Consumer Portfolio Services, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. CPS purchases and services subprime automobile contracts, funding purchases largely through warehouse facilities and asset-backed securitizations. Its managed portfolio was $781.8 million, up from $679.7 million a year earlier, including a $217.8 million Fireside Bank portfolio acquired in September 2011.
Key financial results and position
Dollar amounts are in millions except per-share data and percentages.
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $44.5 | $32.4 in Q1 2011 |
| Interest income / interest expense | $40.6 / $22.3 | $28.6 / $19.1 in Q1 2011 |
| Net income (loss) | $0.5; diluted EPS $0.02 | $(4.2); diluted loss per share $(0.23) in Q1 2011 |
| Pre-tax margin | About 1.2% of revenue | About (13.0)% in Q1 2011 |
| Operating cash flow | $4.5 | $3.5 in Q1 2011 |
| Investing / financing cash flow | $27.9 / $(31.9) | $34.9 / $(45.4) in Q1 2011 |
| Cash and restricted cash | $10.6 unrestricted; $131.5 restricted | $10.1 and $159.2, respectively, at Dec. 31, 2011 |
| Debt | Approximately $853.9 | Approximately $876.2 at Dec. 31, 2011 |
| Shareholders’ equity | Deficit of $12.6 | Deficit of $14.2 at Dec. 31, 2011 |
| Finance receivables, net | $543.7, excluding $126.9 measured at fair value | $506.3 and $160.3, respectively, at Dec. 31, 2011 |
- Total expenses were $44.0 million versus $36.6 million. Provision for credit losses rose to $4.8 million from $3.7 million; interest expense rose to $22.3 million from $19.1 million.
- CPS purchased 7,942 contracts totaling $119.9 million in Q1, versus 3,296 contracts totaling $50.0 million in Q1 2011.
- For the total owned portfolio, delinquencies were 3.0% of the gross servicing portfolio, compared with 3.1% a year earlier. Annualized net charge-offs were 3.9%, versus 9.3% in Q1 2011.
Material changes and unusual items
- Revenue grew 37.4%, primarily because of higher interest income as the consolidated receivables balance expanded. The Fireside acquisition contributed substantially to portfolio growth and introduced related acquisition debt and fair-value accounting.
- Q1 included a $155.0 million securitization issuance. Its pre-funding arrangement left $46.3 million in restricted cash at quarter-end pending delivery of additional receivables. CPS reported that the receivables were delivered in April 2012 and related restricted cash was released, with a significant portion used to repay warehouse borrowings.
- On March 29, CPS amended three warrants to remove price-reset features; their aggregate $1.1 million value was reclassified from liabilities to common stock. One warrant remained a liability, valued at $0.1 million at quarter-end.
- CPS repurchased 210,711 shares in Q1 for an average $1.15 per share under its existing repurchase authorization.
Outlook, liquidity, and risks
- Management planned to increase contract purchases gradually, subject to available capital, and said it expected to complete additional term securitizations in 2012. CPS reported lower effective coupons on recent securitizations, including 3.47% for the March 2012 transaction.
- At March 31, CPS reported $99.1 million available under the Goldman facility and $7.0 million under the UBS facility; advances depend on eligible collateral. Restricted cash is subject to securitization terms and is not equivalent to unrestricted liquidity.
- The company reported compliance with financial covenants. However, it depends on continuing access to warehouse funding and securitizations, and trust cash releases depend on collateral performance. Higher interest rates, weaker collections, adverse used-car values, or reduced funding access could constrain purchases and cash flow.
- Management cautioned that debt service and refinancing are not assured. CPS had approximately $853.9 million of debt and a shareholders’ deficit, and its ability to meet obligations depends on generating sufficient operating profits and cash flows.
- The $15.0 million net deferred tax asset depends partly on estimated taxable income from potential asset sales; the filing identifies a three-year cumulative pretax loss position as negative evidence. A $61.4 million valuation allowance was recorded.
- Legal matters include a proposed Griffith class-action settlement with preliminary but not final court approval, and a separate Rhode Island action with trial scheduled for November 2012. CPS said recorded legal accruals reflect its estimate, but outcomes remain uncertain.
- Fireside receivables and related debt use Level 3 fair-value estimates based on significant unobservable assumptions; actual realizable values may differ materially.
Important facts for investors to verify
- Whether subsequent securitizations and eligible warehouse capacity support planned contract growth, and how much cash remains freely available after restricted balances and financing obligations.
- Whether portfolio credit performance, charge-offs, and recoveries sustain the Q1 improvement, including performance of the Fireside portfolio.
- How higher debt costs and interest-rate changes affect funding spreads, earnings, and cash generation.
- Whether projected taxable income and potential asset-sale strategies support realization of the deferred tax asset.
- Final outcomes and any additional costs from the Griffith and Stanwich litigation, and sensitivity of Level 3 fair values to revised assumptions.