Atlanticus Holdings Corp. (then CompuCredit Holdings Corporation) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The filing is issued under the name CompuCredit Holdings Corporation. Dollar amounts below are in millions unless stated otherwise.
Business context
The company provided credit and related services to financially underserved consumers. It was managing down legacy credit-card and auto-finance portfolios, was not broadly originating new credit cards, and was growing its charged-off receivables business. Its MEM business was sold in April 2011; its Retail Micro-Loans business was classified as discontinued operations at quarter-end and sold on October 10, 2011.
Financial results and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total interest income | $36.0 | $61.0 | $118.3 | $214.8 |
| Net interest, fees and related income on earning assets, after stated losses/provision | $22.5 | $23.0 | $83.3 | $26.0 |
| Income (loss) from continuing operations before tax | $0.03 | $(8.8) | $20.6 | $(91.6) |
| Net income (loss) attributable to controlling interests | $1.7 | $1.8 | $130.9 | $(70.0) |
| Basic earnings (loss) per share | $0.08 | $0.05 | $4.85 | $(1.70) |
Nine-month 2011 earnings included $113.0 million of discontinued-operations income, including a $106.0 million gain on the MEM sale. Q3 discontinued-operations income was $2.0 million. The filing does not present a single consolidated revenue figure in the conventional format; the measures above follow its financial-statement presentation.
- Cash flow: For the nine months, operating cash flow was $93.2 million, investing cash flow was $344.2 million, and financing cash flow was $(406.6) million. Unrestricted cash increased $31.8 million on the cash-flow statement. Ending cash there was $117.1 million, including $11.1 million classified as held for sale; balance-sheet unrestricted cash was $106.0 million.
- Liquidity and balance sheet: At September 30, unrestricted cash was $106.0 million and restricted cash was $25.2 million. Total assets were $710.8 million, total liabilities $631.3 million, and total equity $79.5 million. Management reported no material unused capacity under debt facilities at quarter-end and described $106.0 million as maximum available liquidity.
- Debt: Convertible notes had a $197.5 million net carrying value (face amount $246.9 million). Structured-financing debt was $308.8 million in total carrying value: $277.8 million at fair value and $31.0 million at face value. The fair-value debt is largely non-recourse to the company and secured by specified receivables and cash. The 3.625% convertible notes had $106.4 million face value outstanding at quarter-end, with potential holder conversion in May 2012.
- Margins and portfolio quality: Managed credit-card receivables were $537.8 million at quarter-end, down from $913.7 million a year earlier. The 30-days-or-more delinquency rate was 12.7% versus 18.0%; the net charge-off ratio was 16.5% versus 29.6%. Auto-finance managed receivables were $99.2 million, down from $177.8 million year over year. The filing’s segment statistics are managed-basis measures, not GAAP margins.
Material changes versus the prior comparable period
- Interest income fell 41% in Q3 and 45% year to date, principally as credit-card and auto-finance portfolios liquidated. Management expected further declines absent acquisitions.
- Q3 continuing operations were near break-even before tax, compared with an $8.8 million pretax loss a year earlier. For the nine months, continuing pretax income improved to $20.6 million from a $91.6 million loss; discontinued-operations sale gains were a major contributor to total reported earnings.
- Operating expenses declined: Q3 total other operating expense was $32.4 million versus $40.5 million; nine-month expense was $102.6 million versus $149.1 million. Management cited cost reductions and lower servicing and depreciation costs.
- The company repurchased 13.125 million common shares for $105.0 million in April and repurchased $39.6 million face value of 3.625% notes for $37.0 million during the first nine months.
- Q3 fees and related income included $5.3 million of losses from other-than-temporary declines in securities. Fair-value changes remain significant and rely on Level 3 estimates.
Outlook, risks and unusual items
- Management expected continued net liquidation of credit-card and auto-finance receivables, declining related income, and ongoing overhead-reduction efforts. It gave no formal numerical earnings or revenue guidance.
- Management viewed the charged-off receivables segment’s prospects as favorable but noted intense competition for portfolio purchases. It expected the Auto Finance segment to remain profitable, supported by CAR operations and a smaller contribution from liquidating ACC/JRAS portfolios.
- After quarter-end, the company completed the Retail Micro-Loans sale for $46.7 million plus excess working capital; expected net pretax proceeds were approximately $53.8 million. Also after quarter-end, CAR obtained a $40 million facility, with $23.8 million drawn by October 31, and the charged-off receivables segment obtained a $35 million facility in November. These facilities carry covenants and potential early-repayment provisions.
- In October and November, the company bought another $21.3 million face value of 3.625% notes, reducing that series’ balance to $85.1 million. Management said funding markets remained difficult and that future refinancing or capital-raising options were not assured.
- Key risks include subprime borrower credit performance and economic conditions; reliance on external financing and bank partners; regulatory and litigation exposure; valuation sensitivity in fair-valued receivables and related debt; and the ability to reduce fixed overhead as portfolios shrink. The company disclosed material lawsuits, including consumer class actions and litigation with convertible-note holders, and said it was vigorously defending them.
- The Q3 effective tax rate on continuing operations was unusually high because pretax income was nearly zero and results were affected by deferred-tax valuation allowances and permanent differences.
Important facts for investors to verify
- How much of nine-month net income reflects recurring operations versus the $106.0 million MEM-sale gain and other discontinued operations.
- Whether cash generation and segment-level liquidity can support corporate overhead and the May 2012 convertible-note obligation.
- How sensitive Level 3 receivable and structured-debt valuations are to collections, credit losses, payment rates, discount rates and servicing costs.
- Post-sale proceeds and any adjustments or indemnities related to the Retail Micro-Loans transaction, and compliance with covenants on the new credit facilities.
- Developments in the disclosed litigation and regulatory matters, and whether further legal costs or outcomes could materially affect results.