PRA Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. PRA Group purchases, collects and manages nonperforming-loan portfolios across the Americas and Europe, with related fee-based services. Figures below are in U.S. dollars; financial-statement amounts are generally in millions unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $252.1 | $221.5 | $497.9 | $445.6 |
| Operating income | $63.4 | $55.3 | $112.2 | $108.9 |
| Operating margin | 25.1% | 25.0% | 22.5% | 24.4% |
| Net income attributable to PRA Group | $18.6 | $19.6 | $33.8 | $40.7 |
| Diluted EPS | $0.41 | $0.43 | $0.74 | $0.90 |
| Net interest expense | $36.0 | $31.1 | $70.0 | $56.9 |
| Net allowance charges | $1.2 | $2.8 | $7.3 | $3.8 |
- Q2 cash collections grew 15.7% to $470.3 million; first-half collections rose 11.8% to $931.4 million. Growth was led by Americas Core, including stronger U.S. legal-channel collections, and contributions from South America and the Canadian Resurgent acquisition. Americas Insolvency collections declined as older portfolios ran off.
- Q2 income recognized on finance receivables increased 13.8% to $249.2 million; first-half income rose 11.5% to $488.1 million. Management cited prior portfolio purchases and sustained over-performance on select pools, partly offset by runoff in insolvency portfolios.
- Operating expenses increased 14.7% in Q2 and 13.7% in the first half. Legal collection costs increased 77.0% in Q2 and 67.2% in the first half, reflecting expanded U.S. legal-channel activity. Higher interest expense also weighed on earnings.
- At June 30, finance receivables, net were $3.23 billion, versus $3.08 billion at year-end 2018. Estimated remaining collections were $6.40 billion.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $30.9 million (prior year: $30.8 million); investing cash outflow was $177.7 million (prior year: $13.2 million); financing cash inflow was $156.8 million (prior year: $52.0 million outflow). Cash increased $6.8 million to $105.5 million.
- Investing outflows included $549.4 million of finance-receivable acquisitions, a $57.6 million business acquisition and net investment purchases. Collections applied to principal were $443.4 million. Cash flows reflect substantial portfolio investment; operating cash flow should not be viewed in isolation from this activity.
- Borrowings had a $2.62 billion carrying amount ($2.66 billion principal) at June 30, up from $2.47 billion carrying amount at year-end. Interest-bearing deposits were $107.8 million. Total credit-facility availability was $655.7 million before borrowing-base restrictions and $383.4 million after them. The company reported covenant compliance.
- Cash and cash equivalents were $105.5 million, including $85.0 million held in foreign operations and intended to be indefinitely reinvested. Lease liabilities recorded after adopting the new lease standard were $76.8 million.
Changes, outlook and key risks
- Revenue growth did not translate into higher attributable earnings: Q2 PRA-attributable net income fell 4.9%, and first-half net income fell 16.8%. First-half operating margin declined to 22.5% from 24.4%, as operating expenses and interest expense grew faster than revenue.
- Portfolio purchases were $608.0 million in the first half, compared with $389.7 million in the prior-year period. Management said it could slow purchases if necessary and expected operating collections, existing cash and available facilities to fund operations, planned capital spending and portfolio commitments over the next 12 months. No quantified earnings or revenue guidance was provided.
- Forward-flow agreements represented maximum remaining purchase commitments of approximately $713.4 million. Management noted that acquisitions, adverse litigation outcomes or higher-than-expected portfolio purchasing could require additional financing.
- Material collection-related matters include a multi-state attorneys general investigation, the Pounds class action and remaining opt-out claims from TCPA litigation. The company said the range of loss could not be estimated for these matters; it stated that estimated reasonably possible legal losses in excess of accruals were not material where estimable. Actual outcomes may differ.
- Key business risks include changes in collection laws and regulation, portfolio availability and pricing, collection performance and cash-flow estimates, funding and interest rates, foreign exchange, and litigation. Variable-rate borrowings were approximately $2.0 billion; management estimated a 50-basis-point rate increase would add about $6.8 million to interest expense over the following 12 months, after considering derivatives.
- The company adopted lease accounting on January 1, 2019, recording right-of-use assets and lease liabilities. It also said the expected-credit-loss standard effective January 1, 2020 was expected to materially change finance-receivable accounting; implementation work was underway.
Important facts for investors to verify
- Whether recent U.S. legal-channel collection growth can continue, and how the accompanying court costs and legal fees affect net portfolio profitability.
- Collection forecasts, yield changes and allowance trends across portfolio vintages, particularly the $7.3 million first-half net allowance charge and management’s estimated remaining collections.
- Debt-facility availability after borrowing-base limits, refinancing and maturity requirements, and sensitivity of earnings to interest rates.
- Developments in the attorneys general investigation and outstanding litigation, including any change in loss estimates or required business practices.
- The effects of the 2020 expected-credit-loss accounting adoption and the company’s ability to meet its portfolio purchase commitments while maintaining liquidity.