PRA Group, Inc. — 2022 Form 10-K
Business context and reporting period. PRA Group purchases, collects and manages nonperforming loan portfolios across the Americas, Europe and Australia, with additional fee-based claims recovery and U.S. bankruptcy-account servicing. This annual report covers the year ended December 31, 2022; comparisons below are primarily with 2021. The company has one reportable segment.
Financial and operating performance
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $966.5 million | $1,095.7 million | Down 11.8% |
| Operating income | $285.8 million | $375.0 million | Down 23.8% |
| Operating margin | 29.6% | 34.2% | Down 4.6 percentage points |
| Net income attributable to PRA Group | $117.1 million | $183.2 million | Down 36.0% |
| Diluted earnings per share | $2.94 | $4.04 | Down 27.2% |
| Net margin attributable to PRA Group | 12.1% | 16.7% | Down 4.6 percentage points |
| Cash collections | $1.729 billion | $2.062 billion | Down 16.1% |
| Portfolio purchases | $850.0 million | $972.3 million | Down about 12.6% |
| Adjusted EBITDA (non-GAAP) | $1.107 billion | $1.378 billion | Down 19.7% |
| Debt to Adjusted EBITDA | 2.25x | 1.89x | Higher leverage |
- Portfolio revenue was $941.2 million, down 12.3%; it included $772.3 million of portfolio income and $168.9 million of changes in expected recoveries. Other revenue increased 12.5% to $25.3 million.
- Cash efficiency ratio improved to 61.0% from 65.3%. Management reported estimated remaining collections (ERC) of $5.7 billion at year-end.
- Cash from operating activities was $21.6 million, versus $84.9 million in 2021. Investing activities provided $120.5 million; financing activities used $121.3 million. The cash flow statement reports year-end cash, cash equivalents and restricted cash of $84.8 million; balance-sheet cash and cash equivalents were $83.4 million.
- At December 31, 2022, total assets were $4.18 billion, finance receivables net were $3.30 billion, and total equity was $1.29 billion. Borrowings were $2.495 billion. Cash was $83.4 million, with $75.3 million held internationally and treated as indefinitely reinvested.
- Revolving facilities had $1.637 billion of nominal unused capacity, but only $465.1 million was available after borrowing-base and covenant restrictions. Interest-bearing deposits were $113.0 million.
Material changes and management commentary
- Collections fell across most portfolio categories. Americas and Australia Core collections declined 21.6%; Europe Core declined 8.9%. Management attributed lower U.S. collections partly to unusually strong 2021 collections amid excess consumer liquidity, reduced portfolio purchasing, and fewer accounts entering the legal channel. Currency translation also reduced reported European collections.
- Management said excess consumer liquidity had reduced lender charge-offs and the supply of portfolios for purchase in the U.S. during 2021 and 2022, contributing to lower purchase volumes and pricing pressure. It expected these conditions to continue temporarily, while anticipating higher charge-offs and portfolio supply in coming months; timing and magnitude are uncertain.
- Interest expense rose 5.3% to $130.7 million, primarily due to higher interest rates. Operating expenses decreased 5.6% to $680.7 million, but fell less than revenue, compressing operating margin. Full-time equivalents decreased 4.9% to 3,277.
- Changes in expected recoveries were a net positive $168.9 million. This included $106.7 million from collections above forecast and a $62.2 million net positive adjustment to future recovery estimates. Those estimates depend on management assumptions about collection experience, timing, economic conditions and other factors.
Liquidity, outlook, risks and unusual items
- The company stated that operating cash generation, cash on hand, available revolving credit and capital-market access should fund operations, planned spending, forward-flow commitments, debt maturities and portfolio purchases for the next 12 months and beyond. This assessment depends on collections, facility availability and continued covenant compliance.
- At year-end, forward-flow purchase commitments had a maximum purchase price of $792.2 million, including $722.9 million due within 12 months. Estimated interest, unused fees and principal payments over the next 12 months were approximately $489.7 million, including $345.0 million of 2023 convertible-note principal.
- After year-end, on February 6, 2023, PRA issued $400 million of 8.375% senior notes due 2028. It placed $345 million of proceeds in a segregated account to retire all or part of the 2023 convertible notes or meet related obligations, and used the remaining proceeds to repay North American revolving borrowings. The new notes add higher-coupon debt.
- Key risks include collection shortfalls or downward revisions to ERC; constrained or more expensive portfolio supply; inflation, recession and consumer payment capacity; rising floating-rate debt costs; refinancing and covenant risks; foreign-exchange exposure; extensive collection, consumer-protection and privacy regulation; cybersecurity and operational disruption; and international tax uncertainty, including potential effects of OECD Pillar Two implementation.
- Regulatory and litigation matters remain significant uncertainties. The company is in discussions with the CFPB concerning its prior consent order and investigation; it says the regulator has taken positions on penalties, restitution and business practices with which it disagrees. Multi-state investigations and consumer litigation also remain, including cases for which potential losses cannot be estimated. Management said recorded accruals reflect its anticipated CFPB outcome; the filing does not provide a clear quantified potential exposure for these matters.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls. The audit identified expected recoveries on purchased credit-deteriorated assets as a critical audit matter because the $3.3 billion finance-receivables balance relies on significant estimates and judgment. Goodwill was $435.9 million after foreign-currency translation reductions; the 2022 annual impairment review found no impairment.
- The company repurchased approximately $99.4 million of stock in 2022 and had $67.7 million remaining under its $150 million authorization at year-end. It paid no regular dividends in the three years ended December 31, 2022.
Important facts for investors to verify
- Whether collection performance, especially U.S. call-center and legal collections, stabilizes and supports management’s expected recovery forecasts.
- Whether new portfolio supply and purchase pricing improve as charge-offs change, and whether recent purchases earn adequate returns.
- The composition and sensitivity of ERC and the $62.2 million positive estimate adjustment; compare subsequent actual collections with forecasts.
- Post-refinancing debt, interest expense, covenant headroom and genuinely drawable revolver availability, including borrowing-base constraints.
- Developments, accruals and potential financial effects from the CFPB matter, multi-state investigation and material consumer litigation.
- Whether operating cash flow and liquidity are sufficient to fund forward-flow commitments, debt service and portfolio purchases if collections weaken.