PRA Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. PRA Group purchases and collects nonperforming loan portfolios globally, with additional fee-based services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $271.9 | $252.1 | $523.7 | $497.9 |
| Operating income | $111.3 | $63.4 | $171.8 | $112.2 |
| Net income attributable to PRA Group | $57.9 | $18.6 | $77.0 | $33.8 |
| Diluted EPS | $1.26 | $0.41 | $1.68 | $0.74 |
| Operating margin | 40.9% | 25.1% | 32.8% | 22.5% |
- Revenue increased 7.9% in Q2 and 5.2% year to date. Q2 operating income rose 75.6%; six-month operating income rose 53.1%.
- Q2 total cash collections were $509.9 million, up 8.4%; six-month collections were $1,004.5 million, up 7.8%. U.S. Core call-center and other collections were particularly strong.
- Net cash provided by operating activities was $122.5 million for the first half, versus $30.9 million a year earlier. Investing activities provided $88.1 million, including $501.6 million of recoveries applied to the negative allowance, while finance receivable purchases used $436.1 million. Financing activities used $193.0 million. The cash-flow statement reports $124.9 million in cash, cash equivalents and restricted cash; the balance sheet reports $115.7 million of cash and equivalents.
- At June 30, cash and equivalents were $115.7 million; finance receivables, net, were $3.35 billion; and total assets were $4.20 billion. Borrowings were $2.58 billion net of debt discount and issuance costs ($2.61 billion principal); total equity was $1.19 billion.
- Reported borrowing availability was $905.3 million before borrowing-base restrictions and $414.0 million after those restrictions. The company reported compliance with financing covenants at quarter-end.
Changes and accounting comparability
- Operating expenses fell 14.3% in Q2 and 7.0% for the first half. Lower employee costs and legal collection costs contributed; the latter reflected temporarily reduced legal placements and court closures during the pandemic. Employee headcount was 3,793, down from 4,863 a year earlier.
- Q2 cash collections exceeded forecasts, but management said much of the outperformance reflected accelerated timing rather than higher total expected collections. Changes in expected recoveries added $19.8 million in Q2 and $7.0 million year to date, after offsets for lower present values of future recoveries.
- The company adopted ASC 326 credit-loss accounting on January 1, 2020. Its 2020 revenue presentation includes portfolio income and changes in expected recoveries, while 2019 included income recognized on finance receivables and net allowance charges. The periods therefore are not fully comparable by line item.
- First-half comprehensive loss attributable to PRA Group was $9.1 million despite positive net income, largely reflecting currency translation and cash-flow hedge losses recorded in other comprehensive income.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said operating cash generation, existing cash, available credit and facility amendments should fund operations, planned capital expenditures, forward-flow commitments, debt maturities and additional portfolio purchases over the next 12 months, while noting that outcomes depend on evolving conditions.
- COVID-19 affected staffing, court and legal activity, mailings, and portfolio-sale volumes. U.S. Core collections increased, which management attributed in part to customer contact and discretionary funds; sellers also deferred some portfolio sales. The company adjusted the timing of near-term estimated remaining collections for certain pools and cautioned that assumptions may change materially as pandemic conditions evolve.
- After quarter-end, PRA repaid the $287.5 million principal of its 3.00% convertible notes due August 1, 2020: it repurchased $21.0 million at a discount and repaid the remaining $266.5 million at par, primarily using its domestic revolving facility.
- Forward-flow purchase commitments had a maximum remaining amount of approximately $383.7 million. The company also cited potential collection, economic, currency, interest-rate, regulatory, litigation and refinancing risks.
- Several hundred plaintiffs had opted out of an earlier TCPA class-action settlement. The Supreme Court granted review in Facebook v. Duguid; the filing said the decision could affect many pending TCPA matters, but the potential loss could not be estimated.
Important facts for investors to verify
- Whether unusually high U.S. Core collections persist and whether they represent lasting collection improvement or mainly accelerated payments.
- How COVID-19, economic conditions and deferred portfolio sales affect future collections, estimated recoveries and portfolio acquisition opportunities.
- Post-quarter-end debt repayment funding, remaining revolver capacity after borrowing-base limits, and compliance with leverage and other covenants.
- The sensitivity of reported earnings and finance receivable values to management’s recovery and timing estimates, including the effect of the new ASC 326 presentation on comparisons.
- Developments in TCPA litigation and other regulatory or legal matters, and any resulting changes to collection practices or financial exposure.