012
$708
GrowING ShAreholDer VAlU e
(in thousands, except per share amounts)
Revenues
Operating income
Net income attributable to PRA
Diluted earnings per share
2010
$ 372,706
$ 129,862
$ 73,454
2011
$ 458,935
$ 178,025
$ 100,791
2012
$ 592,801
$ 216,064
$ 126,593
$
4.35
$
5.85
$
7.39
Weighted-average shares (diluted)
16,885
17,230
17,123
Operating margin
Net margin
Return on average equity
Finance receivables, net
Total assets
Total debt
Stockholders’ equity
600
500
portfolio purChAses, u.s.
400
($ in millions)
300
600
200
500
100
400
0
300
200
100
0
42
2002
42
2002
62
61
2003
2004
62
61
150
2005
150
112
2006
112
34.8%
19.8%
16.6%
$ 831,330
$ 995,908
$ 302,396
$ 490,516
38.8%
22.0%
18.5%
$ 926,734
$ 1,071,123
$ 221,246
$ 595,488
36.5%
21.3%
19.6%
$ 1,078,951
$ 1,288,956
$ 327,542
$ 708,427
264
280
289
264
2007
280
2008
289
2009
367
367
2010
522
408
Core Asset
Bankruptcy
522
408
2011
2012
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Core Asset & BAnkruptCy portfolios, u.s.
($ in millions)
estimated remaining Collections
Collections
purchases
2,500
2,000
1,500
2,500
1,000
2,000
500
1,500
0
1,000
500
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Portfolio r ecovery AssociAtes, i nc. – 1
2012
600000000
500000000
400000000
300000000
600000000
200000000
500000000
100000000
400000000
300000000
0
200000000
100000000
0
2500
2000
1500
2500
1000
2000
500
1500
0
1000
500
0
letter to shareholders
i Am pleAsed to report to you thAt in 2012, BeCAuse of A greAt teAm effort, portfolio reCovery
AssoCiAtes AChieved yet Another yeAr of reCord CAsh reCeipts, revenues And net inCome.
In this our 10th year as a public
company, our stock price rose
58% year-over-year, significantly
outperforming the leading stock
indices, our peer group, and our
publicly-traded, debt-buyer com-
petitors. By continuing to focus on
the long term, PRA again sustained
the strong top-line and bottom-
line performance you have come
to expect of us since our IPO.
In 2012, PRA increased cash
collections 29% to a new record of
$908.7 million, while collecting 8
million individual payments, another
PRA record. This helped to gener-
ate a 29% increase in revenue that
also set a new record of $592.8
million. Our operating efficiencies
drove net income growth of 26%,
helping us deliver record net
income attributable to PRA of
$126.6 million.
Our financial performance in 2012
was recognized for the sixth year
in a row by Forbes, which named
PRA for the first time to the Top
25 of its 100 Best Small Companies
in America, and by Fortune, which
ranked PRA as one of America’s
100 Fastest-Growing Companies.
Model for Success
PRA has achieved this level of
performance year-over-year by
successfully combining skill sets
not often found in a single
company: expertise in data
and analytics with a mastery
of people-intensive workflows
and processes.
PRA is distinguished by an ability
to realize value by applying unique,
sophisticated analytics to the
large data sets we assemble
for each of our businesses. This
helps to inform the decisions
we make about which distressed
consumer debt portfolios to
purchase, where missing auto
loan collateral is most likely to
be located, or how to identify
underreported revenues for local
governments.
Our approach to data-driven
analytics then directs how our
employees interact with custom-
ers or clients. Analytics enable
us to find the right approach to
helping customers pay back their
debt or show a client how to
recover lost class-action claims or
back taxes. Most important, we
use the data gleaned from more
than 16 years of customer and
client relationships to continually
sharpen our analytics even further.
This year, we successfully invested
$522 million in new portfolios of
2 – 2012 AnnuAl r ePort
prA hAs AChieved this level
of performAnCe By
suCCessfully ComBining
expertise in dAtA And
AnAlytiCs with A mAstery
of people-intensive
workflows And proCesses.
U.S. consumer debt, an increase
of 28% over 2011. By applying
sophisticated analytics to data
drawn from our database of
more than 31 million customer
accounts, we are able to calculate
a desired return on investment
with impressive precision, confi-
dently making informed pricing
and purchasing decisions.
Our approach to growing a diver-
sified financial and business ser-
vices company also highlights
another important quality: We
are deliberately experimental.
In 2002, when we first looked at
acquiring and servicing bankruptcy
claims, we decided to devote
several years to mastering this
business. We refined our analy t-
ics and purchased successively
larger portfolios. We gained
experience filing proofs of claim
in bankruptcy courts and devel-
oped proprietary systems to
effectively manage these claims
throughout their lifecycle. All of
this was accomplished before
we fully committed resources
to what has become one of our
most profitable businesses.
We applied the same deliberate
method in 2012 when we acquired
Mackenzie Hall Holdings, Ltd.,
a debt collection agency serving
clients throughout the United
Kingdom. We’ve been moving
forward at a measured pace,
deepening our understanding of
the marketplace and testing new
approaches and ideas.
This careful experimentation
characterizes each of our opera-
tions today, and the rationale is
straight forward: The more we
know, the better our forecasts.
The better our forecasts, the
more value we can return to our
shareholders.
Core U.S. Collections
The effectiveness of this model
was clearly evident in our core
U.S. business in 2012. We grew
core cash collections from cus-
tomers by 27% and increased
investment by 22% in new core
assets from banks and creditors,
laying a foundation for future
growth.
CAreful experimentAtion
ChArACterizes eACh of our
operAtions todAy.
The value of our analytics was
especially evident in two key
areas in 2012, reflecting our
growing ability to successfully
resolve customer debt with
unmatched efficiency.
First, our success at identifying
customers with the capacity to
pay prompted us to sharpen a
focus on legal action against some
of these customers who refuse
the many attempts by PRA
account representatives to help
them resolve their debt obliga-
tions. Legal collections from these
Portfolio r ecovery AssociAtes, i nc. – 3
letter to shareholders
customers increased 49% year-
over-year to $256 million, becom-
ing a stronger collections channel
for PRA. But, unlike many collec-
tors, we only target for legal action
those customers who can but
won’t pay their debt, approximately
5% of our core U.S. accounts and
well below others in the industry.
customers who now are reliably
making their payments on time,
resolving their debt at affordable
terms designed for their unique
circumstances.
This success at collecting past-due
payments not only reflects our
ability to connect with customers,
but also our determination to treat
customers fairly and respectfully.
By Applying sophistiCAted AnAlytiCs to dAtA drAwn from
our dAtABAse of more thAn 31 million Customer ACCounts,
we Are ABle to CAlCulAte A desired return on investment
with impressive preCision.
A second area where analytics
demonstrated value in 2012 was
our success at identifying custom-
ers willing and able to make regular
payments. This has favorable
implications for future collections
and revenue. PRA customers who
are on monthly payment plans
represent a very low cost to
collect going forward. Nearly all
of these payments are from
We welcome the Consumer
Financial Protection Bureau’s
scrutiny of our industry and its
advocacy of effective consumer
debt management. We believe
our conscientious approach to
complying with consumer protec-
tion laws is a differentiator for
PRA, distinguishing us from firms
that are less concerned about the
consumer experience and follow-
ing the spirit, as well as the letter
of the law.
We also are sustaining and creat-
ing American jobs by using our
technological advantages to stay
cost competitive with our off-
shoring peers, even as we main-
tain about 90% of our 2,153 call
center jobs right here in the U.S.
Bankruptcy Services
The contributions of the bank-
ruptcy business to our bottom
line this year further diversified
our company, as the wave of
bankruptcies produced by the
recession continued to work its
way through the court system.
During the recent economic
downturn we acted opportunisti-
cally, purchasing claims at prices
that continue to generate sizeable
returns. The gradually reviving
economy, however, has led to a
decline in bankruptcy filings and
an increase in the perceived qual-
ity of claims, which has caused
upward pressure on pricing.
In anticipation of circumstances
affecting the size and pricing of
the claims we may purchase,
PRA acquired assets from
National Capital Management,
LLC (NCM) in December 2012.
The move further consolidated
4 – 2012 AnnuAl r ePort
Looking Forward
I believe that PRA’s model—
our unique combination of data-
gathering, analytics and people-
related competencies—coupled
with our disciplined approach to
applying this model, have made
possible the success we enjoyed
in 2012 and set the stage for
continued growth going forward.
I am grateful for the dedication of
our employees and the ongoing
support of all our shareholders.
We will continue to work hard to
reward your trust.
Steve Fredrickson
Chairman, President and
Chief Executive Officer
the bankruptcy claims market
and signaled a growing market
presence for PRA.
We concluded the year with $354
million in bankruptcy recoveries,
an increase of 28% over 2011. Our
bankruptcy claim purchasing com-
prised 49% of PRA’s total port-
folio purchases in 2012, with the
addition of secured bankruptcy
claims as a result of our NCM
acquisition.
Business and Government Services
While our U.S. fee-for-service
businesses represented a smaller
portion of PRA’s total revenue in
2012 than they did five years ago,
these businesses remain impor-
tant to the company in a number
of ways. Together, they not only
continue to diversify our company
but are also an incubator for
new ideas.
Going forward, a number of cir-
cumstances will help us position
these businesses to become a
growing part of our revenue mix.
With automobile financing on
the rise, we believe the demand
for our vehicle location services
will gradually rebound. Record
class-action settlements in a
number of areas have already
fueled demand for our claims
processing services. And cash-
strapped municipalities are increas-
ingly turning to our government
services businesses for assistance
in recovering revenue.
our suCCess At ColleCting
pAst-due pAyments not only
refleCts our ABility to
ConneCt with Customers,
But Also our determinAtion
to treAt Customers
fAirly And respeCtfully.
In late 2012, we appointed a vet-
eran executive to lead our U.S.
fee-for-service businesses and
launch new solutions for our
business and government clients.
We are taking a very hands-on
approach to managing these
businesses, and we continue to
see opportunities to realize their
potential for growth.
Portfolio r ecovery AssociAtes, i nc. – 5
Applying the model to new mArkets
u.k. Consumer deBt
Upon acquiring Mackenzie Hall
Holdings, Ltd., in January 2012, PRA
began to gather key data on how U.K.
consumers manage debt. Analytics
helped PRA to carefully invest in U.K.
niche debt portfolios. Call center pro-
cesses were shared back and forth
across the Atlantic.
The result at year-end 2012: U.K.’s
Consumer Debt Collection Agency of
the Year award from Credit Today.
seCured BAnkruptCy ClAims
Also, in December, expert analysts
joining PRA from NCM began to
collaborate on applying the company’s
model to secured bankruptcy claims,
a new asset class that further diversified
PRA’s Bankruptcy Services.
6 – 2012 AnnuAl r ePort
for success
Data
analytics
PeoPle
Thousands of data points make up
every consumer debt portfolio that
PRA acquires, and each piece of
data adds to PRA’s understanding
of consumer behavior. PRA further
enriches this picture with public
information combined with data
gleaned from ongoing interactions
with customers. The more data
PRA gathers, the better the com-
pany can forecast cash flows.
Because PRA doesn’t resell cus-
tomer accounts, it has one of the
most powerful data sets among
debt buyers: data on managing
debt during good times and bad
these last 16 years from more than
31 million customer accounts.
This proprietary data is the raw
material that fuels the company’s
success in debt buying and collec-
tions, but it also shapes PRA’s
approach with other clients. The
company gathers thousands of data
points on unpaid taxes to local gov-
ernments, lost collateral securing
auto loans, or unfiled class-action
claims to help determine how or
where to recover assets or revenue
due clients.
PRA analytics turn data into action.
Analysts sift through PRA’s proprie-
tary data looking for meaningful
relationships between consumer
characteristics and behavior—and
when analysts find a promising sta-
tistical correlation, they determine
if it holds true by constantly refining
patterns, weighing variables, sharp-
ening their understanding.
This helps PRA price portfolios
based on projected revenue yield
from consumers at a desired return
on investment. Once PRA owns a
portfolio, it rescores the data every
day to determine which customers
are most likely to pay back their
debt, and what action is appropriate
for any account at any given time.
This allows PRA employees to focus
on accounts that will statistically
yield the best results.
Analytics also allow PRA Location
Services to maximize recoveries for
auto lenders. Data on taxpayer
transactions helps MuniServices
point to lost, uncollected fee or tax
revenue for governments. Analysts
at Claims Compensation Bureau
track data on securities trading, retail
sales and other metrics to prepare
accurate class-action claims that may
recover millions of dollars for clients.
Ultimately, the purpose of the data
PRA collects and the analytics it
applies is to enable the company’s
employees to deliver better results
to customers or clients and grow
value to shareholders.
After analytics help target which
consumer debt portfolios will deliver
the most value, PRA’s professionals
effectively price portfolios. They
also build relationships with bank-
ruptcy court trustees who disburse
claim payments. And PRA’s fee-for-
service professionals translate ana-
lytics into revenue for clients.
PRA’s data analytics also enable two
of the most important people to the
company’s growth and success—
a PRA account representative and
a customer—to have a productive
conversation and pay down cus-
tomer debt. This requires being
respectful and patient with custom-
ers. PRA’s well-trained account
representatives demonstrate these
competencies day in and day out.
Portfolio r ecovery AssociAtes, i nc. – 7
operating principles
the foundAtion of our Model
prA’s model for success begins with these principles, which have sustained prA’s year-over-year performance for each of
its 10 years as a public company. every prA investment is carefully assessed to achieve appropriate, long-term returns for
shareholders—whether prA invests in a portfolio, a business in the u.s. or globally, a new product offering, or experienced
people to analyze data in support of customer and client needs.
set the BAr for
disClosure And
trAnspArenCy
We are honest and open with shareholders and keep them up to date with
important news and developments. Our goal is to set the standard by
which companies in our sector are measured.
invest CArefully
with A long-term
view
We build a diverse portfolio across business lines and stay true to our
methodology. We make sure each investment, whether it’s a portfolio or
a business, has been reviewed, assessed objectively and priced to achieve
appropriate returns.
ContAin
Costs, Boost
produCtivity
mAintAin A
ConservAtive
CApitAl struCture
employ steAdy,
Controlled
growth
To keep costs low and productivity high, we operate fewer, larger call
centers. We develop and retain great employees to deliver great
customer service.
We keep debt levels as low as possible. We borrow prudently to expand
and to build a more integrated business.
Growth for growth’s sake drives down productivity, margin and net income.
We maintain a base of experienced, highly productive employees and add
new employees opportunistically to support growth.
enCourAge senior
mAnAgers to
own our stoCk
One of the greatest testaments to our belief in PRA is our ownership of
the company. Our senior managers have a significant portion of their net
worth invested in the company. We expect and encourage our senior man-
agers to retain substantial PRAA stock ownership positions—common
stock, not just options—throughout their tenure.
CreAte CAreers,
not Just JoBs
In a people-intensive business like ours, it is crucial to provide ongoing
employee skill development. This raises each person’s performance level
and drives PRA’s growth and profitability.
8 – 2012 AnnuAl r ePort
our model
10001011010
11100010101
00110110001
01011011110
10101010100
10101010111
dAtA
Purchased portfolios
of accounts
31 million
customer accounts
Public and
government sources
AnAlytiCs
people
Benefits
Portfolio
pricing
Account
scoring and
rescoring
Appropriate
account
actions
likelihood
of customer
payments
taxpayer and
business
audit
selection
class-action
claims
eligibility
and pricing
vehicle
recovery
potential
recover
payments from
credit card
customers
recover
payments from
bankruptcy
courts
recover taxes
and fees for
government
clients
recover
vehicles for
auto lenders
recover
funds from
class-action
settlements
capital
recovery
for banks
debt
reduction
for PrA
customers
revenue
enhancement
for local
governments
lower
costs for
consumers
Growing
value for
shareholders
Portfolio r ecovery AssociAtes, i nc. – 9
Core Asset Acquisitions and Collections
each acquired u.s. portfolio con-
tributes another layer of financial
strength to the company, generat-
ing a revenue stream for years to
come. As prA’s analytics become
more powerful, the ability to gener-
ate value from these existing port-
folios continues to grow over time.
PRA generated a 27% increase in
core U.S. cash collections to $543
million in 2012. Most of PRA’s U.S.
customers pay back their debt with
regular, monthly payments.
These payments provide the foun-
dation for further growth. More than
60% were from individuals who had
previously made more than six pay-
ments to PRA. Analytics indicate
that most of these customers will
continue to make payments. This
speaks well of the communication
skills of the company’s account
representatives, who are adept at
finding solutions that work for both
the customer and the company.
Account representatives and cus-
tomers ultimately benefit from the
long-term perspective that guides
PRA’s business. Because PRA does
not resell its customer accounts to
other companies, it can accept flexi-
ble payment plans from cus tomers
who want to resolve their bills or
delinquent loans.
This level of collections demon-
strates the power of PRA’s model
to identify the percentage of
accounts capable of paying at any
given point in time, allowing call
center employees to apply their
skills productively.
Advances in PRA’s analytics have
been particularly useful in helping
to identify customers who have the
capacity to pay but who have not
responded to calls and letters. PRA’s
renewed focus on legal collections
from these customers is expected to
continue to drive meaningful levels
of cash flow and net income. In
2012, legal cash collections totaled
$256 million, up 49% from 2011.
u.s. Core Asset
CAsh ColleCtions
(in millions)
2002
$79
2012
$543
10 – 2012 AnnuAl r ePort
$259.8 million
prA invested $259.8 million in distressed u.s. consumer receivables in 2012,
a 22% increase over 2011. this brings prA’s total investment since 1996 in its
core debt- buying business to $1.56 billion.
Portfolio r ecovery AssociAtes, i nc. – 11
Bankruptcy services
Acquiring and servicing u.s. bank-
ruptcy court claims builds on and
leverages many of the same
strengths and resources of prA’s
core, charged-off consumer debt-
buying and collections business,
with the power of data and analyt-
ics providing a decisive edge.
PRA’s 4 million owned bankruptcy
accounts and years of experience
with bankruptcy claims underwrit-
ten by various issuers give PRA
valuable insight to more accurately
underwrite the purchase of bank-
ruptcy portfolios.
PRA employees track the detailed
procedures needed to successfully
file claims in hundreds of individual
jurisdictions and work with thou-
sands of bankruptcy trustees, each
of whom has a slightly different set
of procedures. This information is
incorporated into PRA’s proprietary
Bankruptcy Management System,
allowing the company to more pro-
actively manage these accounts.
In addition, PRA constantly monitors
state and federal legislation that
governs bankruptcy. This helps the
company comply with all applicable
laws, while building closer relation-
ships with clients. For instance,
when Bankruptcy Rule 3001 was
amended in December 2011, it
dramatically expanded the types
of information that must accompany
a proof of claim for an account in
a bankruptcy case. Even before
amendment of this rule, PRA was
helping its clients understand the
rule’s implications.
This knowledgeable, proactive
approach is one reason that Bank-
ruptcy Services had another strong
year in 2012. Cash from bankruptcy
accounts totaled $354 million, a
28% increase over 2011. These
payments represented 39% of total
PRA total cash collections in 2012.
Investments in bankrupt accounts,
including those from NCM, totaled
$263 million in 2012, primarily in
unsecured Chapter 13 bankruptcy
claims.
2012
$354
BAnkruptCy
ColleCtions
(in millions)
2002
$0
12 – 2012 AnnuAl r ePort
$262.6 million
Acquisition of $262.6 million in u.s. bankruptcy claims represented 49% of
prA’s total u.s. and u.k. portfolio purchases in 2012, and cash payments from
bankruptcy trustees represented 39% of total cash collections.
Portfolio r ecovery AssociAtes, i nc. – 13
Business and government services
having weathered the u.s. recession, the company’s u.s. fee-for-service businesses
are now leaner, more energized, and poised to increase their contributions to the bot-
tom line as prA’s model of data-driven analytics continues to unlock substantial value.
As competitors exit this space, each prA business in this sector has increased the
tempo of its marketing and has identified opportunities for future growth.
14 – 2012 AnnuAl r ePort
10 yeArs
since 2002 when the company began to consider expanding into bankruptcy claims, prA has focused
on profitably diversifying into a widening range of financial and business services for clients in the
u.s. and globally.
The U.S. recession—which produced declines in property, business, sales
and individual taxes—along with cutbacks in state and federal funding, has
deprived many jurisdictions of the revenue needed to deliver basic services.
PRA’s subsidiaries—Revenue Discovery Systems (RDS), MuniServices, LLC,
and Broussard Partners & Associates (BPA) —provide solutions that have
become increasingly important to state and local governments throughout
the U.S.
Each business helps governments administer, audit and find underreported
local business and individual tax revenue and collect delinquent taxes or fees
from citizens and businesses. They provide a series of advisory services
that include economic development consulting and business inventory
management.
The systems-based approach of PRA’s support to local government provides
a distinct advantage over competitors. The company’s broad analytic expertise
also gives these businesses a competitive edge by enabling them to help
governments recover funds from a variety of distinct revenue streams.
During the years immediately following the U.S. recession, automobile sales
plummeted. With the gradual economic recovery, vehicle financing has begun
to increase, along with repossessions, which typically lag auto lending growth.
PRA Location Services, LLC, a leader in vehicle location, skip-tracing and col-
lateral recovery, is poised to take advantage of this trend. While rivals exited
the industry, the business managed expenses closely, increased resolution
rates and developed an industry-leading compliance operation. In addition,
the business has built its marketing staff and identified new clients beyond
auto lenders and insurers.
PRA purchased a controlling interest in Claims Compensation Bureau, LLC
(CCB) in 2010 because it shared many of the characteristics of PRA’s
successful core asset and bankruptcy businesses.
When PRA acquired CCB, the company operated almost exclusively on a
contingency fee basis. CCB uncovered class-action recoveries, calculated
a recognized loss for each claim filed, and tracked and monitored the status
of each claim until payment was received, confirmed, and delivered. PRA
introduced a robust claims-purchasing option, which would allow clients to
monetize their assets prior to distribution of the claim. The timing is advan-
tageous. Throughout 2012, CCB has enlisted clients to take advantage of
a series of record-setting class-action settlements that are expected to
be approved.
Portfolio r ecovery AssociAtes, i nc. – 15
our employees and management team embody
the elements of our model for success
every day, more than 3,200 prA employees in 10 u.s. states and the u.k. take part in gathering and analyzing
data from multiple sources, or come to decisions about data from analytics. prA employees then take action
to deliver results to customers, clients and shareholders.
mAnAgement
Steve Fredrickson
chairman, President and
chief executive officer
Kevin Stevenson
executive vice President,
chief financial and Administrative
officer, treasurer and
Assistant secretary
Neal Stern
executive vice President,
operations
Judith Scott
executive vice President,
General counsel and secretary
Kent McCammon
executive vice President,
strategy and Business development
Mike Petit
President,
Bankruptcy services
Steve Roberts
President,
Business and Government services
Chris Graves
senior vice President,
core Acquisitions
Michelle Link
senior vice President,
human resources
Rick Goulart
vice President,
corporate communications
16 – 2012 AnnuAl r ePort
Portfolio recoVerY
ASSociAteS, inc. (nASDAQ: PrAA)
10
Years of Growing Shareholder Value
2012 form 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-50058
Portfolio Recovery Associates, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
120 Corporate Boulevard, Norfolk, Virginia
(Address of principal executive offices)
75-3078675
(I.R.S. Employer
Identification No.)
23502
(Zip Code)
Registrant’s telephone number, including area code: (888) 772-7326
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
(Title of Class)
NASDAQ Global Select Market
(Name of Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES
NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.
YES
NO
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
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
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
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
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2012 was
$1,507,062,073 based on the $91.26 closing price as reported on the NASDAQ Global Select Market.
The number of shares of the registrant’s Common Stock outstanding as of February 19, 2013 was 16,930,872.
Documents incorporated by reference: Portions of the registrant’s definitive Proxy Statement for our 2013 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
1 – Summary of Significant Accounting Policies
2 – Finance Receivables, net
3 – Accounts Receivable, net
4 – Operating Leases
5 – Redeemable Noncontrolling Interest
6 – Goodwill and Intangibles Assets, net
7 – Business Acquisitions
8 – Line of Credit
9 – Long-Term Debt
10– Property and Equipment, net
11– Fair Value Measurements and Disclosures
12– Share-Based Compensation
13– Earnings Per Share
14– Stockholders Equity
15– Income Taxes
16– Commitment and Contingencies
17– 401(k) Retirement Plan
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
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28
32
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Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Signatures
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Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking
statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results
to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of
historical fact, are forward-looking statements, including statements regarding overall trends, gross margin trends, operating cost
trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred
to above may include the following:
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a prolonged economic recovery or a deterioration in the economic or inflationary environment in the United States or the
European Union, particularly the United Kingdom, including the interest rate environment, may have an adverse effect
on our collections, results of operations, revenue and stock price or on the stability of the financial system as a whole;
our ability to purchase defaulted consumer receivables at appropriate prices;
our ability to replace our defaulted consumer receivables with additional receivables portfolios;
our ability to obtain accurate and authentic account documents relating to accounts that we acquire and the possibility
that documents that we provide could contain errors;
our ability to successfully acquire receivables of new asset types;
changes in the business practices of credit originators in terms of selling defaulted consumer receivables;
our ability to collect sufficient amounts on our defaulted consumer receivables;
changes in or interpretation of tax laws or adverse results of tax audits;
changes in bankruptcy or collection laws that could negatively affect our business, including by causing an increase in
certain types of bankruptcy filings involving liquidations, which may cause our collections to decrease;
changes in state or federal laws or the administrative practices of various bankruptcy courts, which may impact our ability
to collect on our defaulted receivables;
our ability to collect and enforce our finance receivables may be limited under federal and state laws;
our ability to employ and retain qualified employees, especially collection personnel, and our senior management team;
our work force could become unionized in the future, which could adversely affect the stability of our production and
increase our costs;
changes in the credit or capital markets, which affect our ability to borrow money or raise capital;
the degree, nature, and resources of our competition;
the possibility that we could incur goodwill or other intangible asset impairment charges;
our ability to retain existing clients and obtain new clients for our fee-for-service businesses;
our ability to comply with existing and new regulations of the collection industry, the failure of which could result in
penalties, fines, litigation, damage to our reputation or the suspension or termination of our ability to conduct our business;
changes in governmental laws and regulations which could increase our costs and liabilities or impact our operations;
our ability to successfully operate and/or integrate new business acquisitions;
our ability to maintain, renegotiate or replace our credit facility;
our ability to satisfy the restrictive covenants in our debt agreements;
our ability to manage risks associated with our international operations;
the imposition of additional taxes on us;
changes in interest or exchange rates, which could reduce our net income, and the possibility that future hedging strategies
may not be successful, which could adversely affect our results of operations and financial condition, as could our failure
to comply with hedge accounting principles and interpretations;
the possibility that we could incur significant allowance charges on our finance receivables;
our loss contingency accruals may not be adequate to cover actual losses;
our ability to manage growth successfully;
the possibility that we could incur business or technology disruptions or cyber incidents, or not adapt to technological
advances;
the possibility that we or our industry could experience negative publicity or reputational attacks;
the sufficiency of our funds generated from operations, existing cash and available borrowings to finance our current
operations; and
the risk factors listed from time to time in our filings with the Securities and Exchange Commission (the “SEC”).
You should assume that the information appearing in this annual report is accurate only as of the date it was issued. Our
business, financial condition, results of operations and prospects may have changed since that date.
For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you
should carefully review the “Risk Factors” section beginning on page 17, as well as the “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” section beginning on page 32 and the “Business” section beginning on page 5.
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Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future
events, developments or results described in this report could turn out to be materially different. Except as required by law, we
assume no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not
expect us to do so.
Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do
not, by policy, selectively disclose to them any material nonpublic information or other confidential commercial information.
Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst regardless of the
content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Item 1.
Business.
General
PART I
Our business focuses upon the detection, collection, and processing of both unpaid and normal-course accounts receivable
originally owed to credit grantors, governments, retailers and others. Our primary business is the purchase, collection and
management of portfolios of defaulted consumer receivables. These are the unpaid obligations of individuals to credit originators,
which include banks, credit unions, consumer and auto finance companies and retail merchants. We also provide fee-based services,
including vehicle location, skip tracing and collateral recovery services for auto lenders, governments and law enforcement via
PRA Location Services, LLC (“PLS”), revenue administration, audit and debt discovery/recovery services for local government
entities through PRA Government Services, LLC and MuniServices, LLC (collectively “PRA GS”) and class action claims recovery
services and related payment processing via Claims Compensation Bureau, LLC (“CCB”). In addition, with the acquisition of
100% of the equity interest of Mackenzie Hall Holdings, Limited, and its subsidiaries (“MHH”) on January 16, 2012, we expanded
our contingent collection and purchase of defaulted consumer receivables businesses to the United Kingdom. We also acquired
certain finance receivables and certain operating assets of National Capital Management, LLC ("NCM"), on December 21, 2012.
With this acquisition we expanded our ability to purchase and collect secured bankruptcy accounts. We believe that the strengths
of our business are our sophisticated approach to portfolio pricing, segmentation and servicing, our emphasis on developing and
retaining our collection personnel, our sophisticated processing systems and procedures and our relationships with many of the
largest consumer lenders in the United States.
Definitions
We use the following terminology throughout this document:
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“Allowance charges” refers to a reduction in income recognized on finance receivables on pools of finance receivables whose
cash collection estimates are not received or projected to not be received.
“Amortization rate” refers to cash collections applied to principal on finance receivables as a percentage of total cash collections.
“Buybacks” refers to purchase price refunded by the seller due to the return of non-compliant accounts.
“Cash collections” refers to collections on our owned portfolios.
“Cash receipts” refers to collections on our owned portfolios plus fee income.
“Core” accounts or portfolios refer to accounts or portfolios that are defaulted consumer receivables and are not in a bankrupt
status upon purchase. These accounts are aggregated separately from purchased bankruptcy accounts. Core accounts do not
include the accounts we purchase in the United Kingdom.
“EBITDA” refers to earnings before interest, taxes, depreciation and amortization.
“Estimated remaining collections” or "ERC" refers to the sum of all future projected cash collections on our owned portfolios.
“Fee income” refers to revenues generated from our fee-for-service subsidiaries.
“Income recognized on finance receivables” refers to income derived from our owned debt portfolios.
“Income recognized on finance receivables, net” refers to income derived from our owned debt portfolios and is shown net
of allowance charges.
“Net finance receivable balance” is recorded on our balance sheet and refers to the purchase price less principal amortization
and net allowance charges.
“Principal amortization” refers to cash collections applied to principal on finance receivables.
“Purchase price” refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain capitalized costs,
less buybacks.
“Purchase price multiple” refers to the total estimated collections on owned debt portfolios divided by purchase price.
“Purchased bankruptcy” accounts or portfolios refer to accounts or portfolios that are in bankruptcy when we purchase them
and as such are purchased as a pool of bankrupt accounts.
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“Total estimated collections” refers to the actual cash collections, including cash sales, plus estimated remaining collections.
“Total estimated collections to purchase price” refers to the total estimated collections divided by the purchase price.
Our debt purchase business specializes in receivables that have been charged-off by the credit originator. Because the credit
originator and/or other debt servicing companies have unsuccessfully attempted to collect these receivables, we are able to purchase
them at a substantial discount to their face value. From our 1996 inception through December 31, 2012, we acquired 2,748
portfolios, representing more than 31 million customer accounts and aggregated into 145 pools for accounting purposes, with a
face value of $70.8 billion for a total purchase price of $2.7 billion. The success of our business depends on our ability to purchase
portfolios of defaulted consumer receivables at appropriate valuations and to collect on those receivables effectively and efficiently.
We have one reportable segment, receivables management, based on similarities among the operating units including homogeneity
of services, service delivery methods and use of technology.
We have achieved strong financial results over the past ten years, with cash collections growing from $79.3 million in 2002
to $908.7 million in 2012. Total revenue has grown from $55.8 million in 2002 to $592.8 million in 2012, a compound annual
growth rate of 26.7%. Similarly, pro forma net income has grown from $11.4 million in 2002 to net income attributable to Portfolio
Recovery Associates, Inc. (“PRA”) of $126.6 million in 2012.
