PRA Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. PRA Group purchases, collects and manages nonperforming-loan portfolios, with operations in the Americas and Europe. Amounts below are in U.S. dollars.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $245.9 million | $224.1 million |
| Operating income; operating margin | $48.8 million; 19.9% | $53.6 million; 23.9% |
| Net income attributable to PRA Group; diluted EPS | $15.2 million; $0.34 | $21.1 million; $0.47 |
| Net interest expense | $34.0 million | $25.8 million |
| Operating cash flow | $15.0 million | $34.6 million |
| Cash and cash equivalents (March 31) | $102.1 million | $98.7 million (December 31, 2018) |
| Borrowings, carrying value (March 31) | $2.586 billion | $2.474 billion (December 31, 2018) |
| Finance receivables, net (March 31) | $3.177 billion | $3.085 billion (December 31, 2018) |
Net income margin was 6.9%, versus 10.4% a year earlier. Q1 2019 cash flow from investing activities was an outflow of $112.9 million; financing activities provided $105.5 million. The company reported $686.3 million of nominal undrawn credit-facility capacity, or $388.8 million after borrowing-base restrictions and other constraints. It also had $95.3 million of interest-bearing deposits.
Material changes versus Q1 2018
- Revenue increased 9.7%; cash collections rose 8.1% to $461.2 million. Americas-Core collections increased, while Americas-Insolvency collections fell 19.3% to $44.6 million.
- Income recognized on finance receivables rose 9.2% to $238.8 million, supported by 2018 Americas-Core purchases and improved projected yields on certain portfolios.
- Operating expenses increased 12.6% to $190.9 million. Legal collection costs rose 58.6% to $35.2 million, and agency fees rose 68.7% to $14.0 million. Management attributed higher legal costs largely to expanding U.S. legal-channel activity.
- Net allowance charges were $6.1 million, compared with $0.9 million. Q1 2019 charges included $4.8 million on Americas-Core portfolios, primarily 2013–2015 vintages, and $1.3 million on European portfolios.
- Net interest expense increased 31.8%, reflecting higher average rates and borrowings, as well as derivative fair-value changes. Foreign-exchange gain was $6.3 million, versus $1.3 million.
- Purchases of finance-receivable portfolios were $318.8 million, compared with $168.3 million; face value acquired was $4.7 billion versus $1.5 billion. Investing cash flow also included a $57.6 million business acquisition and $31.2 million in proceeds from a subsidiary sale.
Outlook, risks and unusual items
- Management said operating cash generation, collections, existing cash and available revolving borrowings should fund operations, capital spending, forward-flow commitments and additional portfolio purchases over the next 12 months. This is not quantified earnings guidance; the filing provides no specific revenue or EPS forecast.
- Forward-flow purchase commitments had a maximum remaining amount of $351.5 million. Management said portfolio buying could be slowed if needed, with limited near-term effect on collections.
- The company reported compliance with financing covenants. Approximately $10 million of term-loan principal was due within one year; the filing’s principal maturity schedule shows larger amounts due in 2021 and 2023. Variable-rate credit-facility borrowings were approximately $2.0 billion; management estimated a 50-basis-point rate increase would raise following-12-month interest expense by $6.4 million.
- Legal and regulatory matters include a multi-state attorneys-general investigation of U.S. collection practices; the potential loss range could not be estimated. In the Pounds putative class action, the state court denied the company’s motion to compel arbitration and the company was seeking review; the potential loss also could not be estimated. The company said reasonably possible losses above accrued amounts, where estimable, were not material.
- The company adopted lease accounting guidance on January 1, 2019, recording $72.1 million of right-of-use assets and $75.8 million of lease liabilities at adoption. It expects the not-yet-adopted credit-loss standard (ASU 2016-13) to significantly affect finance-receivable income measurement and balance-sheet presentation; its impact was still under evaluation.
- Other notable items: cash flow hedge losses reduced Q1 other comprehensive income; $83.8 million of cash held in foreign operations was considered indefinitely reinvested. The filing identifies risks from portfolio pricing and collections, regulation and litigation, interest and currency movements, funding access, and accounting estimates.
Important facts for investors to verify
- Whether stronger collections and recent portfolio purchases translate into durable revenue and earnings, especially as portfolio vintages season.
- Whether higher legal and agency costs, allowance charges and financing costs persist, and how they affect margins and cash generation.
- Actual borrowing availability after borrowing-base limits, covenant headroom, and the ability to refinance or repay upcoming maturities.
- Developments in the multi-state investigation and Pounds litigation, including any change in potential exposure or required collection practices.
- The implementation and eventual financial impact of ASU 2016-13, and the sensitivity of portfolio valuations and yields to revised collection estimates.