Credit Acceptance Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Credit Acceptance provides financing through automobile dealers, primarily to consumers with impaired or limited credit histories. The company said COVID-19 disrupted operations and contributed to filing after the original due date.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior year-end |
|---|---|---|
| Total revenue | $389.1 million | $353.8 million; up 10.0% |
| Finance charges | $361.9 million | $321.9 million; up 12.4% |
| Provision for credit losses | $354.7 million | $14.5 million |
| Income (loss) before tax | $(112.8) million | $206.3 million |
| Net income (loss) | $(83.8) million | $164.4 million |
| Diluted earnings (loss) per share | $(4.61) | $8.65 |
| Operating cash flow | $231.3 million | $229.7 million |
| Cash and cash equivalents | $25.7 million | $187.4 million at Dec. 31, 2019 |
| Total debt, carrying amount | $4,837.8 million | $4,538.8 million at Dec. 31, 2019 |
- Net loss margin was approximately 21.5%, versus net income margin of approximately 46.5% in Q1 2019. The change principally reflects the much higher credit-loss provision, not a decline in reported revenue.
- Interest expense rose 15.3% to $51.9 million; the average cost of debt was 4.5%, unchanged year over year. The average debt balance increased to $4,625.7 million from $4,019.5 million.
- Cash flows were $296.3 million used in investing activities and $18.9 million used in financing activities. Cash plus restricted cash ended at $433.8 million, down from $517.7 million at year-end.
- Unused and available lines of credit were $1,085.1 million. Funded debt to equity was 2.5-to-1. The company reported compliance with its debt covenants.
- Net loans receivable were $6,618.5 million, compared with $6,685.2 million at year-end; the gross loan balance increased substantially following CECL adoption, with a corresponding allowance.
Material changes and unusual items
- CECL adoption: Effective January 1, 2020, the new expected-credit-loss accounting standard increased gross loans and the allowance by $2,463.6 million, with no initial effect on net loans or net income. It changes the timing of income recognition and requires a provision on new assignments.
- Of the $354.7 million Q1 credit-loss provision, $157.9 million related to new assignments under CECL and $196.8 million to forecast changes. The new-assignment provision reduced net income by $121.6 million, or $6.69 per diluted share.
- The company reduced forecast future net cash flows by $206.5 million, including a $162.2 million subjective estimate of COVID-19’s future impact and $44.3 million from its forecasting model. The forecast adjustment reduced net income by $151.5 million, or $8.33 per diluted share. Management said pandemic conditions made future collections difficult to forecast confidently.
- Revenue growth reflected a higher average net loan balance; average portfolio yield edged down to 21.7% from 21.8%. Operating expenses declined 2.8% to $79.1 million.
- Consumer Loan assignment unit volume fell 10.1% and dollar volume fell 4.5% year over year. Active dealers increased 2.2%, but average volume per active dealer declined 12.0%. Purchased Loans increased to 35.1% of unit volume from 32.6% a year earlier.
- The company repurchased 725,220 shares for $307.1 million during the quarter. It redeemed the remaining $151.8 million of 2021 notes in January and $250.0 million of 2023 notes in March, recording a $7.4 million debt-extinguishment loss. It also completed a $500 million asset-backed financing in February.
Outlook, management commentary and risks
- No specific earnings or operating guidance was provided. Management expects 2020 net income under CECL to be significantly lower than it would have been under the prior accounting method, with the largest accounting effect in the adoption quarter; the ultimate impact depends on loan volume, portfolio mix, credit quality and economic conditions.
- COVID-19 caused a substantial fall in loan demand and collections beginning in mid-March, alongside dealer closures, suspended repossessions and consumer payment pressure. Management reported that collections and new loan volumes improved from mid-April, with stimulus payments cited as one contributing factor; May month-to-date unit volume was reported up 21.8% year over year through May 26.
- Management cited sufficient expected operating cash flow and financing alternatives to meet maturities and fund operations, but warned that restricted or unavailable capital-market funding could materially harm liquidity. Scheduled principal maturities were $1,076.9 million for the remainder of 2020 and $1,049.6 million in 2021.
- Key risks include collection forecast errors, worsening consumer credit and economic conditions, access to funding, substantial debt and covenant restrictions, interest-rate and LIBOR-transition exposure, competition, and COVID-related operational and liquidity disruption.
- Regulatory and legal matters include inquiries by the New York, Maryland, Mississippi and Massachusetts attorneys general, the Consumer Financial Protection Bureau and the U.S. Department of Justice. The company said it could not estimate reasonably possible losses for the described matters; an adverse outcome could materially affect results, liquidity or financial position.
Important facts for investors to verify
- How actual loan collections, delinquencies and assignment volumes compare with management’s COVID-19 assumptions, particularly the $162.2 million subjective forecast adjustment.
- How CECL provisions and subsequent finance-charge recognition affect quarterly and full-year earnings, separately from underlying cash economics.
- Available borrowing capacity, asset-backed funding access, debt maturities and covenant compliance as economic and capital-market conditions evolve.
- Developments and potential financial consequences of the ongoing regulatory investigations and litigation.
- The scale and timing of share repurchases relative to liquidity needs and the substantial Q1 loss.