We were initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability company, on March 20,
1996. In connection with our 2002 initial public offering (our “IPO”), all of the membership units of Portfolio Recovery Associates,
L.L.C. were exchanged, simultaneously with the effectiveness of our registration statement, for a single class of PRA common
stock, and a new Delaware corporation formed on August 7, 2002. Accordingly, the members of Portfolio Recovery Associates,
L.L.C. became the common stockholders of PRA, which became the parent company of Portfolio Recovery Associates, L.L.C.
and its subsidiaries.
Available Information
PRA maintains an Internet website at the following address: www.portfoliorecovery.com.
We make available on or through our website certain reports that we file with or furnish to the SEC in accordance with the
Securities Exchange Act of 1934. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended. We make this information available on our website free of charge as soon as reasonably
practicable after we electronically file the information with or furnish it to the SEC. The information that is filed with the SEC
may be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, information
on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically
with the SEC at: www.sec.gov.
Reports filed with or furnished to the SEC are also available free of charge upon request by contacting our corporate office
at:
Portfolio Recovery Associates, Inc.
Attn: Corporate Communications
120 Corporate Boulevard, Suite 100
Norfolk, Virginia 23502
Competitive Strengths
We Offer a Compelling Alternative to Debt Owners and Governmental Entities
We offer debt owners the ability to immediately realize value for their charged-off receivables, from receivables that have
only been processed internally by the debt owner to receivables that have been subject to multiple internal and external collection
efforts, whether or not subject to bankruptcy proceedings. This flexibility helps us to meet the needs of debt owners and allows
us to become a trusted resource. Also, through our government services business, we have the ability to service state and local
government’s receivables in various ways. This includes such services as processing tax payments on behalf of the client and
extends to more complicated tax audit and discovery work, as well as additional services that fill the needs of our clients.
Disciplined and Proprietary Underwriting Process
One of the key components of our growth has been our ability to price portfolio acquisitions at levels that have generated
profitable returns on investment. Since inception, we have been able to consistently collect more than our purchase price over the
collection life cycle of the defaulted consumer receivables portfolios we have acquired. In doing so, we have generated increasing
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profits and operational cash flow from these portfolio acquisitions, without relying on the resale of portfolios to achieve these
results. We have not resold any of our purchased portfolios since 2002, and the portfolios we sold then were primarily in Chapter
13 bankruptcy proceedings. We stopped reselling these portfolios as we began the effort to build our own bankruptcy portfolio
buying group which started purchasing bankrupt accounts in 2004.
By holding and collecting the accounts we purchase over the long-term, we create static pool history that we believe is
unique among our peers. Our portfolio underwriting process utilizes the collection results, customer data, and account attributes
held in our data warehouse. The warehouse contains data from more than 2,700 portfolios representing nearly 31 million accounts
purchased over the last 16 years from large issuers and owners of consumer receivables. Our quantitative modeling continuously
evolves as we incorporate new data and develop, test, and adopt new analysis tools that help us improve our underwriting accuracy.
The Core portfolio underwriting process includes both quantitative analytical modeling and qualitative judgment-based
analysis that considers the effects of the origination, servicing, and collection history of the portfolios we price. The combination
of our deep sample of purchase data, our sophisticated analytical modeling, and the underwriting judgment gained from underwriting
thousands of portfolios affords PRA with a significant competitive advantage over our competition.
Ability to Hire, Develop and Retain Collection Staff
We place considerable focus on our ability to hire, develop, motivate and retain effective collection personnel. We offer our
collection personnel competitive wages with the opportunity to receive incentive compensation based on performance, as well as
an attractive benefits package, a comfortable working environment and the ability to work on a flexible schedule. We also provide
a comprehensive training program for new collection staff employees.
Established Systems and Infrastructure
We have devoted significant effort to developing our systems, including statistical models, databases and reporting packages,
to optimize our portfolio purchases and collection efforts. In addition, we believe that our technology infrastructure is flexible,
secure, reliable and redundant, to protect the privacy of our sensitive data and to mitigate exposure to systems failure or unauthorized
access. We take data security and collection compliance very seriously. We employ a staff of Quality Control and Compliance
employees whose role it is to monitor calls and observe collection system entries as well as design, implement, monitor and test
our daily activities. We monitor and research daily exception reports that track significant account status movements and account
changes. To enhance this process, where permissible, we employ sophisticated call and work action recording systems which allow
us to better monitor compliance and quality of our customer contacts. We believe that our systems and infrastructure give us
meaningful advantages over our competitors. We have developed financial models and systems for pricing portfolio acquisitions,
managing the collections process and monitoring operating results. We perform a static pool analysis monthly on each of our
portfolios, inputting actual results back into our acquisition models, to enhance their accuracy. We monitor collection results
continuously, seeking to identify and resolve negative trends immediately. In addition, we do not sell our purchased defaulted
consumer receivables. Instead, we work them over the long-term enhancing our knowledge of a pool’s long-term performance.
This combination of hardware, software and proprietary modeling and systems has been developed by our management team
through years of experience in this industry and we believe provides us with an important competitive advantage from the acquisition
process all the way through collection and payment operations.
Strong Relationships with Major Credit Originators
We have done business with most of the largest consumer lenders in the United States. We maintain an active marketing
effort and our senior management team is in contact on a regular basis with existing and potential sellers of defaulted consumer
receivables. We believe that we have earned a reputation as a reliable and compliant purchaser of defaulted consumer receivables
portfolios and as responsible collectors. Furthermore, from the perspective of the selling credit originator, the failure to close on
a negotiated sale of a portfolio consumes valuable time and expense and can have an adverse effect on pricing when the portfolio
is re-marketed. Similarly, if a credit originator sells a portfolio to a debt buyer who has a reputation for violating industry standard
collecting practices, the reputation of the credit originator can be damaged. We consistently attempt to negotiate reasonable and
mutually acceptable contract terms, resulting in a confident and expeditious closing process for both parties. We go to great lengths
to collect from consumers in a responsible, professional and legally compliant manner. We believe our strong relationships with
major credit originators provide us with access to quality opportunities for portfolio purchases.
Experienced Management Team
We have an experienced management team with considerable expertise in the accounts receivable management industry.
Prior to our formation, our founders played key roles in the development and management of a consumer receivables acquisition
and divestiture operation of Household Recovery Services, a subsidiary of Household International, now owned by HSBC. As we
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have grown, the original management team has been expanded substantially to include a group of experienced, seasoned executives,
many coming from the largest, most sophisticated lenders in the country.
Portfolio Acquisitions
Our portfolio of defaulted consumer receivables includes a diverse set of accounts that can be categorized by asset type, age
and size of account, level of previous collection efforts and geography. To identify attractive buying opportunities, we maintain
an extensive marketing effort with our senior officers contacting known and prospective sellers of defaulted consumer receivables.
We have acquired receivables of Visa®, MasterCard®, private label and other credit cards, installment loans, lines of credit, bankrupt
accounts, deficiency balances of various types, legal judgments, and trade payables, all from a variety of debt owners. These debt
owners include major banks, credit unions, consumer finance companies, telecommunication providers, retailers, utilities, insurance
companies, medical groups, hospitals, auto finance companies and other debt buyers. In addition, we make periodic visits to the
operating sites of debt sellers and attend numerous industry events in an effort to develop account purchase opportunities. We also
maintain active relationships with brokers of defaulted consumer receivables.
Portfolios by Type and Geography (Domestic Portfolio Only)
The following chart categorizes our life to date portfolio purchases as of December 31, 2012 into the major asset types
represented (amounts in thousands):
Asset Type
Major Credit Cards
Consumer Finance
Private Label Credit Cards
Auto Deficiency
Total:
No. of Accounts
%
Face Value
(1)
%
(2)
Price
Life to Date Purchased
Original Purchase
17,516
6,164
6,617
641
30,938
57% $
49,295,499
70% $
1,911,515
20
21
2
100% $
7,366,764
9,158,131
4,493,909
70,314,303
11
13
6
100% $
135,004
560,462
52,146
2,659,127
%
72%
5
21
2
100%
(1) “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has not been reduced
by any adjustments, including payments and buybacks.
(2) “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables.
Since our formation, we have purchased accounts from approximately 150 debt owners. We have acquired portfolios at
various price levels, depending on the age of the portfolio, its geographic distribution, our historical experience with a certain
asset type or credit originator and similar factors. A typical defaulted consumer receivables portfolio that we acquire ranges from
$1 million to $150 million in face value and contains defaulted consumer receivables from diverse geographic locations with
average initial individual account balances of $400 to $7,000.
We refer to the groups of domestic charged-off (non-bankrupt) defaulted consumer receivables we purchase as Core portfolios.
The age of a Core portfolio (the time since an account has been charged-off) is an important factor in determining the price at
which we will purchase the portfolio. Generally, there is an inverse relationship between the age of a Core portfolio and the price
at which we will purchase the portfolio. This relationship is due to the fact that older Core portfolio receivables typically liquidate
at lower rates. The accounts receivables management industry places Core portfolio receivables into categories depending on the
number of collection agencies that have previously attempted to collect on the receivables. Fresh accounts are typically past due
120 to 270 days, charged-off by the credit originator and are either being sold prior to any post-charge-off collection activity or
are placed with a third-party for the first time. These accounts typically sell for the highest purchase price. Primary accounts are
typically 360 to 450 days past due and charged-off, have been previously placed with one contingent fee servicer and receive a
lower purchase price. Secondary and tertiary accounts are typically more than 660 days past due and charged-off, have been placed
with two or three contingent fee servicers and receive even lower purchase prices. We also purchase portfolios of accounts previously
worked by four or more agencies and these are typically two to three years or more past due and receive an even lower price. In
addition, we purchase portfolios of accounts that are included in consumer bankruptcies. These bankrupt accounts are typically
filed under Chapter 13 of the U.S. Bankruptcy Code and have an associated payment plan that can range from 3 to 5 years in
duration. We purchase portfolios of bankrupt accounts in both forward flow and spot transactions and, consequently, they can be
at any age in the bankruptcy plan life cycle.
8
The following table summarizes our life to date portfolio purchases as of December 31, 2012, into the delinquency categories
represented (amounts in thousands):
Account Type
Fresh
Primary
Secondary
Tertiary
Bankruptcy Trustees
Other
Total:
No. of Accounts
%
Face Value
(1)
%
(2)
Price
Life to Date Purchased
Original Purchase
2,370
4,595
5,456
4,044
4,365
10,108
30,938
8% $
15
17
13
14
33
100% $
6,072,477
8,420,292
8,323,896
5,434,509
19,682,872
22,380,257
70,314,303
8% $
12
12
8
28
32
589,579
433,013
326,288
76,378
1,095,485
138,384
%
22%
17
12
3
41
5
100% $
2,659,127
100%
(1) “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has not been reduced
by any adjustments, including payments and buybacks.
(2) “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables.
We also review the geographic distribution of accounts within a portfolio because we have found that state specific laws
and rules can have an effect on the collectability of accounts located there. In addition, economic factors and bankruptcy trends
vary regionally and are factored into our purchase price equation.
The following table summarizes our life to date portfolio purchases as of December 31, 2012, by geographic location
(amounts in thousands):
Geographic
Distribution
California
Texas
Florida
New York
Ohio
Pennsylvania
North Carolina
Illinois
Georgia
New Jersey
Michigan
Arizona
Virginia
Tennessee
Massachusetts
Indiana
Other(3)
Total:
No. of Accounts
%
Face Value
(1)
%
(2)
Price
Life to Date Purchased
Original Purchase
3,260
4,485
2,440
1,747
1,494
1,101
1,103
1,155
1,000
706
818
548
843
657
525
557
11% $
14
8
6
5
4
4
4
3
2
3
2
3
2
2
2
9,254,352
7,828,181
6,676,604
4,151,513
2,635,188
2,570,572
2,465,985
2,457,601
2,339,521
1,894,274
1,891,966
1,507,856
1,502,273
1,465,471
1,290,669
1,244,574
13% $
11
9
6
4
4
4
3
3
3
3
2
2
2
2
2
344,442
232,081
242,625
140,377
112,059
95,785
92,306
102,607
104,756
75,174
81,156
56,595
62,731
62,478
47,549
58,244
%
13%
9
9
5
4
4
3
4
4
3
3
2
2
2
2
2
8,499
30,938
25
100% $
19,137,703
70,314,303
27
100% $
748,162
2,659,127
29
100%
(1) “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has not been reduced
by any adjustments, including payments and buybacks.
(2) “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables.
(3) Each state included in “Other” represents less than 2% of the face value of total defaulted consumer receivables.
9
Purchasing Process
We acquire portfolios from debt owners through auctions and negotiated sales. In an auction process, the seller will assemble
a portfolio of receivables and will either broadly offer the portfolio to the market or seek purchase prices from specifically invited
potential purchasers. In a privately negotiated sale process, the debt owner will contact known purchasers directly, take bids and
negotiate the terms of sale. We also acquire accounts in forward flow contracts. Under a forward flow contract we agree to purchase
defaulted consumer receivables from a debt owner on a periodic basis, at a set percentage of face value of the receivables over a
specified time period, generally from three to twelve months. These agreements often contain a provision requiring that the
attributes and selection criteria of the receivables to be sold will not significantly change each month. If this provision is not
adhered to, the contract will typically allow for the early termination of the forward flow contract by the purchaser or other
appropriate remedies as mutually agreed upon. Forward flow contracts provide receivable owners with a consistent source of
value for defaulted accounts, and provide the debt buyer with a steady and reliable source of consumer receivables for its collection
operation.
In a typical Core portfolio sale transaction, after signing a non-disclosure agreement, a debt owner typically distributes a
computer data file containing ten to fifteen essential data fields on each receivables account in the portfolio offered for sale. Such
fields typically include but are not limited to the customer's name, address, outstanding balance, date of charge-off, date of last
payment and the date the account was opened. Information that is not typically provided includes the original underwriting
documentation, charge and payment history prior to charge-off, and collection notations. We perform our initial due diligence
on the portfolio by electronically cross-checking the data fields provided through secured delivery against the accounts in our
owned portfolios and other databases. We compile a variety of portfolio level reports examining all available data.
In order to determine a purchase price for a Core portfolio, we use two separate internally developed computer models and
one externally developed model. We analyze the portfolio using our proprietary multiple linear regression model, which analyzes
the accounts of the portfolio using predictive variables and projects a portfolio liquidation rate. We also analyze the portfolio as
a whole using an adjustment model, which uses an appropriate cash flow model that utilizes our collections results from similar
portfolios we have previously purchased. We supplement the adjustment model with qualitative background information about
the origination, servicing and collection history of the portfolio. Finally, we employ a model that creates statistically similar
portfolios from our existing accounts across our purchased inventory and develops estimated collection curves that are used in
our price modeling. From these models we derive our quantitative projections which are used to help price transactions. The
multiple linear regression model is also used to prioritize collection work efforts subsequent to purchase. With respect to prospective
forward flow contracts and other long-term relationships, we obtain a representative file that we use to determine the price of the
forward flow agreement. Then each month during the flow term, we receive the actual monthly sale file to be funded, and compare
it to the representative file noted above to determine if the delivered file meets the expectations of the initial pricing file. This
process allows us to confirm that the accounts we are purchasing are materially consistent with the accounts we agreed to purchase
under the forward flow arrangement. When purchasing bankrupt consumer receivables, we follow a similar analytical process but
utilize completely separate, specifically designed pricing models.
We maintain a detailed static pool analysis on each portfolio that we have acquired, capturing demographic data and revenue
and expense items for further analysis. We use the static pool analysis to refine the underwriting models that we use to price future
portfolio purchases. The results of the static pool analysis are input back into our models, increasing the accuracy of the models
as the data set increases with every portfolio purchase and each day’s collection efforts. Since we do not sell our purchased defaulted
consumer receivables, we work them over the long-term, enhancing our knowledge of a pool’s long-term performance.
The quantitative and qualitative data derived in our due diligence is evaluated together with our knowledge of the current
defaulted consumer receivables market and any subjective factors about the portfolio or the debt owner of which management
may be aware. A portfolio acquisition approval memorandum is prepared for each prospective portfolio before a purchase price
is submitted to the debt owner. This approval memorandum, which outlines the portfolio’s anticipated collectability and purchase
structure, is distributed to members of our Investment Committee. The approval by the Investment Committee sets a maximum
purchase price for the portfolio.
Once a portfolio purchase has been approved by our Investment Committee and the terms of the sale have been agreed to
with the debt owner, the acquisition is documented in an agreement that contains customary terms and conditions. Provisions are
typically incorporated for disputed, fraudulent, deceased, bankrupt (in the case of Core portfolio purchases), or other ineligible
accounts and typically, the debt owner either agrees to repurchase these accounts or replace them with acceptable replacement
accounts within certain time frames.
10
Owned Portfolio Collection Operations
Call Center Operations – Core Portfolios
Our work flow management system places, recalls and prioritizes accounts, based on our analyses of our accounts and other
demographic, credit and customer behavior attributes and prior collection work activities. We use this process to focus our work
effort on those customers most likely to pay.
The collectability forecast for a newly acquired portfolio will help determine our initial collection strategy. Accounts that
are initially determined to have the highest predicted collection probability will be worked immediately and with greater efforts.
Less collectible accounts may be set aside to be worked with less frequency or with lower cost methods. After owning an account
for a month we begin reassessing the collectability on a daily basis based on a set of observed account characteristics and behaviors.
Some accounts may be worked using a letter and/or settlement strategy.
Our computer system allows each collector to view the scanned documents relating to the account that have been received
from the seller, which can include the original account application, account statements, payment checks, customer correspondence
and other documents.
On the initial contact call, a customer is given a standardized presentation regarding the benefits of resolving his or her
account with us. Emphasis is placed on determining the reason for the customer’s default in order to better assess the customer’s
situation and create a plan for repayment. The collectors work to obtain a repayment plan that is appropriate to the customer's
ability to make a repayment. At times, when determined to be appropriate, and in many cases with management approval, a reduced
lump-sum settlement may be agreed upon.
If a collector is unable to establish contact with a customer based on information received or stored, the system will supplement
the account information by leveraging a series of automated skip tracing procedures. Skip tracing is the process of developing
new phone, address, job or asset information on a customer, or verifying the accuracy of such information.
Legal Recovery – Core Portfolios
An important component of our collections effort involves our legal recovery department and the judicial collection of
accounts of customers who we believe have the ability, but not the willingness, to resolve their obligations. Accounts for which
the customer is not cooperative and for which we can establish garnishable wages or attachable assets are reviewed for legal action.
Additionally, we review accounts using a proprietary scoring model and select those accounts reflecting a high propensity to pay
in a legal environment. Depending on the balance of the defaulted consumer receivable and the applicable state collection laws,
we determine whether to commence legal action to judicially collect on the receivable. The legal process can take an extended
period of time, but it also generates cash collections that likely would not have been realized otherwise.
We use a combination of internal staff (attorney and support), as well as external attorneys, to pursue legal collections under
certain circumstances. Over the past several years we have focused on developing our internal legal collection capability. We have
the capability in all 50 states to initiate lawsuits in amounts up to the jurisdictional limits of the respective courts. Our legal recovery
department, using external vendors, also collects claims against estates in cases involving deceased debtors having assets at the
time of death. Our legal recovery department oversees our internal legal collections and coordinates a nationwide collections
attorney network which is responsible for the preparation and filing of judicial collection proceedings in multiple jurisdictions,
determining the suit criteria, and instituting wage garnishments to satisfy judgments. This network currently consists of
approximately 50 law firms who work on a contingent fee basis. Legal cash collections generated by both our in house attorneys
and outside independent contingent fee attorneys constituted approximately 28% of our total cash collections in 2012. As our
portfolio matures, it is likely that a larger number of accounts will be directed to our legal recovery department for judicial collection;
consequently, we anticipate that legal cash collections will grow commensurately and comprise a larger percentage of our total
Core cash collections.
Bankruptcy Operations
Our bankruptcy department manages customer filings under the U.S. Bankruptcy Code on debtor accounts derived from
three sources; (1) PRA’s Core purchased pools of charged off accounts that have filed for bankruptcy protection after being acquired
by us, (2) our purchased pools of bankrupt accounts, and (3) our third party servicing client relationships. On PRA owned accounts,
we file proofs of claim (“POCs”) or claim transfers and actively manage these accounts through the entire life cycle of the bankruptcy
proceeding in order to substantiate our claims and ensure that we participate in any distributions to creditors. On accounts managed
under a third party relationship, we work on either a full service contingency fee basis or a menu style fee-for-service basis; this
is not a significant portion of our bankruptcy operations.
11
We developed our proprietary Bankruptcy Management System (“BMS”) as a secure and highly automated platform for
providing bankruptcy notification services, filing POCs and claim transfers, managing documents, administering our case load,
posting and reconciling payments and providing customized reports. BMS is a robust system designed to manage claims processing
and case management in a high volume environment. The system is highly flexible and its capacity is easily expanded. Daily
processing volumes are managed to meet individual bar dates associated with each bankruptcy case and specific client turnaround
times. BMS and its underlying business rules were developed with emphasis first on minimizing risks through strict compliance
to the bankruptcy code, and then on maximizing recoveries from automated claim filing and case administration.
Each of our bankruptcy department employees goes through an entry level training program to familiarize them with BMS
and the bankruptcy process, including a general overview of how we interact with the courts, debtors' attorneys and trustees. We
also use a tiered process of cross training designed to familiarize advancing employees with a variety of operational assignments
and analytical tasks. For example, we utilize specially trained employees to perform advanced data matching and analytics for
clients, while others are tasked with resolving objections directly with attorneys and trustees. In rare circumstances, resolution of
these objections may need to be effectuated by working through our network of local counsel.
Fee-for-Service Businesses
Through our subsidiaries, we provide fee-based services, including vehicle location, skip tracing and collateral recovery
services for auto lenders, governments and law enforcement via our PLS subsidiary; revenue administration, audit, and debt
discovery/recovery services for government entities through our PRA GS business; class action claims recovery services and
related payment processing through our CCB subsidiary and contingent fees earned on the collection of finance receivables from
our United Kingdom subsidiary.
PLS, through call center operations, performs national skip tracing, asset location and collateral recovery services, principally
for auto finance companies, for a fee. In addition, PLS will monitor clients’ inventories with a fleet of cars equipped with license
plate recognition cameras for a fee. The amount of fee earned is generally dependent on several different outcomes: whether the
debtor was found and a resolution on the account occurred, if the collateral was repossessed or if payment was made by the debtor
to the debt owner.
PRA GS primarily derives its revenue from servicing taxing authorities in several different ways, including processing their
tax payments and tax forms, collecting delinquent taxes, identifying taxes that are not being paid and auditing tax payments. The
processing and collection services are standard commission based billings or fee-for-service transactions. When audits are
conducted, there are two components. The first is a charge for the hours incurred on conducting the audit, based on a contractual
billing rate. The gross billing amount based on the aforementioned billing rate is a component of the line item “Fee income” while
the salary expense is included in the line item “Compensation and employee services.” The second item is for expenses incurred
while conducting the audit. Most jurisdictions will reimburse us for direct expenses incurred for the audit including such items as
travel and meals. The billed amounts are included in the line item “Fee income” and the expense component is included in its
appropriate expense category, generally, “Other operating expenses.”
We own a controlling interest of the membership units of CCB. CCB was founded in 1996 and is a leading provider of class
action claims settlement recovery services and related payment processing to corporate clients. CCB’s process allows clients to
maximize settlement recoveries, in many cases participating in settlements they would otherwise not know existed. CCB charges
fees for its services and works with clients to identify, prepare and submit claims to class action administrators charged with
disbursing class action settlement funds. In addition, PRA purchases the rights to existing and future class action claims identified
by CCB.
MHH generates revenue from both purchased finance receivables which is accounted for similarly to our Core operations
and also services finance receivables on a contingent fee basis. These portfolios are owned by our clients and placed under a
contingent fee commission arrangement. Our subsidiary is paid to collect funds from the client's debtors and earns a commission
generally expressed as a percentage of the gross collections amount. The "Fee income" line of our income statement reflects the
contingent fee amount earned, and not the gross collection amount.
Competition
We face competition in both of the markets we serve - owned portfolio and fee-for-service receivables management - from
new and existing providers of outsourced receivables management services, including other purchasers of defaulted consumer
receivables portfolios, third-party contingent fee collection agencies and debt owners that manage their own defaulted consumer
receivables rather than outsourcing them. The receivables management industry (owned portfolio and contingent fee) remains
highly fragmented and competitive. There are few significant barriers for entry to new providers of contingent fee receivables
management services and, consequently, the number of agencies serving the contingent fee market may continue to grow.
12
Constrained investment capital, the need for portfolio evaluation expertise sufficient to price portfolios, and compliance with
regulations effectively constitute significant barriers for successful entry to new purchased portfolio receivables companies.
We face bidding competition in our acquisition of defaulted consumer receivables and in obtaining placement of fee-for-
service receivables. We also compete on the basis of reputation, industry experience and performance. Among the positive factors
which we believe influence our ability to compete effectively in this market are our ability to bid on portfolios at appropriate
prices, our reputation from previous transactions regarding our ability to close transactions in a timely fashion, our relationships
with originators of defaulted consumer receivables, our team of well-trained collectors who provide quality customer service and
compliance with applicable collections laws and our ability to efficiently and effectively collect on various asset types. Current
or new competitors that have substantially greater financial, personnel and other resources, greater adaptability to changing market
needs, longer operating histories, or more established relationships in our industry than we currently have, could influence our
ability to compete effectively.
Information Technology
Technology Operating Systems and Server Platform
The architecture and design of our systems provides us with a technology system that is flexible, secure, reliable and redundant
to provide for the protection of our sensitive data. We utilize Intel-based servers running Microsoft Windows 2003/2008 operating
systems. Our desktop PCs run the Windows XP operating system. In addition, we utilize a blend of purchased and proprietary
software systems tailored to the needs of our business. These systems are designed to eliminate inefficiencies in our collections
and continue to meet business objectives in a changing environment.
Network Technology
To provide delivery of our applications, we employ server network architecture to support high-speed data transport. Our
network system is designed to be scalable and meet expansion and inter-building bandwidth and quality of service demands.
Database and Software Systems
The ability to access and utilize data is essential to us being able to operate in a cost-effective manner. Our centralized
computer-based information systems support the core processing functions of our business under a set of integrated databases and
are designed to be scalable to accommodate our internal growth. This integrated approach helps to assure that data sources are
processed efficiently. We use these systems for portfolio and client management, skip tracing, check taking, financial and
management accounting, reporting, and planning and analysis. We use a combination of Microsoft and Oracle database software
to manage our portfolios and financial, customer and sales data. PRA GS, PLS and CCB all maintain unique, proprietary software
systems that manage the movement of data, accounts and information throughout these business units.
Redundancy, System Backup, Security and Disaster Recovery
Our data centers provide the infrastructure for collection services and uninterrupted support of data, applications and hardware
for all of our business units. We believe our facilities and operations include sufficient redundancy, file back-up and security to
ensure minimal exposure to systems failure or unauthorized access. The preparations in this area include the use of call centers
in Virginia, Kansas, Alabama and Tennessee in order to help provide redundancy for data and processes should one site be completely
disabled. We have a disaster recovery plan covering our business that is tested on a periodic basis. The combination of our locally
distributed call control systems provides enterprise-wide call and data distribution between our call centers for efficient portfolio
collection and business operations. In addition to data replication between the sites, differential backups of both software and
databases are performed on a daily basis and a full system backup is performed weekly. Backup data tapes are stored at an off-
site location along with copies of schedules and production control procedures, procedures for recovery using an off-site data
center, and documentation and other critical information necessary for recovery and continued operation. Our Virginia headquarters
has two separate telecommunications feeds, uninterruptible power supplies and natural gas and diesel-generators, all of which
provide a level of redundancy should a power outage or interruption occur. We also have generators installed at each of our domestic
call centers, as well as our subsidiary locations in Alabama, California and Nevada. We also employ rigorous physical and electronic
security to protect our data. Our call centers have restricted card key access and appropriate additional physical security
measures. Electronic protections include data encryption, firewalls and multi-level access controls.
Display Screens for Real Time Data Utilization
We utilize multiple plasma displays at most of our collection facilities to aid in recovery of portfolios. The displays provide
real-time business-critical information to our collection personnel for efficient collection efforts such as telephone, production,
employee status, goal trending, training and corporate information.
13
Employees
As of December 31, 2012, we employed approximately 3,200 persons on a full-time basis in the United States and the United
Kingdom. None of our employees are represented by a union or covered by a collective bargaining agreement. We believe that
our relations with our employees are positive.
Collection Personnel
Our collectors are critical to the success of our debt collection business as a majority of our Core portfolio collection efforts
occur as a result of telephone contact with customers. We have found that the tenure and productivity of our collectors are directly
related. Therefore, attracting, hiring, training, retaining and motivating our collection personnel is a major focus for us. We pay
our collectors competitive wages and offer employees a full benefits program. In addition to a base wage, we provide collectors
with the opportunity to receive compensation through an incentive compensation program that pays bonuses above a set monthly
base, based upon each collector’s collection and compliance results. This program is designed to ensure that employees are paid
based not only on performance, but also on consistency and quality.
We believe that we offer a competitive and, in many cases, a higher base wage than many local employers and therefore
have access to a large number of eligible personnel in each of our call center locations.
Collections Training
We provide a comprehensive multi-week training program for all new owned portfolio collectors. Our training program
begins with lectures on collection techniques, local, state and federal collection laws, systems, negotiation skills, skip tracing and
telephone use. These sessions are then followed by additional weeks of practical instruction, including conducting live calls with
additional managerial supervision in order to provide employees with confidence and guidance while still contributing to our
profitability. Each trainee must successfully pass a comprehensive examination before being assigned to the collection floor, as
well as once a year thereafter. Where permissible, we employ sophisticated call and work action recording systems which allow
us to better monitor compliance and quality of customer contacts. This, in turn, allows us to offer additional training in areas of
deficiency to increase productivity and compliance.
Each of our bankruptcy department employees goes through an entry level training program to familiarize them with BMS
and the bankruptcy process, including a general overview of how we interact with the courts, debtor’s attorneys and trustees. We
also use a tiered process of cross training designed to familiarize advancing employees with a variety of operational assignments
and analytical tasks. For example, we utilize specially trained employees to perform advanced data matching and analytics for
clients, while others are tasked with resolving objections directly with attorneys and trustees. In rare circumstances, resolution of
these objections may need to be effectuated by working through our network of local counsel.
Office of General Counsel
Our Office of General Counsel manages general corporate governance; litigation; insurance; corporate and commercial
transactions; intellectual property; contract and document preparation and review; compliance with federal securities laws and
other regulations and statutes; business acquisitions; and dispute and complaint resolution. As a part of its compliance functions,
our Office of General Counsel works with our Director of Internal Audit in the implementation of our Code of Ethics. In that
connection, we have implemented company-wide ethics training and have established a confidential telephone hotline and email
and web-based portals to report suspected policy violations, fraud, embezzlement, deception in record keeping and reporting,
accounting, auditing matters and other acts which are inappropriate, criminal and/or unethical. Our Code of Ethics is available
at the Investor Relations page of our website at www.portfoliorecovery.com. Our Office of General Counsel also works with our
Quality Control and Compliance Departments to advise our employees in relevant areas including the laws and regulations that
govern the various industries and markets within which the Company conducts business. Our Office of General Counsel
recommends guidelines and procedures for personnel to follow when carrying out their specific job responsibilities. This includes
regularly researching and providing employees and our training department with summaries and updates of changes in federal
and state statutes and relevant case law so that they are aware of and in compliance with changing laws and judicial decisions that
may impact their job duties.
Regulation
Federal and state statutes establish specific guidelines and procedures which debt collectors must follow when collecting
customer accounts. It is our policy to comply with the provisions of all applicable federal laws and corresponding state statutes
in all of our recovery activities. Our failure to comply with these laws could have a material adverse effect on us in the event and
to the extent that they apply to some or all of our recovery activities. Federal and state consumer protection, privacy and related
laws and regulations extensively regulate the relationship between debt collectors and debtors, and the relationship between
14
customers and credit card issuers. Significant federal laws and regulations applicable to our business as a debt collector include
the following:
Fair Debt Collection Practices Act. This act imposes certain obligations and restrictions on the practices of debt collectors,
including specific restrictions regarding communications with customers, including the time, place and manner of the
communications. This act also gives consumers certain rights, including the right to dispute the validity of their obligations and
a right to sue debt collectors who fail to comply with its provisions, including the right to recover their attorney fees.
