Atlanticus Holdings Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated financial statements. Amounts below are in millions unless stated otherwise. Atlanticus provides financial products and servicing primarily to subprime consumers through its Credit and Other Investments and Auto Finance segments.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total interest income | $20.2 | $19.9 |
| Net interest income before fees and loan-loss provision | $14.0 | $14.2 |
| Fees and related income on earning assets | $32.9 | $6.8 |
| Provision for losses on loans at net realizable value | $7.9 | $3.3 |
| Other operating expense | $50.9 | $23.5 |
| Net loss attributable to controlling interests | $11.2; $0.79 per share | $3.0; $0.22 per share |
| Net cash used in operating activities | $13.5 | $6.7 |
Fee income included $21.9 million of rental revenue, reflecting the expansion of rent-to-own activity, and $4.7 million of fair-value gains on receivables, partly offset by a $1.2 million fair-value loss on structured-financing notes. The filing cautions that fair-value results can be volatile. Depreciation was $25.7 million, including $25.0 million on rental merchandise.
Balance sheet and debt: Total assets were $337.9 million, down from $352.2 million at year-end 2013. Total liabilities were $347.5 million and total equity was negative $9.6 million. Unrestricted cash was $47.1 million and restricted cash $23.5 million. Debt carrying amounts included $66.9 million of notes payable at face value, $85.8 million of structured-financing notes at fair value, and $96.1 million of convertible senior notes. Net loans and fees receivable were $92.1 million; rental merchandise was $22.1 million.
Cash declined $3.7 million during the quarter. Operating cash use of $13.5 million was partly offset by $11.0 million of investing cash inflow; financing activities used $1.3 million. The filing does not provide a clear consolidated margin measure.
Material changes versus the prior comparable period
- Net loss attributable to controlling interests widened to $11.2 million from $3.0 million. Rental revenue added $21.9 million, but associated depreciation and higher servicing costs substantially increased expenses.
- Provision for losses on loans at net realizable value rose to $7.9 million from $3.3 million, which management attributed mainly to growth and initial losses in new products, with some effect from U.K. credit-card testing.
- Managed receivables in Credit and Other Investments were $215.2 million at quarter-end, down from $263.3 million a year earlier. Delinquency of 30 or more days was 12.0%, versus 9.4%; the 90-or-more-day rate was 6.7%, versus 4.9%.
- Auto Finance managed receivables were $59.4 million, roughly level with $60.4 million a year earlier. The 30-or-more-day delinquency rate was 11.0%, versus 10.0%.
- Notes payable at face value increased to $66.9 million from $56.7 million at December 31, 2013, while structured-financing notes at fair value declined to $85.8 million from $94.5 million.
Outlook, risks, contingencies, and unusual items
- Management expects point-of-sale finance to be a key growth driver, but a significant retail partner’s product shift suspended new installment-loan and rent-to-own originations late in Q1. The interruption was expected to continue into Q2, slowing growth and potentially causing further contraction in earning assets.
- The company anticipates higher loan-loss provisions as new point-of-sale receivables grow, and slightly higher quarterly interest expense as additional financing is obtained. It expects continued rent-to-own growth over time, but slower growth in Q2; no specific earnings or revenue guidance was provided.
- Management identified cost containment and access to funding as key challenges. It warned that legacy infrastructure costs may continue to pressure profitability if new products do not generate sufficient revenue and cash flow.
- Income tax liability was $57.1 million, substantially related to uncertain tax positions. Management said resolution may be years away but could require a significant payment; the recorded amount may ultimately prove insufficient or excessive.
- Unfunded commitments included $74.9 million under point-of-sale products, $9.3 million in auto floor-plan financing, and £1.8 million (about $3.0 million) of U.K. card commitments. Early termination of the Total System Services agreement could trigger a $6.2 million penalty. The company reported no pending material legal proceedings.
- Structured financings are non-recourse to the company beyond the pledged receivables and restricted cash; the company estimated maximum aggregate pretax equity-loss exposure of $0.4 million on the disclosed facilities. Certain revolving and other facilities have covenants that could require early repayment if breached.
- Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting. The board authorized a plan on May 9, 2014 to repurchase up to 5 million shares through June 30, 2016.
Key facts for investors to verify
- Whether the retail-partner interruption ended as expected and how quickly point-of-sale originations, managed receivables, and rental revenue recovered.
- Whether rental economics improve: Q1 included $21.9 million of rental revenue and $25.0 million of rental-merchandise depreciation, with management noting early payoffs and disrupted originations.
- Credit performance of growing point-of-sale and U.K. products, including delinquency trends, charge-offs, and the adequacy of loan-loss allowances.
- Funding availability, covenant compliance, and repayment or extension of facilities; the company amended certain revolving-facility expiration dates on May 15, 2014.
- Potential cash requirements from the $57.1 million uncertain-tax-position liability and the status of the related tax audits.
- The sustainability of earnings given the quarter’s material fair-value effects and income from equity-method investees, which can vary with estimates and portfolio performance.