PRA Group, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 27, 2018. PRA Group purchases, collects and manages nonperforming loan portfolios across the Americas and Europe, with a single reportable accounts receivable management segment.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $813.6 million | $830.6 million |
| Income recognized on finance receivables, net | $780.8 million | $745.1 million |
| Fee income | $24.9 million | $77.4 million |
| Operating income | $211.0 million | $218.2 million |
| Net income attributable to PRA Group | $162.3 million | $85.1 million |
| Diluted EPS | $3.54 | $1.83 |
| Cash receipts | $1,537.5 million | $1,569.4 million |
| Operating cash flow | $0.8 million | $105.9 million |
Finance receivables generated 96% of FY 2017 revenue. Operating margin was 25.9%, versus 26.2% in 2016. Revenue declined 2.0%, while operating income fell 3.3%. Net income rose substantially, principally reflecting a $48.5 million gain on subsidiary sales, lower finance-receivable allowance charges and a one-time tax benefit.
In Q4 2017, revenue was $205.7 million, compared with $155.3 million in Q4 2016; PRA-attributable net income was $86.9 million, versus a loss of $17.6 million. The quarter’s results included a $64.4 million income tax benefit.
Balance sheet, debt and liquidity
- At year-end, cash and cash equivalents were $120.5 million, net finance receivables were $2.772 billion, total assets were $3.698 billion and total equity was $1.138 billion.
- Borrowings were $2.170 billion, up from $1.784 billion a year earlier. Net interest expense increased 21% to $98.0 million.
- Credit-facility availability was reported as $845.2 million before borrowing-base restrictions and $510.2 million after those restrictions. Management said it believed the company had adequate funding for the next 12 months, subject to portfolio purchases, litigation outcomes and other financing needs.
- Operating cash flow was only $0.8 million, versus $105.9 million in 2016. Cash paid for income taxes rose to $144.3 million and cash interest paid was $79.8 million. Investing activities used $280.3 million; financing activities provided $295.7 million.
- Cash collections were $1.513 billion. Portfolio purchases totaled $1.109 billion, and estimated remaining collections (ERC) were $5.70 billion at year-end.
Material changes and unusual items
- Net allowance charges on finance receivables fell to $11.9 million from $98.5 million in 2016. Management cited improved collection forecasts, including a $149.5 million reclassification from nonaccretable difference to accretable yield, partly offset by weaker income from certain Americas portfolios.
- Fee income dropped 67.8%, mainly after the January sale of government services businesses and the June sale of PRA Location Services. The sales generated a combined $48.5 million gain; proceeds included $91.5 million for the government-services businesses and approximately $4.5 million for PRA Location Services.
- The Tax Act prompted a provisional $73.8 million deferred-tax benefit and contributed to a reported effective tax rate of negative 7.3%. Excluding the Tax Act, the filing reports an estimated 2017 effective rate of 39.5%. The company said its analysis of certain tax provisions remained incomplete.
- The IRS settlement resolved asserted deficiencies for 2005–2012 with no amounts due and no interest or penalties. Beginning in 2017, PRA adopted a different tax accounting method; management estimated related future tax payments at approximately $9.8 million per quarter.
- PRA issued $345 million of 3.50% convertible senior notes due 2023 and completed its remaining $44.9 million share-repurchase authorization. No regular dividend was paid.
- The company opened two call centers and added capacity for approximately 1,000 collectors; the sites were fully operational in Q1 2018. U.S. collector hiring increased, and year-end global full-time equivalents rose 28.2% to 5,154.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management expects the Tax Act to lower the future effective tax rate overall, but noted that its effects were still being evaluated. Cash collection seasonality differs by region: Americas collections generally trend higher in the first half, while European collections tend to be higher in the second half.
Key risks include the availability and pricing of portfolios, collection outcomes and possible further allowance charges; extensive and changing debt-collection, consumer-protection and privacy regulation; CFPB oversight and a prior consent order; pending litigation and state Attorneys General investigations; international, currency and Brexit exposure; variable-rate debt, refinancing and convertible-note liquidity requirements; and cyber incidents. In 2015, the CFPB consent order required consumer refunds, debt relief, changes to practices and an $8 million penalty. PRA reported a covenant waiver in Q4 2017 and stated it believed it was in compliance at year-end. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification points
- Assess whether the lower 2017 allowance charges and increased collection forecasts are supported by subsequent actual collections and portfolio performance.
- Reconcile the $162.3 million reported net income to recurring operating performance, excluding the subsidiary-sale gain and provisional Tax Act benefit.
- Review operating cash conversion, tax payments and debt service needs alongside portfolio purchase requirements and borrowing-base availability.
- Track regulatory and litigation developments, including the multistate investigation, the North Carolina putative class action and CFPB consent-order compliance.
- Confirm the final tax effects of the Tax Act and the cash impact of the revised tax accounting method.