Business context and reporting period
PRA Group, Inc. is a debt-purchasing and collections company, with related fee-based services, operating in the Americas and Europe. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $222.0 million | $229.4 million | $675.3 million | $711.8 million |
| Operating income | $67.5 million | $54.1 million | $211.1 million | $239.2 million |
| Net income attributable to PRA Group | $34.3 million | $17.4 million | $102.7 million | $127.0 million |
| Diluted EPS | $0.74 | $0.36 | $2.21 | $2.61 |
| Operating margin | 30.4% | 23.5% | 31.3% | 33.6% |
- Q3 revenue declined 3.2%; nine-month revenue declined 5.1%. Finance-receivable income fell 2.7% in Q3 and 6.6% year to date. Cash collections were $371.7 million in Q3, down 2.4%, and $1.143 billion year to date, down 2.3%.
- Q3 operating income and PRA-attributable earnings rose despite lower revenue. A key comparison was the $28.8 million CFPB Consent Order-related expense recorded in Q3 2015; Q3 2016 also benefited from a $5.0 million foreign-exchange gain versus a $3.2 million loss. Nine-month operating income and attributable earnings declined.
- Net allowance charges on finance receivables were $13.1 million in Q3 and $36.0 million year to date, versus $11.3 million and $17.9 million, respectively, in 2015. Management cited weaker collections on certain portfolios; insolvency collections decreased, partly offset by stronger European collections.
- Fee income rose to $56.2 million for nine months, from $44.7 million, mainly reflecting acquired businesses and higher contributions from certain service units; other revenue fell to $6.0 million from $10.4 million.
- Operating cash flow was $117.9 million for nine months, compared with $125.5 million. Investing used $236.3 million, including $697.8 million of net finance-receivable purchases and $67.0 million for acquisitions; financing provided $94.1 million. Cash increased to $91.8 million from $71.4 million.
- At September 30, finance receivables, net, were $2.392 billion; total assets were $3.279 billion; total liabilities were $2.291 billion; and total equity was $988.0 million. Borrowings were $1.817 billion, versus $1.717 billion at year-end 2015.
- Interest expense was $19.3 million in Q3 and $59.8 million for nine months, up from $16.8 million and $45.0 million. The effective tax rates were 31.3% for Q3 and 32.1% year to date, down from 48.6% and 36.9%.
Material changes, liquidity and financing
- The company acquired DTP and RMSC in 2016 and had acquired RCB in 2015. Acquisitions contributed to higher goodwill, which was $560.5 million at September 30, up from $495.2 million at December 31, 2015.
- Management reported $630.8 million of nominal unused credit-facility capacity, but only approximately $172.0 million available after borrowing-base and covenant restrictions. Cash was $91.8 million. Management believes operating cash generation, cash collections and available borrowing capacity can fund operations, planned capital spending and purchasing commitments for the next 12 months; acquisitions, litigation outcomes or higher portfolio purchases could require additional financing.
- During the year, PRA amended and extended its domestic and European facilities; the European facility was expanded to $1.2 billion, including an approximately $300 million term loan. The company repaid a $169.9 million seller note in July. It reported compliance with material debt covenants at quarter-end.
- Forward-flow and other portfolio purchase commitments had a maximum remaining amount of approximately $362.5 million. Contractual obligations totaled $2.648 billion, including debt, leases, employment agreements and purchase commitments.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management emphasized that portfolio cash collections, purchase pricing, collection costs, regulatory developments and foreign exchange can materially affect results. Collections are seasonal, with Americas collections generally stronger in the first half and European collections stronger in the second half.
- The IRS disputes PRA’s use of the cost-recovery method for tax years 2005–2012. The Tax Court trial was postponed to May 15, 2017. Related deferred tax liabilities were $253.7 million; estimated federal and state interest of $106.2 million was not accrued. The company believes its tax position is supportable, but an adverse outcome could require payment of taxes, interest and possibly penalties.
- A Missouri jury awarded $251,000 in compensatory damages and $82.0 million in punitive damages in the Mejia matter. PRA appealed; the company states the outcome could result in a loss up to the award if not overturned or significantly reduced. Separately, aggregate reasonably possible legal losses above recorded accruals were estimated at $0–$81 million, excluding potential IRS interest.
- PRA paid $18 million in Q2 2016 under a TCPA class-action settlement agreement that remained subject to final court approval; the amount had been fully accrued at year-end 2015.
- Brexit was identified as a risk: UK portfolios represented approximately 14% of consolidated estimated remaining collections. Currency volatility or changes to UK economic, regulatory or tax conditions could affect results.
- Other stated risks include collection-law and CFPB developments, portfolio underperformance, debt covenant and refinancing capacity, interest-rate and currency movements, integration of acquisitions, and potential goodwill impairment.
Important facts for investors to verify
- Subsequent developments in the IRS Tax Court case, including the potential tax, interest and penalty exposure and its implications for liquidity.
- Status and potential financial impact of the Mejia appeal, TCPA settlement approval and other litigation or regulatory matters.
- Portfolio collection trends and the sustainability of cash flows, particularly given higher allowance charges and lower insolvency collections.
- Actual borrowing availability after borrowing-base restrictions, covenant headroom, debt costs and upcoming maturities.
- Acquisition performance and integration, and the effect of Brexit, foreign exchange and regulatory changes on European operations.