PRA Group, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 26, 2021. PRA Group purchases, collects and manages nonperforming loan portfolios across the Americas, Europe and Australia, and also provides certain fee-based services. The company reports one segment.
Financial performance and position
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $1,065.4 million | $1,017.1 million | +4.7% |
| Operating income | $349.7 million | $247.7 million | +41.2% |
| Operating margin | 32.8% | 24.4% | +8.4 percentage points |
| Net income attributable to PRA Group | $149.3 million | $86.2 million | +73.4% |
| Diluted EPS | $3.26 | $1.89 | +$1.37 |
| Cash collections | $2,005.8 million | $1,841.3 million | +8.9% |
Net margin attributable to PRA Group was 14.0%, versus 8.5% in 2019. Total operating expenses declined 4.0% to $715.7 million; legal collection costs fell 24.3%, while outside fees and services rose 32.4%. Net interest expense was broadly flat at $141.7 million. The effective tax rate increased to 19.7% from 16.8%.
Cash flow: Operating activities provided $141.7 million, compared with $133.4 million in 2019. Investing activities provided $115.0 million, largely reflecting recoveries applied to the negative allowance and lower portfolio purchases; financing activities used $252.1 million. Cash, cash equivalents and restricted cash declined $2.8 million to $121.0 million. Cash and cash equivalents alone were $108.6 million.
Debt and liquidity: Borrowings were $2.66 billion carrying value ($2.69 billion principal) at year-end, down from $2.81 billion carrying value. The company reported $843.2 million of revolving capacity before borrowing-base and covenant restrictions, or $408.0 million available after those restrictions. It also had $132.7 million of European interest-bearing deposits. Management reported compliance with financing covenants at year-end. Debt includes $345 million of 3.50% convertible notes due 2023 and $300 million of 7.375% senior notes due 2025; the 2020 convertible notes were repaid during the year.
Finance receivables, net were $3.51 billion, approximately unchanged year over year. Estimated remaining collections (ERC) were $6.46 billion. Adjusted EBITDA, a company-defined non-GAAP measure, was $1.34 billion; debt to Adjusted EBITDA was 1.99x, versus 2.53x in 2019. The company paid no regular common-stock dividends.
Material changes and management commentary
- U.S. Core cash collections rose, with management attributing the strength largely to higher call-center and digital collections and consumers’ willingness and ability to resolve debts. Europe collections also increased; Americas Insolvency collections declined.
- COVID-19 disrupted normal operations and collection patterns. Courts’ closures and a temporary pause in moving U.S. accounts into the legal channel reduced legal costs. Portfolio purchases also declined amid seller deferrals and lower bankruptcy filings and charge-offs.
- Management characterized unusually strong collections as primarily accelerated timing, rather than evidence of higher total expected collections. In 2020, $282.6 million of recoveries exceeded forecast, largely offset by a $213.3 million decrease in the present value of expected future recoveries, yielding a net $69.3 million increase in expected recoveries.
- The company adopted ASC 326 for credit losses on January 1, 2020. This changed revenue presentation: 2020 includes portfolio income and changes in expected recoveries, while 2019 reports income recognized on finance receivables and net allowance charges. Direct year-over-year comparisons require caution.
- Portfolio acquisitions were $905.1 million in 2020. Forward-flow commitments had a maximum remaining purchase price of $501.9 million, of which $449.5 million was due within 12 months.
Outlook, risks and contingencies
No specific earnings, revenue or collection guidance was provided. Management stated it believed operating cash generation, collections, cash on hand, revolving-credit availability and capital-markets access would be sufficient for operations, planned capital expenditures, purchase commitments, debt maturities and additional portfolio purchases over the next 12 months; this outlook is subject to market conditions and uncertainty.
- COVID-19, economic deterioration and changes in consumer payment capacity could affect collections, staffing, portfolio supply, costs and access to financing.
- Results depend on purchasing sufficient portfolios at appropriate prices and collecting amounts consistent with estimates. Expected recoveries are judgment-intensive; KPMG identified their estimation as a critical audit matter.
- The CFPB advised the company in December 2020 that it believed PRA may have violated provisions of its consent order and applicable law. The company responded and said it could not predict the outcome. Multi-state investigations and other litigation also remain; the company said the aggregate reasonably possible losses above accrued amounts were not material where estimable, but some matters’ ranges could not be estimated.
- The company recorded $110.4 million of unrecognized tax benefits in 2020, primarily related to international transactions and an ongoing audit of prior-year returns. The timing and ultimate resolution are uncertain.
- Leverage, borrowing-base limits, restrictive debt covenants, variable interest rates, refinancing needs, foreign exchange exposure, Brexit-related uncertainty, data privacy and cybersecurity risks could adversely affect results or liquidity.
The company reported no goodwill impairment following its 2020 annual review. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of year-end.
Key facts investors should verify
- Whether elevated collections persist and ultimately represent improved total recoveries rather than accelerated timing.
- Portfolio purchase volumes and pricing, including execution of the $449.5 million of near-term forward-flow commitments, and resulting collection returns.
- Changes in ERC, cash collections and portfolio income under ASC 326, with attention to the accounting comparability change.
- Liquidity available after borrowing-base and covenant restrictions, debt maturities and refinancing plans.
- Developments in the CFPB investigation, multi-state matters, and the $110.4 million of unrecognized tax benefits.