PRA Group, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. The filing is an annual report, not a standalone fourth-quarter report.
Business context
PRA Group purchases, collects and manages portfolios of nonperforming loans, primarily consumer debt, across the Americas and Europe, with operations in Australia. It also provides limited fee-based claims recovery and bankruptcy-account servicing. The company reports one segment.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $1,017.1 million | $908.3 million |
| Income from operations | $247.7 million | $185.3 million |
| Net income attributable to PRA Group | $86.2 million | $65.6 million |
| Diluted earnings per share | $1.89 | $1.44 |
| Cash collections | $1,841.3 million | $1,625.2 million |
| Operating cash flow | $133.4 million | $80.9 million |
| Borrowings at year-end | $2,808.4 million | $2,473.7 million |
- Revenue increased 12.0%, operating income 33.7%, and PRA-attributable net income 31.4%. Operating margin rose to 24.4% from 20.4%; attributable net margin was 8.5% versus 7.2%.
- Finance-receivable income was $998.4 million. Net allowance charges were $24.0 million, down from $33.4 million. The finance-receivables balance, net, rose to $3,514.2 million.
- Cash and cash equivalents were $119.8 million; total assets were $4,423.9 million and total equity $1,227.0 million. The cash-flow statement reports year-end cash, cash equivalents and restricted cash of $123.8 million, including $4.0 million of restricted cash.
- Cash flow from investing activities was negative $441.2 million, principally reflecting portfolio acquisitions; financing activities provided $339.5 million. Cash Efficiency Ratio was 59.9%, compared with 58.0%.
- Credit facilities showed $474.6 million of stated availability, but approximately $271.1 million was available after borrowing-base restrictions. The company also had $106.2 million of interest-bearing deposits.
Material changes and notable items
- Portfolio acquisitions at cost increased to $1,289.3 million from $1,118.0 million. Management attributed higher collections and finance-receivable income to recent purchases, portfolio overperformance and operational improvements. Americas Core collections rose; Americas Insolvency collections declined 13.0%.
- Legal collection costs increased to $134.2 million from $105.0 million, and legal collection fees rose to $55.3 million from $42.9 million, reflecting increased U.S. legal-channel activity. Agency fees increased to $55.8 million, partly reflecting the shift to outsourced servicing after the RCB servicing-platform sale.
- Interest expense, net, rose 17.2% to $141.9 million, primarily because of higher average borrowings, slightly higher rates and derivative fair-value changes. Year-end borrowings increased 13.5%.
- The 2018 sale of 79% of the RCB Brazilian servicing platform generated a $26.6 million gain; there was no subsidiary-sale gain in 2019. PRA retained an 11.7% interest in RCB.
- A Canadian business acquisition in 2019 involved $57.6 million of net cash outflow and added $18.8 million of goodwill.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said operating cash flows, collections, cash on hand and available credit were expected to fund operations, planned capital expenditures, forward-flow commitments and additional purchases for the next 12 months. It noted acquisitions, adverse litigation outcomes or higher-than-expected purchases could require additional financing.
- The company had $287.5 million principal amount of 3.00% convertible notes due August 1, 2020, plus $345.0 million of 3.50% notes due 2023. Management said it believed it could settle the 2020 notes in cash, subject to liquidity and financing conditions. European credit facilities mature in February 2021; North American facilities mature in May 2022.
- Forward-flow and other portfolio-purchase commitments had a maximum remaining amount of approximately $506.9 million at year-end. These commitments are subject to the terms of the agreements.
- Key risks include the accuracy and timing of projected recoveries on purchased debt, portfolio availability and pricing, competition, consumer and economic conditions, foreign exchange and interest rates, regulation and data privacy, cyber and systems disruption, and refinancing and covenant constraints.
- Legal matters include continuing multi-state attorney-general investigations, a North Carolina putative class action, and TCPA opt-out claims. The company stated that the reasonably possible loss in excess of accrued amounts was not material where estimable; losses for some matters could not be estimated. It also disclosed prior CFPB consent-order requirements and continuing monitoring.
- Effective January 1, 2020, the company expected to adopt the new credit-loss accounting standard, which it said would materially change finance-receivables accounting, though it expected no adoption-date impact on income, balance sheet or retained earnings. Finance-receivable cash-flow estimates are a critical audit matter. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether collections and portfolio performance support the $6,754.3 million of estimated remaining collections, and how estimates change under the new credit-loss accounting standard.
- Actual liquidity available after borrowing-base restrictions, covenant tests and the August 2020 convertible-note maturity.
- Progress and potential financial exposure from regulatory investigations and pending litigation, including matters whose loss range is not estimable.
- Whether rising legal and agency collection costs remain proportionate to collections and operating-income growth.
- Effects of portfolio purchases, foreign exchange, interest rates and international conditions on future cash flows and debt capacity.