Fair Credit Reporting Act. This act places certain requirements on credit information providers regarding the verification
of the accuracy of information provided to credit reporting agencies and investigating consumer disputes concerning the accuracy
of such information. We provide information concerning our accounts to the three major credit reporting agencies, and it is our
practice to correctly report this information and to investigate credit reporting disputes. The Fair and Accurate Credit Transactions
Act amended the Fair Credit Reporting Act to include additional duties applicable to data furnishers with respect to information
in the consumer's credit file that the consumer identifies as resulting from identity theft, and requires that data furnishers have
procedures in place to prevent such information from being furnished to credit reporting agencies.
Gramm-Leach-Bliley Act. This act requires that certain financial institutions, including collection agencies, develop policies
to protect the privacy of consumers' private financial information and provide notices to consumers advising them of their privacy
policies. This act also requires that if private personal information concerning a consumer is shared with another unrelated
institution, the consumer must be given an opportunity to opt out of having such information shared. Since we do not share
consumer information with non-related entities, except as required by law, or except as needed to collect on the receivables, our
consumers are not entitled to any opt-out rights under this act. This act is enforced by the Federal Trade Commission, which has
retained exclusive jurisdiction over its enforcement, and does not afford a private cause of action to consumers who may wish to
pursue legal action against a financial institution for violations of this act.
Electronic Funds Transfer Act. This act regulates the use of the Automated Clearing House ("ACH") system to make electronic
funds transfers. All ACH transactions must comply with the rules of the National Automated Check Clearing House Association
("NACHA") and Uniform Commercial Code §3-402. This act, the NACHA regulations and the Uniform Commercial Code give
the consumer, among other things, certain privacy rights with respect to electronic fund transfer transactions, the right to stop
payments on a pre-approved fund transfer, and the right to receive certain documentation of the transaction. This act also gives
consumers a right to sue institutions which cause financial damages as a result of their failure to comply with its provisions.
Telephone Consumer Protection Act. In the process of collecting accounts, we use a variety of methods to communicate with
our customers. This act and similar state laws place certain restrictions on users of certain automated dialing equipment and pre-
recorded messages that place telephone calls to consumers.
Servicemembers Civil Relief Act. The Soldiers' and Sailors' Civil Relief Act of 1940 was amended in December 2003 as the
Servicemembers Civil Relief Act (“SCRA”). The SCRA gives U.S. military service personnel relief from credit obligations they
may have incurred prior to entering military service, and may also apply in certain circumstances to obligations and liabilities
incurred by a servicemember while serving on active duty. The SCRA prohibits creditors from taking specified actions to collect
the defaulted accounts of servicemembers. The SCRA impacts many different types of credit obligations, including installment
contracts and court proceedings, and tolls the statute of limitations during the time that the servicemember is engaged in active
military service. The SCRA also places a cap on interest bearing obligations of servicemembers to an amount not greater than 6%
per year, inclusive of all related charges and fees.
Health Insurance Portability and Accountability Act. The Health Insurance Portability and Accountability Act (“HIPAA”)
provides standards to protect the confidentiality of patients' personal healthcare and financial information. Pursuant to HIPAA,
business associates of health care providers, such as agencies which collect healthcare receivables, must comply with certain
privacy and security standards established by HIPAA to ensure that the information provided will be safeguarded from misuse.
This act is enforced by the Department of Health and Human Services and does not afford a private cause of action to consumers
who may wish to pursue legal action against an institution for violations of this act.
U.S. Bankruptcy Code. In order to prevent any collection activity with bankrupt debtors by creditors and collection agencies,
the U.S. Bankruptcy Code provides for an automatic stay, which prohibits certain contacts with consumers after the filing of
bankruptcy petitions. The U.S. Bankruptcy Code also dictates what types of claims will or will not be allowed in a bankruptcy
proceeding and how such claims may be discharged.
Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010 the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”) became law, and along with it, the unfair, deceptive, or abusive acts or practices
(“UDAAP”) provisions included therein. The Dodd-Frank Act restructured the regulation and supervision of the financial services
industry and created the Consumer Financial Protection Bureau (the "CFPB”), with rulemaking, supervisory, and enforcement
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authority over larger consumer debt collectors. The Dodd-Frank Act also provides for the CFPB to have the authority to adopt
rules describing specified acts and practices as being “unfair,” “deceptive,” or “abusive,” and hence unlawful. The ultimate impact
of the Dodd-Frank Act on our business cannot be determined at this time.
U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. Our operations outside the United States are subject to the
United States Foreign Corrupt Practices Act (FCPA), which prohibits United States companies and their agents and employees
from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in
order to obtain an unfair advantage, to help, obtain or retain business. Violations of these laws and related rules and regulations
can result in the imposition of significant civil and criminal fines, penalties and sanctions.
Additionally, there are some state statutes and regulations comparable to the above federal laws, and specific licensing
requirements which affect our operations. State laws may also limit credit account interest rates and fees, as well as limit the time
frame in which judicial and non-judicial actions may be initiated to collect consumer accounts.
Although we are not a credit originator, some of the following laws, which apply principally to credit originators, may
occasionally affect our operations because our receivables were originated through credit transactions:
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Truth in Lending Act;
Fair Credit Billing Act; and
Equal Credit Opportunity Act.
Federal laws which regulate credit originators require, among other things, that credit card issuers disclose to consumers the
interest rates, fees, grace periods and balance calculation methods associated with their credit card accounts. Consumers are entitled
under current laws to have payments and credits applied to their accounts promptly, to receive prescribed notices and to require
billing errors to be resolved promptly. Some laws prohibit discriminatory practices in connection with the extension of credit.
Federal statutes further provide that, in some cases, consumers cannot be held liable for, or their liability is limited with respect
to, charges to the credit card account that were a result of an unauthorized use of the credit card. These laws, among others, may
give consumers a legal cause of action against us, or may limit our ability to recover amounts owing with respect to the receivables,
whether or not we committed any wrongful act or omission in connection with the account. If the credit originator fails to comply
with applicable statutes, rules and regulations, it could create claims and rights for consumers that could reduce or eliminate their
obligations to repay the account and have a possible material adverse effect on us.
Accordingly, when we acquire defaulted consumer receivables, typically we contractually require credit originators to
indemnify us against any losses caused by their failure to comply with applicable statutes, rules and regulations relating to the
receivables before they are sold to us.
The U.S. Congress and several states have enacted legislation concerning identity theft. Additional consumer protection and
privacy protection laws may be enacted that would impose additional requirements on the enforcement of and recovery on consumer
credit card or installment accounts. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection
and privacy protection laws, may adversely affect our ability to recover the receivables. In addition, our failure to comply with
these requirements could adversely affect our ability to enforce the receivables.
We cannot assure you that some of our receivables were not established as a result of identity theft or unauthorized use of a
credit card. In the event that a receivable was established as a result of identity theft or unauthorized use, we could not recover
the amount of the defaulted consumer receivables. As a purchaser of defaulted consumer receivables, we may acquire receivables
subject to legitimate defenses on the part of the consumer. Typically our account purchase contracts allow us to return to the debt
owners certain defaulted consumer receivables that may not be collectible, due to these and other circumstances. Upon return, the
debt owners are required to replace the receivables with similar receivables or repurchase the receivables. These provisions limit
to some extent our losses on such accounts.
In addition to our obligation to comply with applicable federal, state and local laws and regulations, we are also obligated to
comply with judicial decisions reached in court cases involving legislation passed by any such governmental bodies.
With Portfolio Recovery Associates, Inc.'s acquisition of MHH and its subsidiaries, Mackenzie Hall Limited, Mackenzie Hall
Debt Purchase Limited and Meritforce Limited, came Portfolio Recovery Associates, Inc.'s first presence in the United Kingdom
and subsequent regulation by the Office of Fair Trading (the “OFT”). As part of its regulatory role, the OFT issues guidance for
those seeking to recover debts arising from consumer credit or consumer hire agreements. The United Kingdom has a number of
laws with which collection agencies and debt purchasers must comply, among them, The Consumer Credit Act of 1974, The Data
Protection Act of 1998 as well as guidance statements issued by the OFT and licensure requirements. The Office of General
Counsel works closely with its United Kingdom counterparts to ensure that debt collection activities abroad are carried out in
compliance with applicable rules and regulations.
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Item 1A. Risk Factors.
The following are risks related to our business.
A prolonged economic recovery or a deterioration in the economic or inflationary environment in the United States or the European
Union, particularly in the United Kingdom, may have an adverse effect on our collections, results of operations, revenue and stock
price.
Our performance may be affected by economic or inflationary conditions in the United States and the European Union,
particularly in the United Kingdom. Economic conditions in the United States and the European Union may be impacted by
domestic conditions or by global political and economic conditions such as the recent sovereign debt crises experienced in several
European countries. There are currently concerns regarding the action or inaction of the United States government relating to the
federal debt ceiling, the federal deficit and government spending cuts. For example, the United States domestic economy may be
negatively impacted if the Congress does not pass legislation in early 2013 to raise the federal debt ceiling or fails to reach agreement
on government spending cuts relating to the “fiscal cliff” that was avoided at the end of 2012. Deterioration in economic conditions,
a prolonged economic recovery, or a significant rise in inflation could cause personal bankruptcy filings to increase, and the ability
of consumers to pay their debts could be adversely affected. This may in turn adversely impact our financial condition, results of
operations, revenue and stock price. Deteriorating economic conditions or a prolonged recovery could also adversely impact
businesses and governmental entities to which we provide fee-based services, which could reduce our fee income and cash flow
and thereby adversely impact our financial condition, results of operations, and stock price. Other factors associated with the
economy that could influence our performance include the financial stability of the lenders on our line of credit, our access to
capital and credit, and financial factors affecting consumers.
The financial turmoil which affected the banking system and financial markets in recent years has resulted in a tightening
in credit markets. There could be a number of follow-on effects from the financial turmoil on our business, including a decrease
in the value of our financial investments and the insolvency of lending institutions, including the lenders on our line of credit,
resulting in our inability to obtain credit. These and other economic factors could have a material adverse effect on our financial
condition and results of operations.
We may not be able to purchase defaulted consumer receivables at appropriate prices, and a decrease in our ability to purchase
portfolios of receivables could adversely affect our ability to generate revenue.
If we are unable to purchase defaulted receivables from debt owners at appropriate prices, or one or more debt owners stop
selling defaulted receivables to us, we could lose a potential source of cash flow and revenue, and our business may be harmed.
The availability of receivables portfolios at prices which generate an appropriate return on our investment depends on a number
of factors both within and outside of our control, including the following:
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the continuation of high levels of consumer debt obligations;
sales of defaulted receivables portfolios by debt owners; and
competitive factors affecting potential purchasers and credit originators of receivables.
Moreover, there can be no assurance that our existing or potential clients will continue to sell their defaulted consumer
receivables at recent levels or at all, or that we will be able to continue to offer competitive bids for defaulted consumer receivables
portfolios. If we are unable to expand our business or adapt to changing market needs as well as our current or future competitors,
we may experience reduced access to defaulted consumer receivables portfolios at appropriate prices and reduced profitability.
Because of the length of time involved in collecting defaulted consumer receivables on acquired portfolios and the variability
in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely
manner.
We may not be able to continually replace our defaulted consumer receivables with additional receivables portfolios sufficient to
operate efficiently and profitably.
To operate profitably, we must acquire and service a sufficient amount of defaulted consumer receivables to generate revenue
that exceeds our expenses. Fixed costs such as salaries and lease or other facility costs constitute a significant portion of our
overhead and, if we do not replace the defaulted consumer receivables portfolios we service with additional portfolios, we may
have to reduce the number of our collection personnel. We would then have to rehire collection staff as we obtain additional
defaulted consumer receivables portfolios. These practices could lead to:
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•
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•
•
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low employee morale;
fewer experienced employees;
higher training costs;
disruptions in our operations;
loss of efficiency; and
excess costs associated with unused space in our facilities.
Furthermore, heightened regulation of the credit card and consumer lending industry or changing credit origination strategies
may result in decreased availability of credit to consumers, potentially leading to a future reduction in defaulted consumer
receivables available for purchase from debt owners. We cannot predict how our ability to identify and purchase receivables and
the quality of those receivables would be affected if there were a shift in consumer lending practices, whether caused by changes
in the regulations or accounting practices applicable to debt owners, a sustained economic downturn or otherwise.
A portion of our collections depends on success in individual lawsuits. Additionally, in pursuing legal collections, we may be
unable to obtain accurate and authentic account documents for accounts that we purchase, and despite our quality control measures,
we cannot be certain that all of the documents we provide are error free.
A portion of our collections on accounts is achieved through the legal channel. Accordingly, a percentage of our future
collections is dependent on success in individual lawsuits, and a portion of those are dependent on the success of third party
attorney firms. In addition, when we collect accounts judicially, courts in certain jurisdictions require that a copy of certain account
documents be attached to the pleadings in order to obtain a judgment against the account debtors. If we are unable to
produce accurate and authentic account documents, these courts will deny our claims. We rely on the seller of accounts that we
purchase to fulfill its contractual obligation, if applicable, to provide account documents to us in an accurate and timely fashion.
Additionally, we rely on our employees to produce accurate and authentic documents. Our inability to obtain these documents
from the seller, or our own errors in producing account documents, may negatively impact the liquidation rate on such accounts
that are subject to judicial collections. Additionally, our ability to collect non-judicially may be negatively impacted by state laws
which require that certain types of account documentation be in our possession prior to the institution of any collection activities.
We may not be able to collect sufficient amounts on our defaulted consumer receivables to fund our operations.
Our business primarily consists of acquiring and liquidating receivables that consumers have failed to pay and that the credit
originator has deemed uncollectible and has charged-off. The debt owners have typically made numerous attempts to recover on
their defaulted consumer receivables, often using a combination of in-house recovery efforts and third-party collection agencies.
These defaulted consumer receivables are difficult to collect and we may not collect a sufficient amount to cover our investment
associated with purchasing the defaulted consumer receivables and the costs of running our business.
We may not be successful at acquiring receivables of new asset types.
We may pursue the acquisition of receivables portfolios of asset types in which we have little current experience. We may
not be successful in completing any acquisitions of receivables of these asset types and our limited experience in these asset types
may impair our ability to collect on these receivables. This may cause us to pay too much for these receivables and, consequently,
we may not generate a profit from these receivables portfolio acquisitions.
Our collections may decrease if certain types of bankruptcy filings involving liquidations increase.
Various economic trends and potential changes to existing legislation may contribute to an increase in the amount of personal
bankruptcy filings. Under certain bankruptcy filings a debtor's assets may be sold to repay creditors, but because the defaulted
consumer receivables we service are generally unsecured we often would not be able to collect on those receivables. We cannot
ensure that our collections would not decline with an increase in personal bankruptcy filings or a change in bankruptcy regulations
or practices. If our actual collection experience with respect to a defaulted bankrupt consumer receivables portfolio is significantly
lower than we projected when we purchased the portfolio, our financial condition and results of operations could deteriorate.
Our ability to collect on portfolios of bankrupt consumer receivables may be impacted by changes in federal laws or changes in
the administrative practices of the various bankruptcy courts.
We file claims in bankruptcy courts on consumer receivables in which consumers have filed for bankruptcy protection under
available U.S. bankruptcy laws. We receive payments from the courts on consumer receivables which become bankrupt after we
acquire them, and we also purchase accounts that are currently in bankruptcy proceedings. Our ability to collect on portfolios of
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bankrupt consumer receivables may be impacted by changes in federal laws or changes in administrative practices of the various
bankruptcy courts.
Our ability to collect and enforce our finance receivables may be limited under federal and state laws.
The businesses conducted by PRA's operating subsidiaries are subject to licensing and regulation by governmental and
regulatory bodies in the many jurisdictions in which we operate and conduct our business. Federal and state laws may limit our
ability to collect and enforce our defaulted consumer receivables regardless of any act or omission on our part. Some laws and
regulations applicable to credit issuers may preclude us from collecting on defaulted consumer receivables we purchase if the
credit issuer previously failed to comply with applicable laws in generating or servicing those receivables. Collection laws and
regulations also directly apply to our business. Such laws and regulations are extensive and subject to change. Additional consumer
protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement of and
collection on consumer credit receivables. Any new laws, rules or regulations that may be adopted, as well as existing consumer
protection and privacy protection laws, may adversely affect our ability to collect on our defaulted consumer receivables and may
harm our business. In addition, federal, state and local governmental bodies are considering, and may consider in the future,
legislative proposals that would regulate the collection of our defaulted consumer receivables. Further, certain tax laws could
negatively impact our ability to collect or cause us to incur additional expenses. Although we cannot predict if or how any future
legislation would impact our business, our failure to comply with any current or future laws or regulations applicable to us could
limit our ability to collect on our defaulted consumer receivables, which could reduce our profitability and harm our business.
Failure to comply with existing and new government regulation of the collections industry could result in penalties, fines, litigation,
damage to our reputation or the suspension or termination of our ability to conduct our business.
The collections industry is governed by various U.S. federal, state and local laws and regulations, as well as by laws and
regulations in the U.K. Many states regulate our business and require us to be a licensed debt collector. Our industry is also at
times investigated by regulators and offices of state attorneys general, which could lead to enforcement actions, fines and penalties,
or the assertion of private claims and law suits against us. The Federal Trade Commission has the authority to investigate consumer
complaints against debt collection companies and to recommend enforcement actions and seek monetary penalties. If we fail to
comply with applicable laws and regulations, such failure could result in penalties, litigation losses and expenses, damage to our
reputation, or the suspension or termination of our ability to conduct collections, which would materially adversely affect our
results of operations, financial condition and stock price. In addition, new federal and state or local laws or regulations or changes
in the ways that existing rules or laws are interpreted or enforced could limit our activities in the future or significantly increase
the cost of compliance. Furthermore, judges or regulatory bodies could interpret current rules or laws differently than the way
we do, leading to such adverse consequences described above. The resolution of such matters may require considerable time and
expense, and if not resolved in our favor, may result in fines or damages, and possibly result in an adverse effect on our financial
condition.
Changes in governmental laws and regulations could increase our costs and liabilities or impact our operations.
Changes in laws and regulations or the manner in which they are interpreted or applied may alter our business environment.
This could affect our results of operations or increase our liabilities. These negative impacts could result from changes in collection
laws, laws related to credit reporting, laws related to consumer bankruptcy, accounting standards, taxation requirements,
employment laws and communications laws, among others. For example, we know that federal and state governments are currently
reviewing existing laws related to debt collection, in order to determine if any changes are needed. Additionally, in July 2010,
the Dodd-Frank Act became law. The Dodd-Frank Act restructures the regulation and supervision of the financial services industry.
The Dodd-Frank Act created a new independent regulator, the CFPB, with rulemaking, supervisory, and enforcement authority
over larger consumer debt collectors, as a result of which, we may become subject to examination, the frequency and scope of
which are unknown. The Dodd-Frank Act also provides for the CFPB to have the authority to adopt rules describing specified
acts and practices as being “unfair,” “deceptive,” or “abusive,” and hence unlawful. If we become subject to additional costs or
liabilities in the future resulting from our supervision or examination by the CFPB, or by changes in, or additions to laws and
regulations, that could adversely affect our results of operations and financial condition.
We may make business acquisitions that prove unsuccessful or strain or divert our resources.
Through acquisitions, we may enter markets in which we have no or limited experience. Further, acquisitions may place
additional constraints on our resources by diverting the attention of our management team from other business concerns. Moreover,
any acquisition may result in a potentially dilutive issuance of equity securities or may result in the incurrence of additional debt
and amortization expenses of related intangible assets, which could reduce our profitability and harm our business.
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We intend to consider acquisitions of companies that could complement our business, including the acquisition of entities
offering greater access and expertise in other asset types and markets that are related but that we do not currently serve. We may
not be able to successfully operate future acquired entities, or integrate these businesses with our own, and we may be unable to
maintain our standards, controls and policies.
Our international operations expose us to additional risks which could harm our business, operating results, and financial
condition.
In 2012, we acquired MHH, a United Kingdom debt collection and purchase group, and we may expand our international
operations in the future. We have limited operating experience in international markets. In addition to risks described elsewhere
in this section, our international operations expose us to numerous risks and uncertainties, including the following:
• Changes in local political, economic, social and labor conditions in the European Union, particularly in the United
Kingdom,
• Foreign exchange controls that might prevent us from repatriating cash earned in countries outside the United States,
• Currency exchange rate fluctuations and our ability to manage these fluctuations through a foreign exchange risk
management program,
• Different employee/employer relationships, laws and regulations and existence of employment tribunals,
• Laws and regulations imposed by foreign governments, including those relating to governing data security, sharing and
transfer,
• Potentially adverse tax consequences resulting from changes in tax laws in the foreign jurisdictions in which we operate;
and
• Logistical, communications and other challenges caused by distance and cultural differences, making it harder to do
business in certain jurisdictions.
Any one of these factors could materially adversely affect our business, results of operations and financial condition.
Compliance with complex foreign and U.S. laws and regulations that apply to our international operations could increase our
cost of doing business in international jurisdictions.
Compliance with complex foreign and U.S. laws and regulations that apply to our international operations could increase
our cost of doing business in international jurisdictions. These laws and regulations include anti-corruption laws such as the
Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act of 2010 and other local laws prohibiting corrupt payments to
governmental officials, and those related to taxation. The FCPA, and similar antibribery laws in other jurisdictions generally
prohibit U.S.-based companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of
obtaining or retaining business. The U.K. Bribery Act 2010 prohibits certain entities from making improper payments to
governmental officials and to commercial entities. Violations of these laws and regulations could result in fines and penalties;
criminal sanctions against us, our officers, or our employees; prohibitions on the conduct of our business and on our ability to
offer our products and services in one or more countries, and could also materially affect our brand, our international expansion
efforts, our ability to attract and retain employees, our business and our operating results. Although we have implemented policies
and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees,
contractors or agents will not violate our policies.
Exchange rate fluctuations could adversely affect our results of operations and financial position.
Because we conduct business in currencies other than U.S. dollars but report our financial results in U.S. dollars, we face
exposure to fluctuations in currency exchange rates. As a result, significant fluctuations in exchange rates between the U.S. dollar
and foreign currencies may adversely affect our net income. We may or may not implement a hedging program related to currency
exchange rate fluctuations. Additionally, if implemented, such hedging programs could expose us to additional risks that could
adversely affect our financial condition and results of operations.
Goodwill or other intangible asset impairment could negatively impact our net income and stockholders' equity.
Goodwill is not amortized, but is tested for impairment at the reporting unit level. Goodwill is required to be tested for
impairment annually and between annual tests if events or circumstances indicate that it is more likely than not that the fair value
of a reporting unit is less than its carrying amount. There are numerous risks that may cause the fair value of a reporting unit to
fall below its carrying amount, which could lead to the recognition of goodwill impairment. These risks include, but are not limited
to, adverse changes in macroeconomic conditions, the business climate, or the market for the entity's products or services; significant
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variances between actual and expected financial results; lowered expectations of future results; failure to realize anticipated
synergies from acquisitions; a more likely-than-not expectation of selling or disposing all or a portion of a reporting unit; the loss
of key personnel; a sustained decline in the Company's market capitalization; and an adverse action or assessment by a regulator.
Other intangible assets, such as client and customer relationships, non-compete agreements and trademarks, are amortized.
Risks, such as those that could lead to the recognition of goodwill impairment, could also lead to the recognition of other intangible
asset impairment.
The loss of customers in our fee-for-service businesses could negatively affect our operations.
Our fee-for-service customers, in general, may terminate their relationship with us on 30 to 90 days' prior notice. In the
event a customer or customers terminate or significantly cut back any relationship with us, it could reduce our profitability and
harm our business. Additionally, with respect to the acquisitions of our fee businesses a significant portion of the valuation of
such business was attributed to existing client and customer relationships. Therefore, a loss of customers in these businesses could
give rise to an impairment charge related to intangible assets specifically ascribed to existing client and customer relationships.
Our senior management team is important to our continued success and the loss of one or more members of senior management
could negatively affect our operations.
The loss of the services of one or more of our key executive officers or key employees could disrupt our operations. We
have employment agreements with Steve Fredrickson, our president, chief executive officer and chairman of our board of directors,
Kevin Stevenson, our executive vice president and chief financial and administrative officer, and several of our other senior
executives. The current agreements contain non-compete provisions that survive termination of employment. However, these
agreements do not and will not assure the continued services of these officers and we cannot ensure that the non-compete provisions
will be enforceable. Our success depends on the continued service and performance of our key executive officers, and we cannot
guarantee that we will be able to retain those individuals.
Our work force could become unionized in the future, which could adversely affect the stability of our operations and increase
our costs.
Currently, none of our employees are represented by unions. However, our U.S. employees have the right at any time under
the National Labor Relations Act to form or affiliate with a union. If some or all of our workforce were to become unionized and
the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could
adversely affect the stability of our work force and increase our costs.
We experience high employee turnover rates and we may not be able to hire and retain enough sufficiently trained employees to
support our operations.
The receivables management industry is very labor intensive and, similar to other companies in our industry, we typically
experience a high rate of employee turnover. We experience higher productivity with more seasoned collectors. Our annual
turnover rate for the past several years for collectors who complete our multi-week training program has ranged between 58% and
61%. We compete for qualified personnel with companies in our industry and in other industries. Our growth requires that we
continually hire and train new collectors. A higher turnover rate among our collectors will increase our recruiting and training
costs and limit the number of experienced collection personnel available to service our Core defaulted consumer receivables. If
this were to occur, we would not be able to service our Core defaulted consumer receivables effectively and this would reduce
our ability to continue our growth and operate profitably.
We may not be able to retain, renegotiate or replace our existing credit facility.
Our credit facility includes an aggregate principal amount available of $600.0 million which consists of a $200.0 variable
rate term loan and a $400.0 million revolving facility that both mature on December 19, 2017. If we are unable to retain, renegotiate
or replace our credit facility, our growth could be adversely affected, which could negatively impact liquidity, our business
operations and the price of our common stock.
We may not be able to continue to satisfy the restrictive covenants in our debt agreements.
Our debt agreements impose a number of covenants, including restrictive covenants on how we operate our business. Failure
to satisfy any one of these covenants could result in negative consequences including the following, each of which could have a
material adverse effect on our liquidity and our ability to conduct business:
• acceleration of outstanding indebtedness;
• exercise by our lenders of rights with respect to the collateral pledged under certain of our outstanding indebtedness;
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• our inability to continue to purchase receivables needed to operate our business; or
• our inability to secure alternative financing on favorable terms, if at all.
Changes in interest rates could increase our interest expense and reduce our net income. Our future hedging strategies may not
be successful in mitigating our risks associated with changes in interest rates and could adversely affect our results of operations
and financial condition, as could our failure to comply with hedge accounting principles and interpretations.
Our revolving credit facility bears interest at a variable rate. Increases in interest rates could increase our interest expense
which would, in turn, lower our earnings. From time to time, we may enter into hedging transactions to mitigate our interest rate
risk on a portion of our credit facility. Our hedging strategies rely on assumptions and projections. If these assumptions and
projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, we may experience
volatility in our earnings that could adversely affect our results of operations and financial condition. We had no interest rate
hedge contracts at December 31, 2012.
In addition, hedge accounting in accordance with FASB ASC Topic 815 “Derivatives and Hedging” requires the application
of significant subjective judgments to a body of accounting concepts that is complex and for which the interpretations have
continued to evolve within the accounting profession and among the standard-setting bodies. Our failure to comply with hedge
accounting principles and interpretations in the future could result in the loss of the applicability of hedge accounting which could
adversely affect our results of operations and financial condition.
Additional taxes levied on us could harm our financial results.
PRA is subject to taxes in the U.S. and the United Kingdom. PRA's future effective tax rates could be affected by changes
in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities,
or changes in tax laws or their interpretation. Any of these changes could have a material adverse effect on PRA's profitability.
The determination of the worldwide provision for income taxes and other tax liabilities requires significant judgment. Although
we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements
and may materially affect our financial results in the period or periods for which such determination is made.
Our tax filings are subject to audit by domestic and foreign tax authorities. These audits may result in assessments of
additional taxes, adjustments to the timing of taxable income or deductions or allocations of income among tax jurisdictions. If
any such challenges are made and are not resolved in our favor, they could have an adverse effect on our financial condition and
results of operations.
We file domestic income tax returns using the cost recovery method for tax revenue recognition as it relates to our debt
purchasing business. The Internal Revenue Service (“IRS”) has audited and issued a Notice of Deficiency for the tax years ended
December 31, 2007, 2006 and 2005. It has asserted that cost recovery for tax revenue recognition does not clearly reflect taxable
income and that unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction.
We have filed a petition in the United States Tax Court and believe we have sufficient support for the technical merits of our
positions and that it is more-likely-than-not that they will ultimately be sustained; therefore, a reserve for uncertain tax positions
is not necessary. If we are unsuccessful in the United States Tax Court, we can appeal to the federal Circuit Court of Appeals. If
judicial appeals prove unsuccessful, we may ultimately be required to pay the related deferred taxes, any potential interest, and
penalties, possibly requiring additional financing from other sources. The deferred tax liability related to revenue recognition on
our debt purchasing business is $190.1 million at December 31, 2012. On June 30, 2011, we were notified by the IRS that the
audit period was expanded to include the tax years ended December 31, 2009 and 2008. The statute of limitations for the 2010,
2009 and 2008 tax years has been extended to September 26, 2014.
Changes in the United States tax laws regarding earnings of our subsidiaries located outside the United States could materially
affect our future results.
There have been proposals to change United States tax laws that would significantly impact how United States corporations
are taxed on foreign earnings. We earn a portion of our income in foreign countries. Although we cannot predict whether or in
what form any of these proposals might be enacted into law, if adopted they could have a material adverse impact on our liquidity,
results of operations, financial condition and cash flows.
22
For financial reporting purposes, we utilize the interest method of revenue recognition for determining our income recognized on
finance receivables, which is based on an analysis of projected cash flows that may prove to be less than anticipated and could
lead to reductions in future revenues or the incurrence of allowance charges.
We utilize the interest method to determine income recognized on finance receivables under the guidance of Financial
Accounting Standards Board Accounting Standards Codification 310-30, “Loans and Debt Securities Acquired with Deteriorated
Credit Quality” (“ASC 310-30”). Under this method, static pools of receivables we acquire are modeled upon their projected cash
flows. A yield is then established which, when applied to the unamortized purchase price of the receivables, results in the recognition
of income at a constant yield relative to the remaining balance in the pool. Each static pool is analyzed regularly to assess the
actual performance compared to that expected by the model. Significant increases in actual or projected future cash flows are
recognized prospectively, through an upward adjustment of the yield, over a pool's estimated remaining life. If a valuation allowance
had been previously recognized for that pool, the allowance is reversed before recording any prospective yield adjustments. Any
increase to the yield then becomes the new benchmark for future impairment testing for the pool. Under ASC 310-30, rather than
lowering the estimated yield for significant decreases in actual or projected future cash flows, an allowance charge is recorded to
reduce the carrying value of a pool to maintain the then current yield and is shown as a reduction in revenues in the consolidated
income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheets.
As a result, if the accuracy of the modeling process deteriorates or there is a significant decline in anticipated future cash flows,
we could incur reductions in future revenues resulting from additional allowance charges, which could reduce our profitability in
a given period and negatively impact our stock price.
Our loss contingency accruals may not be adequate to cover actual losses.
We are involved in judicial, regulatory, and arbitration proceedings or investigations concerning matters arising from our
business activities. Although we believe we have meritorious defenses in all material litigation pending against us, there can be
no assurance as to the ultimate outcome. We establish accruals for potential liability arising from legal proceedings when it is
probable that such liability has been incurred and the amount of the loss can be reasonably estimated. We may still incur legal
costs for a matter even if we have not accrued a liability. In addition, actual losses may be higher than the amount accrued for a
certain matter, or in the aggregate. An unfavorable resolution of a legal proceeding or claim could materially adversely impact
our financial condition, results of operations, or cash flows. For more information, refer to the “Litigation” section of Note 16
(Commitments and Contingencies).
We may not be able to successfully anticipate, manage or adopt technological advances within our industry.
