PRA Group, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Global purchaser and collector of nonperforming loans, with fee-based collection and related services. This unaudited report covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. The company sold its government services businesses in January 2017 and reported one operating segment.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / prior period |
|---|---|---|
| Total revenue | $206.6 million | $224.9 million; down 8.1% |
| Income recognized on finance receivables, net | $194.5 million | $206.5 million; down 5.8% |
| Fee income | $9.9 million | $16.3 million; down 39.3% |
| Operating expenses | $153.3 million | $154.0 million |
| Income from operations | $53.3 million; 25.8% of revenue | $70.9 million; 31.6% of revenue |
| Gain on sale of subsidiaries | $46.8 million | None |
| Net income attributable to PRA Group | $48.2 million; diluted EPS $1.03 | $32.0 million; diluted EPS $0.69 |
| Cash and cash equivalents | $82.1 million | $94.3 million at Dec. 31, 2016 |
| Net cash from operating activities | $32.7 million | $13.2 million |
| Borrowings | $1.709 billion | $1.784 billion at Dec. 31, 2016 |
| Finance receivables, net | $2.367 billion | $2.308 billion at Dec. 31, 2016 |
Q1 cash flows also included $44.7 million provided by investing activities, including $89.1 million net proceeds from the subsidiary sale, and $90.3 million used in financing activities. Cash declined by $12.2 million during the quarter. Cash paid for interest was $20.3 million.
Material changes versus the prior comparable period
- Reported net income increased, but included the $46.8 million pretax disposal gain. Operating income fell as revenue declined while operating expenses were nearly flat; operating margin decreased from 31.6% to 25.8%.
- Finance-receivable cash collections decreased 1.2% to $379.8 million. Net allowance charges declined to $2.7 million from $9.9 million, while principal amortization increased to $182.6 million from $167.9 million.
- Portfolio purchases fell to $227.8 million from $336.8 million. Estimated remaining collections (ERC) were $5.1 billion, versus $5.3 billion a year earlier.
- Interest expense increased 6.5% to $21.3 million, primarily reflecting higher rates and unused-line fees. The effective tax rate rose to 38.8% from 33.1%, partly due to earnings mix and adoption of a share-based compensation accounting standard.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management said cash from operations and collections, existing cash and available credit were expected to fund operations, planned capital expenditures, forward-flow commitments and additional portfolio purchases over the next 12 months. It noted that acquisitions, adverse litigation outcomes or higher-than-expected portfolio purchases could require other financing.
- At March 31, reported undrawn facility capacity was $712.6 million, but only $285.7 million was available after borrowing-base restrictions and covenants. Cash included $69.6 million held in foreign operations and considered indefinitely reinvested.
- The IRS disputes the company’s use of the cost-recovery method for tax years 2005–2012; Tax Court trial was scheduled to begin May 15, 2017. Related deferred tax liabilities were $241.9 million, and estimated federal and state interest of $117.6 million was not accrued. Management said a final outcome was not expected in the short term; an adverse result could materially affect liquidity and could involve additional taxes, interest and penalties.
- Subsequent event: on May 5, 2017, the company amended and restated its North American credit facility, increasing it to $1.2 billion and extending maturity to May 5, 2022. The $207.5 million due in December 2017 was repaid at closing; stated interest rates and unused-line fee were unchanged.
- Other exposures include collection regulation and litigation, foreign exchange and interest-rate risk, and portfolio cash-flow estimation risk. The company reported compliance with material debt covenants and no material change to previously disclosed risk factors. A 50-basis-point rate increase was estimated to raise interest expense by $5.3 million over the following 12 months.
Important facts for investors to verify
- How much of reported earnings growth is attributable to the one-time subsidiary-sale gain, and how ongoing operations perform after the government services divestiture.
- Subsequent developments and potential financial impact of the IRS cost-recovery dispute, including the unaccrued estimated interest.
- Portfolio collection performance, cash-flow revisions, allowance charges and the sustainability of ERC estimates, particularly given lower Q1 collections and purchases.
- Liquidity available under borrowing-base restrictions, refinancing execution and debt maturities; confirm the impact of the May 2017 facility amendment.
- Whether increased legal-channel costs and higher interest expense pressure future operating margins and cash generation.