Atlanticus Holdings Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Atlanticus provides financial products and servicing, primarily to sub-prime consumers, through Credit and Other Investments and Auto Finance. Unless noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Interest income | $16.9 | $17.4 | $34.4 | $37.6 |
| Fees and related income on earning assets | $12.8 | $22.2 | $26.0 | $55.1 |
| Other operating income | $2.2 | $2.3 | $5.1 | $7.0 |
| Net income (loss) attributable to controlling interests | $1.4 | $(11.2) | $3.4 | $(22.4) |
| Basic and diluted earnings (loss) per share | $0.10 | $(0.80) | $0.24 | $(1.59) |
| Net cash used in operating activities | — | $(10.2) | $(14.6) | |
| Net cash provided by investing activities | — | $20.0 | $24.6 | |
| Net cash used in financing activities | — | $(3.3) | $(28.3) |
Q2 income before taxes was $2.8 million, versus a $10.5 million loss a year earlier; the six-month result was $4.2 million pretax income versus a $19.5 million loss. The filing does not provide a single conventional consolidated revenue or net interest margin measure; the line items above are presented separately.
At June 30, total assets were $271.9 million, total liabilities $259.7 million, and total equity $12.2 million. Unrestricted cash was $46.3 million and restricted cash $16.9 million. Loans and fees receivable, net, were $120.1 million; rental merchandise, net, was $12.0 million. Reported debt-related balances included $84.5 million of notes payable at face value, $20.0 million payable to related parties, $28.7 million of structured-financing notes at fair value, and $64.5 million of convertible senior notes.
Six-month cash used in operations was partly offset by investing cash inflows and a $6.4 million increase in unrestricted cash, to $46.3 million. Cash paid for interest was $8.9 million. These cash-flow figures reflect continued investment in receivables and rental merchandise and collections from liquidating portfolios.
Material changes and operating trends
- Profitability improved substantially year over year, while interest income and fee income declined. Q2 fees and related income fell $9.4 million; rental revenue and fees on credit products were lower, reflecting reduced originations and continued credit-card portfolio liquidations.
- Q2 included a $10.0 million net recovery of charge-offs on receivables carried at fair value, compared with a $0.1 million net loss in Q2 2014. For the first half, the comparable reported amount was a $20.4 million net recovery versus a $1.8 million net loss. Management noted that portfolio reimbursements exceeded charge-offs in Q1 and Q2 2015 and that their timing and continuation are uncertain.
- Operating expenses fell to $28.5 million in Q2 from $39.6 million, and to $63.4 million for the first half from $90.5 million. The main reductions were depreciation of rental merchandise and card and loan servicing costs, in part due to lower originations and portfolio contraction.
- Auto Finance managed receivables grew to $78.3 million at June 30, 2015, from $64.0 million a year earlier. Credit and Other Investments managed receivables were $134.8 million, down from $200.1 million. Q2 pretax income was $1.2 million for Credit and Other Investments and $1.7 million for Auto Finance; first-half pretax income was $0.6 million and $3.6 million, respectively.
- Credit and Other Investments managed receivables were 12.4% at least 30 days past due and 5.2% at least 90 days past due. Auto Finance figures were 13.5% and 2.5%, respectively. These managed measures are not identical to GAAP balance-sheet receivables.
Outlook, risks, contingencies and unusual items
- No quantitative earnings or revenue guidance was provided. Management expected continued growth in point-of-sale, direct-to-consumer and CAR auto-finance receivables, dependent on funding, retail-partner additions and growth in existing channels. It also expected higher growth-related spending and potentially higher provisions as new receivables expand.
- Management anticipated declining fee income in 2015, no significant new U.K. credit-card originations, and gradually diminishing fair-value effects as credit-card portfolios liquidate. It cautioned that fair-value results can be volatile and that charge-off rates may rise as newer products season.
- Management said fixed overhead remains a challenge: Credit and Other Investments cash inflows cover direct variable costs and only part of allocated overhead. Failure to contain overhead or grow earning activities could pressure sustained profitability.
- Potential refinancing needs identified by management totaled $53.2 million, including a $20.0 million related-party term loan due November 2015, a $31.7 million CAR revolving facility, and a $1.5 million U.K. facility. Management characterized near-term refinancing risk as low. A separate $112.6 million face-value securitization was amortizing with its collateral and was described as non-recourse, with no early acceleration or bullet-payment provision.
- The related-party term loan bears 9% interest and is secured by certain company and subsidiary assets. The lender, Dove Ventures, is associated with trusts whose trustees have family ties to company executives.
- Atlanticus accrued a £3.3 million ($5.1 million) liability related to a preliminary U.K. tax authority review of VAT refund claims. It also reported an unpaid $9.1 million IRS assessment and $2.6 million of accrued interest and penalties. A favorable IRS settlement in February 2015 affected the six-month effective tax rate.
- In August 2015, the company resolved a dispute and recovered approximately $2.0 million on a previously fully reserved receivable; the income was to be recognized in Q3 2015. No other subsequent events requiring adjustment were identified.
- Unfunded point-of-sale credit commitments were $86.0 million and CAR floor-plan commitments were $10.0 million. The company said it did not expect material payments under its other contingent commitments. It reported no pending material legal proceedings.
- Key risks include reliance on sub-prime borrowers, credit-loss and fair-value estimation, funding availability, dependence on a small number of retail partners, consumer-finance regulation, bank and service-provider relationships, and data security. The three largest retail partners accounted for over 78% of 2014 point-of-sale and rental revenue.
Important facts for investors to verify
- Whether the reported net recoveries and portfolio reimbursements recur, and how they affect underlying earnings and cash generation.
- Receivables growth, delinquency and charge-off trends as newer point-of-sale and auto portfolios season, compared with the runoff of legacy credit-card assets.
- Availability and terms of financing, including repayment or refinancing of the $20.0 million related-party loan due in November 2015 and compliance with facility covenants.
- Outcome and potential cash impact of the U.K. VAT review and the remaining tax assessment and related accruals.
- Progress in diversifying retail partners and generating sufficient revenue to cover fixed overhead and growth investment.
- The sensitivity of fair-value receivables and structured-financing liabilities to management’s estimates of credit losses, payment rates, yields and discount rates.
Management concluded that disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.