PRA Group, Inc. — Q2 2018 Form 10-Q
Business context and reporting period
Global purchaser, collector and manager of nonperforming loan portfolios, with fee-based claims recovery and servicing businesses. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the same 2017 periods. The company reported one operating segment.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $221.5m | $203.7m | $445.6m | $412.9m |
| Operating income | $55.3m | $48.3m | $108.9m | $101.6m |
| Operating margin | 25.0% | 23.7% | 24.4% | 24.6% |
| Net income attributable to PRA Group | $19.6m | $11.7m | $40.7m | $59.8m |
| Diluted EPS | $0.43 | $0.25 | $0.90 | $1.29 |
| Net interest expense | $31.1m | $22.5m | $56.9m | $43.8m |
For the six months, operating cash flow was $27.1m, versus cash used of $14.4m in 2017. Investing activities used $9.4m; financing activities used $52.0m. Cash declined $48.9m to $71.6m, including a $14.6m adverse foreign-exchange effect. Cash paid for interest was $46.9m.
At June 30, 2018, finance receivables, net were $2.730bn and estimated remaining collections (ERC) were $5.7bn. Borrowings had a $2.202bn principal balance and a $2.134bn carrying value after debt discounts and issuance costs. Interest-bearing deposits were $82.6m. Credit-facility availability was $876.9m before borrowing-base restrictions and $495.3m after them. The company said it complied with financing covenants.
Material changes versus prior periods
- Q2 revenue rose 8.7%; management attributed higher finance-receivable income and collections mainly to stronger Americas Core and European Core portfolios. Q2 cash collections increased 8.5% to $406.6m.
- Q2 operating expenses rose 7.5%, led by compensation, up 20.8%, as staffing expanded; U.S. full-time equivalents increased to 5,747 from 4,512 a year earlier. Communication expense also rose materially.
- Q2 net income attributable to PRA Group increased to $19.6m. Lower tax expense helped: the effective tax rate was 15.1%, versus 43.7% in Q2 2017, primarily reflecting U.S. tax reform and changes in the geographic mix of taxable income.
- Six-month net income attributable to PRA Group fell to $40.7m from $59.8m. The prior-year period included $48.2m in gains on sales of subsidiaries; 2018 also had higher interest expense.
- Foreign-currency translation reduced equity by $30.6m in the first half. In Q2, total comprehensive income was a loss of $39.1m, principally reflecting translation losses.
Outlook, risks, contingencies and unusual items
No specific earnings or revenue guidance was provided. Management said operating cash generation, collections, existing cash and available credit were expected to fund operations, capital spending, forward-flow commitments and additional portfolio purchases over the next 12 months. It noted that acquisitions, adverse litigation outcomes or higher-than-expected portfolio purchases could require additional financing. Forward-flow purchase commitments had a maximum remaining amount of $376.1m.
Management identified sensitivity to portfolio collection estimates, purchase pricing, interest and foreign-exchange rates, funding access, regulation and litigation. A 50-basis-point rate increase was estimated to raise interest expense over the following 12 months by $6.7m; a 50-basis-point decrease was estimated to reduce it by $5.5m. The multistate attorneys-general investigation could involve penalties, restitution or operational changes; potential loss could not be estimated. In the Pounds class action, potential loss also could not be estimated because of uncertainty over liability, class certification and statutory damages. Management stated that reasonably possible legal losses above accruals, where estimable, were not material.
Accounting items include adoption of the equity-investment standard, with a $3.9m net-of-tax reduction to opening retained earnings, and early adoption of the hedge-accounting standard, with no material financial-statement impact. The company said the forthcoming expected-credit-loss standard could significantly affect finance-receivable income measurement and was evaluating its impact. Disclosure controls were assessed as effective; the filing reported no material change in internal control over financial reporting.
Investor verification points
- Assess whether portfolio collection growth and favorable cash-flow estimate revisions are sustainable; finance-receivable income depends on proprietary forecasts.
- Track the impact of higher borrowing costs, debt maturities and borrowing-base limits on liquidity and portfolio purchasing capacity.
- Review staffing and communication cost growth against collections and operating-margin trends.
- Monitor outcomes of the multistate investigation and Pounds litigation; disclosed potential losses were not estimable.
- Check subsequent updates on the expected-credit-loss accounting standard and the company’s tax accounting under the Tax Cuts and Jobs Act.