Atlanticus Holdings Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; balance-sheet comparisons are to December 31, 2013. Amounts are in U.S. dollars.
Business context
Atlanticus provides credit and related financial products mainly to financially underserved, subprime consumers. Its two reportable segments are Credit and Other Investments, including point-of-sale lending and rent-to-own, and Auto Finance. Legacy U.S. credit-card accounts are largely closed and portfolios are generally running off. Management is seeking growth in point-of-sale products and CAR auto-finance operations.
Financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total interest income | $18.5m | $18.0m | $56.2m | $54.7m |
| Fees and related income on earning assets | $20.7m | $18.4m | $75.8m | $35.4m |
| Net loss attributable to controlling interests | $5.8m | $8.9m | $28.2m | $21.7m |
| Basic and diluted loss per share | $0.42 | $0.65 | $2.01 | $1.58 |
- Q3 pre-tax loss was $4.9m versus $7.4m a year earlier. For the nine months, pre-tax loss widened to $24.5m from $19.3m.
- Reported operating expenses were $33.7m in Q3 and $124.2m for nine months, including depreciation of $11.3m and $53.6m, respectively. Rent-to-own merchandise depreciation was $10.3m in Q3 and $51.1m year to date.
- Q3 segment pre-tax results: Credit and Other Investments lost $6.2m; Auto Finance earned $1.3m. For nine months, the segments lost $28.0m and earned $3.5m, respectively.
- Credit and Other Investments managed receivables were $186.6m at quarter-end, down from $248.6m a year earlier. Its Q3 total-yield ratio was 42.6%; combined gross and adjusted charge-off ratios were 21.4% and 17.7%. The 90-or-more-days-past-due rate was 5.8%, versus 5.2% a year earlier.
- Auto Finance managed receivables were $68.1m, versus $59.2m a year earlier. Its Q3 total-yield ratio was 39.2% and gross charge-off ratio was 2.2%; 90-or-more-days-past-due was 2.7%, versus 1.6% a year earlier.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was negative $18.6m; investing cash flow was positive $25.6m; financing cash flow was negative $19.4m. Unrestricted cash fell $12.7m to $38.2m. Restricted cash was $22.9m.
- Total assets were $302.4m and total liabilities $328.8m at September 30, compared with $352.2m and $351.1m at year-end 2013. Total equity was negative $26.4m, versus positive $1.2m.
- Reported debt included $71.3m of notes payable at face value, $69.7m of structured-financing notes carried at fair value, and $96.4m carrying value of convertible senior notes. The $58.7m income-tax liability primarily relates to uncertain tax positions.
- For the first nine months, the company used $18.6m of operating cash, compared with $20.2m in 2013. Cash provided by investing activities fell to $25.6m from $42.5m, while financing cash used was $19.4m versus $30.8m.
Changes, outlook and risks
- Q3 net loss improved year over year, principally alongside higher rental revenue and lower net loss provisions; nine-month net loss worsened. Year-to-date fees and related income rose substantially, chiefly reflecting rent-to-own revenue, while the associated depreciation expense increased sharply.
- A major retail partner’s product shift suspended or reduced new originations from late Q1 into Q2. Management reported subsequent monthly growth but expected originations with that partner to remain below historical levels. It also cited the need for new retail partners, capital for growth, and cost containment.
- Management expected point-of-sale growth to support revenue and anticipated further financing as the business expanded. It expected higher future credit-loss provisions as new receivables grow and season, and warned that fixed overhead not covered by current Credit and Other Investments cash inflows could prolong profitability pressure.
- A tentative IRS settlement was awaiting Joint Committee on Taxation review. If approved, it could release a material amount of recorded tax liabilities; no benefit had been recorded. Management also disclosed a preliminary U.K. HMRC review of VAT claims: $1.5m of receivables could be delayed or challenged, with potential adverse financial impact.
- In November 2014, the company agreed, subject to financing and other conditions, to buy $44.6m principal amount of 5.875% convertible notes for $18.5m plus accrued interest, with retirement planned upon acquisition. In July, it had repurchased $80.0m principal amount of those notes for $25.2m.
- Other notable exposures include $9.1m in unfunded auto floor-plan commitments, $102.7m in point-of-sale credit commitments, and a $4.2m potential early-termination penalty under its processing-services agreement. Management said litigation was not material and no material legal proceedings were pending.
- Principal risks include subprime credit performance, dependence on financing and retail partners, regulation, uncertain tax positions, fair-value estimation, and limited operating history in point-of-sale and rent-to-own products. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track originations, receivables growth, partner concentration and the effect of the retail partner’s product shift on point-of-sale performance.
- Assess rent-to-own unit economics, including rental revenue, merchandise depreciation, early payoffs and impairment trends.
- Monitor delinquencies, charge-offs, provisions and the seasoning of newer, higher-risk receivables in both segments.
- Confirm the outcome and timing of the IRS settlement and HMRC VAT review, including any cash or earnings effects.
- Review liquidity, refinancing needs, debt covenants and the conditions and funding for the proposed November note purchase; consider the negative equity position and cash burn.
- Evaluate the sensitivity of reported income and asset values to Level 3 fair-value assumptions and collections forecasts.