PRA Group, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides fourth-quarter results. Amounts are in U.S. dollars.
Business context
PRA Group purchases, collects and manages nonperforming loan portfolios in the Americas and Europe, with one reportable segment. It also provides limited fee-based services. In December 2018, PRA sold 79% of its interest in the RCB servicing platform to Banco Bradesco, retaining an 11.7% interest; the transaction did not include PRA’s Brazilian loan-purchasing business.
Financial performance and liquidity
- Revenue: $908.3 million, up 9.7% from $828.2 million in 2017. Finance-receivable income was $891.9 million; fee income fell to $14.9 million, primarily reflecting 2017 business sales.
- Profitability: Operating income was $185.3 million (20.4% of revenue), down from $213.7 million (25.8%) in 2017. Net income attributable to PRA was $65.6 million, or $1.44 diluted EPS, versus $164.3 million, or $3.59, in 2017. The prior-year result included a $73.8 million after-tax benefit from revaluing deferred taxes under the Tax Act and $48.5 million in subsidiary-sale gains.
- Collections and portfolio investment: Cash collections increased 7.4% to $1.625 billion. Portfolio purchases were approximately $1.1 billion; year-end estimated remaining collections (ERC) were $6.1 billion, up from $5.7 billion.
- Credit estimates: Net allowance charges rose to $33.4 million from $11.9 million in 2017, including $31.0 million on Americas Core portfolios. Management cited affected 2013–2015 vintages. Finance receivables, net, increased to $3.085 billion.
- Cash flow: Operating activities provided $80.9 million, compared with $15.5 million in 2017. Investing activities used $387.3 million and financing activities provided $294.9 million. Cash and cash equivalents declined to $98.7 million from $120.5 million.
- Debt and liquidity: Borrowings were $2.474 billion on the balance sheet ($2.533 billion principal before discounts and issuance costs), versus $2.170 billion and $2.247 billion, respectively, at year-end 2017. The company reported $797.8 million of nominal facility availability, or $456.4 million after borrowing-base restrictions. It also had $82.7 million in interest-bearing deposits. Cash includes $78.6 million held abroad and considered indefinitely reinvested.
Material changes and fourth quarter
- Revenue increased, primarily on stronger Core portfolio collections and higher finance-receivable income; operating expenses rose 14.4% to $689.6 million. Legal collection costs increased 38.2%, and compensation and communication costs also rose.
- Net interest expense increased 23.6% to $121.1 million, reflecting higher average borrowings and interest rates.
- Fourth-quarter revenue was $236.7 million and PRA-attributable net income was $14.9 million. Fourth-quarter 2018 included a $21.4 million net allowance charge and a $26.6 million gain on the RCB sale. Fourth-quarter 2017 PRA-attributable net income of $88.9 million included a $63.7 million income-tax benefit.
- Annual cash collections rose in Americas Core and Europe Core, while Americas Insolvency collections declined 6.6%, reflecting lower purchasing and runoff of older portfolios.
Outlook, risks, contingencies and unusual items
- Outlook and funding: No specific earnings or collection guidance is provided. Management said operating cash generation, existing cash and available credit were expected to fund operations, planned capital expenditures, forward-flow commitments and additional portfolio purchases for the next 12 months. Forward-flow purchase commitments had a maximum remaining amount of $303.7 million.
- Key business risks: Returns depend on uncertain future collections and portfolio pricing. Changes in consumer behavior, economic conditions, regulation, bankruptcy law, or collection practices could reduce collections or portfolio supply. Foreign exchange, interest rates, Brexit-related uncertainty, data privacy and cybersecurity are additional exposures.
- Regulatory and legal matters: A 2015 CFPB consent order required specified judgment vacatur, consumer refunds and an $8.0 million civil penalty; the company said it had implemented the order, while CFPB monitoring continues. A multi-state attorneys-general investigation remained unresolved, with potential loss not estimable. A North Carolina putative class action also remained pending, with potential loss not estimable.
- Accounting and estimates: Finance-receivable income and allowances rely on modeled future collections. The company expects adoption of the credit-loss standard (ASU 2016-13) to significantly affect how it measures and records finance-receivable income. It estimated lease-standard adoption would increase assets and liabilities by approximately $72 million.
- Other items: The company corrected immaterial prior-period errors relating to certain Austrian secured-loan accounting and revised prior-year presentations. The auditor gave unqualified opinions on the financial statements and internal controls; management also reported effective controls.
Important facts for investors to verify
- Whether actual collections and updated ERC estimates support the carrying value of the $3.085 billion finance-receivable portfolio, especially affected Americas Core vintages.
- Availability under credit facilities after borrowing-base and covenant restrictions, and the ability to refinance or meet upcoming debt maturities.
- Developments and potential financial effects of the multi-state investigation, the North Carolina class action and CFPB monitoring.
- The effect of ASU 2016-13 adoption on reported revenue, allowances and portfolio valuations.
- Whether higher legal, staffing and interest costs can be absorbed while maintaining collection growth and operating margins.