PRA Group, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The company acquires and collects nonperforming consumer debt, primarily in the Americas and Europe, and also provides fee-based collection and related services. Results include Aktiv for the full year and RCB from its August 3, 2015 acquisition; PRA owns 55% of RCB.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue | $942.0 million | $881.0 million |
| Income from operations | $310.3 million | $342.1 million |
| Net income attributable to PRA | $167.9 million | $176.5 million |
| Diluted EPS | $3.47 | $3.50 |
| Cash collections on owned portfolios | $1,539.5 million | $1,378.8 million |
| Operating cash flow | $186.7 million | $267.9 million |
| Cash and cash equivalents at year-end | $71.4 million | $39.7 million |
| Borrowings at year-end | $1,723.3 million | $1,482.5 million |
- Revenue increased 6.9%, primarily as finance-receivable income rose 7.1% with higher collections, including a full year of Aktiv contributions. Fee income fell 2.0% to $64.4 million.
- Operating expenses rose 17.2% to $631.7 million. Operating margin decreased to 32.9% from 38.8%; net margin was 17.8% versus 20.0%.
- Net income declined 4.9% despite revenue growth, reflecting higher operating expenses and interest expense, partly offset by lower income tax expense and a $7.5 million foreign-exchange gain (versus a $5.8 million loss in 2014).
- Net allowance charges on finance receivables were $29.4 million, compared with $4.9 million of net reversals in 2014. Finance receivables, net, were $2.20 billion at year-end.
- Investing activities used $282.3 million; financing activities provided $136.5 million. The company spent $955.0 million on finance-receivable acquisitions, net of buybacks, and repurchased $165.5 million of stock.
Liquidity, debt, and capital
- Year-end cash was $71.4 million and reported available borrowing capacity was approximately $446.8 million, subject to borrowing-base limits and covenants. Management said operating cash generation, collections, cash on hand, and available facilities should fund operations and normal portfolio purchases for the next 12 months.
- Debt included $541.8 million of domestic revolving borrowings, $576.4 million under the multicurrency facility, a $169.9 million seller note, a $170.0 million term loan, and $287.5 million of 3.00% convertible notes due 2020, before the debt discount.
- Forward-flow purchase commitments had a maximum remaining purchase price of approximately $541.1 million at year-end. No regular dividend was paid; the company had $45.0 million remaining under its $125 million repurchase authorization.
- In a subsequent event, the European multicurrency facility was amended in February 2016: commitments increased from $750 million to $900 million and final maturity was extended to February 2021, subject to specified conditions.
Material changes, outlook, and significant matters
- Portfolio purchases totaled $963.8 million in 2015, down from $1.43 billion in 2014, which included Aktiv portfolios acquired at closing. Management described portfolio availability, pricing, and collection performance as key drivers; it provided no specific earnings or revenue guidance.
- Operating costs included $28.8 million related to the CFPB consent order. The order required $19.0 million in consumer refunds, an $8.0 million civil penalty, cessation of collection on certain debt, and changes to collection practices; payments were made in 2015.
- The IRS disputes PRA’s use of the cost-recovery method for tax purposes for 2005–2012. The Tax Court denied the IRS’s summary-judgment motions and set trial for September 2016. Related deferred tax liabilities were $251.7 million; estimated potential federal and state interest was $91.0 million and had not been accrued. An adverse outcome could materially affect liquidity.
- A jury awarded $251,000 compensatory and $82.0 million punitive damages in the Mejia case. PRA appealed and stated it believed the verdict and award were erroneous; an unreversed or unreduced award could materially affect liquidity.
- Management identified risks from regulation and enforcement, portfolio pricing and availability, collection estimates, foreign exchange, acquisition integration, variable-rate debt, and international operations. Foreign-currency translation reduced equity by $112.9 million in 2015.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The control assessment excluded RCB, which represented 3.2% of assets and 0.2% of revenue at/for year-end 2015.
Key investor verification points
- Track collection results and allowance trends, especially whether the $29.4 million of 2015 net allowance charges signal persistent underperformance in particular portfolio vintages or geographies.
- Review the IRS tax case outcome, potential tax and interest payments, and related liquidity implications.
- Monitor the appeal and any settlement or accrual related to the $82.0 million Mejia punitive award.
- Assess the sustainability of operating margins as costs, interest expense, debt, and acquisition integration affect results.
- Verify borrowing availability, covenant compliance, maturities, and conditions attached to the amended European credit facility and portfolio purchase commitments.
- Evaluate ongoing CFPB consent-order compliance and any further regulatory action, litigation, or changes to collection rules.