Business context and reporting period
CompuCredit Holdings Corporation (the issuer named in the filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2012. The company served financially underserved, subprime consumers through credit products and receivables servicing. Its three reportable segments were Credit Cards and Other Investments, Investments in Previously Charged-Off Receivables, and Auto Finance. The 2011 sales of its U.K. Internet and Retail Micro-Loans businesses are presented as discontinued operations.
Key financial results and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Interest income | $26.3 million | $42.9 million |
| Net interest income, fees and related income on earning assets, after stated credit losses and provision | $21.2 million | $36.5 million |
| Continuing operations loss before tax | $4.2 million | Income of $23.4 million |
| Net loss attributable to controlling interests | $4.4 million; loss per share $0.20 | Income of $28.5 million; income per share $0.80 |
| Operating cash flow | $19.7 million | $28.4 million |
| Investing cash flow | $38.9 million | $103.3 million |
| Financing cash flow | $(58.4) million | $(104.3) million |
| Unrestricted cash at period end | $145.3 million | $144.9 million at December 31, 2011 |
| Total assets / total liabilities | $595.4 million / $522.7 million | $647.9 million / $571.6 million at December 31, 2011 |
| Debt carrying amounts | $420.7 million, including $177.7 million convertible notes and $202.5 million fair-value structured financing notes | $465.1 million at December 31, 2011 |
Q1 2012 total interest expense was $10.9 million. The company reported $21.8 million of restricted cash, which is not included in unrestricted liquidity. The filing does not provide a single consolidated operating margin measure.
Material changes versus comparable periods
- Results deteriorated from Q1 2011 profit to a Q1 2012 continuing-operations loss. Interest income declined $16.7 million as credit-card and auto receivables liquidated; equity-method income fell $12.3 million.
- Fair-value income from receivables was lower, while the corresponding fair-value loss on structured-financing notes was also substantially smaller. These estimates are sensitive to assumptions about collections, credit losses, payment rates, servicing costs and discount rates.
- The Q1 2011 comparison included $6.6 million of discontinued-operations income and a $17.1 million share of a one-time gain recognized by a U.K. portfolio joint venture. Q1 2012 had no discontinued-operations income.
- Credit Cards and Other Investments managed receivables fell to $401.4 million from $698.2 million a year earlier; Auto Finance managed receivables fell to $75.3 million from $128.3 million. These are management-defined, non-GAAP measures.
- Operating and investing cash generation declined year over year. Financing outflows mainly reflected debt repayments, while unrestricted cash increased only $0.4 million from year-end.
- The company retired treasury shares during the quarter, recording a $182.6 million charge to retained earnings. This was an equity reclassification, not a reported Q1 cash outlay of that amount.
Outlook, risks and unusual items
- Outlook: No numerical earnings or revenue guidance was provided. Management expected continued net liquidation of credit-card and auto receivables, declining credit-product fee income, and gradual reductions in fair-value gains and related financing effects, absent acquisitions or material valuation changes. It expected relatively stable, low-double-digit credit-card managed net interest margin and continued opportunities, though competitive, in charged-off receivables.
- Liquidity and debt: Management anticipated that holders would require repurchase in May 2012 of $83.9 million face amount of 3.625% convertible notes, and expected to fund it from unrestricted cash. The company said it had no material general-purpose unused debt capacity; the $35 million charged-off-receivables facility was restricted to that segment. The CAR facility has financial and collateral-performance covenants that could trigger early repayment.
- Operating pressures: Management cited constrained subprime funding, weak economic and employment conditions, declining portfolios, and difficulty cutting fixed overhead as risks to liquidity and profitability. Credit Cards and Other Investments cash inflows covered direct variable costs and only part of allocated overhead, according to management.
- Credit and valuation: Managed credit-card delinquency improved, but Q1 charge-off ratios were elevated by a sale of £27.8 million ($44.0 million) of late-stage delinquent U.K. receivables, treated as charged off in managed statistics. Fair-value assets and related debt rely heavily on Level 3, unobservable inputs.
- Auto Finance and other unusual items: Auto Finance recognized a $1.2 million impairment related to unfavorable terms on a former office sublease; management also cited nonrecurring JRAS collection costs. ACC contingent interest expense increased, with an accrued liability of $3.5 million at quarter-end.
- Legal, tax and other contingencies: A North Carolina class action concerning former retail micro-loan operations was certified, and the court denied arbitration; the company said it was vigorously defending the case. A separate Aspire card class action was ordered to individual arbitration. On April 25, 2012, the Eleventh Circuit reversed denial of a motion to dismiss a noteholder lawsuit and remanded for dismissal. The company also disclosed IRS disputes over prior-year net operating loss carrybacks and $59.7 million of income tax liability. A potential $14.0 million contract termination penalty for its U.S. processing relationship was disclosed.
- Controls: Management concluded disclosure controls were effective at quarter-end and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether and how the $83.9 million convertible-note put was satisfied in May 2012, and the resulting cash and debt balances.
- Subsequent-quarter unrestricted cash, segment-level liquidity and compliance with CAR and other facility covenants.
- Actual collections and losses versus the Level 3 fair-value assumptions, including the expected collections on $36.8 million of charged-off-receivables investments; management estimated $186.9 million of remaining collections before servicing costs.
- Progress in reducing overhead and whether continued portfolio runoff creates further operating losses or liquidity pressure.
- Developments in the North Carolina litigation, IRS disputes and other contingencies, including any required payments or changes to business practices.
- Clarification of the share counts: the filing reported 23.7 million shares issued and outstanding at March 31, including 1.7 million loaned shares to be returned; it reported 22.0 million common shares outstanding as of April 30, excluding those loaned shares.