PRA Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are to the same periods in 2016. PRA Group purchases, collects and manages nonperforming loan portfolios, primarily in the Americas and Europe, and also provides fee-based services. The company sold its government-services business in January 2017 and its vehicle-location and recovery business in June 2017.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $200.3 million | $228.5 million | $406.9 million | $453.3 million |
| Operating income | $48.3 million | $72.8 million | $101.6 million | $143.7 million |
| Operating margin | 24.1% | 31.8% | 25.0% | 31.7% |
| Net income attributable to PRA Group | $11.7 million | $36.5 million | $59.8 million | $68.4 million |
| Diluted EPS | $0.25 | $0.79 | $1.29 | $1.48 |
| Cash collections | $374.7 million | $387.2 million | $754.5 million | $771.5 million |
Q2 revenue included $190.8 million of net finance-receivable income, $6.3 million of fee income and $3.1 million of other revenue. Fee income fell sharply, primarily following the government-services sale and lower class-action-related revenue. Net finance-receivable income declined as Americas insolvency collections weakened and European results were affected by currency movements and Italian portfolios on cost-recovery accounting. Lower allowance charges partly offset these declines.
First-half results included a $48.2 million gain on subsidiary sales; without that unusual gain, reported pretax income would have been materially lower. The six-month effective tax rate was 39.9%; Q2’s was 43.7%. Management attributed the elevated rates partly to the mix of taxable income across jurisdictions, subsidiary dispositions and state taxes.
Cash flow, balance sheet and debt
- At June 30, cash and cash equivalents were $92.8 million; finance receivables, net, were $2.521 billion; total assets were $3.361 billion.
- Six-month operating cash flow was negative $14.4 million, versus positive $83.3 million a year earlier. Management cited higher tax payments, including sale-related taxes and deferred-tax payments, as well as working-capital movements.
- Investing cash flow was negative $56.1 million, including $514.0 million of finance-receivable acquisitions, partly offset by $93.0 million of net subsidiary-sale proceeds. Financing cash flow was positive $61.6 million. Cash decreased $1.5 million over the period.
- Borrowings were $1.899 billion net of debt discount and issuance costs. Total principal outstanding was $1.984 billion. The company issued $345 million of 3.50% convertible senior notes due 2023 in May.
- Credit availability was $1.1 billion before borrowing-base limits and $658.6 million after those limits: $483.9 million North American and $174.7 million European. The company reported compliance with material debt covenants.
- Estimated remaining collections on owned finance-receivable portfolios were $5.32 billion. First-half portfolio purchases were $523.5 million at purchase price, while cash collections were $754.5 million.
Material changes, outlook and risks
- Q2 revenue decreased 12.3% year over year and attributable net income fell to $11.7 million from $36.5 million. First-half revenue declined 10.2%; operating margin contracted to 25.0% from 31.7%.
- Management said lower Americas insolvency collections reflected reduced purchasing in prior years. It also reported hiring approximately 900 net new U.S. collectors since June 2016, contributing to a workforce of 4,512 at quarter-end.
- The IRS settlement resolved tax disputes for 2005–2012 with no amounts due and no related interest or penalties. A new tax accounting method applies from 2017; timing-related deferred tax liability is to be incorporated into tax filings evenly over four years. Based on current tax rates and subject to IRS acceptance, the company estimated related payments of $14.5 million per quarter.
- The company repurchased approximately $44.9 million of shares in Q2, leaving about $92,000 of authorization under its existing repurchase program.
- No specific earnings or revenue guidance is provided in the filing. Management said operating cash generation, collections, existing cash and available credit should fund the next 12 months, while noting that acquisitions, adverse litigation outcomes or higher portfolio purchases could require additional financing.
- Key risks include collection performance and forecast revisions, portfolio purchase pricing and availability, debt-market access and covenant capacity, variable interest rates, foreign-exchange movements, regulatory and legal matters, and changes in tax law or tax estimates. Management said reasonably possible legal losses above accrued amounts were not material at quarter-end; actual losses could exceed estimates.
Investor verification priorities
- Track collections and portfolio performance, especially Americas insolvency trends, and compare actual outcomes with the $5.32 billion ERC estimate.
- Assess recurring earnings separately from the $48.2 million subsidiary-sale gain, and monitor fee income after the business disposals.
- Reconcile negative operating cash flow and tax payments with management’s liquidity outlook and the expected quarterly tax payments under the IRS settlement.
- Review debt maturities, borrowing-base availability, covenant headroom and the cash-versus-share settlement terms and dilution thresholds on convertible notes.
- Monitor allowance charges, regulatory developments and legal exposures, and the effect of interest-rate and foreign-currency changes.