Our business relies on computer and telecommunications technologies and our ability to integrate these technologies into
our business is essential to our competitive position and our success. Computer and telecommunications technologies are evolving
rapidly and are characterized by short product life cycles. We may not be successful in anticipating, managing or adopting
technological changes on a timely basis, which could reduce our profitability or disrupt our operations and harm our business.
While we believe that our existing information systems are sufficient to meet our current demands and continued expansion,
our future growth may require additional investment in these systems. We depend on having the capital resources necessary to
invest in new technologies to acquire and service defaulted consumer receivables. We cannot ensure that adequate capital resources
will be available to us at the appropriate time.
We rely on our systems, including our telecommunications and computers systems, and employees, and certain failures or
disruptions could adversely affect the continuity of our business operations.
We may be subject to disruptions of our operating systems arising from events that are not entirely within our control. Those
events may include, for example, terrorist attacks, war and the outcome of war and threats of attacks; computer viruses; electrical
or telecommunications outages; natural disasters; computer hacking attacks; malicious employee acts; other intentional destructive
human acts; and disease pandemics. We could be subject to both private and public legal actions if consumer information stored
in our systems is lost or misappropriated, as we are subject to extensive laws and regulations concerning the use and safeguarding
of this information. Any or all of these occurrences could have a material adverse effect on our results of operations, financial
condition and stock price.
Additionally, our success depends in large part on sophisticated telecommunications and computer systems. The temporary
or permanent loss of our computer and telecommunications equipment and software systems, through casualty or operating
malfunction, could disrupt our operations. In the normal course of our business, we must record and process significant amounts
of data quickly and accurately to access, maintain and expand the databases we use for our collection activities. Any failure of
our information systems or software and our backup systems would interrupt our business operations and harm our business. Our
headquarters are located in a region that is susceptible to hurricane damage, which may increase the risk of disruption of information
systems and telephone service for sustained periods.
23
Further, our business depends heavily on services provided by various local and long distance telephone companies. A
significant increase in telephone service costs or any significant interruption in telephone services could reduce our profitability
or disrupt our operations and harm our business.
The occurrence of cyber incidents, or a deficiency in our cyber-security, could negatively impact our business by causing a
disruption in our operations, a compromise or corruption of our confidential information or damage to our Company's image,
all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our
information resources. More specifically, a cyber incident is an intentional event that can include gaining unauthorized access to
systems to disrupt operations, corrupt data or steal confidential information. As our reliance on technology has increased, so have
the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from
the occurrence of a cyber incident are operational interruption, damage to our image, and private data exposure. We have
implemented solutions, processes, and procedures to help mitigate this risk, but these measures, as well as our organization's
increased awareness of our risk of a cyber incident, do not guarantee that our financial results will not be negatively impacted by
such an incident.
We serve markets that are highly competitive, and we may be unable to compete with businesses that may have greater resources
than us.
We face competition in the markets we serve from new and existing providers of outsourced receivables management
services, including other purchasers of defaulted consumer receivables portfolios, contingent fee businesses and debt owners that
manage their own defaulted consumer receivables rather than outsourcing them. The receivables management industry is highly
fragmented and competitive, consisting of thousands of consumer and commercial agencies, most of which compete in the
contingent fee business.
We face bidding competition in our acquisition of defaulted consumer receivables and in our placement of fee based
receivables, and we also compete on the basis of reputation, industry experience and performance. Some of our current competitors
and possible new competitors may have substantially greater financial, personnel and other resources, greater adaptability to
changing market needs, longer operating histories and more established relationships in our industry than we currently have. In
the future, we may not have the resources or ability to compete successfully. As there are few significant barriers for entry to new
providers of fee based receivables management services, there can be no assurance that additional competitors with greater resources
than ours will not enter the market.
We may not be able to manage our growth effectively.
We have expanded significantly since our formation and we intend to maintain our focus on growth. However, our growth
will place additional demands on our resources and we cannot ensure that we will be able to manage our growth effectively. In
order to successfully manage our growth, we may need to:
• expand and enhance our administrative infrastructure;
• continue to improve our management, financial and information systems and controls; and
• recruit, train, manage and retain our employees effectively.
Continued growth could place a strain on our management, operations and financial resources. We cannot ensure that our
infrastructure, facilities and personnel will be adequate to support our future operations or to effectively adapt to future growth.
If we cannot manage our growth effectively, our results of operations may be adversely affected.
The market price of our shares of common stock could fluctuate significantly.
Wide fluctuations in the trading price or volume of our shares of common stock could be caused by many factors, including
factors relating to our company or to investor perception of our company (including changes in financial estimates and
recommendations by research analysts), but also factors relating to (or relating to investor perception of) the receivables
management industry or the economy in general.
Negative publicity or reputational attacks could damage our reputation.
From time to time there are negative news stories about our industry or company, especially with respect to alleged conduct
in collecting debt from customers. Negative public opinion about our alleged or actual debt collection practices or about the debt
collection industry, including those expressed via television, newspapers, radio, or social media such as blogs, websites or
newsletters, could adversely impact our stock price and our ability to retain and attract customers and employees.
24
Our certificate of incorporation, by-laws and Delaware law contain provisions that may prevent or delay a change of control or
that may otherwise be in the best interest of our stockholders.
Our certificate of incorporation and by-laws contain provisions that may make it more difficult, expensive or otherwise
discourage a tender offer or a change in control or takeover attempt by a third-party, even if such a transaction would be beneficial
to our stockholders. The existence of these provisions may have a negative impact on the price of our common stock by discouraging
third-party investors from purchasing our common stock. In particular, our certificate of incorporation and by-laws include
provisions that:
• classify our board of directors into three groups, each of which will serve for staggered three-year terms;
• permit a majority of the stockholders to remove our directors only for cause;
• permit our directors, and not our stockholders, to fill vacancies on our board of directors;
• require stockholders to give us advance notice to nominate candidates for election to our board of directors or to make
stockholder proposals at a stockholders’ meeting;
• permit a special meeting of our stockholders to be called only by approval of a majority of the directors, the chairman of
the board of directors, the chief executive officer, the president or the written request of holders owning at least 30% of
our common stock;
• permit our board of directors to issue, without approval of our stockholders, preferred stock with such terms as our board
of directors may determine;
• permit the authorized number of directors to be changed only by a resolution of the board of directors; and
• require the vote of the holders of a majority of our voting shares for stockholder amendments to our by-laws.
In addition, we are subject to Section 203 of the Delaware General Corporation Law which provides certain restrictions on
business combinations between us and any party acquiring a 15% or greater interest in our voting stock other than in a transaction
approved by our board of directors and, in certain cases, by our stockholders. These provisions of our certificate of incorporation,
our by-laws and Delaware law could delay or prevent a change in control, even if our stockholders support such proposals.
Moreover, these provisions could diminish the opportunities for stockholders to participate in certain tender offers, including
tender offers at prices above the then-current market value of our common stock, and may also inhibit increases in the trading
price of our common stock that could result from takeover attempts or speculation.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters and primary operations facility are located in Norfolk, Virginia. In addition, we have operational
centers, all of which are leased except the facilities in Kansas and in Tennessee, in the following locations in the United States:
- Birmingham, Alabama
- Conshohocken, Pennsylvania
- Fresno, California
- Hampton, Virginia
- Hutchinson, Kansas
- Jackson, Tennessee
- Lake Forest, California
- Las Vegas, Nevada, and
- Rosemont, Illinois.
Our leased MHH subsidiary facility, which we acquired on January 16, 2012 is located in Kilmarnock, Scotland.
We do not consider any specific leased or owned facility to be material to our operations. We believe that equally suitable
alternative facilities are available in all areas where we currently do business.
25
Item 3. Legal Proceedings.
We are from time to time subject to routine legal claims and proceedings, most of which are incidental to the ordinary course
of our business. We initiate lawsuits against customers and are occasionally countersued by them in such actions. Also, customers,
either individually, as members of a class action, or through a governmental entity on behalf of customers, may initiate litigation
against us in which they allege that we have violated a state or federal law in the process of collecting on an account. From time
to time, other types of lawsuits are brought against us.
No legal proceedings were commenced during the period covered by this report that the Company believes could reasonably
be expected to have a material adverse effect on its financial condition, results of operations and cash flows. Refer to Note 16
“Commitments and Contingencies” of our Consolidated Financial Statements (Part II, Item 8 of this Form 10-K) for information
regarding legal proceedings in which we are involved.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Price Range of Common Stock
The Company's common stock is traded on the NASDAQ Global Select Market under the symbol “PRAA.” The following
table sets forth the high and low sales price for the Company's common stock, as reported by the NASDAQ Global Select Market,
for the periods indicated.
2011
Quarter ended March 31, 2011
Quarter ended June 30, 2011
Quarter ended September 30, 2011
Quarter ended December 31, 2011
2012
Quarter ended March 31, 2012
Quarter ended June 30, 2012
Quarter ended September 30, 2012
Quarter ended December 31, 2012
High
$86.89
$90.95
$89.67
$73.63
High
$74.08
$91.36
$106.18
$107.01
Low
$68.29
$77.64
$56.76
$58.29
Low
$60.12
$64.90
$80.19
$91.89
As of February 7, 2013, there were 59 holders of record of the Company's common stock. Based on information provided
by our transfer agent and registrar, we believe that there are approximately 30,340 beneficial owners of the Company's common
stock as of January 18, 2013.
Stock Performance
The following graph compares from December 31, 2007 to December 31, 2012, the cumulative stockholder returns assuming
an initial investment of $100 in the Company's common stock at the beginning of the period, the stocks comprising the NASDAQ
Global Market Composite Index, the NASDAQ Market Index (U.S.) and the stocks comprising a peer group index consisting of
six peers which includes Encore Capital Group, Inc., Asset Acceptance Capital Corp., Asta Funding, Inc., Compucredit Holdings
Corporation, FTI Consulting Inc. and EPIQ Systems Inc. Any dividends paid during the five year period are assumed to be
reinvested.
26
2007
2008
2009
2010
2011
2012
As of December 31,
Portfolio Recovery Associates, Inc.
NASDAQ Market Index (U.S.)
NASDAQ Global Market Composite Index
Custom Peer Group
$
$
$
$
100
100
100
100
$
$
$
$
85
59
49
67
$
$
$
$
113
85
71
73
$
$
$
$
190
99
85
69
$
$
$
$
170
99
73
68
$
$
$
$
269
118
85
66
The comparisons of stock performance shown above are not intended to forecast or be indicative of possible future
performance of PRA’s common stock. PRA does not make or endorse any predictions as to its future stock performance.
Dividend Policy
Our board of directors sets our dividend policy. We do not currently pay regular dividends on our common stock and did
not pay dividends in 2012 or 2011; however, our board of directors may determine in the future to declare or pay dividends on
our common stock. Under the terms of our credit facility, cash dividends may not exceed $20 million in any fiscal year without
the consent of our lenders. Any future determination as to the declaration and payment of dividends will be at the discretion of
our board of directors and will depend on then existing conditions, including our financial condition, results of operations,
contractual restrictions, capital requirements, business prospects and other factors that our board of directors may consider relevant.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under equity compensation plans see Note 12 "Share-Based
Compensation" of our Consolidated Financial Statements.
Share Repurchase Program
On February 2, 2012, the Company's board of directors authorized a share repurchase program to purchase up to $100,000,000
of the Company's outstanding shares of common stock on the open market. The following table provides information about the
Company's common stock purchased during the fourth quarter of 2012.
Month Ended
November 30, 2012
Total
Total Number of
Shares Purchased
Average Price Paid
per Share
Maximum Remaining
Purchase Price for
Share Repurchases
Under the Plan
100 $
100 $
27
93.02 $
93.02 $
77,264,947
77,264,947
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with the “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” section below, the audited consolidated financial statements and the notes to
the audited consolidated financial statements.
INCOME STATEMENT DATA:
(In thousands, except per share data)
Revenues:
Income recognized on finance receivables, net
Fee income
Total revenues
Operating expenses:
Compensation and employee services
Legal collection fees
Legal collection costs
Agent fees
Outside fees and services
Communications
Rent and occupancy
Depreciation and amortization
Other operating expenses
Total operating expenses
Gain on sale of property
Income from operations
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Adjustment for net loss/(income) attributable to
redeemable noncontrolling interest
Net income attributable to Portfolio Recovery Associates,
Inc.
Net income per share attributable to Portfolio Recovery
Associates, Inc:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
OPERATING AND OTHER FINANCIAL DATA:
(Dollars in thousands)
Cash receipts
Operating expenses to cash receipts
Return on equity (1)
Acquisitions of finance receivables, at cost (2)
Acquisitions of finance receivables, at face value (2)
Employees at period end
2012
2011
2010
2009
2008
Years Ended December 31,
$
530,635
62,166
592,801
$
401,895
57,040
458,935
$
309,680
63,026
372,706
$
215,612
65,479
281,091
$
206,486
56,789
263,275
168,356
34,393
72,325
5,906
28,867
29,110
6,781
14,515
16,484
376,737
—
216,064
10
(9,041)
207,033
80,934
126,099
$
138,202
23,621
38,659
7,653
19,310
23,372
5,891
12,943
12,416
282,067
1,157
178,025
7
(10,569)
167,463
66,319
101,144
$
124,077
17,599
31,330
12,012
12,554
17,226
5,313
12,437
10,296
242,844
—
129,862
65
(9,052)
120,875
47,004
73,871
$
106,388
14,872
16,462
15,644
9,570
14,773
4,761
9,213
8,799
200,482
—
80,609
3
(7,909)
72,703
28,397
44,306
$
88,073
20,610
16,194
16,065
8,883
10,304
3,908
7,424
6,977
178,438
—
84,837
60
(11,151)
73,746
28,384
45,362
494
(353)
(417)
—
—
$
$
126,593
$
100,791
$
73,454
$
44,306
$
45,362
$7.45
$7.39
16,997
17,123
$5.89
$5.85
17,110
17,230
$4.37
$4.35
16,820
16,885
$2.87
$2.87
15,420
15,454
$2.98
$2.97
15,229
15,292
$
970,852
$
762,530
$
592,368
$
433,482
$
383,488
39%
20%
37%
19%
41%
17%
46%
14%
47%
17%
$
538,501
$ 6,153,987
3,221
$
408,408
$ 9,792,356
2,641
$
367,443
$ 6,804,952
2,473
$
288,889
$ 8,109,694
2,213
$
280,336
$ 4,588,234
2,032
(1) Calculated by dividing net income for each year by average monthly stockholders’ equity for the same year.
(2) Represents cash paid for finance receivables. It does not include certain capitalized costs or buybacks. It also does not
include the finance receivables acquired as part of the initial acquisition of MHH.
28
Below are listed certain key balance sheet data for the periods presented:
(Dollars in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents
Finance receivables, net
Total assets
Long-term debt
Total debt, including obligations under capital lease and
line of credit
Total stockholders’ equity
2012
2011
2010
2009
2008
As of December 31,
$
$
32,687
1,078,951
1,288,956
200,542
327,542
708,427
$
26,697
926,734
1,071,123
1,246
221,246
595,488
$
41,094
831,330
995,908
2,396
320,396
490,516
$
20,265
693,462
794,433
1,499
320,799
335,480
13,901
563,830
657,840
—
268,305
283,863
Below are listed the quarterly consolidated income statements for the years ended December 31, 2012 and 2011:
Dec. 31,
2012
Sept. 30,
2012
June 30,
2012
Mar. 31,
2012
Dec. 31,
2011
Sept. 30,
2011
June 30,
2011
Mar. 31,
2011
For the Quarter Ended
(In thousands, except per share data)
INCOME STATEMENT DATA:
Revenues:
Income recognized on finance
receivables, net
Fee income
Total revenues
Operating expenses:
Compensation and employee services
Legal collection fees
Legal collection costs
Agent fees
Outside fees and services
Communications
Rent and occupancy
Depreciation and amortization
Other operating expenses
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Adjustment for net loss/(income)
attributable to redeemable
noncontrolling interest
Net income attributable to Portfolio
Recovery Associates, Inc.
Net income per share attributable to
Portfolio Recovery Associates, Inc:
$ 138,068
$ 135,754
$ 132,587
$ 124,226
$ 102,743
$ 102,875
$ 100,303
$
95,974
16,183
154,251
14,765
150,519
15,298
147,885
15,920
140,146
15,344
118,087
11,401
114,276
14,492
114,795
15,803
111,777
35,759
33,475
34,815
34,153
44,849
9,153
14,619
1,411
7,292
7,073
1,728
3,681
4,456
41,334
8,635
15,810
1,545
10,131
6,777
1,786
3,623
3,820
42,479
8,988
18,227
1,323
5,584
7,007
1,656
3,555
4,470
39,694
7,617
23,669
1,627
5,860
8,253
1,611
3,656
3,738
5,940
9,711
1,647
5,608
5,488
1,538
3,188
3,255
5,962
9,731
1,643
6,222
5,865
1,517
3,223
2,808
5,970
9,879
1,724
4,066
5,706
1,438
3,316
3,501
70,415
1,157
45,537
—
5,749
9,338
2,639
3,414
6,313
1,398
3,216
2,852
69,072
—
42,705
—
2
—
7
1
—
7
(1,818)
(2,189)
(2,381)
(2,653)
(2,512)
(2,555)
(2,635)
(2,867)
58,173
22,441
35,732
54,869
21,742
33,127
52,222
20,171
32,051
41,769
16,580
25,189
43,441
16,775
26,666
41,282
16,089
25,193
42,902
17,326
25,576
39,838
16,129
23,709
70
187
(36)
273
(76)
313
(2)
(588)
$
35,802
$
33,314
$
32,015
$
25,462
$
26,590
$
25,506
$
25,574
$
23,121
Total operating expenses
94,262
93,461
93,289
95,725
72,134
70,446
Gain on sale of property
—
—
—
—
—
—
Income from operations
59,989
57,058
54,596
44,421
45,953
43,830
Basic
Diluted
$
$
2.12
2.10
$
$
1.97
1.96
$
$
1.88
1.87
$
$
1.48
1.47
$
$
1.55
1.54
$
$
1.49
1.48
$
$
1.49
1.48
$
$
1.35
1.34
Weighted average number of shares
outstanding:
Basic
Diluted
16,883
17,072
16,881
17,022
17,027
17,133
17,196
17,267
17,121
17,269
17,117
17,228
17,108
17,225
17,092
17,199
29
Below are listed the quarterly consolidated balance sheets for the years ended December 31, 2012 and 2011:
Dec. 31,
2012
Sept. 30,
2012
June 30,
2012
Mar. 31,
2012
Dec. 31,
2011
Sept. 30,
2011
June 30,
2011
Mar. 31,
2011
Quarter Ended as of:
(Dollars in thousands)
BALANCE SHEET DATA:
Assets
Cash and cash equivalents
$
32,687
$
31,488
$
42,621
$
28,068
$
26,697
$
30,035
$
25,481
$
35,443
Finance receivables, net
Accounts receivable, net
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
1,078,951
973,594
966,508
945,242
926,734
919,478
879,515
866,992
10,486
25,312
8,417
25,506
109,488
100,456
20,364
11,668
21,167
9,070
8,580
26,016
99,384
22,364
8,265
9,107
26,369
97,480
27,179
8,581
7,862
25,727
61,678
14,596
7,829
6,462
22,975
61,678
14,748
8,728
6,683
23,810
61,678
15,965
8,485
7,369
24,469
61,678
17,215
6,933
$ 1,288,956
$ 1,169,698
$ 1,173,738
$ 1,142,026
$ 1,071,123
$ 1,064,104
$ 1,021,617
$ 1,020,099
Liabilities and Equity
Liabilities
Accounts payable
Accrued expenses
Income taxes payable
Accrued compensation
Net deferred tax liability
Line of credit
Long-term debt
Total liabilities
Redeemable noncontrolling
interest
Stockholders’ equity
Common stock
Additional paid in capital
Retained earnings
Accumulated other
comprehensive income
Total stockholders’ equity
$
12,155
$
10,234
$
10,508
$
10,915
$
7,439
$
5,148
$
5,326
$
11,197
7,359
13,241
186,506
250,000
674
6,859
8,468
11,588
190,639
292,000
849
7,852
16,688
6,854
194,286
265,000
936
6,076
13,109
16,036
193,898
220,000
1,246
5,856
2,651
11,409
192,298
260,000
1,553
4,389
2,877
10,563
188,142
250,000
1,856
7,498
2,620
1,577
6,300
179,043
290,000
2,098
18,953
3,125
12,804
185,277
127,000
200,542
559,856
479,211
520,911
502,531
457,804
478,915
463,153
489,136
20,673
19,998
19,381
18,783
17,831
16,884
16,068
15,253
169
151,216
554,191
169
149,818
518,389
169
147,881
485,075
172
166,133
453,060
171
167,719
427,598
171
167,126
401,008
171
166,723
375,502
171
165,611
349,928
2,851
2,113
321
1,347
—
—
—
—
708,427
670,489
633,446
620,712
595,488
568,305
542,396
515,710
Total liabilities and equity
$ 1,288,956
$ 1,169,698
$ 1,173,738
$ 1,142,026
$ 1,071,123
$ 1,064,104
$ 1,021,617
$ 1,020,099
30
Below are certain key financial data and ratios as of and for the years ended December 31, 2012, 2011 and 2010:
FINANCIAL HIGHLIGHTS
2012
2011
2010
EARNINGS (in thousands)
Income recognized on finance receivables, net
Fee income
Total revenues
Operating expenses
Income from operations
Net interest expense
Net income
Net income attributable to Portfolio Recovery Associates, Inc.
PERIOD-END BALANCES (in thousands)
Cash and cash equivalents
Finance receivables, net
Goodwill and intangible assets, net
Total assets
Line of credit and long-term debt
Total liabilities
Total equity
FINANCE RECEIVABLE COLLECTIONS (dollars in thousands)
Cash collections
Principal amortization without allowance charges
Principal amortization with allowance charges
Principal amortization w/ allowance charges as % of cash collections:
Including fully amortized pools
Excluding fully amortized pools
ALLOWANCE FOR FINANCE RECEIVABLES (dollars in thousands)
Balance at period-end
Allowance charge
Allowance charge to period-end net finance receivables
Allowance charge to net finance receivable income
Allowance charge to cash collections
PURCHASES OF FINANCE RECEIVABLES (1) (dollars in thousands)
Purchase price—core
Face value—core
Purchase price—bankruptcy
Face value—bankruptcy
Purchase price—total
Face value—total
Number of portfolios—total
ESTIMATED REMAINING COLLECTIONS (1) (in thousands)
Estimated remaining collections—core
Estimated remaining collections—bankruptcy
Estimated remaining collections—total
SHARE DATA (share amounts in thousands)
$
$
$
$
$
$
$
$
$
Net income per common share—diluted
Weighted average number of shares outstanding—diluted
Shares repurchased
Average price paid per share repurchased (including acquisition costs)
Closing market price
RATIOS AND OTHER DATA (dollars in thousands)
Return on average equity (2)
Return on revenue (3)
Operating margin (4)
Operating expense to cash receipts (5)
Debt to equity (6)
Number of employees
Cash receipts (5)
Line of credit—unused portion at period end
(1) Domestic portfolio only.
(2) Calculated as net income divided by average equity for the year.
(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.
$
31
530,635
62,166
592,801
376,737
216,064
9,031
126,099
126,593
32,687
1,078,951
129,852
1,288,956
327,542
559,856
708,427
908,684
371,497
378,049
41.6%
43.0%
93,123
6,552
0.61%
1.23%
0.72%
259,795
3,581,246
262,630
2,104,977
522,425
5,686,223
376
1,387,711
905,136
2,292,847
7.39
17,123
331
68.57
106.86
19.6%
21.3%
36.4%
38.8%
46.3%
3,221
970,852
273,000
$
$
$
$
$
$
$
$
$
401,895
57,040
458,935
282,067
178,025
10,562
101,144
100,791
26,697
926,734
76,274
1,071,123
221,246
457,804
595,488
705,490
293,431
303,595
43.0%
45.4%
86,571
10,164
1.10%
2.53%
1.44%
213,389
7,900,762
195,019
1,891,595
408,408
9,792,356
333
1,159,086
794,262
1,953,348
5.85
17,230
—
—
67.52
18.5%
22.0%
38.8%
37.0%
37.2%
2,641
762,530
187,500
$
$
$
$
$
$
$
$
$
309,680
63,026
372,706
242,844
129,862
8,987
73,871
73,454
41,094
831,330
80,144
995,908
302,396
490,943
490,516
529,342
194,510
219,662
41.5%
44.8%
76,407
25,152
3.03%
8.12%
4.75%
149,998
3,424,313
217,445
3,380,639
367,443
6,804,952
305
974,108
749,410
1,723,518
4.35
16,885
—
—
75.20
16.6%
19.8%
34.8%
41.0%
61.6%
2,473
592,368
107,500
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
PRA is a financial and business services company. Our primary business is the purchase, collection and management of portfolios
of defaulted consumer receivables. We also service receivables on behalf of clients on either a commission or transaction-fee basis as
well as providing class action claims settlement recovery services and related payment processing to our corporate clients.
PRA is headquartered in Norfolk, Virginia, and employs approximately 3,200 people. The shares of PRA are traded on the
NASDAQ Global Select Market under the symbol “PRAA.”
On January 16, 2012, we acquired 100% of the equity interest in MHH, a United Kingdom debt collection and purchase group.
Based in Kilmarnock, Scotland, MHH employs approximately 176 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.
On December 21, 2012, we acquired certain assets of National Capital Management, LLC ("NCM"), a bankruptcy debt buying
and claims processing business. These assets include secured and unsecured consumer bankruptcy accounts and operating assets
associated with the underwriting and collection of secured bankruptcy claims. The transaction also included the hiring of approximately
25 employees.
Earnings Summary
For the year ended December 31, 2012, net income attributable to PRA was $126.6 million, or $7.39 per diluted share, compared
with $100.8 million, or $5.85 per diluted share, for the year ended December 31, 2011. Total revenues were $592.8 million for the year
ended December 31, 2012, up 29.2% from the same year ago period. Revenues during the year ended December 31, 2012 consisted
of $530.6 million in income recognized on finance receivables, net of allowance charges, and $62.2 million in fee income. Income
recognized on finance receivables, net of allowance charges, for the year ended December 31, 2012 increased $128.7 million, or 32.0%,
over 2011, primarily as a result of a significant increase in cash collections. Cash collections were $908.7 million during the year ended
December 31, 2012, up 28.8% over $705.5 million in the year ended December 31, 2011. During the year ended December 31, 2012,
PRA recorded $6.6 million in net allowance charges, compared with $10.2 million in the year ended December 31, 2011. Our
performance has been positively impacted by operational efficiencies surrounding the cash collections process, including the continued
refinement of account scoring analytics as it relates to both legal and non-legal collection channels. Additionally, we have continued
to develop our internal legal collection staff resources, which enables us to place accounts into that channel that otherwise would have
been prohibitively expensive for legal action and to collect these accounts more efficiently and profitably.
Fee income increased from $57.0 million for the year ended December 31, 2011 to $62.2 million in 2012, primarily due to the
acquisition of MHH in the first quarter of 2012. This increase was partially offset by declines in revenue generated by both our PLS
business and CCB. The decline from PLS is due primarily to the adverse impact of the economic slowdown on automobile financing
and related collateral recovery activities. The decline from CCB is due primarily to larger distributions of class action settlements in
the year ended December 31, 2011 as compared to the year ended December 31, 2012.
A summary of how our revenue was generated during the year ended December 31, 2012, 2011 and 2010 is as follows:
(in thousands)
Cash collections
Principal amortization
Net allowance charges
Income recognized on finance receivables, net
Fee income
Total revenues
2012
2011
2010
$
$
908,684
(371,497)
(6,552)
530,635
62,166
$
705,490
(293,431)
(10,164)
401,895
57,040
$
592,801
$
458,935
$
529,342
(194,510)
(25,152)
309,680
63,026
372,706
Operating expenses were $376.7 million for the year ended December, 31, 2012, up 33.5% as compared to the year ended
December 31, 2011, due primarily to increases in compensation expense, legal collection costs, legal collection fees and outside fees
and services. Compensation expense increased primarily as a result of larger staff sizes, including the acquisition of MHH on January
16, 2012, as well as an increase in share-based compensation expense. Compensation and employee services expenses increased as
total employees grew 22.0% to 3,221 as of December 31, 2012 from 2,641 as of December 31, 2011. Legal collection costs were
$72.3 million for the year ended December 31, 2012 compared to $38.7 million for the year ended December 31, 2011, an increase of
$33.6 million or 86.8%. This increase was the result of an increased portfolio size as well as a refinement of our internal scoring
32
methodology that expanded our account selections for legal action. This strategy to expand the accounts brought into the legal collection
process resulted in significant initial expenses, which may drive additional future cash collections and revenue. Legal collection fees
increased from $23.6 million for the year ended December 31, 2011 to $34.4 million for the year ended December 31, 2012, an increase
of $10.8 million or 45.8%. This increase was the result of an increase in cash collections from outside attorneys from $106.3 million
in the year ended December 31, 2011 to $157.8 million for the year ended December 31, 2012, an increase of $51.5 million or 48.4%.
Outside fees and services increased primarily as a result of legal related expenses as well as increases in costs related to software
development.
Results of Operations
The results of operations include the financial results of PRA and all of our subsidiaries, all of which are in the receivables
management business. Under the guidance of the FASB ASC Topic 280 “Segment Reporting” (“ASC 280”), we have determined that
we have several operating segments that meet the aggregation criteria of ASC 280, and therefore, we have one reportable segment,
accounts receivables management, based on similarities among the operating units including homogeneity of services, service delivery
methods and use of technology.
The following table sets forth certain operating data as a percentage of total revenues for the years indicated:
2012
2011
2010
Revenues:
Income recognized on finance
receivables, net
Fee income
Total revenues
Operating expenses:
$
530,635
89.5% $ 401,895
87.6% $ 309,680
83.1%
62,166
592,801
10.5
100.0
57,040
458,935
12.4
100.0
63,026
372,706
16.9
100.0
Compensation and employee services
168,356
138,202
30.1
124,077
33.3
Legal collection fees
Legal collection costs
Agent fees
Outside fees and services
Communications
Rent and occupancy
Depreciation and amortization
Other operating expenses
Total operating expenses
Gain on sale of property
Income from operations
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Adjustment for net loss/(income)
attributable to redeemable
noncontrolling interest
Net income attributable to Portfolio Recovery
Associates, Inc.
34,393
72,325
5,906
28,867
29,110
6,781
14,515
16,484
376,737
—
216,064
10
(9,041)
207,033
80,934
28.4
5.8
12.2
1.0
4.9
4.9
1.1
2.4
2.8
63.5
—
36.4
0.0
(1.5)
34.9
13.7
23,621
38,659
7,653
19,310
23,372
5,891
12,943
12,416
282,067
1,157
178,025
7
(10,569)
167,463
66,319
5.1
8.4
1.7
4.2
5.1
1.3
2.8
2.7
61.4
0.3
38.9
0.0
(2.3)
36.6
14.5
17,599
31,330
12,012
12,554
17,226
5,313
12,437
10,296
242,844
—
129,862
65
(9,052)
120,875
47,004
73,870
4.7
8.4
3.2
3.4
4.6
1.4
3.3
2.8
65.2
0.0
34.8
0.0
(2.4)
32.4
12.6
19.8%
$
126,099
21.3% $ 101,144
22.1% $
494
0.1
(353)
(0.1)
(417)
(0.1)
$
126,593
21.4% $ 100,791
22.0% $
73,454
19.7%
33
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenues
Total revenues were $592.8 million for the year ended December 31, 2012, an increase of $133.9 million or 29.2% compared to
total revenues of $458.9 million for the year ended December 31, 2011.
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net, was $530.6 million for the year ended December 31, 2012, an increase of $128.7
million or 32.0% compared to income recognized on finance receivables, net, of $401.9 million for the year ended December 31, 2011.
The increase was primarily due to an increase in cash collections on our owned finance receivables to $908.7 million for the year ended
December 31, 2012 compared to $705.5 million for the year ended December 31, 2011, an increase of $203.2 million or 28.8%. Our
finance receivables amortization rate, including net allowance charges, was 41.6% for the year ended December 31, 2012 compared
to 43.0% for the year ended December 31, 2011. During the year ended December 31, 2012, excluding the initial investment in the
MHH portfolio, we acquired finance receivables portfolios with an aggregate face value amount of $6.2 billion at a cost of $538.5
million. During the year ended December 31, 2011, we acquired finance receivable portfolios with an aggregate face value of $9.8
billion at a cost of $408.4 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age,
type and ultimate collectability. We may pay significantly different purchase rates for purchased receivables within any period as a
result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality
fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying
activity in that period. However, regardless of the average purchase price and for similar time frames, we intend to target a similar
internal rate of return, after direct expenses, in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily
relevant to the estimated profitability of a period's buying.
