PRA Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. PRA Group purchases, collects and manages nonperforming loan portfolios in the Americas and Europe, alongside fee-based services. The company sold its government services businesses in January and vehicle location business PLS in June 2017.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $201.0M | $222.0M | $607.9M | $675.3M |
| Operating income | $54.3M | $67.5M | $155.8M | $211.1M |
| Operating margin | 27.0% | 30.4% | 25.6% | 31.3% |
| Net income attributable to PRA Group | $15.6M | $34.3M | $75.4M | $102.7M |
| Diluted EPS | $0.34 | $0.74 | $1.64 | $2.21 |
| Net interest expense | $25.9M | $19.3M | $69.7M | $59.8M |
- Q3 revenue fell 9.5%; finance receivables income declined 2.7% to $197.2M, while fee income fell 84.7% to $2.7M, largely following the business sales. Nine-month revenue decreased 10.0%.
- Q3 cash collections increased 2.7% to $381.8M; nine-month collections edged down 0.6% to $1.136B. Net allowance charges were $3.4M in Q3 and $9.4M year to date, below the comparable 2016 amounts of $13.1M and $36.0M.
- Reported nine-month results included $48.5M in gains on subsidiary sales. Excluding this item, pre-tax results were lower year over year; the filing does not present adjusted earnings excluding the gains.
Financial position and cash flow
- At September 30, cash and cash equivalents were $113.8M; finance receivables, net, were $2.578B; total assets were $3.461B; and total equity was $1.064B.
- Borrowings were $1.964B carrying value ($2.045B principal). Interest-bearing deposits were $96.4M. Cash was up from $94.3M at year-end 2016, while borrowings rose from $1.784B.
- Reported credit-facility availability was approximately $1.0B before borrowing-base limits and $618.8M after those limits: $453.5M under North American facilities and $165.4M under European facilities. The company said it complied with material financing covenants.
- For the first nine months, operating activities used $10.9M of cash, versus $118.9M provided in 2016; investing activities used $77.7M, versus $236.3M; financing activities provided $99.3M. Cash paid for income taxes was $114.6M, including amounts related to the business sale and deferred taxes.
- Portfolio purchases were $734.4M for the nine months, compared with $747.5M in 2016. Estimated remaining collections (ERC) were $5.4B at quarter-end.
Changes, outlook and risks
- Lower fee revenue from the divestitures and declining income from Americas insolvency portfolios and European portfolios weighed on revenue. Management cited prior years’ lower insolvency purchases and competitive European pricing and yields. Higher collections on selected core portfolios and lower allowance charges partly offset these pressures.
- Operating expenses declined 5.0% in Q3, but compensation rose with staffing growth; PRA reported 4,555 full-time equivalents, including about 700 net new U.S. collectors since September 2016. Interest expense increased, in part due to the 3.5% convertible notes issued in May 2017 ($345M principal, due 2023).
- No numerical earnings or collection guidance was provided. Management stated that cash collections, existing cash and available credit were expected to fund operations, planned capital expenditures and portfolio purchases for the next 12 months; it can slow portfolio purchases if needed. Forward-flow purchase commitments remaining were up to $413.6M.
- The IRS settlement resolved disputed tax years 2005–2012 with no amounts due or penalties, but requires a new tax accounting method beginning in 2017. Management estimated related tax payments of about $14.5M per quarter; the timing difference is to be incorporated into tax filings over four years.
- Risks include uncertain collection estimates and possible future allowance charges; competition and availability/pricing of portfolios; interest-rate and foreign-exchange exposure; and legal, regulatory and compliance matters. A multi-state Attorneys General investigation remained unresolved; possible outcomes could include penalties, restitution or changes to business practices. The company said reasonably possible legal losses beyond accruals were not material, while noting actual losses could exceed estimates.
Investor verification priorities
- Assess whether cash collections and revised collection forecasts support the $5.4B ERC and the carrying value of finance receivables.
- Separate recurring operating performance from the $48.5M subsidiary-sale gains and from the substantial decline in fee income.
- Review cash conversion and tax payments, including the shift to negative operating cash flow and the estimated quarterly tax burden.
- Confirm borrowing-base availability, covenant headroom, debt maturities and the effects of variable rates; the filing estimates a 50-basis-point rate move changes 12-month interest expense by about $5.3M.
- Track resolution of the multi-state investigation and other regulatory or litigation matters, plus portfolio purchase volumes and competitive pricing/yields.