PRA Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. PRA Group purchases, collects and manages nonperforming-loan portfolios, with operations in the Americas, Europe and Australia.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $289.5 million | $251.8 million | Up 15.0% |
| Income from operations | $110.8 million | $60.5 million | Up 82.9% |
| Operating margin | 38.2% | 24.0% | Up 14.2 percentage points |
| Net income attributable to PRA Group | $58.4 million | $19.1 million | Up 205.2% |
| Diluted EPS | $1.27 | $0.42 | Up $0.85 |
| Net interest expense | $31.6 million | $37.2 million | Down 15.1% |
| Cash provided by operating activities | $20.2 million | $46.8 million | Down $26.6 million |
- Revenue composition: Portfolio income was $231.7 million, down 11.6%; changes in expected recoveries were positive $50.1 million versus negative $12.8 million; fee income was $2.2 million. Other revenue increased to $5.5 million, primarily from a gain on sale of certain assets.
- Collections and purchases: Cash collections rose 12.4% to $555.9 million. Portfolio acquisitions were $159.0 million, down from $273.2 million. U.S. call-center and other collections were notably stronger; U.S. legal collections and Americas insolvency collections declined.
- Margins and earnings: Total operating expenses fell 6.5% to $178.7 million, with lower legal collection costs contributing to the improvement. The effective tax rate rose to 21.9% from 12.1%, principally reflecting jurisdictional earnings mix and a prior-year tax adjustment.
Balance sheet, debt and liquidity
- At March 31, 2021, total assets were $4.28 billion and total equity was $1.40 billion. Net finance receivables were $3.37 billion.
- Cash and cash equivalents were $92.8 million; restricted cash was $16.1 million. Cash, cash equivalents and restricted cash together were $108.9 million, down from $121.0 million at year-end 2020.
- Borrowings, net of debt discounts and issuance costs, were $2.50 billion, down from $2.66 billion at December 31, 2020. The company reported compliance with financing covenants.
- Revolving facilities had $1.07 billion of availability before borrowing-base and covenant restrictions and $491.7 million available after those restrictions. Interest-bearing deposits were $125.0 million.
- Management reported a 1.77x debt-to-adjusted-EBITDA ratio for the last 12 months, versus 1.99x at year-end 2020. Adjusted EBITDA is a non-GAAP measure.
- Investing activities provided $167.0 million, principally reflecting $328.6 million of recoveries applied to the negative allowance, partly offset by $159.3 million of finance-receivable purchases. Financing activities used $193.0 million, largely due to net repayments on revolving credit lines.
Material changes and notable items
- The company early adopted ASU 2020-06 for convertible debt accounting on January 1, 2021. Adoption increased the carrying amount of the 2023 Convertible Notes and, in Q1, reduced interest expense by $2.0 million, increased net income by $1.6 million and increased EPS by $0.04.
- Q1’s $50.1 million positive change in expected recoveries included $103.0 million of collections above forecast, offset by a $52.9 million reduction in expected future recoveries. Management said it viewed most of the outperformance as accelerated collection timing rather than higher total expected collections.
- The European revolving credit facility was amended in March, adding $50.0 million through its accordion feature. The facility matures in February 2023; the 2023 Convertible Notes mature in June 2023, the North American facility in May 2024, and the 2025 Senior Notes in September 2025.
- Q1 comprehensive income attributable to PRA Group was $50.6 million; foreign-currency translation and cash-flow hedge movements contributed to other comprehensive loss.
Outlook, commentary and risks
- The filing provides no specific earnings or revenue guidance. Management said it expects operating cash generation, collections, existing cash and available credit, together with potential capital-markets access, to be sufficient for the next 12 months’ operations, planned capital expenditures, forward-flow commitments, debt maturities and additional portfolio purchases.
- Forward-flow agreements had maximum remaining purchase commitments of $640.7 million, including $621.2 million due within the next 12 months. Management said it can slow portfolio purchases if needed.
- COVID-19 continued to affect markets where the company operates. Management cited consumer payment behavior, economic conditions and market volatility as risks, while reporting that remote work and other operating measures helped limit disruption.
- Key stated risks include lower-than-expected collections or revised recovery estimates, portfolio availability and pricing, regulation and litigation, credit-facility access and covenant compliance, interest and currency movements, international operations, cybersecurity and economic deterioration.
- The company described routine legal and regulatory matters, including customer lawsuits and regulator inquiries. It said the estimated aggregate reasonably possible losses above accrued amounts were not material where estimable, but actual losses could exceed current estimates.
- Management found disclosure controls effective at March 31, 2021 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether unusually strong collections persist and whether the Q1 overperformance represents timing acceleration or higher ultimate recoveries.
- How portfolio income and recovery-estimate changes develop, particularly as new purchases remain below the prior-year level and older portfolios run off.
- Whether cash generation and borrowing availability remain adequate against $621.2 million of near-term forward-flow commitments and debt-service needs.
- The sustainability of lower operating costs and improved margins, including the effects of collection-channel mix and jurisdictional taxes.
- Any changes in COVID-19 impacts, legal or regulatory exposure, recovery assumptions, or compliance with borrowing-base and debt covenants.