Income recognized on finance receivables, net, is shown net of changes in valuation allowances recognized under FASB ASC
Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), which requires that a valuation
allowance be recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise
require a reduction in the stated yield on a pool of accounts. For the year ended December 31, 2012, we recorded net allowance charges
of $6.6 million, $8.6 million of which related to purchased bankruptcy portfolios acquired mainly in 2007 and 2008, offset by a net
reversal of $2.0 million on Core portfolios. For the year ended December 31, 2011, we recorded net allowance charges of $10.2 million,
$6.6 million of which related to Core portfolios acquired mainly in 2005 through 2008 and $3.6 million of which related to purchased
bankruptcy portfolios acquired mainly in 2007 through 2008. In any given period, we may be required to record valuation allowances
due to pools of receivables underperforming our expectations. Factors that may contribute to the recording of valuation allowances
may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently
to the overall profitability, of purchased pools of defaulted consumer receivables include: new laws or regulations relating to collections,
new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an
impact on the collectability, and subsequently the overall profitability, of purchased pools of defaulted consumer receivables would
include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (relating
to the collection and movement of accounts on both our collection floor and external channels), and decreases in productivity related
to turnover of our collection staff.
Fee Income
Fee income was $62.2 million for the year ended December 31, 2012, an increase of $5.2 million or 9.1% compared to fee income
of $57.0 million for the year ended December 31, 2011. Fee income increased primarily due to the acquisition of MHH in the first
quarter of 2012. This increase was partially offset by declines in revenue generated by both our PLS and CCB businesses. The decline
from PLS is due primarily to the adverse impact of the economic slowdown on automobile financing and related collateral recovery
activities. The decline from CCB is due primarily to larger distributions of class action settlements in the year ended December 31,
2011 as compared to the year ended December 31, 2012. We anticipate, based on available data on hand at December 31, 2012, that
CCB's fee income should increase in 2013. In particular, we believe there will likely be one large class action settlement which could
generate approximately $4.0 to $6.0 million or more in fee income.
Operating Expenses
Total operating expenses were $376.7 million for the year ended December 31, 2012, an increase of $94.6 million or 33.5%
compared to total operating expenses of $282.1 million for the year ended December 31, 2011. Total operating expenses were 38.8%
of cash receipts for the year ended December 31, 2012 compared with 37.0% for the year ended December 31, 2011.
34
Compensation and Employee Services
Compensation and employee service expenses were $168.4 million for the year ended December 31, 2012, an increase of $30.2
million or 21.9% compared to compensation and employee service expenses of $138.2 million for the year ended December 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, as well as an increase in share-based compensation expense. Total employees grew 22.0%
to 3,221 as of December 31, 2012 from 2,641 as of December 31, 2011. Additionally, existing employees received normal salary
increases. Compensation and employee service expenses as a percentage of cash receipts decreased to 17.3% for the year ended
December 31, 2012 from 18.1% of cash receipts for the year ended December 31, 2011.
Legal Collection Fees
Legal collection fees represent contingent fees incurred for the cash collections generated by our independent third party attorney
network. Legal collection fees were $34.4 million for the year ended December 31, 2012, an increase of $10.8 million, or 45.8%,
compared to legal collection fees of $23.6 million for the year ended December 31, 2011. This increase was the result of an increase
in our external legal collections which increased $51.5 million or 48.4%, from $106.3 million for the year ended December 31, 2011
to $157.8 million for the year ended December 31, 2012. Legal collection fees for the year ended December 31, 2012 were 3.5% of
cash receipts, compared to 3.1% for the year ended December 31, 2011.
Legal Collection Costs
Legal collection costs consist of costs paid to courts where a lawsuit is filed and the cost of documents paid to sellers of defaulted
consumer receivables. Legal collection costs were $72.3 million for the year ended December 31, 2012, an increase of $33.6 million,
or 86.8%, compared to legal collection costs of $38.7 million for the year ended December 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
may drive additional future cash collections and revenue. These legal collection costs represent 7.4% and 5.1% of cash receipts for
the years ended December 31, 2012 and 2011, respectively.
Agent Fees
Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $5.9 million for the year
ended December 31, 2012, a decrease of $1.8 million, or 23.4%, compared to agent fees of $7.7 million for the year ended December 31,
2011. The decrease was mainly due to reduced business activity associated with PLS.
Outside Fees and Services
Outside fees and services expenses were $28.9 million for the year ended December 31, 2012, an increase of $9.6 million or
49.7% compared to outside legal and other fees and services expenses of $19.3 million for the year ended December 31, 2011. Of the
$9.6 million increase, $8.1 million was attributable to an increase in legal reserve accruals and corporate legal expenses and the
remaining $1.5 million increase was attributable to other outside fees and services including increases in non-capitalized software
development costs.
Communications
Communications expenses were $29.1 million for the year ended December 31, 2012, an increase of $5.7 million or 24.4%
compared to communications expenses of $23.4 million for the year ended December 31, 2011. The increase was primarily due to
additional postage expense resulting from an increase in special letter campaigns. The remaining increase was mainly attributable to
telephone expenses incurred by MHH. Expenses related to customer mailings were responsible for 84.2% or $4.8 million of this
increase, while the remaining 15.8% or $0.9 million was attributable to increased telephone and telecommunication related expenses.
Rent and Occupancy
Rent and occupancy expenses were $6.8 million for the year ended December 31, 2012, an increase of $0.9 million or 15.3%
compared to rent and occupancy expenses of $5.9 million for the year ended December 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 $14.5 million for the year ended December 31, 2012, an increase of $1.6 million
or 12.4% compared to depreciation and amortization expenses of $12.9 million for the year ended December 31, 2011. The increase
35
was primarily due to the additional depreciation and amortization expense incurred as a result of the acquisition of MHH and its related
property, equipment and intangible assets.
Other Operating Expenses
Other operating expenses were $16.5 million for the year ended December 31, 2012, an increase of $4.1 million or 33.1%
compared to other operating expenses of $12.4 million for the year ended December 31, 2011. Of the $4.1 million increase, $0.9 million
was due to an increase in the provision for doubtful accounts, $0.8 million was due to an increase in travel and travel related expenses,
$0.4 million was primarily attributable to additional taxes, fees and licenses, $0.5 million was due to an increase in repairs and
maintenance and $0.4 million was due to increased insurance expenses, when compared to the year ended December 31, 2011. None
of the remaining $1.1 million increase was attributable to any significant identifiable items.
Gain on Sale of Property
Gain on sale of property was $0 for the year ended December 31, 2012, compared to $1.2 million for the year ended December 31,
2011. The 2011 amount was the result of the sale of a parcel of land adjacent to our Norfolk headquarters during 2011.
Interest Expense
Interest expense was $9.0 million for the year ended December 31, 2012, a decrease of $1.6 million or 15.1% compared to interest
expense of $10.6 million for the year ended December 31, 2011. The decrease was mainly due to a decrease in our weighted average
interest rate which decreased to 3.27% for the year ended December 31, 2012 from 3.71% for the year ended December 31, 2011, as
well as a decrease in our average borrowings to $258.0 million for the year ended December 31, 2012 compared to $263.2 million for
the year ended December 31, 2011.
Provision for Income Taxes
Income tax expense was $80.9 million for the year ended December 31, 2012, an increase of $14.6 million or 22.0% compared
to income tax expense of $66.3 million for the year ended December 31, 2011. The increase was mainly due to an increase of 23.6%
in income before taxes for the year ended December 31, 2012 when compared to the year ended December 31, 2011. This was partially
offset by a decrease in the effective tax rate to 39.1% for the year ended December 31, 2012 compared to 39.6% for the year ended
December 31, 2011. The decrease in the effective tax rate is primarily attributable to the tax benefits created by our international
operations.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues
Total revenues were $458.9 million for the year ended December 31, 2011, an increase of $86.2 million or 23.1% compared to
total revenues of $372.7 million for the year ended December 31, 2010.
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net was $401.9 million for the year ended December 31, 2011, an increase of $92.2
million or 29.8% compared to income recognized on finance receivables, net of $309.7 million for the year ended December 31, 2010.
The increase was primarily due to an increase in cash collections on our owned finance receivables to $705.5 million for the year ended
December 31, 2011 compared to $529.3 million for the year ended December 31, 2010, an increase of $176.2 million or 33.3%. Our
finance receivables amortization rate, including net allowance charges, was 43.0% for the year ended December 31, 2011 compared
to 41.5% for the year ended December 31, 2010. During the year ended December 31, 2011, we acquired finance receivables portfolios
with an aggregate face value amount of $9.8 billion at a cost of $408.4 million. During the year ended December 31, 2010, we acquired
finance receivable portfolios with an aggregate face value of $6.8 billion at a cost of $367.4 million. In any period, we acquire defaulted
consumer receivables that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different
purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive
pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any
given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average
purchase price and for similar time frames, we intend to target a similar internal rate of return, after direct expenses, in pricing our
portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to the estimated profitability of a period’s buying.
Income recognized on finance receivables, net is shown net of changes in valuation allowances recognized under FASB ASC
Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), which requires that a valuation
allowance be recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise
require a reduction in the stated yield on a pool of accounts. For the year ended December 31, 2011, we recorded net allowance charges
36
of $10.2 million, $6.6 million of which related to core portfolios acquired mainly in 2005 through 2008 and $3.6 million of which
related to purchased bankruptcy portfolios acquired mainly in 2007 through 2008. For the year ended December 31, 2010, we recorded
net allowance charges of $25.2 million, the majority of which related to non-bankruptcy portfolios acquired in 2005 through 2007. 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 relate 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 $57.0 million for the year ended December 31, 2011, a decrease of $6.0 million or 9.5% compared to fee income
of $63.0 million for the year ended December 31, 2010. Fee income declined as a result of a decrease in revenue generated by our PLS
fee-for-service business, which was partially offset by an increase in revenue generated by our PRA GS government processing and
collection business. The decline at PLS was due primarily to a decrease in volume related to a continued decline in automobile financing
activity nationwide.
Operating Expenses
Total operating expenses were $282.1 million for the year ended December 31, 2011, an increase of $39.3 million or 16.2%
compared to total operating expenses of $242.8 million for the year ended December 31, 2010. Total operating expenses were 37.0%
of cash receipts for the year ended December 31, 2011 compared with 41.0% for the year ended December 31, 2010.
Compensation and Employee Services
Compensation and employee service expenses was $138.2 million for the year ended December 31, 2011, an increase of $14.1
million or 11.4% compared to compensation and employee service expenses of $124.1 million for the year ended December 31, 2010.
This increase was mainly due to an overall increase in our owned portfolio collection staff as well as an increase in share-based
compensation expense. Total employees grew 6.8% to 2,641 as of December 31, 2011 from 2,473 as of December 31, 2010. Additionally,
existing employees received normal salary increases. Compensation and employee service expenses as a percentage of cash receipts
decreased to 18.1% for the year ended December 31, 2011 from 21.0% of cash receipts for the year ended December 31, 2010.
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 $23.6 million for the year ended December 31, 2011, an increase of $6.0 million, or 34.1%,
compared to legal collection fees of $17.6 million for the year ended December 31, 2010. This increase was the result of an increase
in our external legal collections which increased $27.5 million or 35.0%, from $78.8 million for the year ended December 31, 2010
to $106.3 million for the year ended December 31, 2011. Legal collection fees for the year ended December 31, 2011 were 3.1% of
cash receipts, compared to 3.0% for the year ended December 31, 2010.
Legal Collection Costs
Legal collection costs are costs paid to courts where a lawsuit is filed. It also includes the cost of documents paid to sellers of
defaulted consumer receivables. Legal collection costs were $38.7 million for the year ended December 31, 2011, an increase of $7.4
million, or 23.6%, compared to legal collection costs of $31.3 million for the year ended December 31, 2010. The increase was
attributable to an increase in legal collection costs resulting from accounts referred to both our in-house attorneys and outside independent
contingent fee attorneys due to portfolio growth and the refinement of our internal scoring methodology that expanded our account
selections for legal action. In addition, the growth in the size of our owned debt portfolios resulted in additional document costs related
to the filing of more lawsuits. These legal collection costs represent 4.6% and 4.9% of cash receipts for the years ended December 31,
2011 and 2010, respectively.
Agent Fees
Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $7.7 million for the year
ended December 31, 2011, a decrease of $4.3 million, or 35.8%, compared to agent fees of $12.0 million for the year ended December 31,
2010. The decrease was mainly due to a decline in agent fees related to reduced business activity associated with PLS.
37
Outside Fees and Services
Outside fees and service expenses were $19.3 million for the year ended December 31, 2011, an increase of $6.7 million or
53.2% compared to outside fees and service expenses of $12.6 million for the year ended December 31, 2010. Of the $6.7 million
increase, $4.5 million was attributable to an increase in our corporate legal expenses while the remaining $2.2 million increase was
due to increases in other outside fees and services and accounting fees.
Communications
Communications expenses were $23.4 million for the year ended December 31, 2011, an increase of $6.2 million or 36.0%
compared to communications expenses of $17.2 million for the year ended December 31, 2010. The increase was mainly due to a
growth in mailings due to 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 related calls
that are generated by the dialer. Mailings were responsible for 90.3% or $5.6 million of this increase, while the remaining 9.7% or
$0.6 million was attributable to increased call volumes.
Rent and Occupancy
Rent and occupancy expenses were $5.9 million for the year ended December 31, 2011, an increase of $0.6 million or 11.3%
compared to rent and occupancy expenses of $5.3 million for the year ended December 31, 2010. The increase was due to several new
leases being entered into in the latter part of 2010 and in 2011, the additional space resulting from our acquisition of a 62% controlling
interest in CCB on March 15, 2010, and other renewals and expansions, as well as increased utility charges.
Depreciation and Amortization
Depreciation and amortization expenses were $12.9 million for the year ended December 31, 2011, an increase of $0.5 million
or 4.0% compared to depreciation and amortization expenses of $12.4 million for the year ended December 31, 2010. The increase
was mainly due to the continued capital expenditures on equipment, software and computers related to our growth and systems upgrades.
Other Operating Expenses
Other operating expenses were $12.4 million for the year ended December 31, 2011, an increase of $2.1 million or 20.4%
compared to other operating expenses of $10.3 million for the year ended December 31, 2010. The increase was mainly due to increases
in various expenses related to general growth of PRA. No individual item represents a significant portion of the overall increase.
Interest Income
Interest income was $7,000 for the year ended December 31, 2011, a decrease of $58,000 compared to interest income of $65,000
for the year ended December 31, 2010. This decrease was the result of interest earned and a refund received on the overpayment of
federal and state income taxes in 2010 that did not occur in 2011.
Interest Expense
Interest expense was $10.6 million for the year ended December 31, 2011, an increase of $1.5 million or 16.5% compared to
interest expense of $9.1 million for the year ended December 31, 2010. The increase was mainly due to an increase in our weighted
average interest rate which increased to 3.71% for the year ended December 31, 2011 from 2.46% for the year ended December 31,
2010, partially offset by a decrease in our average variable rate borrowings to $213.2 million for the year ended December 31, 2011
compared to $244.2 million for the year ended December 31, 2010.
Provision for Income Taxes
Income tax expense was $66.3 million for the year ended December 31, 2011, an increase of $19.3 million or 41.1% compared
to income tax expense of $47.0 million for the year ended December 31, 2010. The increase was mainly due to an increase of 38.5%
in income before taxes for the year ended December 31, 2011 when compared to the same period in 2010 as well as an increase in the
effective tax rate of 39.6% for the year ended December 31, 2011 compared to 38.9% for the same period in 2010. The increase in the
effective tax rate is primarily attributable to an increase in the state effective rate due to a change in the mix of income apportionment
between various states.
38
Supplemental Performance Data
Domestic Finance Receivables Portfolio Performance:
The following tables show certain data related to our domestic finance receivables 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.
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 2012 described in the
tables below are lower than multiples in previous years. For the purchase years 2005-2008, this trend is primarily, but not entirely,
related to increased pricing competition. When competition increases and/or supply decreases, pricing often becomes negatively
impacted relative to expected collections, and yields tend to trend lower. The opposite tends to occur when competition decreases and/
or supply increases. The multiples associated with the purchase years 2009-2012 are additionally the result of pricing displacements
that occurred as a result of the economic downturn. This phenomenon coupled with the relative newness of the portfolios as described
below, results in lower multiples.
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 multiples 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.
39
Entire Portfolio
Domestic Portfolio Data – Life-to-Date
Inception through December 31, 2012
As of December 31, 2012
($ in thousands)
Purchase
Period
Purchase
Price
Actual
Cash
Collections
Including
Cash
Sales
Income
Recognized
on Finance
Receivables
Principal
Amortization
Net
Allowance
Charges
Income
Recognized
on Finance
Receivables,
Net
Net
Finance
Receivables
Balance
Estimated
Remaining
Collections
Total
Estimated
Collections
Total Estimated
Collections
to Purchase
Price
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$
3,080 $
10,183
$
7,060
$
3,123
$
— $
7,060
$
— $
39
$
10,222
7,685
11,089
18,898
25,020
33,481
42,325
61,448
59,176
143,168
107,674
258,397
275,165
281,456
358,143
394,198
518,333
25,422
37,178
68,872
115,316
173,568
195,044
259,874
193,754
301,186
199,716
449,362
430,738
599,137
539,508
318,030
74,289
17,318
26,192
49,697
90,120
139,216
152,719
198,426
135,778
180,002
123,726
247,160
243,565
391,142
318,917
179,319
47,982
8,104
10,986
19,175
25,196
34,352
42,325
61,448
57,976
121,184
75,990
202,202
187,173
207,995
220,591
138,711
26,307
—
—
—
—
—
—
—
1,200
13,688
22,515
22,875
32,845
—
—
—
—
17,318
26,192
49,697
90,120
139,216
152,719
198,426
134,578
166,314
101,211
224,285
210,720
391,142
318,917
179,319
47,982
—
—
—
—
—
—
—
—
8,298
9,170
33,314
55,112
73,461
137,577
255,488
492,013
168
404
1,075
2,492
3,518
6,321
12,485
11,257
14,681
15,278
58,574
91,374
252,549
402,726
556,211
863,694
25,590
37,582
69,947
117,808
177,086
201,365
272,359
205,011
315,867
214,994
507,936
522,112
851,686
942,234
874,241
937,983
Total
$2,598,736 $ 3,991,177
$ 2,548,339
$ 1,442,838
$
93,123
$ 2,455,216
$ 1,064,433
$ 2,292,846
$ 6,284,023
332%
333%
339%
370%
471%
529%
476%
443%
346%
221%
200%
197%
190%
303%
263%
222%
181%
242%
Purchased Bankruptcy Portfolio
Inception through December 31, 2012
As of December 31, 2012
($ in thousands)
Purchase
Period
Purchase
Price
Actual
Cash
Collections
Including
Cash
Sales
Income
Recognized
on Finance
Receivables
Principal
Amortization
Net
Allowance
Charges
Income
Recognized
on Finance
Receivables,
Net
Net
Finance
Receivables
Balance
Estimated
Remaining
Collections
Total
Estimated
Collections
Total Estimated
Collections
to Purchase
Price
1996-
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$
— $
— $
— $
— $
— $
— $
— $
— $
—
7,468
29,301
17,630
78,544
108,607
156,053
209,224
182,175
258,317
14,402
43,472
31,146
102,925
152,538
309,083
269,005
81,597
17,388
8,134
14,719
14,526
35,192
69,169
197,120
147,075
39,466
10,516
6,268
28,753
16,620
67,733
83,369
111,963
121,930
42,131
6,872
1,200
493
900
9,280
6,750
—
—
—
—
6,934
14,226
13,626
25,912
62,419
197,120
147,075
39,466
10,516
—
56
110
1,531
18,488
44,090
87,294
140,044
251,445
99
97
340
1,871
23,354
133,617
202,454
209,336
333,968
14,501
43,569
31,486
104,796
175,892
442,700
471,459
290,933
351,356
Total
$1,047,319 $ 1,021,556
$
535,917
$
485,639
$
18,623
$
517,294
$
543,058
$ 905,136
$ 1,926,692
—%
194%
149%
179%
133%
162%
284%
225%
160%
136%
184%
40
Core Portfolio
Inception through December 31, 2012
As of December 31, 2012
($ in thousands)
Purchase
Period
Purchase
Price
Actual
Cash
Collections
Including
Cash
Sales
Income
Recognized
on Finance
Receivables
Principal
Amortization
Net
Allowance
Charges
Income
Recognized
on Finance
Receivables,
Net
Net
Finance
Receivables
Balance
Estimated
Remaining
Collections
Total
Estimated
Collections
Total Estimated
Collections
to Purchase
Price
1996
$
3,080 $
10,183
$
7,060
$
3,123
$
— $
7,060
$
— $
39
$
10,222
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
7,685
11,089
18,898
25,422
37,178
68,872
25,020
115,316
33,481
173,568
42,325
195,044
61,448
259,874
51,708
179,352
113,867
257,714
90,044
168,570
179,853
346,437
166,558
278,200
125,403
290,054
148,919
270,503
212,023
236,433
260,016
56,901
17,318
26,192
49,697
90,120
139,216
152,719
198,426
127,644
165,283
109,200
211,968
174,396
194,022
171,842
139,853
37,466
8,104
10,986
19,175
25,196
34,352
42,325
61,448
51,708
92,431
59,370
134,469
103,804
96,032
98,661
96,580
19,435
—
—
—
—
—
—
—
—
13,195
21,615
13,595
26,095
—
—
—
—
17,318
26,192
49,697
90,120
139,216
152,719
198,426
127,644
152,088
87,585
198,373
148,301
194,022
171,842
139,853
—
—
—
—
—
—
—
—
8,242
9,060
31,783
36,624
29,371
50,283
168
404
1,075
2,492
3,518
6,321
12,485
11,158
14,584
14,938
56,703
68,020
25,590
37,582
69,947
117,808
177,086
201,365
272,359
190,510
272,298
183,508
403,140
346,220
118,932
408,986
200,272
470,775
115,444
346,875
583,308
37,466
240,568
529,726
586,627
332%
333%
339%
370%
471%
529%
476%
443%
368%
239%
204%
224%
208%
326%
316%
275%
226%
Total
$1,551,417 $ 2,969,621
$ 2,012,422
$
957,199
$
74,500
$ 1,937,922
$
521,375
$ 1,387,710
$ 4,357,331
281%
41
Domestic Portfolio Data – 2012
Entire Portfolio
($ in thousands)
Purchase
Period
Purchase
Price
Actual
Cash
Collections
Including
Cash
Sales
For the Year Ended December 31, 2012
As of December 31, 2012
Income
Recognized
on Finance
Receivables
Principal
Amortization
Net
Allowance
Charges
Income
Recognized
on Finance
Receivables,
Net
Net
Finance
Receivables
Balance
Estimated
Remaining
Collections
Total
Estimated
Collections
Total Estimated
Collections
to Purchase
Price
1996
$
3,080 $
39
$
39
$
— $
— $
39
$
— $
39
$
10,222
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
7,685
11,089
18,898
25,020
33,481
42,325
61,448
59,176
143,168
107,674
258,397
275,165
112
241
709
1,927
3,104
4,768
7,477
6,604
13,302
12,560
47,136
71,806
281,456
177,273
358,143
234,893
394,198
240,840
518,333
74,289
112
241
709
1,927
3,104
4,768
7,477
6,604
6,074
6,347
21,649
28,699
119,013
143,501
133,374
47,982
—
—
—
—
—
—
—
—
7,228
6,213
25,487
43,107
58,260
91,392
107,466
26,307
—
—
—
—
—
—
—
—
(4,258)
2,100
3,410
5,300
—
—
—
—
112
241
709
1,927
3,104
4,768
7,477
6,604
10,332
4,247
18,239
23,399
119,013
143,501
133,374
—
—
—
—
—
—
—
—
8,298
9,170
33,314
55,112
73,461
168
404
1,075
2,492
3,518
6,321
12,485
11,257
14,681
15,278
58,574
91,374
25,590
37,582
69,947
117,808
177,086
201,365
272,359
205,012
315,867
214,993
507,937
522,112
252,549
851,686
137,577
402,726
942,234
255,488
556,211
874,240
47,982
492,013
863,694
937,983
332%
333%
339%
370%
471%
529%
476%
443%
346%
221%
200%
197%
190%
303%
263%
222%
181%
Total
$2,598,736 $ 897,080
$
531,620
$
365,460
$
6,552
$
525,068
$ 1,064,433
$ 2,292,846
$ 6,284,023
242%
Purchased Bankruptcy Portfolio
For the Year Ended December 31, 2012
As of December 31, 2012
($ in thousands)
Purchase
Period
Purchase
Price
Actual
Cash
Collections
Including
Cash
Sales
Income
Recognized
on Finance
Receivables
Principal
Amortization
Net
Allowance
Charges
Income
Recognized
on Finance
Receivables,
Net
Net
Finance
Receivables
Balance
Estimated
Remaining
Collections
Total
Estimated
Collections
Total Estimated
Collections
to Purchase
Price
1996-
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$
— $
— $
— $
— $
— $
— $
— $
— $
—
7,468
29,301
17,630
78,544
108
250
665
7,551
108,607
28,956
156,053
107,888
209,224
125,020
182,175
258,317
66,379
17,388
108
49
407
1,144
8,224
66,755
65,740
28,959
10,516
—
201
258
6,407
20,732
41,133
59,280
37,420
6,872
—
(188)
(300)
4,170
4,950
—
—
—
—
108
237
707
(3,026)
3,274
66,755
65,740
28,959
10,516
—
56
110
1,531
18,488
44,090
87,294
99
97
340
14,501
43,569
31,486
1,871
104,796
23,354
175,892
133,617
442,700
202,454
471,459
140,044
209,336
290,933
251,445
333,968
351,356
—%
194%
149%
179%
133%
162%
284%
225%
160%
136%
Total
$1,047,319 $ 354,205
$
181,902
$
172,303
$
8,632
$
173,270
$
543,058
$ 905,136
$ 1,926,692
184%
42
Core Portfolio
For the Year Ended December 31, 2012
As of December 31, 2012
($ in thousands)
Purchase
Period
Purchase
Price
Actual
Cash
Collections
Including
Cash
Sales
Income
Recognized
on Finance
Receivables
Principal
Amortization
Net
Allowance
Charges
Income
Recognized
on
Finance
Receivables,
Net
Net Finance
Receivables
Balance
Estimated
Remaining
Collections
Total
Estimated
Collections
Total Estimated
Collections to
Purchase Price
1996
$
3,080 $
39
$
39
$
— $
— $
39
$
— $
39
$
10,222
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
7,685
11,089
18,898
25,020
33,481
42,325
61,448
51,708
113,867
90,044
179,853
166,558
125,403
112
241
709
1,927
3,104
4,768
7,477
6,496
13,052
11,895
39,585
42,850
69,385
148,919
109,873
112
241
709
1,927
3,104
4,768
7,477
6,496
6,025
5,940
20,505
20,475
52,258
77,761
212,023
174,461
104,415
260,016
56,901
37,466
—
—
—
—
—
—
—
—
7,027
5,955
19,080
22,375
17,127
32,112
70,046
19,435
—
—
—
—
—
—
—
—
(4,070)
2,400
(760)
350
—
—
—
—
112
241
709
1,927
3,104
4,768
7,477
6,496
10,095
3,540
21,265
20,125
52,258
77,761
—
—
—
—
—
—
—
—
8,242
9,060
31,783
36,624
29,371
50,283
168
404
1,075
2,492
3,518
6,321
12,485
11,158
14,584
14,938
56,703
68,020
25,590
37,582
69,947
117,808
177,086
201,365
272,359
190,511
272,298
183,507
403,141
346,220
118,932
408,986
200,272
470,775
104,415
115,444
346,875
583,307
37,466
240,568
529,726
586,627
332%
333%
339%
370%
471%
529%
476%
443%
368%
239%
204%
224%
208%
326%
316%
275%
226%
Total
$1,551,417 $
542,875
$
349,718
$
193,157
$
(2,080) $
351,798
$
521,375
$ 1,387,710
$ 4,357,331
281%
The following graph shows the purchase price of our domestic portfolios by year for the last ten years. The purchase price number
represents the cash paid to the seller, plus certain capitalized costs, less buybacks.
As shown in the above chart, the composition of our domestic purchased portfolios has shifted in favor of bankrupt accounts in
recent years. We began buying bankrupt accounts during 2004 and slowly increased the volume of accounts we acquired through 2006
as we tested our models, refined our processes and validated our operating assumptions. After observing a high level of modeling
confidence in our early purchases, we began increasing our level of purchases more dramatically commencing in 2007.
43
Our ability to profitably purchase and liquidate pools of bankrupt accounts provides diversity to our distressed asset acquisition
business. Although we generally buy bankrupt portfolios from many of the same consumer lenders from whom we acquire Core
customer portfolios, the volumes and pricing characteristics as well as the competitors are different. Based upon market dynamics, the
profitability of portfolios purchased in the bankrupt and Core markets may differ over time. We have found periods when bankrupt
accounts were more profitable and other times when Core accounts were more profitable. From 2004 through 2008, our bankruptcy
buying fluctuated between 13% and 39% of our total portfolio purchasing in those years. In 2009, for the first time in our history,
bankruptcy purchasing exceeded that of our Core buying, finishing at 55% of total portfolio purchasing for the year and during 2010
this percentage increased to 59%. This occurred as severe dislocations in the financial markets, coupled with legislative uncertainty,
caused pricing in the bankruptcy market to decline substantially, thereby driving our strategy to make advantageous bankruptcy portfolio
acquisitions during this period. For 2011 and 2012, bankruptcy buying represented 48% and 50%, respectively, of our total domestic
portfolio purchasing.
In order to collect our Core portfolios, we generally need to employ relatively higher amounts of labor and incur additional
collection costs to generate each dollar of cash collections as compared with bankruptcy portfolios. In order to achieve acceptable
levels of net return on investment (after direct expenses), we are generally targeting a total cash collections to purchase price multiple
in the 2.25-3.0x range. On the other hand, bankrupt accounts generate the majority of cash collections through the efforts of the U.S.
bankruptcy courts. In this process, cash is remitted to our Company with no corresponding cost other than the cost of filing claims at
the time of purchase and general administrative costs for monitoring the progress of each account through the bankruptcy process. As
a result, overall collection costs are much lower for us when liquidating a pool of bankrupt accounts as compared to a pool of Core
accounts, but conversely the price we pay for bankrupt accounts is generally higher than Core accounts. We generally target similar
returns on investment (measured after direct expenses) for bankrupt and Core portfolios at any given point in the market cycles.
However, because of the lower related collection costs, we can pay more for bankrupt portfolios, which causes the estimated total cash
collections to purchase price multiples of bankrupt pools generally to be in the 1.4-2.0x range. In summary, compared to a pool of
Core accounts, to the extent both pools had identical targeted returns on investment (measured after direct expenses), the bankrupt
pool would be expected to generate less revenue, a lower yield, less direct expenses, similar operating income, and a higher operating
margin.
In addition, collections on younger, newly filed bankrupt accounts tend to be of a lower magnitude in the earlier months when
compared to Core charge-off accounts. This lower level of early period collections is due to the fact that we primarily purchase
portfolios of accounts that represent unsecured claims in bankruptcy, and these unsecured claims are scheduled to begin paying out
after payment of the secured and priority claims. As a result of the administrative processes regarding payout priorities within the
court-administered bankruptcy plans, unsecured creditors do not generally begin receiving meaningful collections on unsecured claims
until 12 to 18 months after the bankruptcy filing date. Therefore, to the extent that we purchase portfolios with more recent bankruptcy
filing dates, as we did to a significant extent commencing in 2009, we would expect to experience a delay in cash collections compared
with Core charged-off portfolios.
We utilize a long-term approach to collecting our owned portfolios of receivables. This approach has historically caused us to
realize significant cash collections and revenues from purchased portfolios of finance receivables years after they are originally acquired.
