Business context and reporting period
PRA Group, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2016, with comparison to Q1 2015 and balance-sheet comparison to December 31, 2015. The company purchases and collects nonperforming-loan portfolios and also provides fee-based services in the Americas and Europe.
Financial performance and condition
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $224.9 | $245.2 |
| Income from operations | $70.9 | $96.2 |
| Operating margin | 31.5% | 39.2% |
| Net income attributable to PRA Group | $32.0 | $58.1 |
| Diluted EPS | $0.69 | $1.19 |
| Operating cash flow | $12.1 | $64.0 |
| Cash and equivalents | $79.4 | $71.4 at Dec. 31, 2015 |
| Borrowings | $1,896.4 | $1,717.1 at Dec. 31, 2015 |
| Finance receivables, net | $2,377.1 | $2,202.1 at Dec. 31, 2015 |
Q1 2016 revenue comprised $206.5 million of net income recognized on finance receivables, $16.3 million of fee income, and $2.1 million of other revenue. Net income margin was 14.2%, versus 23.7% in Q1 2015. The tax provision was $16.2 million, and the effective tax rate was 33.1%.
Investing activities used $169.6 million, including $321.6 million of net finance-receivable acquisitions and $25.0 million for business acquisitions, partly offset by $177.8 million of principal collections. Financing activities provided $146.8 million, mainly from increased net credit-line borrowings. The company reported $435.7 million of availability under its credit facilities at quarter-end. Management said operating cash generation, collections, existing cash, and available borrowing were expected to fund operations, planned capital spending, purchase commitments, and additional portfolio purchases for the next 12 months.
Material changes versus the prior period
- Revenue fell 8.3% year over year; net finance-receivable income decreased 9.6%. Cash collections declined 3.9% to $384.3 million, while net allowance charges rose to $9.9 million from $1.6 million.
- Operating expenses increased 3.4% to $154.0 million, increasing to 68.5% of revenue from 60.8%. Higher outside fees, agency fees, compensation, and depreciation and amortization offset lower legal collection costs.
- Interest expense increased 35.1% to $20.0 million, principally due to higher average borrowings. Foreign-exchange results shifted from a $6.8 million gain to a $1.9 million loss.
- Finance-receivable purchases were approximately $336.8 million, versus $185.0 million a year earlier. The net finance-receivable balance increased, as did borrowings.
- Credit agreements were amended: domestic facility maturity was extended to December 2020 (subject to the specified notes-related condition), and the European multicurrency facility was increased to $900 million and extended to February 2021.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance is provided. Management’s liquidity outlook depends on collections, access to credit, portfolio purchasing, and operating performance; acquisitions, litigation outcomes, or unusually high portfolio purchases could require additional financing.
- The IRS disputes the company’s cost-recovery method for tax years 2005–2012. Tax Court trial was scheduled to begin September 19, 2016. Related deferred tax liabilities were $252.3 million; estimated federal and state interest of $95.2 million was not accrued. The company believes its tax position is supportable.
- A proposed $18 million settlement of the TCPA class action was submitted for preliminary court approval in April 2016; the amount had been fully accrued at December 31, 2015.
- An adverse jury verdict in the Mejia case included $251,000 compensatory and $82.0 million punitive damages. The company appealed; the filing says the award could result in a loss up to the verdict amount if not overturned or significantly reduced. Separately, the estimated range of reasonably possible losses above accruals for other legal proceedings was $0–$82 million, excluding potential IRS interest.
- After quarter-end, the company completed its DTP S.A. tender offer on April 26, 2016, acquiring 99.73% of outstanding shares for approximately $45.0 million. A $46.6 million escrow related to the DTP acquisition was included in other assets at March 31, 2016.
- Variable-rate borrowings were approximately $1.6 billion. The company estimated that a 50-basis-point rate increase would add $6.7 million to interest expense over the following 12 months. Foreign-currency movements also affect earnings and equity.
- Management reported compliance with financing covenants at March 31, 2016 and effective disclosure controls. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether cash collections and portfolio-level forecasts stabilize, and whether allowance charges rise further.
- How the September 2016 IRS trial and potential tax, interest, and penalty exposure develop.
- Final court approval and payment timing for the TCPA settlement, and the outcome of the Mejia appeal and other litigation.
- Post-quarter DTP completion costs, integration, and the effect of acquisition-related funding on liquidity and debt.
- Borrowing availability, covenant headroom, and refinancing or repayment needs, including the $169.9 million note payable due July 2016.