PRA Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. PRA Group buys and collects portfolios of nonperforming loans and also provides fee-based recovery and servicing services in the Americas and Europe. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $228.5 | $237.2 | $453.3 | $482.4 |
| Operating income | $72.8 | $88.9 | $143.7 | $185.0 |
| Operating margin | 31.8% | 37.5% | 31.7% | 38.4% |
| Net income attributable to PRA Group | $36.5 | $51.4 | $68.4 | $109.6 |
| Diluted earnings per share | $0.79 | $1.06 | $1.48 | $2.25 |
Q2 finance-receivable income, net, fell 7.3% to $204.0 million; fee income rose 61% to $22.3 million, partly offsetting the decline. First-half finance-receivable income, net, declined 8.5% to $410.5 million, while fee income increased to $38.6 million from $26.9 million. Lower finance-receivable income reflected lower collections and higher allowance charges: net charges were $12.9 million in Q2 and $22.8 million in the first half, versus $4.9 million and $6.5 million, respectively, in 2015.
Operating expenses rose 5.0% in Q2 and 4.1% in the first half. Management cited higher agency fees, outside fees and services, and acquisition-related costs, partly offset by lower compensation and legal collection costs. Interest expense increased to $20.6 million in Q2 from $13.5 million, and to $40.5 million for the first half from $28.2 million, primarily reflecting higher average borrowings. First-half foreign-exchange gains were $0.2 million, down from $10.4 million in 2015. Net margin attributable to PRA Group was 16.0% in Q2 (21.7% in 2015) and 15.1% for the first half (22.7% in 2015).
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $117.1 million at June 30, 2016, versus $71.4 million at year-end 2015; $19.9 million of the balance represented funds held on behalf of others.
- First-half operating cash flow was $82.4 million, compared with $96.1 million in 2015. Investing used $242.9 million, including $538.1 million for finance-receivable acquisitions and $65.2 million for business acquisitions; financing provided $169.9 million, chiefly through net additional borrowing.
- Net finance receivables were $2.400 billion, up from $2.202 billion at December 31, 2015. First-half portfolio cash collections were $771.5 million, compared with $789.4 million in 2015.
- Total borrowings were $1.912 billion, versus $1.717 billion at year-end. The company reported $201.0 million available to draw after borrowing-base and covenant restrictions (about $430.7 million of nominal unused capacity before those restrictions). It reported compliance with material debt covenants.
- Management said operating cash generation, existing cash and available facilities should fund operations, planned capital expenditures, forward-flow commitments and additional portfolio purchases over the next 12 months. Forward-flow and other purchase commitments totaled approximately $329.9 million.
Material changes, outlook and risks
- Acquisitions and portfolio expansion: The company acquired DTP in Q2 and RMSC in Q1 2016; these and prior acquisitions contributed to higher fee income and expenses. Goodwill was $544.3 million at June 30, 2016, including acquisition-related additions. Finance-receivable purchases increased compared with the first half of 2015.
- Debt actions: Credit facilities were amended or extended in 2016. After quarter-end, on July 18, the company repaid the $169.9 million Aktiv acquisition note, funded mainly by a draw on its domestic revolving facility. DTP’s Polish revolving facilities were also repaid and terminated after quarter-end. DTP bonds remained outstanding at June 30.
- Tax dispute: The IRS challenges the company’s cost-recovery method for tax years 2005–2012. The Tax Court trial was rescheduled to May 15, 2017. Related deferred tax liabilities were $252.4 million; estimated federal and state interest of $100.7 million was not accrued. An adverse outcome could require payment of taxes, interest and possibly penalties.
- Other litigation: The company paid $18 million in Q2 under a proposed TCPA class settlement, subject to final court approval; the amount had been accrued in 2015. A Missouri jury awarded $251,000 in compensatory damages and $82.0 million in punitive damages in the Mejia case; the company appealed. The estimated range of reasonably possible losses above accruals for other outstanding legal proceedings was $0–$81 million, excluding potential IRS interest.
- Regulatory and operating risks: Debt collection is highly regulated, and the CFPB was expected to adopt additional industry rules. Other risks include portfolio collection performance and valuation estimates, competition and portfolio supply/pricing, funding availability and interest rates, litigation, acquisitions, and foreign-exchange movements. The UK’s June 2016 vote to leave the EU introduced further uncertainty; UK portfolios represented about 14% of consolidated estimated remaining collections.
- Outlook: The filing provides no specific earnings or revenue guidance. Management’s liquidity assessment is forward-looking and depends on collections, financing availability, portfolio purchases and legal outcomes.
Key facts for investors to verify
- Whether collections and portfolio cash-flow estimates support the carrying value of finance receivables, and whether elevated allowance charges persist.
- Progress and final outcomes of the IRS tax case, including exposure beyond the recorded deferred tax liability and unaccrued interest.
- Final court approval and terms of the TCPA settlement, and the outcome of the Mejia appeal and other litigation.
- Post-quarter borrowing changes, covenant headroom and liquidity after repayment of the Aktiv note and funding of portfolio purchases.
- Contribution and integration costs of DTP, RMSC and other acquisitions, and the sustainability of the fee-income increase.
- Effects of Brexit and currency movements on European collections, reported results and the value of foreign assets.