PRA GROUP INC quarterly report, Q3 FY2021

PRA Group, Inc. — Q3 2021 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2021. The unaudited filing covers PRA Group’s global accounts receivable management business, principally purchasing and collecting nonperforming loan portfolios. Amounts below are in millions unless otherwise indicated.

Financial performance

Metric	Q3 2021	Q3 2020	Nine months 2021	Nine months 2020
Total revenue	$263.7	$267.9	$838.8	$791.6
Income from operations	$77.6	$88.7	$292.5	$260.5
Net income attributable to PRA Group	$34.5	$42.5	$148.9	$119.5
Diluted EPS	$0.76	$0.92	$3.24	$2.60
Operating margin	29.4%	33.1%	34.9%	32.9%

• Q3 revenue declined 1.6% year over year; operating income fell 12.5% and PRA-attributable net income fell 18.9%. The operating margin narrowed, while the effective tax rate rose to 25.6% from 13.6%.
• For the first nine months, revenue increased 6.0%, operating income 12.3%, and PRA-attributable net income 24.5%. The effective tax rate was 20.8%, versus 15.9%.
• Q3 portfolio revenue was $256.7 million, including $43.8 million of positive changes in expected recoveries; portfolio income was $212.9 million. For nine months, portfolio revenue was $821.2 million, including $157.5 million of positive changes in expected recoveries.
• Cash collections were $488.4 million in Q3, down 6.0%, and $1,588.1 million year to date, up 4.2%. Nine-month collections grew particularly in Europe; Q3 weakness was concentrated in U.S. call-center and legal collections.

Cash flow, balance sheet and debt

• Operating cash flow was $38.3 million for the first nine months, down from $131.4 million. Investing cash flow was $123.8 million, versus $172.5 million; financing used $216.7 million. Cash, cash equivalents and restricted cash decreased $59.8 million to $61.3 million.
• At September 30, cash and cash equivalents were $56.5 million; finance receivables, net, were $3.450 billion; total assets were $4.332 billion; and total equity was $1.429 billion.
• Borrowings, net of debt discount and issuance costs, were $2.521 billion, down from $2.661 billion at year-end 2020. Debt to Adjusted EBITDA was 1.81x, compared with 1.99x at December 31, 2020. Management reported compliance with financing covenants.
• Available revolving-credit capacity was $1.392 billion before borrowing-base and covenant restrictions and $763.8 million after restrictions. Interest-bearing deposits were $132.6 million. Management said existing cash, operating collections, available facilities and capital-market access were expected to fund operations and commitments for the next 12 months.
• Principal maturities listed include $10.9 million in the 12 months ending September 2022 and $1.313 billion in the 12 months ending September 2023. The European facility matures in February 2023 and $345 million of convertible notes mature in June 2023.

Material changes and notable items

• Q3 operating expenses rose 3.9% to $186.1 million; higher outside fees and services and investment in digital operations and data analytics contributed. Lower U.S. legal collection expenses partly offset the increases.
• Nine-month portfolio purchases were $770.4 million, compared with $613.1 million in the prior-year period. Estimated remaining collections were $6.145 billion at quarter-end.
• In September, PRA issued $350 million of 5.00% senior notes due 2029. The company also amended its North American credit agreement, extending maturity to July 2026. Adoption of convertible-debt accounting guidance increased nine-month net income by $4.8 million and EPS by $0.11, according to the filing.
• The company repurchased approximately 1.797 million shares for $73.8 million during Q3 at an average $41.10 per share. After quarter-end, the board increased the repurchase authorization by $80 million, adding to the prior $150 million authorization.

Outlook, commentary and risks

• The filing provides no specific numerical earnings or revenue guidance. Management said COVID-19 had been mitigated to date and that collections had continued to overperform, but it could not predict the pandemic’s full impact. Management attributed part of recent collection overperformance to acceleration of future collections, with higher near-term forecasts in some geographies offset by reductions later in the forecast period.
• Key sensitivities include the timing and amount of future portfolio recoveries, portfolio purchase availability and pricing, consumer payment behavior, regulatory limits on collection activity, operating costs, foreign exchange, interest rates and access to credit. Management cautioned that interim results may not indicate future results.
• The CFPB investigation into debt-collection practices remains unresolved. PRA said it disagrees with certain CFPB positions concerning potential penalties, restitution and business practices and cannot predict the outcome. The filing said the estimated aggregate reasonably possible legal losses above accruals were not material where estimable; actual losses could exceed current estimates.
• The company uses interest-rate and foreign-currency derivatives to manage exposures, not for speculation. Currency translation produced a $38.2 million comprehensive loss in Q3. Goodwill impairment was not indicated as of September 30, 2021.

Important facts for investors to verify

• Whether collection outperformance represents durable improvement or mainly accelerated recoveries, and how portfolio cash flows compare with management’s estimates.
• Whether portfolio purchases can be sustained at attractive prices, particularly as U.S. collections and purchasing trends differ from Europe.
• Liquidity and refinancing plans for the European facility and convertible notes maturing in 2023, alongside borrowing-base capacity and covenant headroom.
• Developments in the CFPB investigation, other regulatory matters and litigation, including any effect on costs, collections or required practices.
• The effects of the share repurchase program and the newly increased authorization on cash available for portfolio purchases and debt obligations.