Atlanticus Holdings Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparisons are to fiscal 2015. Although the request references 2016 Q4, this filing reports annual results, with quarterly portfolio metrics where noted.
Business context
Atlanticus provides technology, servicing and credit-related services focused primarily on financially underserved consumers. Its two reportable segments are Credit and Other Investments, including point-of-sale and direct-to-consumer lending, and Auto Finance. The company generally invests in receivables originated through its platform and relies substantially on borrowing to fund those assets.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Total interest income | $88.6 million | $69.9 million |
| Interest expense | $20.2 million | $18.3 million |
| Net interest income before fees and credit-loss items | $68.4 million | $51.6 million |
| Fees and related income on earning assets | $17.3 million | $53.2 million |
| Provision for losses on loans and fees receivable | $53.7 million | $26.6 million |
| Loss before income taxes | $12.4 million | Income of $3.5 million |
| Net loss attributable to controlling interests | $6.3 million; $0.46 per share | Income of $1.7 million; $0.12 per share |
| Operating cash flow | $39.0 million | $0.9 million |
| Investing cash flow | Use of $75.8 million | Source of $14.5 million |
| Financing cash flow | Source of $63.5 million | Use of $3.6 million |
Point-of-sale and direct-to-consumer receivables grew from $105.3 million at year-end 2015 to $214.9 million at year-end 2016. Credit and Other Investments managed receivables totaled $245.0 million at year-end, versus $152.5 million a year earlier. Auto Finance managed receivables were $79.7 million, versus $77.8 million.
At December 31, 2016, Atlanticus had $76.1 million of unrestricted cash and $16.6 million of restricted cash. Total assets were $364.0 million, total liabilities $358.2 million, and total equity $5.8 million. Debt carrying amounts included $141.6 million of notes payable, $40.0 million of related-party notes, $12.3 million of structured-financing notes at fair value, and $61.8 million of convertible senior notes. Standard net interest margin and operating margin figures are not clearly provided in the filing.
Credit and Other Investments reported a pretax loss of $18.9 million in 2016, compared with a loss of $4.7 million in 2015. Auto Finance pretax income was $6.6 million, compared with $8.2 million.
Material changes versus 2015
- Interest income increased as point-of-sale, direct-to-consumer and auto receivables grew, partly offset by liquidation of legacy credit-card portfolios.
- Fees and related income fell to $17.3 million from $53.2 million, primarily as rent-to-own revenue contracted after the company sharply reduced that business and stopped new acquisitions in 2016.
- The provision for losses more than doubled, largely reflecting the greater volume and seasoning of newer point-of-sale, direct-to-consumer and credit-card receivables.
- Net loss replaced net income. Lower rental-merchandise depreciation and servicing costs partly offset the revenue decline and higher loan-loss provision.
- Unrestricted cash increased by $25.0 million. The company funded substantial receivables investment with increased borrowings.
Outlook, risks and unusual items
- Management expects continued growth in point-of-sale and direct-to-consumer receivables and modest Auto Finance growth during 2017, subject to partner additions, origination activity and available financing. It expects higher interest expense as growth requires additional debt.
- Management expects rising charge-off rates as newer receivables mature, and does not expect growth to offset all declines in fee revenue, particularly from the discontinued rent-to-own acquisitions. The filing provides no numeric earnings guidance.
- In February 2017, a subsidiary established a receivables-backed funding facility with capacity of up to $90 million and maturity in 2022, subject to covenants and collateral performance tests. At year-end, certain other facilities included maturities in 2017, including a $40 million related-party term loan due November 22, 2017.
- In 2016, the company repurchased and retired $5.0 million principal amount of convertible notes for $2.3 million plus accrued interest, recognizing a $1.2 million gain. It also reversed a £3.4 million ($5.0 million) U.K. VAT-related liability after HMRC ended its review without changes and paid suspended refund claims.
- Cash flows and reported results are exposed to estimates of receivable collections, credit losses and fair values. The five largest retail partners represented over 50% of point-of-sale receivables. Other risks include reliance on bank and funding partners, regulation and litigation, and data-security and service-provider disruptions.
- An IRS-related assessment of $7.3 million plus $3.4 million accrued interest and penalties remained disputed; the IRS had filed a lien, and the company planned to pursue the matter through appeals and, if needed, litigation. Management said pending legal proceedings were not expected to be material.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The independent auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether new receivables generate sufficient returns to cover credit losses, funding costs and the company’s fixed overhead; track portfolio seasoning and charge-offs.
- Availability, pricing, covenant compliance and renewal of funding facilities, especially the 2017 maturities and the new receivables-backed facility.
- The concentration and retention of major retail partners, and the pace and quality of new originations.
- Resolution and cash consequences of the IRS assessment, and whether reported performance depends on unusual reimbursements or fair-value estimates.
- Whether liquidity and the company’s thin year-end equity position remain adequate as receivables and debt grow.