PRA Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited. The company changed its name from Portfolio Recovery Associates, Inc. to PRA Group, Inc. effective October 23, 2014.
Business context and significant developments
PRA Group purchases, collects and manages defaulted consumer receivables and also provides collection and other fee-based services. On July 16, 2014, it acquired Aktiv Kapital, expanding operations across Europe and Canada. The transaction’s estimated enterprise value was approximately $1.3 billion, including assumed debt. The quarter includes Aktiv’s results from the acquisition date. PRA also acquired certain PCM IVA servicing assets for approximately $5 million.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $239.0 million | $197.8 million | $630.2 million | $550.3 million |
| Operating income | $88.2 million | $79.5 million | $232.2 million | $219.2 million |
| Operating margin | 36.9% | 40.2% | 36.8% | 39.8% |
| Net income attributable to PRA Group | $51.2 million | $47.3 million | $129.5 million | $129.5 million |
| Diluted EPS | $1.01 | $0.93 | $2.57 | $2.54 |
- Q3 revenue grew 20.8%, primarily reflecting higher finance-receivable income and Aktiv’s contribution. Q3 finance-receivable income rose 30.8% to $224.3 million; collections were $372.7 million, up 27.8%.
- Fee income fell to $12.9 million from $26.3 million in Q3, mainly because the prior-year period benefited from the timing of class-action settlements.
- Operating expenses increased 27.5% in Q3 to $150.8 million, reflecting Aktiv’s costs and $5.9 million of acquisition transaction costs. Operating margin declined 3.3 percentage points.
- Nine-month revenue increased 14.5%, while attributable net income was essentially unchanged. Nine-month operating margin fell 3.0 percentage points; interest expense more than doubled to $21.7 million.
Cash flow, balance sheet and liquidity
- At September 30, cash was $70.3 million, versus $162.0 million at December 31, 2013. Total assets were $2.76 billion and stockholders’ equity was $959.9 million.
- Borrowings were $1.43 billion, compared with $451.8 million at year-end. The balance includes domestic and Aktiv facilities, a $169.9 million seller note, and $287.5 million principal of convertible notes, net of debt discount.
- For the first nine months, operating cash flow was $169.5 million (prior year $172.1 million); investing cash outflow was $859.9 million, including $851.2 million for business acquisitions; financing cash inflow was $603.1 million. Cash decreased by $91.7 million.
- Management reported $513.8 million of availability under credit facilities at quarter-end, subject to borrowing-base limits and covenants, and said existing cash, operating cash flows and available borrowings should fund operations, planned capital expenditures and normal-course portfolio purchases for the next 12 months. Higher-than-normal purchases or acquisitions could require additional financing.
- Forward-flow purchase commitments had a maximum remaining amount of approximately $622.9 million. Finance receivables, net, were $1.91 billion; estimated remaining collections were $4.37 billion.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management estimated an additional $8–10 million of non-recurring Aktiv integration costs over the next several quarters and cited integration, international operations, regulation, collections, funding, interest rates and foreign exchange as risks.
- After quarter-end, PRA entered into a $500 million multicurrency revolving facility maturing in 2019. Aktiv’s maturing revolving, term and bridge facilities were transferred to that facility when it closed. Certain Aktiv facility covenant/limit issues had required waivers before this refinancing.
- The IRS disputes PRA’s use of the cost-recovery method for tax purposes for years 2005–2012. PRA filed a Tax Court petition in October 2014 and believes its position is supportable. The company estimated potential federal and state interest of $75 million; related deferred tax liabilities were $235.0 million. An adverse outcome could materially affect finances and may require additional funding.
- A putative TCPA class-action proceeding was stayed pending FCC action. PRA stated that pending litigation was not expected to materially adversely affect its financial condition, while acknowledging that outcomes are uncertain and actual losses could exceed accruals.
- Foreign currency translation reduced other comprehensive income by $45.2 million for the nine months. The company also reported a $3.0 million year-to-date foreign-exchange loss in earnings and acquisition-related euro forward-contract losses of $8.2 million.
- Goodwill rose to $594.4 million, largely from the Aktiv acquisition. Management expected to conduct its next annual goodwill review in Q4 2014. Disclosure controls were deemed effective; assessment of Aktiv’s internal controls was underway.
Important facts for investors to verify
- Whether Aktiv integration, expected synergies and collection performance support the acquisition’s carrying values and goodwill.
- How the post-quarter refinancing affects debt maturities, borrowing availability, interest expense and covenant headroom.
- The status and potential financial exposure of the IRS cost-recovery dispute, including any related tax, interest or penalties.
- Whether collection forecasts and portfolio cash-flow estimates remain supported, particularly as finance receivables and estimated collections expand.
- Whether regulatory developments, including CFPB discussions and European oversight, create material compliance costs or constraints.