PRA Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Figures are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. PRA Group purchases and collects portfolios of nonperforming loans, primarily across the Americas, Europe and Australia, and also earns fee income from claims recovery and account servicing.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $258.3 | $285.6 | $498.9 | $575.1 |
| Operating income | $83.7 | $104.2 | $155.7 | $215.0 |
| Operating margin | 32.4% | 36.5% | 31.2% | 37.4% |
| Net income attributable to PRA Group | $36.5 | $56.0 | $76.5 | $114.4 |
| Diluted EPS | $0.91 | $1.22 | $1.88 | $2.48 |
| Cash collections | $444.1 | $543.8 | $925.0 | $1,099.7 |
- Q2 total portfolio revenue declined 11.4% year over year; total revenue fell 9.6%. For the first half, portfolio revenue declined 13.5% and total revenue declined 13.3%.
- Q2 operating expenses decreased 3.8% to $174.5 million, but rose to 67.6% of revenue from 63.5%. Outside fees and services increased 31.0%, mainly due to higher corporate legal fees.
- Q2 net interest expense was $31.6 million, up 2.4%; first-half expense was $63.3 million, up 1.5%. Q2 effective tax rate was 26.6%, versus 16.4%; first-half rate was 20.3%, versus 19.3%.
- Finance receivables were $3.184 billion at June 30, down from $3.428 billion at year-end 2021. Estimated remaining collections (ERC) were $5.571 billion.
Cash flow, debt and liquidity
- First-half operating cash flow was negative $41.8 million, versus positive $21.6 million in 2021. Investing activities provided $147.0 million; financing activities used $110.2 million. Cash and cash equivalents were $68.0 million at quarter-end, down from $87.6 million at December 31, 2021.
- Borrowings were $2.482 billion, compared with $2.609 billion at year-end. The filing reports $1.622 billion of revolving capacity available without restrictions and $452.9 million available after borrowing-base and covenant restrictions. Interest-bearing deposits were $114.4 million.
- Debt to LTM Adjusted EBITDA was 2.03x, up from 1.89x at year-end 2021. The company reported covenant compliance at June 30, 2022.
- Estimated principal, interest and unused fees due in the next 12 months were approximately $468.0 million, including $355.3 million of principal, primarily related to the $345 million convertible notes due June 2023.
- Forward-flow portfolio purchase commitments totaled up to $960.2 million, of which $815.1 million was due within 12 months. Management said cash generation, existing cash, revolving availability and capital-market access should be sufficient for operations and obligations over the next 12 months and beyond.
Changes, outlook and risks
- Management attributed lower collections mainly to excess consumer liquidity in 2021 and reduced portfolio purchasing, which lowered U.S. call-center collections and legal-channel volumes. A stronger U.S. dollar also reduced reported European collections.
- Management said easing pandemic restrictions and excess consumer liquidity had reduced charge-offs and U.S. supply of portfolios, contributing to lower purchasing and pricing pressure. It expected these trends to continue near term, while anticipating charge-offs and portfolio supply could rise in coming months. No numerical earnings or revenue guidance was provided.
- Second-quarter changes in expected recoveries were positive $56.6 million, including $35.9 million of collections above forecast and a $20.7 million increase to expected future recoveries, mainly for certain older pools. Management said much of recent-pool overperformance reflected accelerated collection timing rather than higher total collections.
- First-half changes in expected recoveries were positive $86.5 million, including a $20.5 million write-down on one Brazilian portfolio in Q1. The company identifies estimates of future collection amounts and timing as critical accounting judgments.
- Inflation, energy-market disruption related to Russia’s invasion of Ukraine, portfolio supply and pricing, consumer payment behavior, foreign exchange, interest rates, regulation, litigation, and access to financing are among the stated risks. A $115.5 million Q2 currency translation loss drove a substantial portion of the first-half comprehensive loss; goodwill fell $43.2 million from year-end due to foreign-currency translation. Management reported no goodwill impairment trigger as of June 30.
- Routine legal and regulatory matters remain ongoing; management said the estimated aggregate reasonably possible losses above recorded accruals, where estimable, were not material. Actual losses could exceed estimates.
Important facts for investors to verify
- Whether collection levels, portfolio purchase volumes and pricing recover as management anticipates, and whether recent outperformance is mainly timing-related.
- The assumptions supporting ERC and finance-receivable valuation, including the effect of the Brazil portfolio write-down and foreign-exchange movements.
- Liquidity after borrowing-base restrictions, covenant headroom, and the company’s ability to meet the 2023 convertible-note maturity and other near-term obligations.
- How higher interest rates, inflation and currency fluctuations affect funding costs, collections, reported earnings and equity.
- The size and execution of forward-flow commitments, share repurchases, and any developments in legal or regulatory matters.