Credit Acceptance Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Amounts are in millions of dollars unless stated otherwise. Credit Acceptance provides automobile financing through dealer partners, primarily serving consumers with impaired or limited credit histories. Most assignments were through the Portfolio Program (93.9% of Q2 unit volume).
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $169.4 | $151.8 | $334.1 | $294.2 |
| Income before taxes | $97.4 | $89.2 | $192.5 | $168.0 |
| Net income | $61.5 | $56.6 | $122.1 | $106.9 |
| Diluted EPS | $2.56 | $2.18 | $5.04 | $4.10 |
| Net margin | 36.3% | 37.3% | 36.5% | 36.3% |
| Provision for credit losses | $5.4 | $2.8 | $11.2 | $8.0 |
| Interest expense | $16.2 | $15.6 | $32.2 | $30.8 |
- Q2 revenue rose 11.6% and net income rose 8.7% year over year; six-month revenue rose 13.6% and net income rose 14.2%. Management attributed earnings growth primarily to a larger average loan portfolio.
- Finance charges increased 10.1% in Q2 and 11.6% for the half, mainly from higher average net loans receivable. Average portfolio yield declined to 28.5% from 30.1% in Q2 and to 28.8% from 30.3% for the half, partly reflecting higher advance rates.
- Q2 other income increased 55.2% to $9.0, primarily from vehicle-service-contract profit sharing and GPS/SID fees. Six-month other income rose 66.4% to $18.8.
- Q2 total costs and expenses grew 15.0%, faster than revenue. Credit-loss provision nearly doubled year over year; claims provision increased 16.7% in Q2 as the reinsurance portfolio and claims per contract grew.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $140.7 versus $151.6 in 2012. Investing used $199.6, including $712.7 in dealer advances, partly offset by $677.9 of loan collections. Financing provided $58.9, including $95.9 of share repurchases. Cash and cash equivalents remained $9.0.
- At June 30, net loans receivable were $2,092.7, up from $1,933.5 at year-end 2012; total assets were $2,315.3, versus $2,133.2. The allowance for credit losses was $185.8, compared with $176.4 at year-end.
- Total balance-sheet debt was $1,407.2, up $156.4 from year-end; funded debt to equity was 2.2:1. Debt included $150.8 on the revolving secured line, $902.3 of secured financing, $350.2 of senior notes and a $3.9 mortgage note.
- Unrestricted cash was $9.0; restricted cash was $116.9 and is not generally available for ordinary corporate use. The revolving line had $84.2 available, subject to borrowing-base limits. Management said anticipated operating cash flows and financing alternatives should provide sufficient funding, but noted that reduced access to financing could materially harm liquidity.
Changes, outlook and risks
- Q2 unit and dollar assignment volume increased 8.4% and 10.5% year over year. Active dealers increased 21.6%, while average volume per active dealer fell 10.7%; management cited competition. For the first half, unit and dollar volumes grew 2.0% and 4.5%, while average unit volume per active dealer declined 17.1%.
- Management enhanced its collection-forecasting methodology in Q2 using more recent data, different segmentations and new variables. The change increased the credit-loss provision by $3.0 pre-tax and reduced net income by $2.1. The reported portfolio forecast showed better-than-initial expected collections for 2009–2013 vintages, but weaker results for 2006–2007 vintages. Recent-vintage forecasts remain less certain because relatively few expected collections have been realized.
- Funding actions included a $140.3 Term ABS financing, with an expected annualized cost of approximately 1.7%, and extensions to the revolving credit line maturity (to June 2016) and Warehouse IV revolving period (to April 2016); Warehouse IV pricing also decreased. Debt maturities were estimated at $75.7 for the remainder of 2013, $368.1 in 2014, $348.4 in 2015, $264.8 in 2016 and $350.0 in 2017.
- No specific earnings or operating guidance was provided. Management identified key dependencies as access to capital, accurate estimates of future collections, and maintaining loan volume at expected levels. Risks include credit-performance forecast error, competition, substantial debt and covenant restrictions, interest-rate and capital-market conditions, regulation, and litigation.
- The company reported compliance with debt covenants at June 30, 2013. Six dealer arbitrations seek unspecified damages relating to servicing agreements; the company said it intends to defend them. It cautioned that an adverse disposition in litigation could materially affect financial position, liquidity or results.
- Stock repurchases totaled $95.9 for the first half, including 857,424 open-market shares; 676,788 shares remained authorized at quarter-end. The filing reported no material change in internal control over financial reporting and no material off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether actual collections on newer loan vintages support management’s forecasts, particularly after the Q2 methodology change and its $3.0 provision impact.
- Whether rising loan balances and assignment volume can sustain finance-charge growth despite lower yields and declining average volume per active dealer.
- Availability and cost of secured funding, borrowing-base capacity, upcoming maturities and continued compliance with financing covenants.
- Credit-loss allowance adequacy and the effect of future changes in forecasted collections on earnings and loan values.
- Developments in dealer arbitrations and other customer or regulatory litigation, and the continuing scale and claims experience of the reinsurance business.