As a result, we have in the past been able to temporarily reduce our level of current period acquisitions without a corresponding negative
current period impact on cash collections and revenue.
44
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Total
2004
2005
2006
2007
2008
2009
2010
2011
2012
The following tables, which exclude any proceeds from cash sales of finance receivables, demonstrate our ability to realize
significant multi-year cash collection streams on our domestic portfolios.
Cash Collections By Year, By Year of Purchase – Entire Domestic Portfolio
($ in thousands)
Purchase
Period
Purchase
Price
1996-
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Total
Cash Collection Period
$
3,080 $
8,521 $
398 $
285 $
210 $
237 $
102 $
83 $
78 $
68 $
100 $
39 $
10,121
7,685
11,089
18,898
25,020
33,481
42,325
61,448
59,176
143,168
107,674
258,397
275,165
281,456
358,143
394,198
518,333
19,597
26,081
39,895
45,870
41,879
15,073
1,324
2,797
7,336
16,628
28,003
36,258
— 24,308
1,022
2,200
5,615
14,098
26,717
35,742
49,706
— 18,019
860
1,811
4,352
10,924
22,639
32,497
52,640
46,475
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 18,968
— 22,971
—
—
—
—
—
—
—
—
—
—
—
—
—
597
1,415
3,032
8,067
16,048
24,729
43,728
40,424
75,145
—
—
—
—
—
437
882
2,243
5,202
10,011
16,527
30,695
30,750
69,862
53,192
346
616
1,533
3,604
6,164
9,772
18,818
19,339
49,576
40,560
215
397
1,328
3,198
5,299
7,444
13,135
13,677
33,366
29,749
94,805
216
382
1,139
2,782
4,422
6,375
10,422
9,944
23,733
22,494
83,059
— 42,263
115,011
187
332
997
2,554
3,791
5,844
8,945
8,522
17,234
18,190
67,088
89,344
112
241
709
1,927
3,104
4,768
7,477
6,604
13,302
12,560
47,136
71,806
— 61,277
107,974
100,337
—
—
—
—
— 57,338
177,407
187,119
177,273
—
—
—
— 86,562
218,053
234,893
—
—
— 77,190
240,840
—
— 74,289
24,913
37,154
68,179
114,854
168,077
195,029
259,874
193,754
301,186
199,716
449,362
430,738
599,137
539,508
318,030
74,289
$ 2,598,736 $196,916 $117,052 $153,404 $191,376 $236,393 $262,166 $326,699 $368,003 $529,342 $705,490 $897,080 $ 3,983,921
Cash Collections By Year, By Year of Purchase – Purchased Bankruptcy Portfolio
($ in thousands)
Purchase
Period
Purchase
Price
1996-
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Total
Cash Collection Period
$
7,468 $
— $
— $
743 $
4,554 $
3,956 $
2,777 $
1,455 $
496 $
164 $
149 $
108 $
14,402
29,301
17,630
78,544
108,607
156,053
209,224
182,175
258,317
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,777
15,500
11,934
—
—
—
—
—
—
—
5,608
—
—
—
—
—
—
6,845
6,522
27,972
9,455
2,850
— 14,024
3,318
4,398
25,630
35,894
1,382
2,972
22,829
37,974
466
1,526
16,093
35,690
250
665
7,551
28,956
—
—
—
—
— 16,635
81,780
102,780
107,888
—
—
— 39,486
104,499
125,020
—
—
— 15,218
66,379
—
— 17,388
43,472
31,146
102,925
152,538
309,083
269,005
81,597
17,388
Total
$ 1,047,319 $
— $
— $
743 $
8,331 $ 25,064 $ 27,016 $ 56,818 $ 86,371 $186,587 $276,421 $354,205 $ 1,021,556
45
Cash Collections By Year, By Year of Purchase – Core Portfolio
($ in thousands)
Purchase
Period
Purchase
Price
1996-
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Total
Cash Collection Period
$
3,080 $
8,521 $
398 $
285 $
210 $
237 $
102 $
83 $
78 $
68 $
100 $
39 $
10,121
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
7,685
11,089
18,898
25,020
33,481
42,325
61,448
51,708
113,867
90,044
179,853
166,558
125,403
148,919
212,023
260,016
19,597
26,081
39,895
45,870
41,879
15,073
1,324
2,797
7,336
16,628
28,003
36,258
— 24,308
1,022
2,200
5,615
14,098
26,717
35,742
49,706
— 17,276
860
1,811
4,352
10,924
22,639
32,497
52,640
41,921
597
1,415
3,032
8,067
16,048
24,729
43,728
36,468
59,645
—
—
—
—
—
346
616
1,533
3,604
6,164
9,772
18,818
17,884
42,731
34,038
87,039
215
397
1,328
3,198
5,299
7,444
13,135
13,181
30,048
25,351
69,175
72,080
— 47,253
— 40,703
437
882
2,243
5,202
10,011
16,527
30,695
27,973
57,928
43,737
—
—
—
—
— 15,191
— 17,363
— 39,413
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
216
382
1,139
2,782
4,422
6,375
10,422
9,780
22,351
19,522
60,230
62,363
95,627
187
332
997
2,554
3,791
5,844
8,945
8,373
16,768
16,664
50,995
53,654
84,339
112
241
709
1,927
3,104
4,768
7,477
6,496
13,052
11,895
39,585
42,850
69,385
—
—
—
— 47,076
113,554
109,873
—
—
— 61,972
174,461
—
— 56,901
24,913
37,154
68,179
114,854
168,077
195,029
259,874
179,352
257,714
168,570
346,437
278,200
290,054
270,503
236,433
56,901
Total
$ 1,551,417 $196,916 $117,052 $152,661 $183,045 $211,329 $235,150 $269,881 $281,632 $342,755 $429,069 $542,875 $ 2,962,365
When we acquire a new pool of finance receivables, our estimates typically result in a 60-96 month projection of cash collections,
depending on the type of finance receivables acquired. The following chart shows our historical cash collections (including cash sales
of finance receivables) in relation to the aggregate of the total estimated collection projections made at the time of each respective pool
purchase, adjusted for buybacks, for the last ten years.
Primarily as a result of the downturn in the economy, the decline in the availability of consumer credit, our efforts to help customers
establish reasonable payment plans, and improvements in our collections capabilities which have allowed us to profitably collect on
accounts with lower balances or lower quality, the average payment size has decreased over the past several years. However, due to
improved scoring and segmentation, together with enhanced productivity, we have been able to realize increased amounts of cash
collections by generating enough incremental payments to overcome the decrease in payment size. The decreasing average payment
size trend moderated during 2012.
46
The following chart illustrates the excess of our cash collections on our finance receivables portfolios over income recognized
on finance receivables on a quarterly basis. The difference between cash collections and income recognized on finance receivables is
referred to as payments applied to principal. It is also referred to as amortization of purchase price. This amortization is the portion of
cash collections that is used to recover the cost of the portfolio investment represented on the balance sheet.
(1) Includes cash collections on finance receivables only and excludes cash proceeds from sales of defaulted consumer
receivables.
Seasonality
Collections tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year,
due to customer payment patterns in connection with seasonal employment trends, income tax refunds and holiday spending habits.
Historically, our growth has partially offset the impact of this seasonality.
The following table displays our quarterly cash collections by source, for the periods indicated.
Cash Collection Source (in
thousands)
Call Center & Other
Collections
External Legal
Collections
Internal Legal
Collections
Purchased Bankruptcy
Collections
Q42012
Q32012
Q22012
Q12012
Q42011
Q32011
Q22011
Q12011
$
72,624
$
72,394
$
73,582
$
79,805
$
61,227
$
63,967
$
64,566
$
67,377
41,521
39,913
41,464
34,852
26,316
27,245
27,329
25,378
23,968
25,650
25,361
23,345
17,615
16,444
16,007
15,598
91,098
91,095
92,018
79,994
75,166
74,512
68,379
58,364
Total Cash Collections
$ 229,211
$ 229,052
$ 232,425
$ 217,996
$ 180,324
$ 182,168
$ 176,281
$ 166,717
47
Rollforward of Net Finance Receivables
The following table shows the changes in finance receivables, net, including the amounts paid to acquire new portfolios for the
years ended December 31, (in thousands).
Balance at beginning of year
Acquisitions of finance receivables (1)
Foreign currency translation adjustment
Cash collections applied to principal on finance receivables (2)
Balance at end of year
Estimated Remaining Collections (“ERC”) (3)
2012
2011
2010
$
$
$
926,734
$
831,330
$
529,691
575
(378,049)
1,078,951
2,315,189
$
$
398,999
—
(303,595)
926,734
1,953,348
$
$
693,462
357,530
—
(219,662)
831,330
1,723,518
(1) Acquisitions of finance receivables is net of buybacks and includes certain capitalized acquisition related costs.
(2) Cash collections applied to principal (also referred to as amortization) on finance receivables consists of cash collections less
income recognized on finance receivables, net of allowance charges.
(3) Estimated Remaining Collections refers to the sum of all future projected cash collections on our owned portfolios.
Collections Productivity
The following table contains our collector productivity metrics, as defined, by calendar quarter.
Cash Collections per Collector Hour Paid (Domestic Portfolio Only)
Core cash collections
(1)
2008
2009
2010
2011
2012
Q1 $
Q2 $
Q3 $
Q4 $
Q1 $
Q2 $
Q3 $
Q4 $
Q1 $
Q2 $
Q3 $
Q4 $
Q1 $
Q2 $
Q3 $
Q4 $
116
115
110
98
133
136
134
123
96
99
99
94
2008
2008
$
$
$
$
$
$
$
$
$
$
$
$
120
114
111
109
$
$
$
$
135
127
127
129
Total cash collections
$
$
$
$
(2)
162
154
152
137
2009
2010
2011
147
143
144
148
$
$
$
$
182
188
200
204
$
$
$
$
241
243
249
228
Non-legal cash collections
(3)
2009
2010
2011
118
116
119
123
$
$
$
$
154
160
170
174
$
$
$
$
204
205
212
194
(4)
Non-legal/non-bankruptcy cash collections
2008
2009
2010
2011
79
78
76
69
$
$
$
$
90
87
87
84
$
$
$
$
106
100
97
98
$
$
$
$
125
116
115
103
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
166
169
171
150
258
275
279
245
216
225
230
200
125
120
122
105
2012
2012
2012
(1) Represents total cash collections less purchased bankruptcy cash collections from trustee-administered accounts. This metric
includes cash collections from purchased bankruptcy accounts administered by the Core call center collection floor as well as
48
cash collections generated by our internal staff of legal collectors. This calculation does not include hours paid to our internal
staff of legal collectors or to employees processing the bankruptcy-required notifications to trustees.
(2) Represents total cash collections (assigned and unassigned) divided by total hours paid (including holiday, vacation and sick
time) to collectors (including those in training).
(3) Represents total cash collections less external legal cash collections. This metric includes internal legal collections and all
bankruptcy collections and excludes any hours associated with either of those functions.
(4) Represents total cash collections less external legal cash collections and less purchased bankruptcy cash collections from trustee-
administered accounts. This metric does not include any labor hours associated with the bankruptcy or legal (internal or
external) functions but does include internally-driven cash collections from the internal legal channel.
Liquidity and Capital Resources
Historically, our primary sources of cash have been cash flows from operations, bank borrowings and equity offerings. Cash has
been used for acquisitions of finance receivables, corporate acquisitions, repurchase of our common stock, payment of cash dividends,
repayments of bank borrowings, operating expenses, purchases of property and equipment and working capital to support our growth.
As of December 31, 2012, cash and cash equivalents totaled $32.7 million, as compared to $26.7 million at December 31, 2011.
Total debt outstanding on our revolving $400.0 million line of credit was $127.0 million as of December 31, 2012, which represents
availability of $273.0 million (subject to the borrowing base and applicable debt covenants).
We have in place forward flow commitments for the purchase of defaulted consumer receivables over the next 12 months of
approximately $204.5 million as of December 31, 2012. Additionally we may enter into new or renewed flow commitments in the
next twelve months and close on spot transactions in addition to the aforementioned flow agreements. We believe that funds generated
from operations and from cash collections on finance receivables, together with existing cash and available borrowings under our new
credit agreement with Bank of America, N.A., as administrative agent, and a syndicate of lenders named therein will be sufficient to
finance our operations, planned capital expenditures, the aforementioned forward flow commitments, and a material amount of
additional portfolio purchasing in excess of the currently committed flow amounts during the next twelve months.
We entered into the new $600.0 million secured credit facility referred to above, on December 19, 2012. Refer to the “Borrowings”
section below for additional information on this facility. We filed a $150 million shelf registration during the third quarter of 2009.
We issued $75.5 million of equity securities under that registration statement during February 2010 in order to take advantage of market
opportunities while retaining the ability to issue up to an additional $74.5 million of equity or debt securities under the shelf registration
statement in the future. The outcome of any future transaction is subject to market conditions.
With the acquisition of a controlling interest in CCB, we have the right to call (purchase) the noncontrolling interest through
February 2015. In addition, the noncontrolling interest has the right to put the remainder of the shares to us beginning in March 2012
and ending February 2018. From March 2012 to February 2015, the put option is subject to a minimum amount of trailing EBITDA.
As of December 31, 2012, the total maximum amount we would have to pay for the noncontrolling interest in CCB under any
circumstances is $22.8 million. In February 2013, we provided notice that we would exercise our right to purchase half of the remaining
noncontrolling interest for a purchase price of $1.1 million.
We file domestic income tax returns using the cost recovery method for tax revenue recognition as it relates to our debt purchasing
business. The Internal Revenue Service (“IRS”) has audited and issued a Notice of Deficiency for the tax years ended December 31,
2007, 2006 and 2005. It has asserted that cost recovery for tax revenue recognition does not clearly reflect taxable income and that
unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction. We have filed
a petition in the United States Tax Court and believe we have sufficient support for the technical merits of our positions and that it is
more-likely-than-not that they will ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary. If we are
unsuccessful in the United States Tax Court, we can appeal to the federal Circuit Court of Appeals. If judicial appeals prove unsuccessful,
we may ultimately be required to pay the related deferred taxes, any potential interest, and penalties, possibly requiring additional
financing from other sources. In accordance with 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. Deferred
taxes related to this item were $190.1 million at December 31, 2012.
Cash generated from operations is dependent upon our ability to collect on our finance receivables. Many factors, including the
economy and our ability to hire and retain qualified collectors and managers, are essential to our ability to generate cash flows.
Fluctuations in these factors that cause a negative impact on our business could have a material impact on our future cash flows.
On February 2, 2012, the Company's board of directors authorized a share repurchase program of up to $100 million of our
outstanding shares of Common Stock. The program is administered by a special committee of the board of directors. Repurchases
depend on prevailing market conditions and other factors. The repurchase program may be suspended or discontinued at any time.
49
During the year ended December 31, 2012, we repurchased 331,449 shares of our common stock at an average price of $68.57 per
share. At December 31, 2012, the maximum remaining purchase price for share repurchases under the plan is approximately $77.3
million.
Our operating activities provided cash of $131.4 million, $173.0 million and $143.6 million for the years ended December 31,
2012, 2011 and 2010, respectively. In these periods, cash from operations was generated primarily from net income earned through
cash collections and fee income received. The changes were due in part to a deferred tax benefit of $8.6 million for the year ended
December 31, 2012, compared to deferred tax expense of $28.9 million and $47.5 million for the years ended December 31, 2011 and
2010, respectively. This was offset by an increase in net income to $126.1 million for the year ended December 31, 2012, from $101.1
million for the year ended December 31, 2011 and $73.9 million for the year ended December 31, 2010 as well as net changes in other
accounts related to our operating activities.
Our investing activities used cash of $205.6 million, $104.8 million and $170.5 million for the years ended December 31, 2012,
2011 and 2010, respectively. Cash provided by investing activities is primarily driven by cash collections applied to principal on finance
receivables. Cash used in investing activities is primarily driven by acquisitions of finance receivables, purchases of property and
equipment and business acquisitions. The change was due in part to net cash payments for corporate acquisitions totaling $149.0 million
for the year ended December 31, 2012 compared to $1.0 million for the year ended December 31, 2011 and $23.0 million for the year
ended December 31, 2010 as well as an increase in acquisitions of finance receivables to $457.1 million for the year ended December 31,
2012 from $399.0 million for the year ended December 31, 2011 and $357.5 million for the year ended December 31, 2010. This
increase was offset by an increase in collections applied to principal on finance receivables to $378.0 million for the year ended
December 31, 2012 from $303.6 million for the year ended December 31, 2011 and $219.7 million for the year ended December 31,
2010.
Our financing activities provided cash of $80.7 million, used cash of $82.7 million and provided cash of $47.8 million for the
years ended December 31, 2012, 2011 and 2010, respectively. Cash used in financing activities is primarily driven by payments on
our line of credit and principal payments on long-term debt. Cash is provided primarily by draws on our line of credit and proceeds
from stock offerings. The change was due in large part to changes in the net borrowings on our credit facility. We had a net increase
on our credit facility of $107.0 million for the year ended December 31, 2012, compared to net repayments of $80.0 million and $19.3
million for the years ended December 31, 2011 and 2010, respectively. Additionally, cash flow related to financing activities was
impacted by stock repurchases of $22.7 million in 2012, and by $71.7 million in proceeds from issuance of common stock in 2010.
Cash paid for interest was $9.6 million, $10.3 million and $9.4 million for the years ended December 31, 2012, 2011 and 2010,
respectively. The majority of interest was paid on our lines of credit and other long-term debt. The decrease for the year ended
December 31, 2012 from the year ended December 31, 2011 was mainly due to an decrease in our weighted average interest rate which
decreased to 3.27% for the year ended December 31, 2012 from 3.71% for the year ended December 31, 2011, as well as a decrease
in our weighted average borrowings to $258.0 million for the year ended December 31, 2011 compared to $263.2 million for the year
ended December 31, 2011. The increase from the year ended December 31, 2010 to the year ended December 31, 2011 was mainly
due to an increase in our weighted average interest rate which increased to 3.71% for the year ended December 31, 2011 from 2.46%
for the year ended December 31, 2010, offset by a decrease in our average variable rate borrowings to $213.2 million for the year
ended December 31, 2011 compared to $244.2 million for the year ended December 31, 2010.
Borrowings
On December 19, 2012, we 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 $600.0 million (subject to the borrowing base and applicable debt covenants) which consists of a $200.0
million floating rate term loan that matures on December 19, 2017 and a $400.0 million revolving credit facility that matures on
December 19, 2017. The term and revolving loans accrue interest, at our option, at either the base rate or the Eurodollar rate (as defined
in the Credit Agreement) for the applicable term plus 2.50% 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. Our revolving credit facility includes a $20.0 million swingline loan sublimit, a $20.0 million letter of credit sublimit
and a $20.0 million alternative currency equivalent sublimit. It also contains an accordion loan feature that allows us to request an
increase of up to $250.0 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. The Credit Agreement
is secured by a first priority lien on substantially all of our assets. The Credit Agreement contains restrictive covenants and events of
default including the following:
•
•
borrowings may not exceed 30% of the ERC of all our eligible asset pools plus 75% of our 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;
50
•
•
•
•
consolidated Tangible Net Worth (as defined in the Credit Agreement) must equal or exceed $455,091,200 plus 50% of positive
cumulative consolidated net income for each fiscal quarter beginning with the quarter ended December 31, 2012, plus 50%
of the cumulative net proceeds of any equity offering;
capital expenditures during any fiscal year cannot exceed $30 million;
cash dividends and distributions during any fiscal year cannot exceed $20 million;
stock repurchases during the term of the agreement cannot exceed $250 million and cannot exceed $100 million in a single
fiscal year;
permitted acquisitions (as defined in the Credit Agreement) during any fiscal year cannot exceed $250 million;
•
• we 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.
Our borrowings at December 31, 2012 consisted of $122.0 million in 30-day Eurodollar rate loans and $5.0 million in base rate
loans with a weighted average interest rate of 2.74%. In addition, we had $200.0 million outstanding on the term loan at December
31, 2012 with an annual interest rate of 2.71%.
Our previous credit facility included an aggregate principal amount available of $407.5 million as of December 31, 2011, which
consisted of a $50 million fixed rate loan and a $357.5 million revolving credit facility. Borrowings under the revolving credit facility
consisted of 30-day Eurodollar rate loans and base rate loans with a weighted average interest rate of 3.16%. We also paid an unused
line fee for the previous credit facility equal to 0.375% on any unused portion of the facility. The credit facility was collateralized by
substantially all of our assets and contained certain restrictive covenants.
We had $327.0 million and $220.0 million of borrowings outstanding on our credit facility as of December 31, 2012 and 2011,
respectively, of which $50 million represented borrowing under the non-revolving fixed rate loan at December 31, 2011.
We were in compliance with all covenants of our credit facilities as of December 31, 2012 and 2011.
Stockholders’ Equity
Stockholders’ equity was $708.4 million at December 31, 2012 and $595.5 million at December 31, 2011. The increase was due
primarily to $126.6 million in net income attributable to Portfolio Recovery Associates, Inc.
Contractual Obligations
Our contractual obligations as of December 31, 2012 were as follows (amounts in thousands):
Contractual Obligations
Operating leases
Line of credit (1)
Long-term debt (2)
Purchase commitments (3) (4)
Employment agreements
Total
Payments due by period
Less
than 1
year
1 - 3
years
3 - 5
years
More
than 5
years
$
5,276
$
9,596
$
5,711
$
2,272
4,762
10,964
246,175
11,352
9,711
36,166
2,696
4,055
139,116
181,712
388
—
—
—
—
—
$
Total
22,855
153,589
228,842
249,259
15,407
$ 669,952
$
278,529
$
62,224
$
326,927
$
2,272
(1) This amount includes principal, estimated interest and unused line fees due on the line of credit and assumes that the balance
on the line of credit remains constant from the December 31, 2012 balance of $127.0 million and the balance is paid in full at
its respective maturity in December 2017.
(2) This amount also includes estimated interest on our long-term borrowings under our credit facility.
(3) This amount includes the maximum remaining amount to be purchased under forward flow contracts for the purchase of charged-
off consumer debt in the amount of approximately $204.5 million.
(4) This amount includes the maximum remaining purchase price of $22.8 million which could be paid to acquire the noncontrolling
interest in CCB.
51
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements as of December 31, 2012 as defined by Item 303(a)(4) of Regulation S-K
promulgated under the Securities Exchange Act of 1934.
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 ASC 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. generally accepted accounting principles
and International Financial Reporting Standards. The provisions of ASU 2011-04 are effective prospectively for interim and annual
periods beginning after December 15, 2011. Early adoption is prohibited. We adopted ASU 2011-04 on January 1, 2012, and have
included the required disclosures in the notes to our 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 income statement or in a separate statement immediately following the income statement. 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. We adopted ASU 2011-05 on January 1, 2012, and have included the required disclosures in our consolidated
financial statements.
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. We adopted ASU 2011-08 on January 1, 2012, which had no material impact on our consolidated financial
statements.
In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for Impairment" to amend the accounting guidance on intangible asset impairment testing. ASU 2012-02 permits entities to
perform an optional qualitative assessment for determining whether it is more likely than not that an indefinite-lived intangible asset
is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September
15, 2012. Early adoption is permitted. We adopted ASU 2012-02 on October 1, 2012, which had no impact on our consolidated
financial statements.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Our
significant accounting policies are discussed in Note 1 of the Notes to the Consolidated Financial Statements. Our significant accounting
policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates,
assumptions and judgments that affect the reported amounts of revenues, expenses, assets, and liabilities.
Three of these policies are considered to be critical because they are important to the portrayal of our financial condition and
results, and because they require management to make judgments and estimates that are difficult, subjective, and complex regarding
matters that are inherently uncertain.
We base our estimates on historical experience, current trends and on various other assumptions that we believe are reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. If these estimates differ significantly from actual results, the impact on our consolidated
financial statements may be material.
Management has reviewed these critical accounting policies with the Company's Audit Committee.
52
Revenue Recognition
Finance Receivables:
We account for our investment in finance receivables under the guidance of ASC 310-30. We acquire portfolios of accounts that
have experienced deterioration of credit quality between origination and our acquisition of the accounts. The amount paid for a portfolio
reflects our determination that it is probable we will be unable to collect all amounts due according to an account's contractual terms.
At acquisition, we review the accounts to determine whether there is evidence of deterioration of credit quality since origination, and
if it is probable that we will be unable to collect all amounts due according to the loan's contractual terms. If both conditions exist,
we then determine whether each such account is to be accounted for individually or whether such accounts will be assembled into
pools based on common risk characteristics. We consider expected prepayments and estimate the amount and timing of undiscounted
expected principal, interest and other cash flows (expected at acquisition) for each acquired portfolio based on our proprietary models,
and then subsequently aggregate portfolios of accounts into pools. We determine 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 our estimates derived from our 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 may include 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 our 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, we do not record accretion in the first six to
twelve months of the estimated life of the pool; accordingly, we utilize 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 we have 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, we use 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 we have fully collected the cost of the pool, or until such
time that we consider the collections to be probable and estimable and begin to recognize income based on the interest method as
described above.
We establish valuation allowances, if necessary, for acquired accounts subject to ASC 310-10. Valuation allowances are established
only subsequent to acquisition of the accounts.
We implement the accounting for income recognized on finance receivables under ASC 310-30 as follows. We create each
accounting pool using our projections of estimated cash flows and expected economic life. We then compute 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, we balance those results to the data contained in our proprietary models to ensure accuracy, then review
each pool watching for trends, actual performance versus projections and curve shape (a graphical depiction of the timing of cash
flows), regularly re-forecasting future cash flows utilizing our statistical models. The review process is primarily performed by our
finance staff; however, our operational and statistical staff is also involved, providing updated statistical input and cash projections to
the finance staff. If there is an increase in expected cash flows, we will recognize the effect of the increase prospectively through an
increase in yield. If a valuation allowance had been previously recognized for that pool, the allowance is reversed before recording
any prospective yield adjustments. If the over performance is considered more of an acceleration of cash flows (a timing difference),
we will: a) adjust estimated future cash flows downward which effectively extends the amortization period to fall within a reasonable
expectation of the pool's economic life, b) introduce some level of future cash adjustment as noted previously coupled with an increase
in yield in order for the amortization period to fall within a reasonable expectation of the pool's economic life, or c) take no action at
53
all if the amortization period falls within a reasonable expectation of the pool's expected economic life. To the extent there is
underperformance, we 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.
Fee Income:
We utilize the provisions of ASC Topic 605-45, “Principal Agent Considerations” (“ASC 605-45”), to account for fee income
revenue from our fee-for-service subsidiaries. ASC 605-45 requires an analysis to be completed to determine if certain revenues should
be reported gross or reported net of their related operating expense. This analysis includes an assessment of who retains inventory/
credit risk, controls vendor selection, establishes pricing and remains the primary obligor on the transaction. Each of these factors was
considered to determine the correct method of recognizing revenue from our subsidiaries.
Our skip tracing subsidiary utilizes both gross and net reporting under ASC 605-45. We generate revenue by working an account
and successfully locating a customer for our client. An “investigative fee” is received for these services. In addition, we incur “agent
expenses” where we hire a third-party collector to effectuate repossession. In many cases we have an arrangement with our client
which allows us to bill the client for these fees. We have determined these fees to be gross revenue based on the criteria in ASC 605-45
and they are recorded as such in the line item “Fee income,” because we are primarily liable to the third party collector. There is a
corresponding expense in “Agent fees” for these pass-through items. We also incur fees to release liens on the repossessed collateral.
These lien-release fees and related reimbursement of these fees are netted in the line “Agent fees.”
Our government processing and collection business' primary source of income is derived from servicing taxing authorities in
several different ways: processing all of their tax payments and tax forms, collecting delinquent taxes, identifying taxes that are not
being paid and auditing tax payments. The processing and collection pieces are standard commission based billings or fee-for-service
transactions. When an audit is conducted, there are two components. The first component is a billing for the hours incurred to conduct
the audit. This billing is marked up from the actual costs incurred. The gross billing is a component of the line item “Fee income” and
the expense is included in the line item “Compensation and employee services.” The second component is expenses incurred while
conducting the audit. Most jurisdictions will reimburse us for direct expenses incurred for the audit including such items as travel and
meals. The billed amounts are included in the line item “Fee income” and the expense component is included in its appropriate expense
category, generally, “Other operating expenses.”
Our claims administration and payment processing business utilizes net reporting under ASC 605-45. We generate revenue by
filing claims with the class action claims administrator on behalf of our clients and receiving the related settlement payment. Under
SEC Staff Accounting Bulletin 104, we have determined that our fee is not earned until we have received the settlement funds. When
a payment is received from the claims administrator for settlement of a lawsuit, the fee is recorded on a net basis as revenue and
included in the line item “Fee income.” The balance of the received amounts is recorded as a liability and included in the line item
“Accounts payable.”
Our United Kingdom subsidiary generates revenue from both purchased finance receivables which is accounted for as described
above and also services finance receivables on a contingent fee basis. These portfolios are owned by our clients and placed under a
contingent fee commission arrangement. Our subsidiary is paid to collect funds from the client's debtors and earns a commission
generally expressed as a percentage of the gross collections amount. The "Fee income" line of our income statement reflects the
contingent fee amount earned, and not the gross collection amount.
Valuation of Acquired Intangibles and Goodwill
In accordance with ASC Topic 350, “Intangibles-Goodwill and Other” (“ASC 350”), we amortize intangible assets over their
estimated useful lives. Goodwill, pursuant to ASC 350, is not amortized but rather is reviewed for impairment annually or earlier if
indicators of potential impairment exist. The review of goodwill for potential impairment is highly subjective and requires that:
(1) goodwill is allocated to various reporting units of our business to which it relates; and (2) we estimate the fair value of those
reporting units to which the goodwill relates and then determine the book value of those reporting units. During the review, we also
consider qualitative factors that may have an impact on the final assessment regarding potential impairment. If the estimated fair value
of reporting units with allocated goodwill is determined to be less than their book value, we are required to estimate the fair value of
all identifiable assets and liabilities of those reporting units in a manner similar to a purchase price allocation for an acquired business.
This requires independent valuation of certain unrecognized assets. Once this process is complete, the amount of goodwill impairment,
if any, can be determined.
Income Taxes
We follow 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. Accordingly, we record a tax provision for the anticipated tax consequences of the reported results
54
of operations. In accordance with ASC 740, the provision for income taxes is computed using the asset and liability method, under
which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the
financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets
and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax
assets are expected to be realized or settled. The evaluation of a tax position in accordance with the guidance is a two-step process.
The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position
will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is
measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit
to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than fifty percent
likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized
tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. We record interest and penalties related to unrecognized tax benefits as a
component of income tax expense.
We utilize the cost recovery method of income recognition for tax purposes. We believe cost recovery to be an acceptable method
for companies in the bad debt purchasing industry. Under the cost recovery method, collections on finance receivables are applied
first to principal to reduce the finance receivables to zero before any income is recognized.
In the event that all or part of the deferred tax assets are determined not to be realizable in the future, a valuation allowance would
be established and charged to earnings in the period such determination is made. Similarly, if we subsequently realize deferred tax
assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive
adjustment to earnings or a decrease in goodwill in the period such determination is made. In addition, the calculation of tax liabilities
involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these
uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial
position.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are subject to interest rate risk from outstanding borrowings on our variable rate credit facility. We assess this interest
rate risk by estimating the increase in interest expense that would occur due to an increase in short-term interest rates. The average
borrowings on our variable rate credit facility were $241.0 million and $213.2 million for the years ended December 31, 2012 and
2011, respectively. Assuming a 200 basis point increase in interest rates, for example, interest expense would have increased by
$4.8 million and $4.3 million for the year ended December 31, 2012 and 2011, respectively, resulting in a decrease in income before
income taxes of 2.4% and 2.6%, respectively. As of December 31, 2012 and December 31, 2011, we had $327.0 million and $170.0
million, respectively, of variable rate debt outstanding on our credit facility. We do not have any other variable rate debt outstanding
as of December 31, 2012. We had no interest rate hedging programs in place for the years ended December 31, 2012 and 2011.
Significant increases in future interest rates on our variable rate credit facility could lead to a material decrease in future earnings
assuming all other factors remained constant.
