CompuCredit Holdings Corporation (now Atlanticus Holdings Corp.) — Q2 2012 Form 10-Q
Period: Quarter and six months ended June 30, 2012. Financial statement amounts are in U.S. dollars; amounts below are in millions unless stated otherwise. The filing reports the company as CompuCredit Holdings Corporation.
Business context and reporting period
The company served financially underserved, sub-prime consumers through credit card, charged-off receivables and auto finance activities. Most credit card accounts were closed and portfolios were running off; management cited limited growth funding and was reducing overhead. The 2011 comparison includes discontinued micro-loan operations, including a substantial sale gain, so reported net income is not directly comparable.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total interest income | $24.1 | $39.3 | $50.4 | $82.3 |
| Net interest income, fees and related income on earning assets | $21.4 | $24.2 | $42.6 | $60.8 |
| Loss from continuing operations before tax | $(5.4) | $(2.8) | $(9.5) | Income of $20.6 |
| Net loss attributable to controlling interests | $(5.7) | Income of $100.8 | $(10.2) | Income of $129.2 |
| Operating cash flow | Not separately stated | Not separately stated | $30.8 | $58.1 |
The 2011 six-month results included $111.0 million of net income from discontinued operations; $103.7 million was a gain on sale of assets. No discontinued-operation income was reported in 2012. GAAP operating margins are not separately presented.
At June 30, 2012, unrestricted cash was $51.3 million and restricted cash was $18.0 million, versus unrestricted cash of $144.9 million at December 31, 2011. Total assets were $495.3 million, down from $647.9 million; total liabilities were $429.1 million, down from $571.6 million; and total equity was $66.2 million, down from $76.3 million.
Debt included $95.1 million carrying value of convertible senior notes, $182.8 million of structured-financing notes at fair value, $9.7 million of structured-financing notes at face value, and $38.6 million of other notes payable at face value. In May 2012, the company repaid $83.5 million face amount of its 3.625% convertible notes after holders exercised put rights. The company reported $30.8 million of operating cash flow, $45.0 million of investing cash flow and $169.4 million used in financing during the first half; unrestricted cash declined $93.6 million.
Changes versus the prior comparable period
- Q2 interest income fell $15.2 million year over year, which management attributed mainly to shrinking credit card and auto receivables. Q2 net loss from continuing operations attributable to controlling interests widened to $5.7 million from $3.7 million.
- First-half continuing operations shifted from $19.5 million of attributable income to a $10.2 million loss. Lower fair-value gains on receivables and lower equity-method income were among the significant year-over-year changes.
- First-half operating cash flow fell $27.3 million. Management cited lower collections from smaller portfolios and the absence of cash flows from businesses sold in 2011.
- Managed credit card receivables declined to $356.9 million at June 30, 2012, from $613.7 million a year earlier. Auto finance managed receivables fell to $72.9 million from $113.3 million.
Outlook, commentary, risks and unusual items
- Management expected interest income and receivables to continue declining absent portfolio acquisitions. It anticipated relatively stable, low-double-digit credit-card net interest margins and said CAR auto-finance operations were performing profitably, while legacy ACC and JRAS portfolios continued to run off.
- Management emphasized liquidity monitoring, cost reduction and the possibility of further pressure on liquidity and profitability if overhead could not be reduced or new revenue sources developed. It could not predict whether or when financing markets would normalize.
- On August 3, 2012, after quarter-end, the company sold its Investments in Previously Charged-Off Receivables segment, including balance-transfer card operations, for stated consideration of $130.5 million: $106.7 million cash and a $13.0 million note at closing, with $5.4 million held in escrow and up to $10.8 million of contingent cash consideration tied to performance targets. The filing said the transaction generated more than $90 million of additional net cash after quarter-end. The contingent amount would be recognized upon achievement of targets.
- Fair-value estimates for loans and related structured debt depend on significant unobservable assumptions, including collections, payment rates, credit losses, servicing costs and discount rates; changes can materially affect reported earnings. Management also noted uncertainty in asset values and potential further impairment.
- Risks include sub-prime credit and economic deterioration, constrained funding, regulation and litigation, dependence on issuing-bank and service-provider relationships, tax audits and uncertain tax positions, and risks associated with a consolidated coal-mining investment. A North Carolina class action involving the former retail micro-loan business remained pending; the court had certified a class and denied a motion to compel arbitration. Potential damages were stated as up to $75,000 per class member, plus attorneys’ fees.
- The company reported $60.2 million of income tax liability. It said IRS audits include disputes concerning carryback claims for 2007 and 2008 net operating losses; ultimate resolution could differ from recorded liabilities. Disclosure controls were concluded effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Post-quarter sale proceeds actually received, the escrow release, and whether the contingent $10.8 million consideration is earned.
- Liquidity available at the parent and subsidiaries after the sale, and the impact of continued receivables runoff and debt repayments.
- Performance and covenant status of the CAR facility, which matures in October 2014, and the company’s plan for its remaining convertible notes.
- Assumptions supporting Level 3 fair values, credit-loss allowances and expected cash collections.
- Developments in the North Carolina class action, tax audits and other regulatory or legal matters.
- Whether cost reductions and continuing businesses can offset shrinking credit-card and auto-finance portfolios; the filing provides no quantitative earnings guidance.