PRA Group, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. PRA Group purchases, collects and manages charged-off consumer loan portfolios, with related fee-based services, operating across the Americas and Europe.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $830.6 million | $942.0 million |
| Income from operations | $218.2 million | $310.3 million |
| Operating margin | 26.2% | 32.9% |
| Net income attributable to PRA Group | $85.1 million | $167.9 million |
| Diluted EPS | $1.83 | $3.47 |
| Operating cash flow | $103.0 million | $186.7 million |
| Cash collections on owned portfolios | $1,492.0 million | $1,539.5 million |
| Net finance receivables | $2,308.0 million | $2,202.1 million |
Cash and cash equivalents were $94.3 million at year-end, including $73.6 million held in foreign operations with earnings treated as indefinitely reinvested. Borrowings were $1.784 billion, versus $1.717 billion a year earlier. Reported credit-facility availability was $641.1 million, but borrowing-base and covenant restrictions reduced immediately drawable availability to $204.0 million. Total equity was $917.2 million.
Changes and key drivers
- Revenue fell 11.8% and net income attributable to PRA Group fell 49.3% year over year. Finance-receivable income declined 13.9%, chiefly as net allowance charges rose to $98.5 million from $29.4 million and collections decreased 3.1%.
- Management cited weaker-than-expected collections and regulatory and operational factors affecting calling efforts. It revised collection forecasts and amortization periods for many Core portfolios; domestic Core portfolios accounted for most allowance charges.
- Fee income increased 20.2% to $77.4 million, partly offsetting lower portfolio income. Operating expenses decreased 3.1%, including because 2015 included $28.8 million of expenses related to the CFPB consent order. Operating margin nevertheless contracted.
- Interest expense rose 34.2% to $80.9 million, reflecting higher average borrowings and variable rates. A $5.8 million impairment was recorded on an investment in a Polish fund after collections underperformed expectations.
- Fourth-quarter 2016 revenue was $155.3 million and PRA-attributable net loss was $17.6 million, compared with fourth-quarter 2015 revenue of $230.2 million and net income of $41.0 million. The quarter included the $5.8 million investment impairment and $21.0 million of interest expense.
- Finance-receivable acquisitions cost $947.3 million in 2016, compared with $963.8 million in 2015. The company acquired Polish debt collector DTP in April 2016 for approximately $44.9 million and acquired Recovery Management Systems Corporation in 2016.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said cash from operations and collections, existing cash and available borrowing capacity were expected to fund operations, planned capital spending, forward-flow commitments and portfolio purchases for the next 12 months. It also noted acquisitions, adverse litigation outcomes or higher portfolio purchases could require additional financing.
- In January 2017, PRA Group sold its government-services businesses for $91.5 million cash plus consideration for certain balance-sheet items. The company expected a pretax gain of approximately $47 million; the sale was not reflected in 2016 operating results.
- A major contingency is the IRS challenge to the company’s use of the cost-recovery method for tax purposes. Related deferred tax liabilities were $239.3 million and estimated potential federal and state interest was $112.0 million, neither representing a stated expected payment. A Tax Court trial was scheduled to begin May 15, 2017; management said a final outcome was not expected in the short term.
- The company had settled with the CFPB in 2015, requiring refunds, debt waivers and an $8.0 million civil penalty, and said it had implemented the order. Further regulatory action, compliance failures, or changes in collection rules could restrict purchasing or collecting activity and increase costs.
- Other significant risks include portfolio cash-flow estimates and additional allowance charges; availability and pricing of portfolios; leverage, refinancing and covenant capacity; variable interest and foreign-exchange exposure; litigation, including TCPA matters; Brexit-related uncertainty; and potential goodwill or intangible impairment.
- The company reported compliance with financing covenants at year-end. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; DTP was excluded from the internal-control assessment due to its recent acquisition.
Important facts for investors to verify
- Whether collections and forecast revisions on domestic Core portfolios stabilize, and how allowance charges develop relative to management’s estimates.
- Actual available borrowing capacity under borrowing-base limits and covenants, debt maturities, interest costs and the refinancing of facilities.
- Developments and potential cash exposure in the IRS tax-method litigation, including the unaccrued estimated interest.
- Completion economics and realized proceeds from the government-services sale, including the expected gain and additional balance-sheet consideration.
- Regulatory or litigation developments, particularly CFPB compliance and the status and final cost of material legal matters.
- Whether international acquisitions and portfolio purchases generate collections and returns consistent with underwriting assumptions, including currency effects.