PRA Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 5, 2014. Unaudited consolidated results. The company purchases, collects and manages defaulted consumer receivables and also provides servicing and claims-related services.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $197.3 million | $183.0 million | $391.3 million | $352.5 million |
| Operating income | $72.5 million | $73.8 million | $144.1 million | $139.7 million |
| Net income attributable to PRA | $37.5 million | $43.6 million | $78.3 million | $82.2 million |
| Diluted EPS | $0.74 | $0.85 | $1.55 | $1.60 |
| Operating margin | 36.8% | 40.4% | 36.8% | 39.5% |
- Q2 revenue increased 7.9%; finance-receivable income rose 8.3% to $182.5 million, while fee income increased to $14.8 million. Cash collections were $319.3 million, up 7.7%.
- Operating expenses increased 14.4% to $124.9 million in Q2, outpacing revenue growth. Higher compensation, legal collection costs and outside services contributed; the latter included $4.1 million of Aktiv acquisition costs. Operating margin and net income declined year over year.
- Q2 interest expense was $5.1 million, versus $2.9 million; other expense was $6.2 million, principally an unrealized foreign-exchange loss on euro forward contracts for the planned Aktiv acquisition. The company recorded a further $2.0 million FX loss on settlement in Q3.
- For the first half, cash collections were $632.6 million, up 10.6%. Net allowance reversals were $4.3 million, compared with net allowance charges of $1.0 million in the prior-year period.
Cash flow, balance sheet and debt
- At June 30, cash and cash equivalents were $270.5 million, versus $162.0 million at year-end 2013. Finance receivables, net, were $1.220 billion, down from $1.239 billion. Total assets were $1.695 billion and stockholders’ equity was $952.3 million.
- Six-month operating cash flow was $102.4 million, compared with $97.3 million. Investing activities provided $6.8 million, versus $165.5 million used in the prior-year period, reflecting lower receivable purchases and higher principal collections. Capital expenditures were $13.2 million. Financing activities used $0.8 million. Cash increased by $108.5 million.
- June 30 borrowings were $448.8 million net of debt discount: $190.0 million on the term loan and $287.5 million principal on 3.00% convertible notes due 2020, net of discount. No revolving credit balance was outstanding; the company reported $650 million of revolving availability, subject to borrowing-base and covenant limits. It reported compliance with debt covenants.
- The company said cash, operating collections and available credit were expected to fund operations, planned capital expenditures, existing portfolio commitments and normal-course purchases over the next 12 months. That pre-acquisition assessment should be considered alongside the subsequent transaction below.
Material developments, outlook and risks
- Aktiv acquisition after quarter-end: On July 16, 2014, PRA completed the acquisition of Norway-based Aktiv Kapital for approximately $872.6 million and assumed about $431.3 million of corporate debt, for estimated enterprise value of $1.3 billion. Funding included $217.7 million cash, $169.9 million seller-affiliate financing and $485.0 million drawn from PRA’s revolver. Management said total borrowings after closing were approximately $1.5 billion, versus $448.8 million at June 30. Purchase accounting and pro forma effects were not yet available. The acquisition adds operations and portfolios across new European and Canadian markets; integration, execution, currency, regulatory and increased-leverage risks are material.
- PRA acquired certain Pamplona Capital Management operating assets on July 1 for approximately $5 million, paid from existing cash.
- No formal earnings guidance is provided in the supplied filing text. Management cited improved collection efficiency from account-scoring analytics and expansion of internal legal collections, while noting upfront costs associated with legal-channel expansion.
- The IRS disputes the company’s use of the cost-recovery method for tax revenue recognition. Notices of deficiency cover 2005–2007 and, received July 7, 2014, 2008–2012. PRA said it believes its position is supportable and had not recorded a reserve for uncertain tax positions. Deferred tax liabilities related to this item were $228.8 million at June 30; an adverse outcome could require significant payments, interest and potentially additional financing.
- Other risks include consumer debt-collection regulation and CFPB activity, the stayed TCPA multidistrict litigation, portfolio collection and valuation assumptions, competition and funding access. The company stated that pending legal matters were not expected to have a material adverse effect based on current knowledge, but acknowledged outcomes could be material.
Important facts for investors to verify
- Post-Aktiv closing debt, financing terms, covenant headroom and the company’s ability to reduce leverage while funding portfolio purchases.
- Aktiv integration progress, purchase-price allocation, transaction and integration costs, and realized benefits across new markets.
- IRS Tax Court developments, the exposure and timing of any potential payment, and the basis for the company’s unreserved tax position.
- Cash-collection performance and revisions to estimated future collections, allowance levels and portfolio yields as acquisition volumes and mix change.
- Regulatory developments, including CFPB discussions, and material developments in TCPA or other litigation.