PRA Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. PRA Group purchases and collects nonperforming loan portfolios and also provides certain fee-based services. Unless otherwise noted, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $267.9 | $250.0 | $791.6 | $747.9 |
| Income from operations | $88.7 | $64.7 | $260.5 | $176.9 |
| Operating margin | 33.1% | 25.9% | 32.9% | 23.7% |
| Net income attributable to PRA Group | $42.5 | $25.0 | $119.5 | $58.8 |
| Diluted EPS | $0.92 | $0.55 | $2.60 | $1.29 |
| Net margin attributable to PRA Group | 15.9% | 10.0% | 15.1% | 7.9% |
Cash collections: $519.3 in Q3, up 14.6%, and $1,523.9 for the nine months, up 10.1%. Management attributed much of the increase to stronger U.S. call-center and digital collections; Europe also grew, while Americas insolvency collections declined.
Cash flow, nine months: Operating cash flow was $131.4, versus $70.7 a year earlier. Investing activities provided $172.5, compared with $233.1 used in 2019; financing activities used $305.9, versus $167.6 provided. Cash and cash equivalents declined $18.7 to $92.8 at quarter-end; cash, cash equivalents and restricted cash totaled $105.2.
Balance sheet and liquidity: Finance receivables, net were $3,332.7; total assets $4,197.2; total liabilities $2,925.1; and total equity $1,272.2. Borrowings were $2,524.4, down from $2,808.4 at year-end 2019. The company reported $979.4 of facility availability before borrowing-base and covenant restrictions and $474.8 after those restrictions. Interest-bearing deposits were $119.8. Management said the company was in compliance with financing covenants.
Material changes and unusual items
- Revenue increased 7.2% in Q3 and 5.8% for the nine months. Operating expenses fell 1.1% and 5.1%, respectively, contributing to higher operating income and margins.
- Effective January 1, 2020, PRA adopted the expected-credit-loss standard (ASC 326) prospectively. Revenue is now presented as portfolio income and changes in expected recoveries; the prior-year comparison uses the former accounting model, so revenue line items are not directly comparable.
- The company recorded $25.4 of favorable changes in expected recoveries in Q3 and $32.4 for the nine months. These amounts included collections above forecast, largely offset by lower present values of expected future recoveries.
- Q3 operating costs included lower compensation and legal collection costs, partly offset by higher outside fees and services. Headcount was 3,811, down from 4,525 a year earlier.
- In August, PRA issued $300.0 of 7.375% senior notes due 2025. It also repaid $287.5 of 3.00% convertible notes due 2020. Debt at quarter-end included $345.0 principal of 3.50% convertible notes due 2023.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected operating cash generation, existing cash, available credit facilities and capital-market access to be sufficient for operations, planned capital expenditures, purchase commitments and debt maturities over the next 12 months, while noting this depends on market conditions.
- Management said unusually strong recent collections may reflect accelerated timing rather than higher total expected collections. Sustained performance could support future increases in expected collections, but COVID-19 assumptions and forecasts may change as conditions evolve.
- COVID-19 continued to affect all operating regions. The company reported higher U.S. collections, reduced legal-channel activity earlier in the year, and lower portfolio purchases amid seller deferrals and reduced bankruptcy filings and charge-offs. The ultimate effects on consumer ability or willingness to pay remain uncertain.
- Key risks include collection-estimate changes, economic conditions, portfolio availability and pricing, regulation and litigation, refinancing and covenant capacity, interest and foreign-exchange movements, and operational or cyber disruption. Goodwill was $456.3; management reported no impairment trigger as of September 30, 2020.
- Forward-flow purchase commitments had a maximum remaining amount of approximately $395.6. The company stated that reasonably possible legal losses in excess of accrued amounts were not material where estimable, but actual losses could exceed estimates.
Important facts for investors to verify
- Whether elevated collections persist and represent higher lifetime recoveries, rather than merely accelerated collections.
- How COVID-19-related economic conditions affect portfolio cash flows, recovery estimates and future portfolio purchase opportunities.
- Available borrowing capacity under actual borrowing-base and covenant limits, alongside the company’s debt maturities and refinancing needs.
- The earnings and cash-flow effects of the ASC 326 accounting change when comparing periods.
- Developments in regulatory inquiries, litigation, and other collection-industry compliance risks.