Atlanticus Holdings Corporation — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2015. Atlanticus provides credit and related financial services, primarily to financially underserved consumers. Its reportable segments are Credit and Other Investments and Auto Finance.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total interest income | $16.9 million | $18.5 million | $51.2 million | $56.2 million |
| Net interest income before fees and loan-loss provision | $12.2 million | $12.4 million | $37.5 million | $37.7 million |
| Fees and related income on earning assets | $16.7 million | $20.7 million | $42.6 million | $75.8 million |
| Net income (loss) attributable to controlling interests | $0.4 million | $(5.8) million | $3.8 million | $(28.2) million |
| Basic and diluted earnings (loss) per share | $0.03 | $(0.42) | $0.27 | $(2.01) |
| Net cash used in operating activities | Not stated by quarter | $(7.2) million | $(18.6) million |
Amounts are rounded. The filing does not present a standard operating margin measure. Q3 pretax loss was $0.5 million, offset by a $0.9 million income-tax benefit; nine-month pretax income was $3.7 million.
- Balance sheet at September 30: Total assets were $271.0 million; unrestricted cash was $38.2 million and restricted cash was $21.5 million. Total liabilities were $258.4 million and total equity was $12.6 million.
- Debt: Notes payable at face value were $85.2 million, related-party notes were $20.0 million, structured-financing notes carried at fair value were $23.2 million, and convertible senior notes were carried at $64.7 million. Debt maturities and refinancing exposures are discussed below.
- Credit quality and scale: Credit and Other Investments managed receivables were $151.1 million at quarter-end, down from $186.6 million a year earlier; 30-plus-day delinquency was 10.5% and the adjusted charge-off ratio was 16.5%. Auto Finance managed receivables were $75.4 million, up from $68.1 million; 30-plus-day delinquency was 13.3% and gross charge-off ratio was 3.0%.
Material changes versus comparable periods
- Atlanticus returned to controlling-interest profitability in Q3 and for the first nine months, compared with losses in 2014. Lower interest expense and operating costs, along with fair-value and charge-off effects, contributed; the results also include significant portfolio reimbursements.
- Nine-month fees and related income fell $33.1 million year over year, chiefly reflecting lower rental revenue, credit-product fees and fair-value income. Rental revenue declined to $28.8 million from $48.0 million.
- Interest expense fell to $13.7 million from $18.5 million for the nine months, while the loan-loss provision declined to $18.0 million from $22.7 million. Depreciation declined to $33.2 million from $53.6 million, largely as rent-to-own originations and rental merchandise contracted.
- Operating cash use narrowed to $7.2 million from $18.6 million. Investing activities provided $12.0 million, versus $25.6 million in the prior-year period; financing activities used $5.9 million, versus $19.4 million.
- At September 30, net loans and fees receivable were $132.9 million, compared with $105.9 million at December 31, 2014. Rental merchandise, net, fell to $9.2 million from $14.2 million.
Outlook, commentary and risks
- Management expected modest managed-receivables growth for the remainder of 2015 and further growth in 2016, driven by point-of-sale and direct-to-consumer lending, CAR operations, planned solicitations and testing of domestic credit-card originations. Growth depends on funding and new or expanding retail relationships.
- Management anticipated additional debt financing to support growth and quarterly interest expense above prior levels for these operations. It expected the $20.0 million, 9% related-party term loan due November 25, 2015 to be extended on similar terms; extension was not yet reported as completed.
- Management expected further declines in rental revenue as current contracts expire, reflecting underwriting changes and reduced originations. It also expected charge-off rates to rise in some newer products as receivables grow and season, and cautioned that fair-value income may be volatile.
- Results included approximately $34.3 million of reimbursements during the first nine months of 2015, disclosed across several income-statement lines and excluded from management’s managed-receivables performance data. The filing says reimbursement timing is uncertain and similar future benefits are not assured. A separate approximately $2.0 million recovery followed resolution of a dispute in Q3.
- The Q3 tax benefit was enhanced by expiration of the statute of limitations for the 2011 tax year and reversals of certain tax interest and penalty accruals. An $8.3 million federal tax assessment remained outstanding; amended-return claims, if accepted, could eliminate substantially all of it. The company continued accruing related interest and penalties.
- Atlanticus accrued a £3.3 million ($5.1 million) liability for a preliminary U.K. HMRC review of VAT refund claims. Management said the outcome remained uncertain. It reported no pending material legal proceedings.
- Principal risks include subprime borrower credit losses, dependence on external financing and a small number of retail partners, regulatory changes, competition, operational and data-security risks, and the company’s limited history and ability to scale newer lending products. Management noted that infrastructure costs could continue to pressure consistent profitability.
Important facts for investors to verify
- Whether the related-party term loan was extended or repaid at its November 25, 2015 maturity, and on what terms.
- The outcome and timing of the IRS amended-return claims and the HMRC VAT review, including any changes to accrued liabilities.
- The nature, accounting presentation, cash realization and potential recurrence of the substantial portfolio reimbursements included in 2015 results.
- Whether point-of-sale and direct-to-consumer growth, new retail relationships and funding capacity can offset liquidating legacy portfolios and declining rent-to-own revenue.
- Trends in delinquency, charge-offs, loan-loss allowances, fair-value assumptions and liquidity as the portfolio mix changes.