Atlanticus Holdings Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; unaudited. Unless stated otherwise, financial amounts are in millions of dollars. Atlanticus provides technology and servicing to consumer lenders and invests in receivables, primarily in point-of-sale and direct-to-consumer credit, alongside its auto-finance business.
Financial results and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total interest income | $41.95 | $29.02 | $115.46 | $81.64 |
| Interest expense | $9.28 | $7.27 | $26.24 | $19.50 |
| Net interest income before fees and loan-loss provision | $32.67 | $21.75 | $89.22 | $62.13 |
| Fees and related income on earning assets | $9.54 | $4.17 | $22.84 | $10.94 |
| Loan-loss provision on receivables at net realizable value | $32.80 | $24.09 | $65.27 | $50.48 |
| Net loss attributable to controlling interests | $(16.09) | $(14.47) | $(15.13) | $(22.52) |
| Basic and diluted loss per share | $(1.16) | $(1.04) | $(1.09) | $(1.61) |
At September 30, total assets were $461.0 million, including $29.3 million unrestricted cash and $30.1 million restricted cash. Net loans and fees receivable were $379.1 million; gross receivables were $480.9 million, with a $68.3 million allowance and $40.6 million deferred revenue. Total liabilities were $508.7 million and total equity was negative $47.7 million. Notes payable at face value were $293.3 million, related-party notes were $40.0 million, fair-value structured-financing notes were $6.2 million, and convertible senior notes had a $62.0 million carrying value.
For the first nine months, operating cash flow was negative $1.7 million, investing cash flow negative $75.3 million, and financing cash flow positive $65.2 million. Cash and cash equivalents, including restricted cash, ended at $59.4 million, down from $70.7 million at year-end 2017. The filing does not present a conventional consolidated operating-margin measure.
Changes versus comparable periods
- Q3 interest income rose 45% year over year, reflecting growth in point-of-sale and direct-to-consumer receivables. Those receivables increased to $395.6 million from $284.9 million a year earlier; total managed receivables in Credit and Other Investments reached $406.1 million.
- Despite higher income, Q3 controlling-interest loss widened to $16.1 million from $14.5 million. The provision for loan losses increased by $8.7 million, and total other operating expenses rose to $24.7 million from $20.5 million.
- Nine-month controlling-interest loss improved to $15.1 million from $22.5 million, but included a $4.7 million income-tax benefit. Management attributed the higher provision primarily to growth and maturation of newer receivables, rather than solely to deterioration in credit quality.
- Credit and Other Investments reported a Q3 pretax loss of $19.1 million, while Auto Finance reported pretax income of $3.0 million. For nine months, the respective results were a $28.3 million loss and $8.3 million income.
- Credit and Other Investments managed receivables grew, but 30-, 60- and 90-day delinquency rates were 12.7%, 9.3% and 6.4%, respectively, versus 12.1%, 8.3% and 5.5% a year earlier. Direct-to-consumer delinquencies were notably higher year over year.
Outlook, risks and unusual items
- Management expected receivables and interest income to grow through the remainder of 2018 and into early 2019, subject to new retail partners, existing-partner growth, direct-to-consumer marketing and funding availability. It anticipated elevated charge-offs as newer, higher-yielding vintages matured, and expected additional debt financing and higher interest expense with portfolio growth.
- Management said fixed infrastructure costs remained high and that Credit and Other Investments cash inflows covered direct variable costs and only part of allocated overhead. Failure to grow revenues or contain overhead could continue to pressure consistent profitability. No specific earnings or margin guidance was provided.
- In November 2018, after quarter-end, Atlanticus issued $167.3 million of asset-backed securities secured by retail point-of-sale receivables. The two-year revolving structure has a subsequent 18-month amortization period and a 5.76% weighted-average interest rate. Proceeds partly paid down existing point-of-sale facilities; remaining proceeds were available for receivable purchases.
- A $40 million related-party secured term loan at 9% was due November 21, 2018. The filing describes it as fully outstanding at September 30 and does not state in the supplied text how it was repaid, refinanced or extended.
- The IRS settled a dispute over prior-year tax losses in June 2018, reducing a $7.4 million assessment to $3.7 million. Atlanticus paid $5.4 million in July and received a $0.5 million refund; accrued interest and failure-to-pay penalties remained, and the company was seeking penalty abatement and removal of an IRS lien.
- Credit risk is concentrated in financially underserved/subprime borrowers, and the five largest retail partners represented over 54% of Q3 point-of-sale receivables purchased. Financing availability, partner and bank relationships, regulatory actions, litigation, economic conditions, valuation assumptions and consumer credit performance are key risks. The company also disclosed $563.7 million of unused consumer credit commitments and $8.4 million of unused auto floor-plan commitments, which it said it could reduce or cancel in relevant cases.
Key facts for investors to verify
- Performance and loss emergence of recent point-of-sale and direct-to-consumer loan vintages, including subsequent delinquency, charge-off and allowance trends.
- Repayment or refinancing of the $40 million related-party loan due November 21, 2018, and the use and ongoing cost of the November ABS proceeds.
- Liquidity, covenant compliance and refinancing capacity across secured facilities, including facilities with 2019–2020 maturities.
- Progress toward covering fixed overhead and achieving sustained profitability, given the continuing consolidated losses and negative equity.
- Resolution of remaining IRS interest, penalties and lien matters, and sensitivity of fair-value earnings to credit, payment-rate and discount-rate assumptions.