Atlanticus Holdings Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unless noted otherwise, amounts are in millions of dollars. Atlanticus provides credit and related financial services primarily to subprime consumers; its reportable segments are Credit Cards and Other Investments and Auto Finance.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Interest income | $18.0 | $20.4 | $54.7 | $68.8 |
| Fees and related income on earning assets | $18.4 | $4.7 | $35.4 | $69.0 |
| Loss from continuing operations | $(8.9) | $(8.4) | $(21.7) | $(26.1) |
| Net income (loss) attributable to controlling interests | $(8.9) | $33.2 | $(21.7) | $23.0 |
| Operating cash flow | Not presented quarterly | $(20.2) | $3.2 |
- Q3 diluted loss per share was $0.65; nine-month diluted loss per share was $1.58. Prior-year net income included discontinued operations.
- At September 30, assets were $356.9, liabilities $360.3, and total equity $(3.4), versus positive equity of $19.2 at December 31, 2012. Loans and fees receivable, net, were $84.3; fair-value receivables were $111.8 in total, including $97.4 pledged under structured financings.
- Unrestricted cash was $59.8, down from $67.9 at year-end; restricted cash was $19.0, up from $12.9. Nine-month investing cash flow was $42.5 and financing cash flow was $(30.8).
- Balance-sheet debt included $52.3 of notes payable at face value, $106.4 of structured-financing notes at fair value, and $95.8 of convertible notes at carrying value. Structured notes had $232.1 of aggregate unpaid principal; they are non-recourse to the company beyond the pledged assets. The $139.5 face amount of 5.875% convertible notes is due in 2035.
- Allowance for uncollectible loans and fees receivable rose to $21.5 from $11.2 at year-end. Gross receivables reported at net realizable value were $117.0, including $19.9 delinquent.
Changes versus the prior period
- Nine-month interest income fell $14.1, principally from liquidation of legacy credit-card and auto receivables, partly offset by growth in private-label merchant credit. Management said interest income increased sequentially from Q2 and expected newer-product growth to support further growth in coming quarters.
- Fees and related income fell $33.6 year to date, largely because fair-value gains on receivables were much smaller than in 2012. Q3 fees increased year over year, including $5.4 of new leased-merchandise revenue and a smaller fair-value-related decline in structured-financing notes.
- Lower fair-value receivable charge-offs helped results: $13.5 for the nine months versus $81.7 in 2012. In contrast, provision for losses on receivables at net realizable value increased to $20.6 from $13.8.
- 2012 results included discontinued operations and a $49.6 pretax gain on the sale of the previously charged-off receivables business. This explains much of the change from prior-year nine-month net income to 2013 net loss.
- Managed Credit Cards and Other Investments receivables continued to decline year over year, but management reported growth in earning assets in Q3, mainly from merchant credit and leased merchandise. Auto Finance receivables also remained below prior-year levels.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management expected continued growth in private-label merchant credit and leased merchandise, subject to access to capital on acceptable terms. It anticipated higher related provisions and expenses as those products grow, and said overhead and liquidity remain challenges until new products generate sufficient cash flow.
- Management expected fair-value effects to diminish as legacy portfolios liquidate, but warned those estimates remain sensitive to credit performance and market assumptions. The relevant Level 3 valuation inputs include expected credit losses, payment rates, yields and discount rates.
- Management expected net interest margins to remain in the low-to-mid teens for the Credit Cards and Other Investments managed portfolio, with newer products potentially improving yields but higher funding costs weighing on margins. These are management expectations, not guaranteed outcomes.
- Liquidity risks include dependence on lenders and refinancing of facilities; $50.8 of listed facilities had maturities or expirations through 2016, including $20.0 of CAR revolving debt expiring in October 2014. The company characterized near-term refinancing risk as low, while noting that continued growth requires funding.
- Uncertain tax positions are a significant exposure: the income tax liability was $62.7, substantially related to uncertain tax positions, including IRS matters concerning 2007 and 2008 tax years. An unfavorable resolution could materially affect results and liquidity.
- In October 2013, the company received $4.4 previously held in escrow after related contingencies were favorably resolved. The filing reports no material pending litigation; ordinary-course legal proceedings were described as immaterial.
- Other risks include subprime credit losses, consumer-credit and rent-to-own regulation, dependence on issuing banks and third-party processing, competition, and the limited operating history of newer merchant-credit and leasing products. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether merchant-credit and leased-merchandise growth produces sustainable cash flow and profitability, and whether funding is available on acceptable terms.
- Recent performance of delinquency, charge-off and loss-provision trends, particularly as newer receivables season.
- Fair-value assumptions and sensitivity for Level 3 receivables and structured-financing liabilities.
- Potential outcomes and timing of uncertain tax matters, and possible cash-payment exposure against the $62.7 tax liability.
- Debt maturity, covenant and collateral details, and the extent of liquidity available at the parent company versus its subsidiaries.
- The impact of the 2012 discontinued-operation sale and other one-time items when assessing recurring earnings and cash generation.