Currency Exchange Risk
In 2012, we acquired MHH. MHH conducts business in the Pound Sterling, but we report our financial results in U.S. dollars.
Therefore, as a result of the MHH acquisition, we face exposure to fluctuations in currency exchange rates. Significant fluctuations
in exchange rates between the U.S. dollar and the Pound Sterling may adversely affect our net income. We may or may not
implement a hedging program related to currency exchange rate fluctuation. In 2012, MHH revenues were 3.1% of consolidated
revenues.
55
Item 8.
Financial Statements and Supplementary Data.
See Item 6 for quarterly consolidated financial statements for 2012 and 2011.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Income Statements for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
Page
57
58
59
60
61
62
63
56
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Portfolio Recovery Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Portfolio Recovery Associates, Inc. and subsidiaries
(the “Company”) as of December 31, 2012 and 2011, and the related consolidated income statements, and statements of
comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Portfolio Recovery Associates, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and
their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Portfolio Recovery Associates, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 28, 2013 expressed an unqualified opinion on the effectiveness of Portfolio Recovery
Associates, Inc.’s internal control over financial reporting.
/s/ KPMG LLP
Norfolk, Virginia
February 28, 2013
57
Portfolio Recovery Associates, Inc.
Consolidated Balance Sheets
December 31, 2012 and 2011
(Amounts in thousands, except per share amounts)
Assets
Cash and cash equivalents
Finance receivables, net
Accounts receivable, net
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities and Equity
Liabilities:
Accounts payable
Accrued expenses and other liabilities
Income taxes payable
Accrued payroll and bonuses
Net deferred tax liability
Line of credit
Long-term debt
Total liabilities
Commitments and contingencies (Note 16)
Redeemable noncontrolling interest
Stockholders' equity:
Preferred stock, par value $0.01, 2,000 authorized shares, 0 issued and
outstanding shares at December 31, 2012 and 2011
Common stock, par value $0.01, 60,000 authorized shares, 16,909 issued and
outstanding shares at December 31, 2012, and 60,000 authorized shares,
17,134 issued and outstanding shares at December 31, 2011
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and equity
2012
2011
$
32,687
$
1,078,951
10,486
25,312
109,488
20,364
11,668
26,697
926,734
7,862
25,727
61,678
14,596
7,829
$
$
1,288,956
$
1,071,123
12,155
$
18,953
3,125
12,804
185,277
127,000
200,542
559,856
7,439
6,076
13,109
16,036
193,898
220,000
1,246
457,804
20,673
17,831
—
—
169
151,216
554,191
2,851
708,427
171
167,719
427,598
—
595,488
$
1,288,956
$
1,071,123
The accompanying notes are an integral part of these consolidated financial statements.
58
Portfolio Recovery Associates, Inc.
Consolidated Income Statements
For the years ended December 31, 2012, 2011 and 2010
(Amounts in thousands, except per share amounts)
2012
2011
2010
Revenues:
Income recognized on finance receivables, net
$
530,635
$
401,895
$
Fee income
Total revenues
Operating expenses:
62,166
592,801
57,040
458,935
309,680
63,026
372,706
Compensation and employee services
168,356
138,202
124,077
Legal collection fees
Legal collection costs
Agent fees
Outside fees and services
Communications
Rent and occupancy
Depreciation and amortization
Other operating expenses
Total operating expenses
Gain on sale of property
Income from operations
Other income and (expense):
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Adjustment for net loss/(net income) attributable
to redeemable noncontrolling interest
Net income attributable to Portfolio Recovery
Associates, Inc.
Net income per common share attributable to Portfolio Recovery
Associates, Inc:
Basic
Diluted
Weighted average number of shares outstanding:
Basic
Diluted
34,393
72,325
5,906
28,867
29,110
6,781
14,515
16,484
376,737
—
216,064
10
(9,041)
207,033
80,934
23,621
38,659
7,653
19,310
23,372
5,891
12,943
12,416
282,067
1,157
178,025
7
(10,569)
167,463
66,319
126,099
$
101,144
$
17,599
31,330
12,012
12,554
17,226
5,313
12,437
10,296
242,844
—
129,862
65
(9,052)
120,875
47,004
73,871
494
(353)
(417)
126,593
$
100,791
$
73,454
7.45
7.39
$
$
5.89
5.85
$
$
16,997
17,123
17,110
17,230
4.37
4.35
16,820
16,885
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
59
Portfolio Recovery Associates, Inc.
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2012, 2011 and 2010
(Amounts in thousands)
Net income
Other comprehensive income:
Foreign currency translation adjustments
Interest rate swap derivative, net of tax
Total other comprehensive income
Comprehensive income
Comprehensive loss/(income) attributable to redeemable
noncontrolling interest
Comprehensive income attributable to Portfolio Recovery Associates,
Inc.
2012
126,099
$
2011
101,144
$
2010
$
73,871
2,851
—
2,851
—
—
—
—
428
428
128,950
101,144
74,299
494
(353)
(417)
$
129,444
$
100,791
$
73,882
The accompanying notes are an integral part of these consolidated financial statements.
60
Portfolio Recovery Associates, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2012, 2011 and 2010
(Amounts in thousands)
Common Stock
Shares Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/
(Loss)
Total
Stockholders’
Equity
Balance at December 31, 2009
15,514
$
155
$
82,400
$
253,353
$
(428) $
335,480
Net income attributable to Portfolio Recovery
Associates, Inc.
Net unrealized change in:
Interest rate swap derivative, net of tax
Exercise of stock options and vesting of
nonvested shares
Proceeds from stock offering, net of offering
costs
Issuance of common stock for acquisition
Amortization of share-based compensation
Income tax benefit from share-based
compensation
—
—
38
1,438
74
—
—
—
—
2
14
—
—
—
—
—
55
71,674
4,950
4,203
256
73,454
—
—
—
—
—
—
—
428
—
—
—
—
—
73,454
428
57
71,688
4,950
4,203
256
Balance at December 31, 2010
17,064
$
171
$
163,538
$
326,807
$
— $
490,516
Net income attributable to Portfolio Recovery
Associates, Inc.
Exercise of stock options and vesting of
nonvested shares
Amortization of share-based compensation
Income tax benefit from share-based
compensation
Employee stock relinquished for payment of
taxes
Adjustment of the redeemable noncontrolling
interest measurement amount
—
70
—
—
—
—
—
—
—
—
—
100,791
150
7,759
641
(257)
(4,112)
—
—
—
—
Balance at December 31, 2011
17,134
$
171
$
167,719
$
427,598
$
Net income attributable to Portfolio Recovery
Associates, Inc.
Foreign currency translation adjustment
Vesting of nonvested shares
Repurchase and cancellation of common stock
Amortization of share-based compensation
Income tax benefit from share-based
compensation
Employee stock relinquished for payment of
taxes
Adjustment of the redeemable noncontrolling
interest measurement amount
—
—
106
(331)
—
—
—
—
—
—
1
(3)
—
—
—
—
—
—
(1)
(22,732)
11,282
2,138
(3,593)
(3,597)
126,593
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
2,851
—
—
—
—
—
—
Balance at December 31, 2012
16,909
$
169
$
151,216
$
554,191
$
2,851
$
The accompanying notes are an integral part of these consolidated financial statements.
100,791
150
7,759
641
(257)
(4,112)
595,488
126,593
2,851
—
(22,735)
11,282
2,138
(3,593)
(3,597)
708,427
61
Portfolio Recovery Associates, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2012, 2011 and 2010
(Amounts in thousands)
2012
2011
2010
$
126,099
$
101,144
$
73,871
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of share-based compensation
Depreciation and amortization
Deferred tax (benefit)/expense
Gain on sale of property
Changes in operating assets and liabilities:
Other assets
Accounts receivable
Accounts payable
Income taxes payable/receivable, net
Accrued expenses
Accrued payroll and bonuses
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Proceeds from sale of property
Acquisition of finance receivables, net of buybacks
Collections applied to principal on finance receivables
Business acquisitions, net of cash acquired
Proceeds received from due from seller
Contingent payment made for business acquisition
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of options
Income tax benefit from share-based compensation
Payment of liability-classified contingent consideration
Proceeds from line of credit
Principal payments on line of credit
Repurchases of common stock
Payments of line of credit origination costs and fees
Proceeds from stock offering, net of offering costs
Distributions paid to noncontrolling interest
Proceeds from long-term debt
Principal payments on long-term debt
Net cash provided by/(used in) financing activities
Effect of exchange rate on cash
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Supplemental disclosure of cash flow information:
Cash and cash equivalents, end of year
Cash paid for interest
Cash paid for income taxes
Noncash investing and financing activities:
Adjustment of the redeemable noncontrolling interest measurement amount
Common stock issued for acquisition
Net unrealized change in fair value of derivative instrument
Distributions payable relating to noncontrolling interest
Employee stock relinquished for payment of taxes
Conversion of revolving line of credit to long-term debt
$
$
$
11,282
14,515
(8,621)
—
1,523
(474)
1,049
(11,193)
469
(3,237)
131,412
(7,115)
—
(457,068)
378,049
(148,995)
29,548
—
(205,581)
—
2,138
—
294,000
(187,000)
(22,735)
(4,994)
—
—
—
(704)
80,705
(546)
5,990
26,697
32,687
9,566
98,738
$
$
7,759
12,943
28,927
(1,157)
(54)
1,070
4,212
15,472
2,118
591
173,025
(9,634)
1,267
(398,999)
303,595
(985)
—
—
(104,756)
150
641
—
32,000
(112,000)
—
—
—
(2,307)
—
(1,150)
(82,666)
—
(14,397)
41,094
26,697
10,280
23,641
$
$
(3,597) $
—
—
261
(3,593)
200,000
(4,112) $
—
—
67
(257)
—
4,203
12,437
47,493
—
1,204
237
(881)
2,097
(892)
3,812
143,581
(9,546)
—
(357,530)
219,662
(23,000)
—
(117)
(170,531)
57
256
(2,000)
177,500
(196,800)
—
(3,819)
71,688
—
1,569
(672)
47,779
—
20,829
20,265
41,094
9,398
107
—
4,950
701
1,291
—
—
The accompanying notes are an integral part of these consolidated financial statements.
62
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Nature of operations: Portfolio Recovery Associates, Inc., a Delaware corporation, and its subsidiaries (collectively, the
“Company”) are a financial and business service company operating principally in the United States and the United Kingdom.
Two call centers, one in the Philippines and one in Panama, operate under contract with the Company. The Company’s 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 and provides class action claims settlement recovery
services and related payment processing to corporate clients.
Basis of presentation: 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, a limited company organized under the laws of England and
Wales, and its subsidiaries (“MHH”) on January 16, 2012, the Company began doing business in the United Kingdom. The assets,
liabilities and operations of the Company's foreign subsidiary are recorded based on the functional currency of the entity. For
MHH, the functional currency is the local currency, which is the Pound Sterling. 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 and cash flows. 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 consolidated income
statements include the results of operations of MHH for the period from January 16, 2012 through December 31, 2012.
The following table shows the amount of revenue generated for the year ended December 31, 2012, and long-lived assets
held at December 31, 2012, by geographical location (amounts in thousands):
Revenues
Long-Lived Assets
United States
United Kingdom
Total
$
$
574,525
18,276
592,801
$
$
23,375
1,937
25,312
Revenues are attributed to countries based on the location of the related operations. 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.
Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. Included in cash and cash equivalents are funds held on the behalf of others arising from
the collection of accounts placed with the Company. The balance of the funds held on behalf of others was $5.5 million and $1.5
million at December 31, 2012 and 2011, respectively. There is an offsetting liability that is included in “Accounts payable” on
the accompanying consolidated balance sheets.
Concentrations of credit risk: Financial instruments, which potentially expose the Company to concentrations of credit
risk, consist primarily of cash, cash equivalents and investments. The Company places its cash and cash equivalents and investments
with high quality financial institutions. At times, cash balances may be in excess of the amounts insured by the Federal Deposit
Insurance Corporation.
Currency translation: Financial statements of operating subsidiaries outside the United States generally are measured
using the local currency as the functional currency. Adjustments to translate those statements into U.S. dollars are recorded in
accumulated other comprehensive income ("OCI").
Finance receivables and income recognition: 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
63
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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 may include 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. 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 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.
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.
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), regularly 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. If there is an increase in expected cash flows, the Company will recognize the effect of the increase prospectively through
an increase in yield. If a valuation allowance had been previously recognized for that pool, the allowance is reversed before
recording any prospective yield adjustments. If the over performance is considered more of an acceleration of cash flows (a timing
difference), the Company will: a) adjust estimated future cash flows downward which effectively extends the amortization period
to fall within a reasonable expectation of the pool's economic life, b) introduce some level of future cash adjustment as noted
previously coupled with an increase in yield in order for the amortization period to fall within a reasonable expectation of the
64
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
pool's economic life, or c) take no action at all if the amortization period falls within a reasonable expectation of the pool's expected
economic life. 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.
The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These
fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest
method.
The agreements to purchase the aforementioned receivables include general representations and warranties from the sellers
covering account holder death or bankruptcy and accounts settled or disputed prior to sale. The representation and warranty period
permitting the return of these accounts from the Company to the seller is typically 90 to 180 days. Any funds received from the
seller of finance receivables as a return of purchase price are referred to as buybacks. Buyback funds are applied against the finance
receivable balance received and are not included in the Company’s cash collections from operations. In some cases, the seller will
replace the returned accounts with new accounts in lieu of returning the purchase price. In that case, the old account is removed
from the pool and the new account is added.
Fee
income recognition: The Company utilizes
the provisions of ASC Topic 605-45, “Principal Agent
Considerations” (“ASC 605-45”), to account for fee income revenue from its fee-for-service subsidiaries. ASC 605-45 requires
an analysis to be completed to determine if certain revenues should be reported gross or reported net of their related operating
expense. This analysis includes an assessment of who retains inventory/credit risk, controls vendor selection, establishes pricing
and remains the primary obligor on the transaction. Each of these factors was considered to determine the correct method of
recognizing revenue from our subsidiaries.
The Company’s skip tracing subsidiary utilizes both gross and net reporting under ASC 605-45. The subsidiary generates
revenue by working an account and successfully locating a customer for its client. An “investigative fee” is received for these
services. In addition, the subsidiary incurs “agent expenses” where it hires a third-party collector to effectuate repossession. In
many cases the subsidiary has an arrangement with its client which allows the subsidiary to bill the client for these fees. The
Company has determined these fees to be gross revenue based on the criteria in ASC 605-45 and they are recorded as such in the
line item “Fee income,” because the subsidiary is primarily liable to the third party collector. There is a corresponding expense in
“Agent fees” for these pass-through items. The subsidiary also incurs fees to release liens on the repossessed collateral. These lien-
release fees are netted in the line “Agent fees.”
The Company’s government processing and collection business’ primary source of income is derived from servicing taxing
authorities in several different ways: processing all of their tax payments and tax forms, collecting delinquent taxes, identifying
taxes that are not being paid and auditing tax payments. The processing and collection pieces are standard commission based
billings or fee-for-service transactions. When an audit is conducted, there are two components. The first component is a billing
for the hours incurred to conduct the audit. This billing is marked up from the actual costs incurred. The gross billing is a component
of the line item “Fee income” and the expense is included in the line item “Compensation and employee services.” The second
component is expenses incurred while conducting the audit. Most jurisdictions will reimburse the business for direct expenses
incurred for the audit including such items as travel and meals. The billed amounts are included in the line item “Fee income” and
the expense component is included in its appropriate expense category, generally, “Other operating expenses.”
The Company’s claims administration and payment processing subsidiary utilizes net reporting under ASC 605-45. It
generates revenue by filing claims with the class action claims administrator on behalf of its clients and receiving the related
settlement payment. Under SEC Staff Accounting Bulletin 104, the Company has determined that the fee is not earned until the
subsidiary has received the settlement funds. When a payment is received from the claims administrator for settlement of a lawsuit,
the fee is recorded on a net basis as revenue and included in the line item “Fee income.” The balance of the received amounts is
recorded as a liability and included in the line item “Accounts payable.”
The Company's United Kingdom subsidiary generates revenue from both purchased finance receivables which is accounted
for as described above and also services finance receivables on a contingent fee basis. These portfolios are owned by its clients
and placed under a contingent fee commission arrangement. The Company is paid to collect funds from the client's debtors and
earns a commission generally expressed as a percentage of the gross collections amount. The "Fee income" line of its income
statement reflects the contingent fee amount earned, and not the gross collection amount.
Property and equipment: Property and equipment, including improvements that significantly add to the productive capacity
or extend useful life, are recorded at cost, while maintenance and repairs are expensed currently. Property and equipment are
depreciated over their useful lives using the straight-line method of depreciation. Software and computer equipment are amortized
or depreciated over three to five years. Furniture and fixtures are depreciated over five years. Equipment is depreciated over five
65
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
to seven years. Leasehold improvements are depreciated over the lesser of the useful life, which ranges from three to ten years,
or the remaining term of the leased property. Building improvements are depreciated over ten to thirty-nine years. When property
is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is included
in the income statement.
Goodwill and intangible assets: In accordance with ASC Topic 350, “Intangibles—Goodwill and Other” (“ASC 350”), the
Company amortizes intangible assets over their estimated useful lives. Goodwill, pursuant to ASC 350, is not amortized but rather
is reviewed for impairment annually or earlier if indicators of potential impairment exist. The review of goodwill for potential
impairment is highly subjective and requires that: (a) goodwill is allocated to various reporting units of the Company’s business
to which it relates; and (b) the Company estimate the fair value of those reporting units to which the goodwill relates and then
determine the book value of those reporting units. If the estimated fair value of reporting units with allocated goodwill is determined
to be less than their book value, the Company is required to estimate the fair value of all identifiable assets and liabilities of those
reporting units in a manner similar to a purchase price allocation for an acquired business. Once this process is complete, the
amount of goodwill impairment, if any, can be determined. See Note 6 for additional information.
Noncontrolling interest: 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 "Consolidation" ("ASC 810").
The ASC 810 measurement amount includes adjustments for the noncontrolling interest’s pro-rata share of earnings, losses and
distributions. 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. 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.
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. Accordingly, the Company records a tax provision for the anticipated
tax consequences of the reported results of operations. In accordance with ASC 740, the provision for income taxes is computed
using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating
losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply
to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The evaluation of a tax
position in accordance with the guidance is a two-step process. The first step is recognition: the enterprise determines whether it
is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-
than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority
that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-
likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The
tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the
first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet
the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which
that threshold is no longer met. The Company records interest and penalties related to unrecognized tax benefits as a component
of income tax expense.
The Company utilizes the cost recovery method of income recognition for tax purposes. The Company believes cost
recovery to be an acceptable method for companies in the bad debt purchasing industry. Under the cost recovery method, collections
on finance receivables are applied first to principal to reduce the finance receivables to zero before any income is recognized.
In the event that all or part of the deferred tax assets are determined not to be realizable in the future, a valuation allowance
would be established and charged to earnings in the period such determination is made. Similarly, if the Company subsequently
realizes deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be
reversed, resulting in a positive adjustment to earnings or a decrease in goodwill in the period such determination is made. In
addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application
66
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact
on our results of operations and financial position.
Advertising costs: Advertising costs are expensed when incurred.
Operating leases: General abatements or prepaid leasing costs are recognized on a straight-line basis over the life of the
lease. In addition, future minimum lease payments (including the impact of rent escalations) are expensed on a straight-line basis
over the life of the lease. Material leasehold improvements are capitalized and amortized over the remaining life of the lease.
Share-based compensation: The Company accounts for share-based compensation in accordance with the provisions of
FASB ASC Topic 718 “Compensation-Stock Compensation” (“ASC 718”). ASC 718 requires that compensation expense associated
with share equity awards be recognized in the income statement. Based on historical experience, the Company assumes a forfeiture
rate for most equity share grants. Most time-based equity share awards generally vest between one and five years from the grant
date and are expensed on a straight-line basis over the vesting period. Equity share awards that contain a performance metric, are
expensed over the requisite service period, generally three years, in accordance with the performance level achieved at each
reporting period. See Note 12 for additional information.
Use of estimates: The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates have been made by management with respect to the timing and amount of future cash collections of
the Company’s finance receivables portfolios. Actual results could differ from these estimates making it reasonably possible that
a change in these estimates could occur within one year. On a quarterly basis, management reviews the estimates of future cash
collections, and whether it is reasonably possible that its assessments of collectibility may change based on actual results and other
factors.
Commitments and contingencies: We are subject to various claims and contingencies related to lawsuits, certain taxes,
as well as commitments under contractual and other obligations. We recognize liabilities for contingencies and commitments when
a loss is probable and estimable. We expense related legal costs as incurred. For additional information, see Note 16.
Estimated fair value of financial instruments: The Company applies the provision of FASB ASC Topic 820 “Fair Value
Measurements and Disclosures” (“ASC 820”). ASC 820 defines fair value as 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. Based upon the fact there are no quoted prices
in active markets or other observable market data, the Company used unobservable inputs for computation of the fair value of
finance receivables, net for disclosure purposes. Disclosure of the estimated fair values of financial instruments often requires the
use of estimates. See Note 11 for additional information.
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 2011-4 generally
represent clarification of ASC 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. The provisions of ASU 2011-4 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 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 shareholders’ equity and provides two options for presenting OCI: in a statement
included in the income statement or in a separate statement immediately following the income statement. 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.
67
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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.
In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived
Intangible Assets for Impairment" to amend the accounting guidance on intangible asset impairment testing. The ASU permits
entities to perform an optional qualitative assessment for determining whether it is more likely than not that an indefinite-lived
intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning
after September 15, 2012. Early adoption is permitted. The Company adopted ASU 2012-02 on October 1, 2012, which had no
impact on its consolidated financial statements.
2. Finance Receivables, net:
Changes in finance receivables, net for the years ended December 31, 2012 and 2011, were as follows (amounts in thousands):
Balance at beginning of year
Acquisitions of finance receivables, net of buybacks
Foreign currency translation adjustment
Cash collections
Income recognized on finance receivables, net
Cash collections applied to principal
Balance at end of year
2012
2011
$
$
926,734
$
529,691
575
(908,684)
530,635
(378,049)
1,078,951
$
831,330
398,999
—
(705,490)
401,895
(303,595)
926,734
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 are estimated to be as follows for the following years ending December 31, (amounts in thousands):
2013
2014
2015
2016
2017
2018
$
$
378,468
307,980
228,479
127,614
33,767
2,643
1,078,951
During the years ended December 31, 2012 and 2011, the Company purchased approximately $6.2 billion and $9.8 billion,
respectively, in face value of charged-off consumer receivables. At December 31, 2012, the estimated remaining collections
(“ERC”) on the receivables purchased during the years ended December 31, 2012 and 2011 were $882.6 million and $556.2 million,
respectively. There were no sales of finance receivables during the years ended December 31, 2012 and 2011. At December 31,
2012 and 2011, the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery
method of $4.2 million and $7.4 million, respectively.
The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These
fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest
method. The balance of the unamortized capitalized fees at December 31, 2012 and 2011 was $3.0 million and $3.1 million,
respectively. During the years ended December 31, 2012, 2011 and 2010 the Company capitalized $1.3 million, $1.1 million and
68
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
$1.0 million, respectively, of these direct acquisition fees. During the years ended December 31, 2012, 2011 and 2010 the Company
amortized $1.4 million, $1.3 million and $1.0 million, respectively, of these direct acquisition fees.
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. When applicable, 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 years ended December 31, 2012 and 2011 were as follows (amounts in thousands):
Balance at beginning of year
Income recognized on finance receivables, net
Additions
Reclassifications from nonaccretable difference
Foreign currency translation adjustment
Balance at end of year
2012
2011
$
$
1,026,614
(530,635)
467,524
276,171
(3,436)
1,239,674
$
$
892,188
(401,895)
443,169
93,152
—
1,026,614
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 years ended December 31, 2012, 2011 and 2010 (amounts
in thousands):
Valuation allowance—finance receivables:
Beginning balance
Allowance charges
Reversal of previous recorded allowance charges
Net allowance (reversal)/charge
Ending balance
Finance receivables, net (3)
Core
Portfolio (1)
Purchased
Bankruptcy Portfolio (2)
Total
2012
$
$
$
76,580
4,300
(6,380)
(2,080)
74,500
521,375
$
$
$
9,991
9,120
(488)
8,632
18,623
543,057
$
$
$
86,571
13,420
(6,868)
6,552
93,123
1,064,432
69
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
Valuation allowance—finance receivables:
Beginning balance
Allowance charges
Reversal of previous recorded allowance charges
Net allowance charge
Ending balance
Finance receivables, net
Valuation allowance—finance receivables:
Beginning balance
Allowance charges
Reversal of previous recorded allowance charges
Net allowance charge
Ending balance
Finance receivables, net
Core
Portfolio (1)
Purchased
Bankruptcy Portfolio (2)
Total
2011
70,030
$
6,377
$
9,650
(3,100)
6,550
76,580
454,161
$
$
4,051
(437)
3,614
9,991
472,573
$
$
76,407
13,701
(3,537)
10,164
86,571
926,734
Core
Portfolio (1)
Purchased
Bankruptcy Portfolio (2)
Total
2010
47,580
$
3,675
$
23,350
(900)
22,450
70,030
411,437
$
$
2,975
(273)
2,702
6,377
419,893
$
$
51,255
26,325
(1,173)
25,152
76,407
831,330
$
$
$
$
$
$
(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 December 31, 2012, the MHH finance receivables balance was $14.5 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 December 31, 2012 and 2011 was $2.4 million and $2.1 million, respectively. The Company does not have any off
balance sheet credit exposure related to its customers.
Changes in the allowance for doubtful accounts for the years ended December 31, 2012, 2011 and 2010 were as follows
(amounts in thousands):
Balance at beginning of year
Provision for doubtful accounts
Write-offs
Balance at end of year
2012
2011
2010
2,102
1,093
(766)
2,429
2,491
81
(470)
2,102
2,507
1,228
(1,244)
2,491
70
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
4. Operating Leases:
The Company leases office space and equipment under operating leases. Rental expense was $5.4 million, $4.7 million and
$4.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Future minimum lease payments for operating leases at December 31, 2012, are as follows for the years ending December 31,
(amounts in thousands):
2013
2014
2015
2016
2017
Thereafter
Total future minimum lease payments
5. Redeemable Noncontrolling Interest:
$
$
5,276
4,989
4,607
3,564
2,146
2,273
22,855
In accordance with ASC 810, the Company has consolidated all financial statement accounts of CCB in its consolidated
balance sheets at December 31, 2012 and 2011 and its consolidated income statements for the years ended December 31, 2012
and 2011 and for the period from March 15, 2010 through December 31, 2010. 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 attributable to the noncontrolling interest is stated separately in the consolidated income statements for 2012,
2011 and 2010.
The Company has the right through February 28, 2015 to purchase the remaining 38% of CCB at certain multiples of
EBITDA. In addition, beginning March 1, 2012 and ending February 28, 2015, the noncontrolling interest can require the Company
to purchase up to one-third of its membership units in CCB per annual period at pre-defined multiples of EBITDA, subject to
achievement of a minimum amount of trailing EBITDA. Beginning March 1, 2015 and ending February 28, 2018, the noncontrolling
interest can require the Company to purchase all or any portion of its remaining membership units in CCB at pre-defined multiples
of EBITDA, with no restrictions.
The 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 at December 31, 2012.
On February 6, 2013, the Company provided notice that it would exercise its right to purchase half of the remaining interest
in CCB for a purchase price of $1.1 million. The purchase price was derived from the formula stipulated in the contractual
agreement and was based on prior levels of EBITDA.
The following table illustrates the changes in the redeemable noncontrolling interest for the period from March 15, 2010 to
December 31, 2012 (amounts in thousands):
Acquisition date fair value of redeemable noncontrolling interest
Net income attributable to redeemable noncontrolling interest
Distributions paid or payable
Redeemable noncontrolling interest at December 31, 2010
Net income attributable to redeemable noncontrolling interest
Distributions paid or payable
Adjustment of the redeemable noncontrolling interest measurement amount
Redeemable noncontrolling interest at December 31, 2011
Net loss attributable to redeemable noncontrolling interest
Distributions paid or payable
Adjustment of the redeemable noncontrolling interest measurement amount
Redeemable noncontrolling interest at December 31, 2012
71
$
$
15,323
417
(1,291)
14,449
353
(1,083)
4,112
17,831
(494)
(261)
3,597
20,673
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
6. Goodwill and Intangible Assets, net:
In connection with the Company’s previous business acquisitions, the Company acquired 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 2012, the Company underwent its annual review of goodwill. Based upon the results of this review, which was conducted as
of October 1, 2012, 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 December 31, 2012 that would indicate
a triggering event and thereby necessitate further evaluation of goodwill or other intangible assets. Accordingly, there were no
impairment losses during the years ended December 31, 2012 and 2011. The Company expects to perform its next annual goodwill
review during the fourth quarter of 2013. At December 31, 2012 and 2011, the carrying value of goodwill was $109.5 million and
$61.7 million, respectively. The following table represents the changes in goodwill for the years ended December 31, 2012 and
2011:
Balance at beginning of year
Acquisitions of MHH and NCM
Foreign currency translation adjustment
Balance at end of year
2012
2011
$
$
61,678
$
45,494
2,316
109,488
$
61,678
—
—
61,678
Goodwill recognized from the acquisitions of MHH and NCM represents, among other things, an established workforce, the
future economic benefits arising from expected synergies and expanded geographical diversity. The acquired goodwill is fully
deductible for U.S. income tax purposes.
Intangible assets, excluding goodwill, consist of the following at December 31, 2012 and 2011 (amounts in thousands):
Client and customer relationships
Non-compete agreements
Trademarks
Total
2012
2011
Gross
Amount
40,698
3,880
3,477
48,055
$
$
Accumulated
Amortization
22,516
$
3,581
1,594
27,691
$
$
$
Gross
Amount
30,777
3,103
2,500
36,380
Accumulated
Amortization
17,950
$
2,771
1,063
21,784
$
Increases in the gross amounts of intangible assets during the year ended December 31, 2012 relate to the purchase of MHH
on January 16, 2012 and NCM on December 21, 2012. The combined original weighted average amortization period related to
the acquired intangible assets of MHH is approximately 13 years. The combined original weighted average amortization period
related to the acquired intangible assets of NCM is 3 years.
In accordance with ASC 350, the Company is amortizing the intangible assets over the estimated useful lives. Total
amortization expense for the years ended December 31, 2012, 2011 and 2010 was $5.9 million, $4.9 million and $5.2 million,
respectively. The Company reviews these intangible assets upon the occurrence of a triggering event.
The future amortization of these intangible assets is estimated to be as follows as of December 31, 2012 for the following
years ending December 31, (amounts in thousands):
2013
2014
2015
2016
2017
Thereafter
$
$
4,755
4,138
3,075
2,414
1,515
4,467
20,364
72
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
7. Business Acquisitions:
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 176 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.
On December 21, 2012, the Company acquired certain finance receivables and certain operating assets of National Capital
Management, LLC ("NCM"). The transaction (the "NCM acquisition") was completed at a total price of $107.3 million, comprised
of $100.3 million in cash and a $7.0 million liability associated with the earn-out potential to the sellers. The cash component of
the purchase price was financed with borrowings under the Company's existing line of credit. The acquisition included a leased
call center location in California as well as underwriting staff in New Jersey. With the acquisition of the accounts and models
used to price the receivables, the Company expanded its ability to purchase and collect unsecured bankruptcy receivables and it
provided the platform to allow us to better purchase and collect secured bankruptcy receivables.
The Company accounted for these purchases in accordance with ASC Topic 805, “Business Combinations” ("ASC 805").
Under this guidance, an entity is required to recognize the assets acquired, liabilities assumed and the consideration given at their
fair value as of acquisition date. The following table summarizes the fair value of the consideration given for MHH and NCM, as
well as the fair value of the assets acquired and liabilities assumed related to the acquisitions.
