PRA GROUP INC quarterly report, Q1 FY2018

PRA Group, Inc. — Q1 2018 Form 10-Q

Business context and reporting period

PRA Group purchases, collects and manages nonperforming-loan portfolios, with operations in the Americas and Europe, and provides certain fee-based services. This unaudited report covers the three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. The company reports one segment: accounts receivable management.

Key financial metrics

Operating expenses rose 10.6% to $169.6 million, faster than revenue, and operating margin declined. Net income fell substantially in part because Q1 2017 included a $46.8 million pretax gain on the sale of government-services businesses; there was no comparable gain in Q1 2018. Higher net interest expense also weighed on results. The effective tax rate was 20.9%, versus 38.8%, primarily reflecting U.S. tax reform and changes in the mix of taxable income.

Cash from investing activities was $21.2 million, including $208.9 million of principal collections and $165.9 million of net finance-receivable acquisitions. Financing activities used $70.6 million; cash declined by $19.1 million during the quarter. Total estimated remaining collections on owned portfolios were $5.8 billion. Portfolio purchases were $168.3 million, down from $227.8 million in Q1 2017.

Material changes and management commentary

• Finance-receivable income rose 11.9% to $217.7 million. Management attributed the increase mainly to stronger-than-expected performance in selected Americas Core and European Core portfolios, lower net allowance charges, and the effect of elevated 2017 purchasing. Cash collections reached records in those Core portfolios.
• Fee income fell 46.5% to $5.3 million, chiefly reflecting the 2017 sales of government-services businesses and PRA Location Services, partly offset by higher Claims Compensation Bureau income.
• Compensation expense increased 18.5%, partly reflecting workforce expansion. U.S. collector headcount had increased by approximately 1,100 net hires since March 2017; total full-time equivalents rose to 5,639 from 4,205.
• At March 31, cash was $101.4 million, including $80.7 million held in foreign operations and intended to remain reinvested there. Credit facilities had $875.0 million of nominal unused availability, subject to borrowing-base and covenant limits; $550.0 million was drawable after those restrictions. Interest-bearing deposits were $90.8 million.
• Management stated that operating cash generation, collections, cash and available borrowings should fund operations, planned capital expenditures, forward-flow commitments and additional portfolio purchases over the next 12 months. This is not specific earnings guidance. Management noted acquisitions, adverse litigation outcomes or higher-than-expected portfolio purchases could require additional financing.
• The company reported compliance with financing covenants. It estimated about $351.3 million of remaining portfolio purchase commitments, of which $348.5 million was due within 12 months. Management estimated related quarterly tax payments under its IRS settlement at approximately $9.8 million.

Outlook, risks, contingencies and unusual items

Results depend on estimates of portfolio collections and their timing; changes in those estimates can increase recognized yield or trigger allowance charges. The filing identifies risks including portfolio availability and pricing, collection performance, interest and foreign-exchange movements, regulatory changes, funding access, cyber or operational disruption, and tax-law interpretation.

The company disclosed a multi-state Attorneys General investigation of U.S. collection practices. Discussions toward resolution were ongoing; the company said a loss range could not be estimated. In the Pounds purported class action in North Carolina, liability, class certification and potential statutory damages remained uncertain, and a loss range could not be estimated. The company said the aggregate reasonably possible loss in excess of accruals, where estimable, was not material. It also reported routine litigation and regulatory matters.

Q1 2018 adoption of ASU 2016-01 resulted in a $3.9 million after-tax reduction to beginning retained earnings for an unrealized investment loss. The company had not completed its accounting for certain Tax Act effects, including GILTI, and recorded no amount for that element. The company said it was evaluating the potential impact of the future credit-loss standard, which could significantly affect how it measures and records finance-receivable revenue. No material changes to the risk factors in its 2017 Form 10-K were reported.

Important facts for investors to verify

• Whether record Core collections and portfolio overperformance persist, and how actual collections compare with the company’s estimated remaining collections.
• Whether portfolio purchasing volumes and pricing support future revenue and returns, given Q1 purchases were lower year over year.
• How higher operating costs and interest expense affect operating margins, earnings and cash generation.
• Actual covenant-adjusted borrowing availability, debt maturities and refinancing needs; principal payments include $1.088 billion due in the 12 months ending March 2021 and $761.0 million in the 12 months ending March 2023.
• Developments in the multi-state investigation and Pounds litigation, including potential financial or operational consequences.
• Final accounting for Tax Act provisions and the impact of upcoming accounting standards on finance-receivable revenue and lease obligations.