Business context and reporting period
Atlanticus Holdings Corporation (formerly CompuCredit Holdings Corporation; ticker changed from CCRT to ATLC in December 2012) filed this Form 10-K for the fiscal year ended December 31, 2012, with 2011 comparisons. The company provides credit and related services primarily to sub-prime consumers. Continuing operations are reported in Credit Cards and Other Investments and Auto Finance. Most U.S. card accounts had been closed since 2009; U.K. card accounts remained open, and the company was developing private-label merchant credit and servicing activities.
The filing presents annual results, not a standalone fourth-quarter income statement. Fourth-quarter portfolio indicators are included below where relevant.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Total interest income | $86.8 million | $145.5 million |
| Interest expense | $31.1 million | $43.8 million |
| Fees and related income on earning assets | $68.2 million | $94.6 million |
| Continuing operations, pretax | Loss of $43.8 million | Loss of $2.0 million |
| Continuing operations, after tax | Loss of $28.2 million | Loss of $1.1 million |
| Discontinued operations, net | Income of $52.4 million | Income of $136.1 million |
| Net income attributable to controlling interests | $24.5 million | $134.0 million |
| Cash flow from operations | $32.9 million | $83.8 million |
Reported 2012 net income depended on discontinued operations: continuing operations lost $28.2 million after tax. The 2012 discontinued-operations result included a $57.3 million gain on the sale of the Investments in Previously Charged-Off Receivables business. Interest income fell with liquidating receivables; interest expense also declined as related debt was repaid.
Liquidity and balance sheet: At December 31, 2012, unrestricted cash was $67.9 million, down from $144.9 million a year earlier; restricted cash was $12.9 million. Cash from investing activities was $199.3 million, including portfolio collections and sale proceeds; financing activities used $309.4 million, principally for debt repayments and the $82.5 million share tender. Total assets were $380.4 million versus $647.9 million; total liabilities were $361.2 million versus $571.6 million; total equity was $19.2 million versus $76.3 million.
Debt included $140.1 million of structured-financing notes carried at fair value, $4.1 million of other asset-backed structured-financing notes, $22.7 million of other notes payable, and convertible senior notes with a $95.3 million net carrying value. The company said its main remaining refinancing exposures were the CAR facility, due October 2014, and 5.875% convertible notes due 2035. It reported compliance with debt covenants at year-end. Amounts use different accounting bases and should not be treated as a single face-value debt total.
Margins and credit indicators: Fourth-quarter 2012 managed credit-card receivables were $294.2 million, down from $480.4 million in fourth-quarter 2011; the 30-or-more-days-past-due rate was 10.0% versus 13.0%, and net charge-off ratio was 14.4% versus 15.2%. Credit-card net interest margin was 12.3% versus 12.6%. Auto Finance managed receivables were $64.2 million versus $87.8 million; its 30-or-more-days-past-due rate rose to 14.0% from 12.8%, while its adjusted charge-off ratio improved to 5.9% from 8.3%. These are managed-portfolio measures, not GAAP consolidated margins.
Continuing-operations segment pretax results were a $46.7 million loss for Credit Cards and Other Investments and $2.8 million income for Auto Finance. The filing does not provide a clear consolidated revenue figure comparable to a conventional operating-company revenue measure; its income statement separates interest income, fair-value changes, credit losses, servicing income, and other items.
Material changes, outlook, and risks
- In August 2012, Atlanticus sold its charged-off receivables and balance-transfer card operations for $130.5 million in fixed and contingent consideration. It received $10.8 million of contingent cash in the fourth quarter; $10.0 million was held in escrow for indemnification. The reported gain was $57.3 million.
- In September 2012, the company repurchased 8.25 million shares for $82.5 million ($10 per share). In May, it repaid $83.5 million face amount of 3.625% convertible notes; $0.45 million remained outstanding at year-end. The 2012 tender included substantial purchases from executives, directors, and a 10% shareholder.
- A lender paid Atlanticus $10.0 million in the fourth quarter to compensate for excess portfolio-servicing costs. Management said this was not expected to be a recurring material servicing-income source in 2013. Continuing-operations results also included a $5.5 million write-down of non-marketable securities; the company reported no material securities holdings at year-end. A small Alabama coal-mining operation ceased operations and substantially all of the investment was written off.
- Management expected ongoing liquidations to reduce interest income and card receivables absent acquisitions. It viewed U.K. card origination and private-label merchant credit as potential growth avenues, but said new-product loss provisions could rise with receivables growth. CAR was described as consistently profitable; planned modest 2013 expansion was expected to add start-up costs. Management cautioned that available growth capital, liquidity, and financing terms could constrain these plans.
- Key risks include regulatory action affecting products or issuing-bank relationships, sub-prime credit losses and fair-value estimation uncertainty, declining receivables and cash generation, funding availability, litigation, foreign-exchange exposure, and the company’s ability to reduce overhead as portfolios contract. The Knox class action concerning former retail micro-loan operations was certified; plaintiffs seek up to $75,000 per class member plus attorneys’ fees. The company said it was vigorously defending the case; the filing does not provide a clear quantified loss estimate for it.
- Tax uncertainty is material: the balance sheet reported a $60.4 million income-tax liability, and IRS audits include 2007–2008 net-operating-loss carrybacks. The company also disclosed $54.6 million of unrecognized tax benefits and a $56.0 million valuation allowance against deferred tax assets. Management said ultimate audit resolution could affect earnings and liquidity.
Most important facts an investor should verify
- How much of 2012 reported profit came from discontinued operations and the $57.3 million sale gain, versus sustainable continuing-operations performance.
- The composition, availability, and subsidiary-level location of the $67.9 million unrestricted cash balance, alongside scheduled debt obligations and the CAR facility’s October 2014 maturity.
- Whether U.K. card and private-label merchant credit growth can offset continued contraction in legacy receivables without materially worsening credit losses or funding needs.
- The assumptions behind Level 3 fair values for card receivables and structured-financing debt, and the sensitivity of earnings and equity to collections, defaults, and discount rates.
- Developments in the Knox litigation, IRS audits and tax positions, and the company’s related-party tender purchases and other disclosed related-party dealings.