Atlanticus Holdings Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Dollar amounts are in millions unless stated otherwise.
Business context
Atlanticus provides credit and related services primarily to financially underserved, sub-prime consumers. Its two reportable segments are Credit and Other Investments—including point-of-sale financing, rent-to-own, legacy credit card portfolios and servicing—and Auto Finance, which serves independent used-car dealers and related borrowers.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Interest income | $17.4 | $16.8 | $37.6 | $36.7 |
| Fees and related income on earning assets | $22.2 | $10.2 | $55.1 | $17.0 |
| Net loss attributable to controlling interests | $(11.2) | $(9.8) | $(22.4) | $(12.9) |
| Loss per share, basic and diluted | $(0.80) | $(0.71) | $(1.59) | $(0.93) |
| Operating cash flow | Not presented by quarter | $(14.6) | $(14.2) |
- Q2 net interest income, fees and related income after loan-loss provisions was $26.8 million, compared with $10.1 million a year earlier. The increase included rent-to-own revenue and fair-value-related items.
- Rent-to-own revenue was $14.7 million in Q2 and $36.6 million for the first half; related rental merchandise depreciation was $15.7 million and $40.7 million, respectively. The rental activity therefore weighed on results during the period.
- Total other operating expenses were $39.6 million in Q2 versus $23.3 million in Q2 2013, mainly reflecting rental merchandise depreciation and increased card and loan servicing costs.
- By segment, Q2 pretax loss was $11.7 million in Credit and Other Investments, while Auto Finance generated $1.2 million pretax income. First-half figures were a $21.7 million loss and $2.2 million income, respectively.
- At June 30, assets were $299.3 million, down from $352.2 million at year-end 2013. Unrestricted cash was $32.9 million and restricted cash $19.1 million. Total equity was negative $20.0 million, versus positive $1.2 million at year-end.
- First-half cash flows were $(14.6) million from operations, +$24.6 million from investing and $(28.3) million from financing. Unrestricted cash declined $18.0 million to $32.9 million.
- Reported debt included $53.3 million of notes payable at face value, $75.5 million of structured-financing notes at fair value and $96.3 million of convertible senior notes at carrying value. The convertible notes’ face amount was approximately $139.9 million; the carrying value reflects a substantial discount.
Changes, outlook and risks
- Growth in point-of-sale originations was disrupted late in Q1 and through Q2 when a major retail partner shifted products and suspended some originations. Management said originations were showing consistent monthly growth but expected them to remain below historical levels. The disruption contributed to contraction in earning assets in both Q1 and Q2.
- Management planned to pursue growth in point-of-sale financing and rent-to-own, add retail partners and obtain funding to support growth and infrastructure costs. It expected higher quarterly interest expense as new borrowing supported the business, and anticipated future increases in loan-loss provisions largely from growth in newer products.
- Credit and Other Investments managed receivables were $200.1 million at quarter-end, down from $252.0 million a year earlier. Its 30-days-or-more delinquency rate rose to 11.2% from 9.2%; the 90-days-or-more rate rose to 5.7% from 4.3%. The combined gross charge-off ratio increased to 25.5% from 16.9%.
- Management identified funding availability, cost containment, retail-partner concentration and the ability to grow new products enough to cover fixed overhead as key challenges. It warned that persistent losses could pressure profitability. Estimates of fair value and loan losses depend on significant assumptions, and results may be volatile.
- Near-term risks include $36.7 million of identified revolving facilities, regulatory and consumer-protection requirements, sub-prime credit performance, and uncertain tax positions. The $57.8 million income-tax liability largely relates to uncertain tax positions; resolution could require significant payment.
- After quarter-end, Atlanticus repurchased $80.0 million face amount of 5.875% convertible notes for $25.2 million following a tender offer. It also obtained an additional $14.0 million in point-of-sale-related amortizing facilities in July. The company reported no pending material legal proceedings and said disclosure controls were effective.
Key facts for investors to verify
- Whether point-of-sale originations recover and the company reduces dependence on a small number of retail partners.
- Whether rent-to-own revenue can exceed depreciation and other costs as the portfolio grows.
- Trends in delinquencies, charge-offs, provisions and managed receivables, particularly as newer products mature.
- Availability, terms and covenant capacity of financing, alongside cash needs and the company’s negative equity position.
- Potential tax-payment exposure and the ultimate cost and effect of the convertible-note repurchase on liquidity and debt obligations.
- The sustainability of reported earnings given fair-value estimates, portfolio liquidations and other unusual or non-recurring items.