PRA Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results. PRA Group purchases, collects and manages nonperforming-loan portfolios, with operations in the Americas, Europe and Australia.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $251.8 million | $245.9 million | Up 2.4% |
| Operating income | $60.5 million | $48.8 million | Up 24.0% |
| Operating margin | 24.0% | 19.9% | Up 4.1 percentage points |
| Net income attributable to PRA Group | $19.1 million | $15.2 million | Up 25.7% |
| Diluted EPS | $0.42 | $0.34 | Up $0.08 |
| Cash collections | $494.6 million | $461.2 million | Up 7.2% |
| Operating cash flow | $46.8 million | $15.0 million | Up $31.8 million |
- Portfolio income was $262.0 million, offset by a $12.8 million negative change in expected recoveries. Fee income was $2.2 million, down from $6.4 million.
- Operating expenses were $191.2 million, nearly unchanged year over year. Net interest expense rose 9.4% to $37.2 million, primarily due to higher average borrowings and derivative fair-value changes. The effective tax rate was 12.1%, versus 18.6%.
- Total comprehensive loss attributable to PRA Group was $95.5 million, compared with comprehensive income of $8.8 million a year earlier. The principal factors were currency translation and cash-flow hedge losses; net income increased.
Balance sheet, cash flow and liquidity
- At March 31, cash and cash equivalents were $180.0 million; total cash, cash equivalents and restricted cash were $184.0 million. Finance receivables, net, were $3.408 billion, and total assets were $4.350 billion.
- Borrowings were $2.828 billion carrying value ($2.863 billion principal); total liabilities were $3.229 billion and total equity was $1.121 billion. Cash provided by operations was $46.8 million; investing activities used $42.2 million and financing activities provided $72.1 million. Cash and cash equivalents increased $60.2 million.
- Credit-facility availability was $655.4 million before borrowing-base restrictions and $234.6 million after those restrictions. The company reported compliance with financing covenants at quarter-end. International operations held $115.4 million of cash considered indefinitely reinvested.
- $287.5 million principal of 3.00% convertible notes was due August 1, 2020. Management stated it believed it could settle the notes in cash at maturity, based on cash, borrowing availability, operating cash flows and financing access.
Material changes and unusual items
- Cash collections increased in Americas Core and Europe Core, but management noted economic disruption in the final two weeks of the quarter. Total collections rose 7.2%; 2019 collections adjusted to 2020 exchange rates rose 8.8%.
- Effective January 1, 2020, PRA adopted the expected-credit-loss standard, ASC Topic 326, prospectively. It changed finance-receivable income presentation: 2020 results show portfolio income and changes in expected recoveries, while 2019 used income recognized on finance receivables and net allowance charges. Comparisons are therefore affected by the accounting change.
- Management’s COVID-19 estimates incorporated a shift in the timing of expected collections over the next 6–12 months. A $20.6 million negative adjustment to expected future recoveries, partly offset by $7.8 million of collections above expectations, resulted in the $12.8 million net write-down. Management said estimates could change materially as conditions evolve.
- Goodwill fell to $418.6 million from $480.8 million, mainly due to a $62.2 million foreign-currency translation adjustment. The company reported no COVID-19-related goodwill impairment trigger at March 31 and said it would continue monitoring conditions.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management said it believed available cash, operating collections, revolving-credit access and amended facility terms would be sufficient for operations, planned capital expenditures, forward-flow commitments, debt maturities and additional portfolio purchases over the next 12 months. Acquisitions, adverse litigation outcomes or higher-than-expected portfolio buying could require additional financing.
- COVID-19 risks identified include weaker consumer payment capacity, lower collections, limits on collection activity, staffing disruption, reduced loan-portfolio supply, economic deterioration, market volatility and heightened cybersecurity exposure from remote work. The company said operations continued and business-continuity measures were in place.
- On May 6, 2020, after quarter-end, the North American credit facility was amended to temporarily loosen leverage limits and increase the domestic Core borrowing-base advance rate for a defined period; the amendment also raised the LIBOR floor on revolving loans to 1.00%. These changes are not quarter-end terms.
- Forward-flow purchase commitments were disclosed as approximately $626.5 million in the liquidity discussion and a maximum remaining purchase amount of approximately $629.2 million in the commitments note. The filing does not explain the difference.
- The company reported routine legal and regulatory matters; it said the estimated aggregate range of reasonably possible losses above accruals, where estimable, was not material. It cautioned actual losses could exceed estimates.
Important facts for investors to verify
- How the COVID-19 collection delays and economic forecasts affect subsequent collections and expected-recovery estimates.
- Cash availability after borrowing-base and covenant limits, including the location and accessibility of international cash.
- The funding and settlement plan for the $287.5 million notes due August 2020, and the effect of the post-quarter credit amendment.
- How the ASC Topic 326 accounting transition affects comparisons of portfolio income, recoveries and portfolio performance.
- The differing forward-flow commitment figures and any changes in portfolio purchase commitments or legal and regulatory exposures.