Recognized amounts of identifiable assets and liabilities are as follows (amounts in thousands):
Purchase price
Cash
Finance receivables, net
Due from seller
Accounts receivable
Prepaid expenses (included in other assets)
Customer relationships
Non-compete agreements
Trademarks
Property and equipment
Accounts payable
Accrued expenses
Income tax payable
Goodwill
NCM
MHH
Total
$
$
107,342
—
(68,786)
(29,548)
—
(23)
—
(127)
—
(235)
—
—
—
8,623
$
$
51,258
(2,605)
(3,906)
—
(2,038)
(330)
(9,334)
(612)
(918)
(814)
3,500
1,461
1,209
36,871
$
$
158,600
(2,605)
(72,692)
(29,548)
(2,038)
(353)
(9,334)
(739)
(918)
(1,049)
3,500
1,461
1,209
45,494
The acquisitions included tangible assets and liabilities whose book values were assumed to approximate their fair values
with the exception of finance receivables. Finance receivables were valued using our internal proprietary acquisition models.
The fair value of the intangible asset related to customer relationships was determined using an income approach that relies
on projected future net cash flows including key assumptions for the client attrition rate and discount rate and is being amortized
over a period of 15 years using an economic benefit pattern amortization rate. The fair value of the intangible asset related to
trademarks was determined using an income approach that relies on projected future net cash flows including key assumptions
for the royalty income rate and discount rate and is being amortized over a period of 3 years using an economic benefit pattern of
amortization rate. The fair value of the intangible assets related to the noncompete agreements was determined using an income
approach that relies on the difference between projected future net cash flows assuming the covenant was in place and without
the covenant in place and is amortized over one year for MHH and three years for NCM.
The NCM acquisition includes an earn-out provision whereby the sellers are able to earn additional cash consideration for
achieving certain cash collection thresholds over a five year period. The maximum amount of earn-out during the period is $15.0
million. ASC 805 requires these contingent liabilities to be recorded at fair value on the date of acquisition using the amount more
than likely to be achieved and discounted to present value at a discount rate. At subsequent reporting dates, the Company will
73
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
adjust the fair value of the liability, if necessary, with any change recorded as a gain or loss in the income statement. As of December
31, 2012, the Company has recorded an estimated fair value amount for this liability of $7.0 million.
8. Line of Credit:
On December 19, 2012, 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 $600.0 million (subject to the borrowing base and applicable debt covenants)
which consists of a $200.0 million floating rate term loan that matures on December 19, 2017 and a $400.0 million revolving
credit facility that matures on December 19, 2017. The term and revolving loans accrue interest, at the option of the Company, at
either the base rate or the Eurodollar rate (as defined in the Credit Agreement) for the applicable term plus 2.50% 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%. The Company’s revolving credit facility includes a $20 million swingline loan sublimit, a $20 million letter of credit
sublimit and a $20 million alternative currency equivalent sublimit. It also contains an accordion loan feature that allows the
Company to request an increase of up to $250.0 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. 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 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 $455,091,200 plus 50% of
positive cumulative consolidated net income for each fiscal quarter beginning with the quarter ended December 31, 2012,
plus 50% of the cumulative net proceeds of any equity offering;
capital expenditures during any fiscal year cannot exceed $30 million;
cash dividends and distributions during any fiscal year cannot exceed $20 million;
stock repurchases during the term of the agreement cannot exceed $250 million and cannot exceed $100 million in a
single fiscal year;
permitted acquisitions (as defined in the Credit Agreement) during any fiscal year cannot exceed $250 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's borrowings at December 31, 2012 consisted of $122 million in 30-day Eurodollar rate loans and $5 in million
base rate loans with a weighted average interest rate of 2.74%. In addition, the Company had $200 million outstanding on the
term loan at December 31, 2012 with an annual interest rate as of December 31, 2012 of 2.71%. Refer to Note 9 "Long-Term
Debt" for payment details related to the term loan.
The Company's previous credit facility included an aggregate principal amount available of $407.5 million as of December
31, 2011, which consisted of a $50 million fixed rate loan and a $357.5 million revolving credit facility. Borrowings under the
revolving credit facility consisted of 30-day Eurodollar rate loans and base rate loans with a weighted average interest rate of
3.16%. The Company also paid an unused line fee for its previous credit facility equal to 0.375% on any unused portion of the
facility. The credit facility was collateralized by substantially all of the Company's assets and contained certain restrictive covenants.
The Company had $327.0 million and $220.0 million of borrowings outstanding on its credit facilities as of December 31,
2012 and 2011, respectively, of which $50 million represented borrowing under a non-revolving fixed rate loan at December 31,
2011.
The Company was in compliance with all covenants of its credit facilities as of December 31, 2012 and 2011.
74
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
9. Long-Term Debt:
On December 19, 2012, the Company entered into the Credit Agreement. Under the terms of the Credit Agreement, the credit
facility includes a $200 million floating rate term loan that matures on December 19, 2017. The term loan accrues interest, at the
option of the Company, at either the base rate or the Eurodollar rate (as defined in the Credit Agreement) for the applicable term
plus 2.50% per annum. See Note 8 for additional details regarding interest rates and restrictive covenants. The term loan includes
quarterly principal payments on the last day of each calendar quarter beginning March 31, 2013 and ending on the maturity date
of December 19, 2017.
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 a three year loan with a fixed rate of 4.78% and it matured
on February 28, 2012.
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.
The following principal payments are due on the Company's long-term debt as of December 31, 2012 during the calendar
year indicated (amounts in thousands):
2013
2014
2015
2016
2017
Total
$
5,542
10,000
15,000
20,000
150,000
$ 200,542
10. Property and Equipment, net:
Property and equipment, at cost, consist of the following as of December 31, 2012 and 2011 (amounts in thousands):
Software
Computer equipment
Furniture and fixtures
Equipment
Leasehold improvements
Building and improvements
Land
Accumulated depreciation and amortization
Property and equipment, net
2012
2011
$
$
29,467
$
14,129
7,220
8,674
7,231
7,014
1,269
(49,692)
25,312
$
25,252
12,221
6,501
7,798
6,117
6,987
1,269
(40,418)
25,727
Depreciation and amortization expense relating to property and equipment for the years ended December 31, 2012, 2011
and 2010 was $8.7 million, $8.1 million and $7.2 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
December 31, 2012 and 2011, the Company has incurred and capitalized $7.8 million and $6.1 million, respectively, of these direct
payroll costs related to software developed for internal use. As of both December 31, 2012 and 2011, $1.3 million of these costs
75
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
are 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
relating to this internally developed software as of and for the years ended December 31, 2012 and 2011 were $1.2 million and
$0.8 million, respectively. Remaining unamortized costs relating to this internally developed software as of and for the years ended
December 31, 2012 and 2011 were $3.9 million and $3.3 million, respectively.
11. 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 at December 31, 2012 and 2011, under the indicated captions (amounts in
thousands):
Financial assets:
Cash and cash equivalents
Finance receivables, net
Financial liabilities:
Line of credit
Long-term debt
2012
2011
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
32,687
1,078,951
$
32,687
1,776,049
$
$
26,697
926,734
26,697
1,269,277
127,000
$
127,000
$
220,000
$
220,000
200,542
200,542
1,246
1,246
$
$
As of December 31, 2012, and 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.
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.
76
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
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 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.
Assets measured at fair value on a non-recurring basis at December 31, 2012 consist of acquired assets from business
acquisitions that were completed during 2012. See Note 7 for the methodologies used to measure the fair value of these assets
using level 3 inputs.
12. Share-Based Compensation:
The Company has a stock option and nonvested share plan. The Company created the 2002 Stock Option Plan (the “Plan”)
on November 7, 2002. The Plan was amended in 2004 (the “Amended Plan”) to enable the Company to issue nonvested shares
of stock to its employees and directors. On March 19, 2010, the Company adopted the 2010 Stock Plan (the "2010 Stock Plan"),
which was approved by its shareholders at the 2010 Annual Meeting. The 2010 Stock Plan is a further amendment to the Amended
Plan, and contains, among other things, specific performance metrics with respect to performance-based stock awards. Up to
2,000,000 shares of common stock may be issued under the 2010 Stock Plan.
As of December 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 $3.6 million with a weighted average
remaining life for all nonvested shares of 2.1 years (not including nonvested shares granted under the LTI program). As of
December 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 $11.3 million, $7.8 million and $4.2 million for the years ended December 31,
2012, 2011 and 2010, respectively. Tax benefits resulting from tax deductions in excess of share-based compensation expense
(windfall tax benefits) recognized under the provisions of ASC 718 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 $4.7 million, $2.1 million and $0.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Stock Options
PRA has issued stock options in periods prior to those presented in these financial statements. No stock options were issued
in 2012, 2011 or 2010. In addition, there are no outstanding stock options at December 31, 2012 or 2011.
Nonvested Shares
With the exception of the awards made pursuant to the LTI program and a few employee and director grants the nonvested
shares vest ratably over three to five years and are expensed over their vesting period.
77
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The following summarizes all nonvested share transactions, excluding those related to the LTI program, from December 31,
2009 through December 31, 2012 (amounts in thousands, except per share amounts):
December 31, 2009
Granted
Vested
Cancelled
December 31, 2010
Granted
Vested
Cancelled
December 31, 2011
Granted
Vested
Cancelled
December 31, 2012
Nonvested Shares
Outstanding
Weighted-Average
Price at Grant Date
81
$
57
(37)
(10)
91
48
(53)
(5)
81
53
(34)
(4)
96
$
40.24
53.06
41.46
39.61
47.89
76.59
55.97
50.34
59.31
65.99
59.36
69.92
62.52
The total grant date fair value of shares vested during the years ended December 31, 2012, 2011 and 2010, was $2.0 million,
$3.0 million and $1.5 million, respectively.
Long-Term Incentive Program
Pursuant to the Amended Plan, the Compensation Committee may grant time-vested and performance based nonvested
shares. All shares granted under the LTI program were granted to key employees of the Company. The following summarizes all
LTI share transactions from December 31, 2009 through December 31, 2012 (amounts in thousands, except per share amounts):
December 31, 2009
Granted at target level
Expired
Cancelled
December 31, 2010
Granted at target level
Adjustments for actual performance
Vested
Cancelled
December 31, 2011
Granted at target level
Adjustments for actual performance
Vested
Cancelled
December 31, 2012
Nonvested LTI Shares
Outstanding
Weighted-Average
Price at Grant Date
182
$
54
(73)
(41)
122
74
15
(16)
(12)
183
66
40
(118)
(5)
166
$
29.47
48.71
36.22
26.01
35.05
75.50
48.71
48.71
39.55
51.03
62.20
54.01
37.75
67.66
65.14
The total grant date fair value of shares vested during the years ended December 31, 2012, 2011 and 2010, was $4.5 million,
$0.8 million and $0, respectively.
78
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
At December 31, 2012, total future compensation costs, assuming the current estimated performance levels are achieved,
related to nonvested share awards granted under the LTI program are estimated to be approximately $5.3 million. The Company
assumed a 7.5% forfeiture rate for these grants and the remaining shares have a weighted average life of 1.5 years at December 31,
2012.
13. Earnings per Share:
Basic earnings per share (“EPS”) are computed by dividing net income available to common shareholders of Portfolio
Recovery Associates, 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 table provides a reconciliation between the
computation of basic EPS and diluted EPS for the years ended December 31, 2012, 2011 and 2010 (amounts in thousands, except
per share amounts):
Net Income
attributable
to Portfolio
Recovery
Associates,
Inc.
$ 126,593
2012
Weighted
Average
Common
Shares
EPS
16,997
$
7.45
Net Income
attributable
to Portfolio
Recovery
Associates,
Inc.
$100,791
2011
Weighted
Average
Common
Shares
EPS
17,110
$
5.89
Net Income
attributable
to Portfolio
Recovery
Associates,
Inc.
$ 73,454
2010
Weighted
Average
Common
Shares
EPS
16,820
$
4.37
126
120
65
Basic EPS
Dilutive effect of
nonvested share
awards
Diluted EPS
$ 126,593
17,123
$
7.39
$100,791
17,230
$
5.85
$ 73,454
16,885
$
4.35
There were no antidilutive options outstanding as of December 31, 2012, 2011 and 2010.
14. Stockholders’ Equity:
On February 2, 2012, the Company's board of directors authorized a share repurchase program to purchase up to $100.0
million of the Company's outstanding shares of common stock on the open market. During the year ended December 31, 2012,
the Company repurchased 331,449 shares of its common stock at an average price of $68.57 per share. At December 31, 2012,
the maximum remaining purchase price for share repurchases under the plan is approximately $77.3 million.
15. Income Taxes:
The Company records an income tax provision for the anticipated tax consequences of the reported results of operations. In
accordance with ASC 740, the provision for income taxes is computed using the asset and liability method, under which deferred
tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax
assets and liabilities are expected to be realized or settled.
79
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
The income tax expense recognized for the years ended December 31, 2012, 2011 and 2010 is comprised of the following
(amounts in thousands):
For the year ended December 31, 2012:
Current tax expense/(benefit)
Deferred tax (benefit)/expense
Total income tax expense/(benefit)
For the year ended December 31, 2011:
Current tax expense
Deferred tax expense
Total income tax expense
For the year ended December 31, 2010:
Current tax benefit
Deferred tax expense
Total income tax expense
Federal
State
Foreign
Total
$
$
$
$
$
$
76,067
(8,837)
67,230
31,185
24,054
55,239
$
$
$
$
(481) $
40,163
39,682
$
14,051
(278)
13,773
6,207
4,873
11,080
$
$
$
$
(8) $
7,330
7,322
$
(563) $
494
(69) $
— $
—
— $
— $
—
— $
89,555
(8,621)
80,934
37,392
28,927
66,319
(489)
47,493
47,004
The Company has recognized a net deferred tax liability of $185.3 million and $193.9 million as of December 31, 2012 and
2011, respectively. The components of the net deferred tax liability are as follows (amounts in thousands):
Deferred tax assets:
2012
2011
Employee compensation
Allowance for doubtful accounts
State tax credit carryforward
State net operating loss carryforward
Accrued liabilities
Guaranteed payments
Leases
Acquisition costs
Total deferred tax assets
Deferred tax liabilities:
Depreciation expense
Intangible assets and goodwill
Prepaid expenses
Other
Use of cost recovery for income tax purposes
Total deferred tax liability
Net deferred tax liability
$
$
5,179
906
644
—
3,060
734
448
704
11,675
3,364
1,669
1,231
554
190,134
196,952
185,277
$
$
3,313
752
685
45
1,365
488
444
300
7,392
4,088
628
1,128
110
195,336
201,290
193,898
A reconciliation of the Company’s expected tax expense at the statutory federal tax rate to actual tax expense for the years
ended December 31, 2012, 2011 and 2010 is as follows (amounts in thousands):
Expected tax expense at statutory federal rates
State tax expense, net of federal tax benefit
Other
Total income tax expense
2012
2011
2010
$
$
72,462
$
58,612
$
8,546
(74)
80,934
7,379
328
$
66,319
$
42,306
4,759
(61)
47,004
The guidance of ASC 740 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. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in
80
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
accordance with the guidance is a two-step process. The first step is recognition: the enterprise determines whether it is more likely
than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes,
based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition
threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have
full knowledge of all relevant information. The second step is measurement: a tax position that meets the more likely than not
recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is
measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax
positions that previously failed to meet the more likely than not recognition threshold should be recognized in the first subsequent
financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely
than not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is
no longer met. There were no unrecognized tax benefits as of December 31, 2012 and 2011. 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 at
December 31, 2012 or 2011.
A valuation allowance for deferred tax assets has not been provided at December 31, 2012 or 2011 since management believes
it is more likely than not that the deferred tax assets will be realized. In the event that all or part of the deferred tax assets are
determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period
such determination is made. Similarly, if the Company subsequently realizes deferred tax assets that were previously determined
to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period
such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of
uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s
expectations could have a material impact on the Company’s results of operations and financial position. At December 31, 2012,
the Company had state income tax credit carryforwards of approximately $0.6 million which will begin to expire starting in the
year ending December 31, 2021.
The Company was notified on June 21, 2007 that it was being examined by the Internal Revenue Service (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 they will ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary. The Company
believes cost recovery to be an acceptable tax revenue recognition method for companies in the bad debt purchasing industry. For
tax purposes, collections on finance receivables are applied first to principal to reduce the finance receivables to zero before any
taxable income is recognized. 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. On November 2, 2011, the Company filed a petition in the United States Tax Court. If the Company is unsuccessful
in the United States 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 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. On June 30, 2011, the Company was notified by the IRS that the
audit period will be expanded to include the tax years ended December 31, 2009 and 2008.
At December 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. The statute of limitations for the 2008, 2009 and
2010 tax years has been extended to September 26, 2014.
As of December 31, 2012, the cumulative unremitted earnings of the Company's foreign subsidiaries are approximately $1.2
million. There were no repatriations of these unremitted earnings during 2012. The Company intends for predominantly all foreign
earnings to be indefinitely reinvested in its foreign operations and, therefore, the recording of deferred tax liabilities for such
unremitted earnings is not required. It is impracticable to determine the total amount of unrecognized deferred taxes with respect
to these permanently reinvested earnings; however, foreign tax credits would be available to partially reduce U.S. income taxes
in the event of a distribution.
81
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
16. 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. As of December 31, 2012, estimated future compensation under
these agreements is approximately $15.4 million. The agreements also contain confidentiality and non-compete provisions.
Leases:
The Company is party to various operating leases with respect to its facilities and equipment. The future minimum lease
payments at December 31, 2012 is approximately $22.9 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. Additionally,
the Company receives subpoenas and other requests for information from regulators or governmental authorities who are
investigating the Company's debt collection activities. The Company makes every effort to respond appropriately to such requests.
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 pending litigation,
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.
Subject to the inherent uncertainties involved in such proceedings, the Company believes, based upon its current knowledge
and after consultation with counsel, that the legal proceedings currently pending against it, including those that fall outside of the
Company's routine legal proceedings, 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 financial condition, results of operations, or cash flows for a particular period.
Excluding the matters described below and other putative class action suits which the Company believes are not material,
the high end of the range of potential litigation losses in excess of the amount accrued is estimated by management to be less than
$1,000,000 as of December 31, 2012. Notwithstanding our attempt to estimate a range of possible losses in excess of the amount
accrued based on current information, actual future losses may exceed both the Company's accrual and the range of potential
litigation losses disclosed above.
In certain legal proceedings, the Company may have recourse to insurance or third party contractual indemnities to cover all
or portions of its litigation expenses, judgments, or settlements. Loss estimates and accruals for potential liability related to legal
proceedings are exclusive of potential recoveries, if any, under the Company's insurance policies or third party indemnities. The
Company has not recorded any potential recoveries under the Company's insurance policies or third party indemnities.
The matters described below fall outside of the normal parameters of the Company's routine legal proceedings.
82
Telephone Consumer Protection Act Litigation
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
As previously disclosed, the Company has been named as defendant in a number of putative class action cases, each alleging
that the Company violated the Telephone Consumer Protection Act by calling consumers' cellular telephones without their prior
express consent. On December 21, 2011, the United States Judicial 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. On
November 14, 2012, the putative class plaintiffs filed their amended consolidated complaint in the matter, now styled as In re
Portfolio Recovery Associates, LLC Telephone Consumer Protection Act Litigation, case No. 11-md-02295 (the “MDL action”).
The Company has filed a motion to dismiss the amended consolidated complaint.
On October 12, 2012, the United States Court of Appeals for the Ninth Circuit, affirmed the decision of the United States
District Court for the Southern District of California in the matter of Meyer v. Portfolio Recovery Associates, LLC, Case No. 11-
cv-01008, which imposed a preliminary injunction prohibiting the Company from using its Avaya Proactive Contact Dialer to
place calls to cellular telephones with California area codes that were obtained through skip-tracing. On December 28, 2012, the
United States Court of Appeals for the Ninth Circuit denied the Company's petition seeking a rehearing en banc. Meyer is one
of the cases included in the MDL action listed above. Both Meyer and the MDL action are ongoing and no final determination on
the merits in either has been made.
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 December 31, 2012
is approximately $204.5 million.
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 through February 28, 2015 to purchase, at a predetermined price, the remaining 38% of the membership units
of CCB not held by the Company. 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. On February 6, 2013, the
Company provided notice that it would exercise its right to acquire one-half of the outstanding noncontrolling interest for $1.1
million computed on a contractual formula. While the actual amount or timing of any future payment related to the remaining
19% of outstanding interest is unknown at this time, the maximum amount of consideration which could be paid for that interest
is $11.4 million.
Contingent Purchase Price:
The NCM acquisition includes an earn-out provision whereby the sellers are able to earn additional cash consideration for
achieving certain cash collection thresholds over a five year period. The maximum amount of earn-out during the period is $15.0
million. As of December 31, 2012, the Company has recorded a present fair amount for this liability of $7.0 million.
Finance Receivables:
Certain agreements for the purchase of finance receivables portfolios contain provisions that may, in limited circumstances,
require the Company to refund a portion or all of the collections subsequently received by the Company on particular accounts.
The potential refunds as of the balance sheet date are not considered to be significant.
Internal Revenue Service Audit
The U.S. Internal Revenue Service (the “IRS”) examined the Company's tax returns 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. The Company subsequently
filed a petition in the United States Tax Court to which the IRS responded on January 12, 2012. If the Company is unsuccessful
in the United States Tax Court, it can appeal to the federal Circuit Court of Appeals. Refer to Note 15 “Income Taxes” for additional
information.
83
Portfolio Recovery Associates, Inc.
Notes to Consolidated Financial Statements
17. 401(k) Retirement Plan:
The Company sponsors a defined contribution plan. Under the plan, all employees over eighteen years of age are eligible
to make voluntary contributions to the plan up to 100% of their compensation, subject to Internal Revenue Service limitations,
after completing six months of service, as defined in the plan. The Company makes matching contributions of up to 4% of an
employee’s salary. Total compensation expense related to these contributions was $1.6 million, $1.5 million and $1.3 million for
the years ended December 31, 2012, 2011 and 2010, respectively.
84
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls
and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies or procedures may deteriorate.
We conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.
Based on this evaluation, the principal executive officer and principal financial officer have concluded that, as of December 31,
2012, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting that
occurred during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and
maintaining effective internal control over financial reporting. Internal control over financial reporting is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f) as a process designed by, or under the supervision of, the company’s principal executive and principal
financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements.
Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”) of the
Treadway Commission. Based on its assessment, management has determined that, as of December 31, 2012, its internal control
over financial reporting was effective based on the criteria set forth in the COSO framework. The Company’s independent registered
public accounting firm, KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting
as of December 31, 2012, which is included herein.
The scope of management's assessment of internal controls over financial reporting did not include our recently acquired subsidiary,
MHH, or our recent purchase of certain finance receivables and certain operating assets of NCM, which were excluded from our
evaluation. These businesses represent approximately 11% of total assets and approximately 3% of total revenues reflected in our
consolidated financial statements as of and for the year ended December 31, 2012.
85
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Portfolio Recovery Associates, Inc.:
We have audited Portfolio Recovery Associates, Inc.’s internal control over financial reporting as of December 31, 2012, based
on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Portfolio Recovery Associates, Inc.’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management’s Report on Internal Control over Financial Reporting (Item 9A). Our responsibility is to express
an opinion on Portfolio Recovery Associates, Inc.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Portfolio Recovery Associates, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Portfolio Recovery Associates, Inc. acquired 100% of the equity interest of Mackenzie Hall Holdings, Limited (MHH) and certain
assets of National Capital Management, LLC (NCM) during 2012, and management excluded from its assessment of the
effectiveness of Portfolio Recovery Associates, Inc.’s internal control over financial reporting as of December 31, 2012, MHH’s
and NCM's internal control over financial reporting associated with approximately 11% of total assets and approximately 3% of
total revenues reflected in the consolidated financial statements of Portfolio Recovery Associates, Inc. and subsidiaries as of and
for the year ended December 31, 2012. Our audit of internal control over financial reporting of Portfolio Recovery Associates,
Inc. also excluded an evaluation of the internal control over financial reporting of MHH and NCM.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Portfolio Recovery Associates, Inc. and subsidiaries as of December 31, 2012 and 2011, and the
related consolidated income statements, and statements of comprehensive income, changes in stockholders’ equity , and cash flows
for each of the years in the three-year period ended December 31, 2012, and our report dated February 28, 2013 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Norfolk, Virginia
February 28, 2013
86
Item 9B. Other Information.
None.
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by Item 10 is incorporated herein by reference to the sections labeled “Security Ownership of
Management and Directors,” “Board of Directors,” “Executive Officers,” “Corporate Governance,” “Committees of the Board of
Directors” and “Report of the Audit Committee” in the Company’s definitive Proxy Statement in connection with the Company’s
2013 Annual Meeting of Shareholders.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated herein by reference to (a) the section labeled “Compensation Discussion
and Analysis” in the Company’s definitive Proxy Statement in connection with the Company’s 2013 Annual Meeting of
Shareholders and (b) the section labeled “Compensation Committee Report” in the Company’s definitive Proxy Statement in
connection with the Company’s 2013 Annual Meeting of Shareholders, which section (and the report contained therein) shall be
deemed to be furnished in this report and shall not be incorporated by reference into any filing under the Securities Act of 1933
or the Securities Exchange Act of 1934 as a result of such furnishing in this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters.
The information required by Item 12 is incorporated herein by reference to the section labeled “Security Ownership of
Management and Directors” in the Company’s definitive Proxy Statement in connection with the Company’s 2013 Annual Meeting
of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by Item 13 is incorporated herein by reference to the sections labeled “Policies for Approval of
Related Party Transactions” and “Director Independence” in the Company’s definitive Proxy Statement in connection with the
Company’s 2013 Annual Meeting of Shareholders.
Item 14. Principal Accountant Fees and Services.
The information required by Item 14 is incorporated herein by reference to the section labeled “Fees Paid to KPMG LLP”
in the Company’s definitive Proxy Statement in connection with the Company’s 2013 Annual Meeting of Shareholders.
87
Item 15.
Exhibits and Financial Statement Schedules.
(a) Financial Statements.
PART IV
The following financial statements of the Company are included in Item 8 of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Income Statements for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012, 2011
and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
(b) Exhibits.
Page
57
58
59
60
61
62
63
2.1
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
Equity Exchange Agreement between Portfolio Recovery Associates, L.L.C. and Portfolio Recovery Associates,
Inc. (Incorporated by reference to Exhibit 2.1 of Amendment No. 2 to the Registration Statement on Form S-1 filed
on October 30, 2002).
Seconded Amended and Restated Certificate of Incorporation of Portfolio Recovery Associates, Inc. (Incorporated
by reference to Exhibit 3.1 of the Quarterly Report on Form 10-Q filed on August 5, 2011).
Second Amended and Restated By-Laws of Portfolio Recovery Associates, Inc. (Incorporated by reference to
Exhibit 3.2 of the Annual Report on Form 10-K for the period ended December 31, 2009).
Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of Amendment No. 1 to the
Registration Statement on Form S-1 filed on October 15, 2002).
Form of Warrant (Incorporated by reference to Exhibit 4.2 of Amendment No. 2 to the Registration Statement on
Form S-1 filed on October 30, 2002).
Employment Agreement, dated December 1, 2011, by and between Steven D. Fredrickson and Portfolio Recovery
Associates, Inc. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on
December 28, 2011).
Employment Agreement, dated December 1, 2011, by and between Kevin P. Stevenson and Portfolio Recovery
Associates, Inc. (Incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K filed on
December 28, 2011).
Employment Agreement, dated December 1, 2011, by and between Judith S. Scott and Portfolio Recovery
Associates, Inc. (Incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed on
December 28, 2011).
Employment Agreement, dated December 1, 2011, by and between Michael J. Petit and Portfolio Recovery
Associates, Inc. (Incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K filed on
December 28, 2011).
Employment Agreement, dated December 1, 2011, by and between Peter K. McCammon and Portfolio Recovery
Associates, Inc. (Incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K filed on
December 28, 2011).
Employment Agreement, dated December 1, 2011, by and between Neal Stern and Portfolio Recovery Associates,
Inc. (Incorporated by reference to Exhibit 10.6 of the Current Report on Form 8-K filed on December 28, 2011).
88
10.7
10.8
10.9
Portfolio Recovery Associates 2010 Stock Plan (Incorporated by reference to Exhibit 10.9 of the Current Report on
Form 8-K filed on June 9, 2010).
Portfolio Recovery Associates, Inc., Annual Bonus Plan (Incorporated by reference to Exhibit 10.10 of the Current
Report on Form 8-K filed on June 9, 2010).
Credit Agreement dated as of December 19, 2012 by and among Portfolio Recovery Associates, Inc., Portfolio
Recovery Associates, LLC, PRA Holding I, LLC, PRA Location Services, LLC, PRA Government Services, LLC,
PRA Receivables Management, LLC, PRA Holding II, LLC, PRA Holding III, LLC, MuniServices, LLC, PRA
Professional Services, LLC, PRA Financial Services, LLC, Bank of America, N.A. as administrative agent, swing
line lender, and l/c issuer, Wells Fargo Bank, N.A. and SunTrust Bank as co-syndication agents, KeyBank, National
Association, as documentation agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities,
LLC, and SunTrust Robinson Humphrey, Inc. as joint lead arrangers and joint book managers, and the lenders
named therein. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed on December 20,
2012).
21.1
Subsidiaries of Portfolio Recovery Associates, Inc. (filed herewith).
23.1
Consent of KPMG LLP (filed herewith).
24.1
Powers of Attorney (included on signature page) (filed herewith).
31.1
31.2
32.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed
herewith).
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed
herewith).
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley
Act of 2002 (filed herewith).
89
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 28, 2013
By:
/s/ Steven D. Fredrickson
Portfolio Recovery Associates, Inc.
(Registrant)
Date: February 28, 2013
Steven D. Fredrickson
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
By:
/s/ Kevin P. Stevenson
Kevin P. Stevenson
Chief Financial and Administrative Officer,
Executive Vice President,
Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned whose signature appears below constitutes and
appoints Steven D. Fredrickson and Kevin P. Stevenson, his true and lawful attorneys-in-fact, with full power of substitution and
resubstitution for him and on his behalf, and in his name, place and stead, in any and all capacities to execute and sign any and
all amendments or post-effective amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorneys-in-fact or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof and the registrant hereby confers like authority on its behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 28, 2013
Date: February 28, 2013
By:
/s/ Steven D. Fredrickson
Steven D. Fredrickson
President, Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
By:
/s/ Kevin P. Stevenson
Kevin P. Stevenson
Chief Financial and Administrative Officer,
Executive Vice President, Treasurer and Assistant
Secretary
(Principal Financial and Accounting Officer)
90
Date: February 28, 2013
By:
/s/ John H. Fain
Date: February 28, 2013
John H. Fain
Director
By:
/s/ John E. Fuller
John E. Fuller
Director
Date: February 28, 2013
By:
/s/ Penelope W. Kyle
Penelope W. Kyle
Director
Date: February 28, 2013
By:
/s/ David N. Roberts
David N. Roberts
Director
Date: February 28, 2013
By:
/s/ Scott M. Tabakin
Scott M. Tabakin
Director
Date: February 28, 2013
By:
/s/ James M. Voss
James M. Voss
Director
91
corporate information
Stock ExchangE LiSting
Portfolio Recovery Associates’ common stock trades on the
NASDAQ Global Select Market under the symbol “PRAA.”
tranSfEr agEnt and rEgiStrar
Continental Stock Transfer & Trust Company
17 Battery Place, 8th Floor
New York, New York 10004
Tel.: 212-509-4000
Fax: 212-509-5150
indEPEndEnt rEgiStErEd PUBLic accoUnting firM
KPMG LLP
Norfolk, Virginia
LEgaL coUnSEL
Dechert, LLP
New York, New York
financiaL PUBLicationS/invEStor inqUiriES
Shareholders may acquire copies of the 2012 Annual
Report or Form 10-K, and other filed documents by visiting
the company’s website at www.PortfolioRecovery.com
or by writing to us at:
Portfolio Recovery Associates, Inc.
Attn: Corporate Communications
120 Corporate Blvd., Suite 100
Norfolk, Virginia 23502
PricE rangE of coMMon Stock
The following table sets forth the high and low sales price
for the company’s common stock for the year ended
December 31, 2012.
2012
High
Low
$107.01
$60.12
boArd of directors
Steve fredrickson
Chairman of the Board
david roberts
lead Director
John fain
Director
John fuller
Director
Penelope kyle
Director
Scott tabakin
Director
James voss
Director
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
Portfolio recovery AssociAtes, inc.
Riverside Commerce Center
120 Corporate Blvd., Suite 100
Norfolk, Virginia 23502