Credit Acceptance Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. The company provides auto financing through dealers, primarily to consumers with impaired or limited credit histories. It operates the Portfolio Program (dealer advances) and Purchase Program (consumer loans purchased from dealers).
Financial results and key metrics
- Revenue: $194.2 million, up 9.8% from $176.9 million. Finance charges rose 11.2% to $169.9 million; premiums earned fell 8.3% to $12.1 million; other income rose 11.9% to $12.2 million.
- Profit: Net income was $71.5 million, up 43.6% from $49.8 million. Diluted EPS was $3.41 versus $2.12. Net margin was approximately 36.8%, compared with 28.2% a year earlier. The filing attributes much of the earnings increase to the prior-year $21.8 million debt-extinguishment loss and growth in the average loan portfolio.
- Costs and yield: Total costs and expenses were $80.9 million versus $96.9 million, including no debt-extinguishment loss in 2015. Average loan yield declined to 26.1% from 27.2%; average net loans receivable increased to $2.606 billion from $2.248 billion. Interest expense fell to $14.9 million from $16.0 million despite higher average debt, as average cost of debt declined to 3.2% from 4.2%.
- Cash flow: Operating cash flow was $117.4 million versus $93.5 million. Investing activities used $268.7 million, principally reflecting dealer advances and loan purchases; financing activities provided $231.6 million. Cash and cash equivalents ended the quarter at $86.7 million, up from $6.4 million at year-end.
- Balance sheet and liquidity: Total assets were $3.127 billion; loans receivable were $2.944 billion gross and $2.733 billion net. Total liabilities were $2.350 billion and shareholders’ equity was $777.3 million. Balance-sheet debt was $1.984 billion, up from $1.753 billion at December 31, 2014. Management reported $681.0 million of unused and available lines of credit. Funded debt to equity was 2.6:1.
- Credit and operating scale: Consumer Loan assignments totaled $626.1 million, up from $472.4 million. Unit volume increased 28.4% to 83,854; active dealers rose 18.5% to 5,996. The allowance for credit losses was $210.4 million, versus $206.9 million at year-end; Q1 provision was $6.2 million. Approximately 96.7% of assigned loan units were to consumers with FICO scores below 650 or no score.
Material changes versus Q1 2014
- Loan assignment growth and a larger average portfolio increased finance charges, while lower portfolio yield partly offset the increase.
- Operating expenses rose 18.0% to $51.2 million, primarily due to compensation and sales and marketing costs. Provision for credit losses increased to $6.2 million from $4.7 million; management said overall loan performance exceeded expectations, although certain pools underperformed.
- Provision for claims declined to $8.6 million from $11.0 million, reflecting lower claims per reinsured vehicle service contract and a smaller reinsurance portfolio.
- Average assignment volume growth was accompanied by a shift toward the Purchase Program: its share of unit volume increased to 11.4% from 8.3%.
- Average diluted shares declined 11.0% to 20.9 million, contributing to the larger increase in EPS than in net income.
Outlook, risks and unusual items
- Outlook: No numerical earnings or volume guidance was provided. Management said anticipated operating cash flows and financing alternatives should be sufficient for debt maturities and future operations, while noting that restricted or unavailable funding could materially harm liquidity and operations.
- Loan forecasts: Q1 2015 assignments had a forecasted collection rate of 68.7% and an advance rate of 45.7%, a 23.0 percentage-point spread. The average initial loan term was 49.1 months versus 46.9 months for 2014 assignments. Management emphasized that newer loan forecasts are less certain because relatively little of expected collections has yet been realized.
- Funding transactions: The company completed a $300.6 million Term ABS financing in January, with an expected annualized cost of approximately 2.6%, and issued $250 million of 7.375% senior notes due 2023 in March. Debt covenants were reported as satisfied at quarter-end.
- Contingencies: The company is cooperating with a U.S. Department of Justice inquiry concerning subprime auto finance and securitization, and a Massachusetts Attorney General inquiry concerning non-prime loan origination and collection; it could not estimate potential losses for either. The FTC closed its investigation in March with no further action warranted. Five dealer arbitrations remained pending; management did not expect a material adverse outcome based on information available.
- Other risks: Results depend on accurately forecasting collections, maintaining access to capital, competing for loan volume, and managing substantial debt, interest-rate exposure, consumer regulation, litigation, and changes in economic conditions. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether collection performance on recent loan cohorts supports the forecasts and spreads used to price new assignments.
- Whether rapid assignment growth and the shift toward Purchased Loans affect portfolio yield, credit-loss provisions, and returns on capital.
- How funding availability, debt maturities, borrowing costs, and covenant headroom evolve as the loan portfolio expands.
- Any developments in the DOJ and Massachusetts inquiries, including whether potential exposure becomes estimable.
- Whether reported liquidity is readily available after considering borrowing-base limits, collateral pledges, and restrictions on subsidiary and securitization assets.