PRA Group, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Global purchaser, collector and manager of nonperforming-loan portfolios, with fee-based services, reported for the quarter and nine months ended September 30, 2018. The company reports one segment. Amounts below are in U.S. dollars; financial figures are rounded to millions unless otherwise noted.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $225.9m | $204.4m | $671.5m | $617.3m |
| Net finance-receivable income, after allowance charges | $214.9m | $197.2m | $648.8m | $582.6m |
| Operating income | $44.1m | $54.3m | $153.0m | $155.8m |
| Operating margin | 19.5% | 26.5% | 22.8% | 25.2% |
| Net income attributable to PRA Group | $9.9m | $15.6m | $50.6m | $75.4m |
| Diluted EPS | $0.22 | $0.34 | $1.11 | $1.64 |
| Net interest expense | $30.6m | $25.9m | $87.5m | $69.7m |
| Net cash from operating activities | — | $68.1m | $(1.5)m |
- Revenue rose 10.5% in Q3 and 8.8% year to date, principally from higher finance-receivable income. Cash collections were $389.3m in Q3, up 2.0%, and $1,222.5m year to date, up 7.6%.
- Profitability weakened despite revenue growth: Q3 operating expenses increased 18.2% to $173.5m. Legal collection costs rose 75.0% to $30.8m in Q3, primarily from expanded U.S. legal-channel activity; compensation also increased as the company grew its collector workforce.
- Q3 net allowance charges were $8.3m, versus $3.4m a year earlier. Year-to-date charges were $12.0m, versus $9.4m. Management cited charges on certain U.S. 2013–2014 vintages, partly offset by reversals on older vintages.
- Year-to-date 2017 results included a $48.5m gain on subsidiary sales; no comparable gain occurred in 2018. The sales of government-services businesses and PLS also reduced 2018 fee and other revenue.
Financial position, liquidity and debt
- At September 30, cash and cash equivalents were $114.2m; finance receivables, net, were $2.819bn; total assets were $3.657bn; and total equity was $1.148bn.
- Borrowings had $2.259bn principal outstanding, or $2.195bn net of debt discount and issuance costs. Interest-bearing deposits were $79.3m. Cash paid for interest in the first nine months was $70.7m.
- Credit-facility availability was $816.0m before borrowing-base restrictions and $431.4m after them. Of the cash balance, $94.0m related to foreign operations with earnings considered indefinitely reinvested.
- Management said the company was in compliance with financing covenants and expected operating cash generation, collections, cash and available credit to fund operations, planned capital expenditures, commitments and additional portfolio purchases for the next 12 months. It noted acquisitions, adverse litigation outcomes or higher-than-expected portfolio buying could require additional financing.
- Operating cash flow was $68.1m for the nine months, compared with cash used of $1.5m in 2017. Investing used $62.6m and financing provided $3.6m. Portfolio acquisitions were $621.5m, while collections applied to principal were $561.6m.
Material developments, outlook and risks
- On July 1, 2018, PRA began consolidating a majority-owned Polish investment fund after becoming its servicer and determining it had effective control. Consolidation added $34.9m of finance receivables and $17.5m of cash; no gain or loss was recognized.
- On October 4, after quarter-end, the company amended its North American credit agreement, increasing the domestic revolving facility by $363m and expanding its accordion feature. It also reduced its European revolving facility by $100m to $800m.
- No formal earnings or revenue guidance is provided. Management described its liquidity expectations but cautioned that interim results may not indicate future results. It cited portfolio collection estimates, purchase pricing and availability, interest and currency movements, regulatory changes, litigation, and collection execution as material uncertainties.
- Variable-rate facilities had approximately $1.6bn outstanding. The company estimated that a 50-basis-point rate increase would raise interest expense over the following 12 months by $7.0m; a 50-basis-point decrease would reduce it by $5.8m, considering hedges.
- Significant unresolved matters include a multi-state attorneys-general investigation into U.S. debt-collection practices and the Pounds class-action litigation in North Carolina. The company said potential losses in these matters could not be estimated; it also stated that reasonably possible losses above accrued amounts for estimable legal matters were not material.
- Forward-flow purchase commitments had a maximum remaining amount of approximately $583.5m. The company reported no material changes to the risk factors in its 2017 Form 10-K and said disclosure controls were effective.
- Management expected adoption of the lease standard in Q1 2019 to increase assets and liabilities by approximately $75m–$85m. It also expected the forthcoming credit-loss standard to significantly affect measurement and recording of finance-receivable income; assessment was ongoing.
Important facts for investors to verify
- Whether collection performance and revised cash-flow estimates support finance-receivable income, given the higher allowance charges and reliance on proprietary forecasts.
- Whether higher staffing, legal-channel and communication costs translate into improved collections or continue to pressure operating margins.
- Actual borrowing capacity after borrowing-base tests and covenants, and the implications of the October 4 credit-facility changes.
- Developments, potential financial exposure and any required changes in practices arising from the attorneys-general investigation and Pounds litigation.
- The effect of tax reform and the IRS settlement on future cash taxes, and implementation impacts of the new lease and credit-loss accounting standards.