Credit Acceptance Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Dollars are in millions except per-share data. Credit Acceptance provides financing through automobile dealers, principally to consumers with impaired or limited credit histories.
Financial results and key metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $426.5 | $378.7 | $1,221.9 | $1,103.1 |
| Net income | $242.1 | $165.4 | $254.7 | $494.2 |
| Diluted EPS | $13.56 | $8.73 | $14.17 | $26.06 |
| Provision for credit losses | $(29.8), a reversal | $19.3 | $464.3 | $49.2 |
| Interest expense | $46.8 | $50.4 | $146.9 | $145.2 |
- Q3 revenue rose 12.6% and net income rose 46.4% year over year. Nine-month revenue rose 10.8%, while net income fell 48.5%.
- Q3 net income margin was approximately 56.8%, compared with 43.7% in Q3 2019; the nine-month margin was approximately 20.8%, versus 44.8% in 2019. These comparisons are materially affected by the CECL accounting change.
- Finance charges increased 15.6% in Q3 and 12.9% for the nine-month period. Management attributed the increases to larger average net loan balances and higher reported portfolio yields; CECL increases reported yields on newer loans.
- Other income fell 56.0% in Q3 and 31.8% for the nine months, reflecting lower ancillary product profit sharing, fewer repossession-related remarketing fees, and lower interest income.
- Operating cash flow was $783.0 for the first nine months, versus $608.0 in 2019. Investing activities used $658.0; financing activities used $241.9. Cash and restricted cash together were $400.8 at September 30.
- Loans receivable, net, were $6,865.2, compared with $6,685.2 at year-end 2019. The allowance for credit losses was $3,310.9, up from $536.0, principally reflecting CECL adoption and its required gross-up.
- Total debt carrying amount was $4,619.3, compared with $4,538.8 at December 31, 2019. Shareholders’ equity was $2,308.5, down from $2,355.3. Funded debt to equity was 2.0 to 1.
Material changes and operating trends
- CECL was adopted January 1, 2020. It increased both loans receivable and the allowance by $2,463.6 at adoption, with no initial effect on net carrying value or income. CECL changes the timing of reported loan income: Credit Acceptance records an initial credit-loss provision on new assignments and recognizes higher finance-charge revenue later.
- New-assignment CECL provisions were $114.1 in Q3 and $426.2 for the first nine months. Management said these provisions reduced nine-month net income by $328.2, or $18.26 per diluted share, compared with the prior accounting method. Management expected 2020 net income to be significantly lower under CECL than under the previous method.
- Q3 forecast changes produced a $143.9 reversal of provision, reflecting improved estimated future net cash flows. For the nine months, forecast changes resulted in $38.1 of provision. Separately, the company had reduced its estimated portfolio future net cash flows by $206.5 in Q1, including a $162.2 estimate of COVID-19 effects; that adjustment remained in its forecasts through Q3.
- Q3 Consumer Loan assignment unit volume fell 8.8% and dollar volume fell 4.7% year over year. Active Dealers declined 6.5%. The company reported a further reduction in demand beginning in late July, following an improvement in volumes during the late spring and early summer.
- During the first nine months, the company repurchased 725,220 shares for $307.1. No shares were repurchased in Q3. At September 30, authorization remained for 3,059,556 additional shares.
Outlook, liquidity, risks and contingencies
- Management gave no specific earnings or volume guidance. It said anticipated operating cash flows and financing alternatives were expected to provide sufficient funding for debt maturities and operations, while warning that reduced access to financing could materially harm liquidity and operations.
- COVID-19 effects remained uncertain. Collections and assignments improved after the initial spring disruption, but demand weakened again from late July into October. Management cited uncertainty around the pandemic, economic activity, consumer behavior, federal stimulus and enhanced unemployment benefits.
- Unrestricted cash was $8.9 at September 30; unused and available lines of credit were $1,139.3. The company also reported $391.9 of restricted cash, which is not generally available for ordinary corporate use. It reported compliance with debt covenants; certain covenant calculations were amended for periods through December 31, 2020 to use the pre-CECL accounting basis.
- Debt includes secured warehouse and asset-backed financings as well as senior notes. Scheduled principal maturities totaled $4,644.3, with $1,111.6 due in 2021 and $1,686.0 in 2022, based partly on forecast collections. A $600.0 Term ABS financing completed October 22, 2020 was used to repay outstanding indebtedness and had an expected annualized cost of approximately 1.8%.
- Significant legal and regulatory matters include investigations or proceedings involving state authorities, the Consumer Financial Protection Bureau and the U.S. Department of Justice, as well as lawsuits in Mississippi and Massachusetts. A shareholder securities class action was filed October 2, 2020. The company said it could not estimate reasonably possible losses for the described matters and intends to defend certain lawsuits vigorously. An adverse outcome could materially affect financial position, liquidity or results.
- Other stated risks include the accuracy of collection forecasts, consumer credit performance, competition, substantial debt and funding access, interest-rate and LIBOR transition risks, regulation, and the effects of the pandemic. The filing reported no material change in market-risk information and no material change in internal control over financial reporting.
Important facts for investors to verify
- How CECL provisions, later-period finance-charge recognition and management’s prior-method comparisons affect interpretation of reported earnings and yields.
- Whether the Q3 improvement in collection forecasts persists, particularly for newer loan cohorts whose expected collections are less seasoned and more uncertain.
- Changes in loan assignment volumes, active Dealers, delinquency performance and repossessions as pandemic-related support measures and economic conditions evolve.
- Availability and cost of financing, borrowing-base capacity, debt maturities and compliance with amended covenants; distinguish restricted cash from available liquidity.
- Developments, potential financial exposure and disclosure updates concerning the shareholder action and state and federal regulatory investigations and litigation.