PRA Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. PRA Group purchases, collects and manages defaulted consumer receivables and provides related services in the Americas and Europe. Results include Aktiv Kapital, acquired in July 2014.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 or comparison |
|---|---|---|
| Total revenue | $245.2 million | $193.9 million; up 26.5% |
| Income from operations | $96.2 million; 39.2% margin | $71.6 million; 36.9% margin |
| Net income | $58.1 million | $40.8 million |
| Diluted EPS | $1.19 | $0.81 |
| Net margin | 23.7% | 21.1% |
| Cash collections | $399.7 million | $313.4 million; up 27.5% |
| Operating cash flow | $64.0 million | $49.2 million |
| Cash, March 31 | $40.5 million | $39.7 million at December 31, 2014 |
| Borrowings, March 31 | $1.479 billion | $1.482 billion at December 31, 2014 |
Investing activities used $17.2 million and financing activities used $53.0 million; cash increased $0.9 million during the quarter. Total assets were $2.701 billion, total liabilities $1.883 billion, and stockholders’ equity $817.3 million at March 31. The filing reports $323.8 million of availability under credit facilities, subject to borrowing-base requirements and covenants.
Finance-receivable income was $228.4 million, fee income $13.1 million and other revenue $3.8 million. The effective tax rate was 34.1%, versus 38.8% a year earlier. Interest expense was $14.9 million, compared with $4.9 million.
Material changes and drivers
- Revenue and collections increased mainly because of Aktiv’s inclusion; international revenue was $60.5 million, versus $2.7 million in Q1 2014.
- Operating expenses rose 21.8% to $149.0 million, primarily reflecting Aktiv. Legal collection costs fell 21.1% to $20.9 million, while agent fees increased to $8.3 million from $1.5 million, largely due to European operations.
- Fee income declined from $15.6 million to $13.1 million, principally because of lower, timing-dependent class-action settlement revenue, partly offset by Aktiv.
- The company recorded a $6.8 million foreign-currency transaction gain, but a $62.7 million foreign-currency translation loss in other comprehensive income. Equity fell from $902.2 million at year-end, mainly due to the translation loss and $77.8 million of share repurchases, partly offset by net income.
- Finance receivables, net, were $1.955 billion, down from $2.002 billion at year-end, including a $59.5 million currency translation reduction. Q1 portfolio purchases were $185.0 million, excluding the Polish securitized-fund investment.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management expects approximately $3–4 million of additional non-recurring Aktiv integration costs over the next few quarters; $1.6 million was incurred in Q1.
- Management believes operating cash generation, collections, cash on hand and available borrowing capacity will fund operations, planned capital expenditures, forward-flow commitments and normal-course purchases for the next 12 months. Higher-than-normal portfolio purchases or acquisitions could require additional financing.
- Remaining forward-flow purchase commitments were approximately $564.4 million. The board’s $100 million repurchase program had approximately $7.8 million remaining at March 31; Q1 repurchases totaled $77.8 million.
- The IRS disputes the company’s cost-recovery tax accounting for 2005–2012. The company is contesting the proposed deficiencies in Tax Court. Related deferred tax liabilities were $244.9 million, and estimated potential federal and state interest was $82.6 million. A court continuance was granted in May 2015; the company states an adverse outcome could require payment of deferred taxes, interest and possibly penalties.
- The CFPB investigation remains unresolved; discussions concern possible penalties, restitution and new practices and controls. The company cannot estimate potential amounts and could face litigation. TCPA class-action proceedings are stayed, and potential losses cannot currently be estimated.
- Key risks include collection estimates and portfolio performance, regulatory changes and enforcement, acquisition integration, foreign-exchange exposure, variable-rate debt, and compliance with debt covenants. The company reported covenant compliance at March 31.
Most important facts for investors to verify
- How much of revenue and collection growth is attributable to Aktiv, and whether acquired operations deliver expected integration benefits.
- Collection performance, forecast revisions, allowance charges and the assumptions underlying estimated remaining collections on receivables.
- Progress and potential financial exposure from the IRS dispute and CFPB discussions, including any subsequent developments.
- Debt maturities, borrowing-base availability, refinancing needs and sensitivity to interest and currency movements.
- Whether repurchases, portfolio purchases and forward-flow commitments remain supportable by cash generation and liquidity.