PRA Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the same periods in 2018. PRA Group purchases, collects and manages nonperforming-loan portfolios in the Americas and Europe, alongside smaller fee-based businesses. The company reports one segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $250.0 million | $225.9 million | $747.9 million | $671.5 million |
| Operating income | $64.7 million | $44.1 million | $176.9 million | $153.0 million |
| Net income attributable to PRA Group | $25.0 million | $9.9 million | $58.8 million | $50.6 million |
| Diluted EPS | $0.55 | $0.22 | $1.29 | $1.11 |
| Operating margin | 25.9% | 19.5% | 23.7% | 22.8% |
Finance-receivable income accounted for nearly all revenue: $247.5 million in Q3 and $735.5 million year to date. Cash collections increased 16.4% in Q3 to $453.2 million and 13.3% year to date to $1.385 billion. The company recognized net allowance charges of $4.1 million in Q3 and $11.4 million year to date.
Net interest expense rose 17.3% in Q3 to $35.9 million and 21.0% year to date to $105.9 million, reflecting higher average borrowing levels and rates, as well as derivative fair-value effects. Q3 foreign-exchange gains were $5.4 million; the company attributed the increase primarily to Brazilian mutual funds.
Cash flow, balance sheet and liquidity
- At September 30, cash and cash equivalents were $90.0 million; finance receivables, net, were $3.239 billion; total assets were $4.118 billion.
- Borrowings had a $2.567 billion net carrying amount, or $2.610 billion principal before debt discounts and issuance costs. Total liabilities were $2.967 billion.
- For the first nine months, operating activities provided $70.7 million, investing activities used $233.1 million, and financing activities provided $167.6 million. Portfolio acquisitions used $833.0 million; principal collections on receivables were $649.1 million.
- Credit facilities had $714.1 million of stated unused availability, reduced to $424.9 million after borrowing-base restrictions. Interest-bearing deposits were $112.0 million. Management said operating cash flow, cash and available borrowing capacity should fund operations and planned purchases for the next 12 months.
- The $287.5 million principal amount of 3.00% convertible notes is due August 2020. The filing says the company believes it can settle the notes in cash at maturity. It reported covenant compliance at quarter-end.
Material changes and management commentary
- Revenue and collections grew, supported by prior portfolio purchases, improved collections on selected pools, European and South American purchasing, and a Canadian business acquisition. Nine-month portfolio purchases were $887.0 million, versus $662.8 million in the comparable period.
- Operating expenses rose 4.4% in Q3 and 10.5% year to date. Legal collection fees, court costs and agency fees increased as activity shifted toward legal collections and outsourced servicing. Compensation expense declined; full-time equivalents fell to 4,525 from 5,405 a year earlier.
- Investing cash outflow increased substantially from the prior-year period, reflecting higher receivable purchases and a $57.6 million business acquisition, partly offset by proceeds associated with the RCB sale. The RCB sale shifted some costs from fixed compensation to variable agency fees.
- The company adopted the new lease standard in January 2019, recording $70.7 million of right-of-use assets and $74.4 million of lease liabilities at quarter-end. It expects the new credit-loss standard, effective January 1, 2020, to materially change finance-receivable accounting.
- There was no specific earnings or revenue guidance. Management noted that purchasing can be slowed if needed, and identified acquisitions, litigation outcomes or higher-than-expected portfolio purchases as potential sources of additional financing needs.
Risks, contingencies and unusual items
- Foreign currency translation and cash-flow hedge losses drove a $53.8 million comprehensive loss attributable to PRA Group in Q3, despite positive net income. Year-to-date comprehensive loss attributable to the company was $5.0 million.
- Variable-rate credit facilities expose the company to interest-rate changes. The filing estimates a 50-basis-point increase would raise interest expense by $5.5 million over the following 12 months; a 50-basis-point decrease would lower it by $4.9 million.
- Debt-collection regulation, government investigations, litigation, portfolio collection estimates, loan-purchase pricing, refinancing and foreign-exchange movements remain material risks. The company said reasonably possible legal losses beyond accrued amounts could not be estimated for certain matters.
- On November 6, 2019, after quarter-end, the company settled certain claims with the Massachusetts Attorney General. The amount had been fully accrued at September 30, and the company said the settlement was not materially adverse. Other multi-state investigation outcomes remained uncertain.
- Cash and cash equivalents in the balance sheet were $90.0 million, while the cash-flow statement reports $96.9 million including $6.9 million of restricted cash.
Important facts for investors to verify
- Whether collections and portfolio yields sustain the reported revenue growth, and whether allowance charges or revised collection estimates increase.
- Whether higher legal, court and agency costs remain proportionate to collections and operating income.
- Funding and refinancing plans for the August 2020 convertible notes, European facility maturity in February 2021, and borrowing-base-constrained liquidity.
- The remaining exposure and potential cost of state investigations and pending litigation, including the Pounds and TCPA matters.
- The impact of adopting the expected-credit-loss standard on reported earnings, finance-receivable balances and disclosures.