PRA Group, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2015. PRA Group purchases, collects and manages nonperforming loan portfolios, with additional fee-based services, and reports one accounts receivable management segment. Results include Aktiv for the full nine-month period in 2015, but only from its July 2014 acquisition date in the prior-year comparison. PRA acquired 55% of Brazilian loan-servicing platform RCB in August 2015.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $229.4 million | $239.0 million | $711.8 million | $630.2 million |
| Operating income | $54.1 million | $88.2 million | $239.2 million | $232.2 million |
| Net income attributable to PRA | $17.4 million | $51.2 million | $127.0 million | $129.5 million |
| Diluted EPS | $0.36 | $1.01 | $2.61 | $2.57 |
| Operating margin | 23.5% | 36.9% | 33.6% | 36.8% |
- Revenue and collections: Q3 revenue declined 4.0%. Finance-receivable income fell 7.2% to $208.2 million, despite cash collections rising 2.1% to $380.8 million; net allowance charges were $11.3 million versus $1.7 million of reversals a year earlier. Fee income increased to $17.8 million. Nine-month revenue rose 12.9%, reflecting higher collections and the longer inclusion of Aktiv; PRA also reported a decline in Americas insolvency collections.
- Profitability and margins: Q3 operating expenses rose 16.2% to $175.3 million, largely due to $28.8 million of CFPB Consent Order expenses. Q3 net income attributable to PRA fell about 66%. Nine-month net income attributable to PRA was slightly lower year over year despite higher revenue. Q3 effective tax rate was 48.6%, compared with 35.8%; the company attributed the increase partly to nondeductible CFPB-related costs.
- Cash flow: Nine-month operating cash flow was $125.5 million, down from $172.4 million. Investing used $215.4 million, including $730.0 million of net finance-receivable acquisitions; financing provided $129.5 million. Cash ended at $69.1 million, up from $39.7 million at year-end 2014.
- Balance sheet and liquidity: Finance receivables, net, were $2.17 billion; total assets were $2.98 billion. Borrowings were $1.65 billion, versus $1.48 billion at year-end 2014. The company reported $393.2 million available under its credit facilities and said cash, operating collections and available borrowing capacity should fund operations, planned capital spending and normal-course purchases for the next 12 months. It reported compliance with debt covenants at September 30.
- Debt and commitments: Debt includes revolving facilities, a $169.9 million Aktiv seller note due January 2016, and $287.5 million of 3.00% convertible notes due 2020. The seller note may be extended to July 2016. Forward-flow and other portfolio purchase commitments were approximately $427.3 million.
Material changes, outlook and risks
- The August RCB acquisition expanded PRA into Brazil; the 55% stake was funded with approximately $55.2 million borrowed under the domestic revolver. The company has an option to acquire the remaining interest beginning in 2019.
- Foreign currency translation reduced comprehensive income and contributed to accumulated other comprehensive loss; Q3 also included a $3.2 million transaction loss. Nine-month results include a $7.2 million foreign currency transaction gain.
- No specific earnings or revenue guidance is provided. Management expects existing cash, collections and credit availability to support the next 12 months, but notes that acquisitions, adverse litigation outcomes or unusually high portfolio purchases could require additional financing.
- CFPB Consent Order: PRA agreed to vacate 837 time-barred judgments, refund approximately $0.9 million collected on them, waive about $3.4 million in related balances, make $18.2 million in additional restitution and pay an $8.0 million penalty. The penalty was paid and the refunds and restitution were accrued; $19.0 million of restricted cash was set aside. Total related Q3 expenses were $28.8 million.
- IRS tax dispute: The IRS challenges PRA’s use of the cost-recovery method for tax years 2005–2012. Deferred tax liabilities related to the matter were $246.9 million; estimated potential federal and state interest of $91.1 million was not accrued. The Tax Court heard summary-judgment arguments and indicated it expected to issue an order shortly; a trial was scheduled for September 2016 if the motions were denied. An adverse outcome could require additional payments and financing.
- Litigation: A Missouri jury awarded $82.0 million in punitive damages and $251,000 in compensatory damages in the Mejia case. PRA challenged the award; the company warned that it could materially affect its financial condition or operations if not reduced or overturned. Other collection-related litigation and regulatory proceedings also remain risks.
- Other key exposures include estimated portfolio cash flows and allowance charges, collection regulation and enforcement, acquisition integration, foreign exchange and interest-rate movements, and debt-covenant compliance. A 50-basis-point rise in short-term rates was estimated to increase annual interest expense by $5.8 million.
Most important facts for investors to verify
- Developments and potential financial effects of the IRS cost-recovery tax case, including the $246.9 million deferred tax liability and unaccrued interest estimate.
- Final payment and implementation of the CFPB restitution requirements, and any further regulatory restrictions or costs.
- Status and potential exposure from the $82.0 million Mejia punitive-damages award.
- Portfolio collection performance, allowance trends and the sustainability of management’s estimated future collections.
- Liquidity and refinancing needs, especially the seller-note maturity, portfolio purchase commitments and borrowing capacity.
- Whether Aktiv and RCB integration, international expansion and foreign-currency exposure affect future margins and cash generation.