Credit Acceptance Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Interim financial statements are unaudited. The company provides auto financing through a nationwide dealer network, primarily serving consumers with impaired or limited credit histories. Most assignments were under the Portfolio Program (93.3% of units).
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $142.4 million | $123.5 million; up 15.3% |
| Finance charges | $126.1 million | $106.5 million; up 18.4% |
| Income before taxes | $78.8 million | $67.3 million; up 17.2% |
| Net income | $50.3 million | $43.2 million; up 16.5% |
| Diluted earnings per share | $1.92 | $1.57 |
| Net income margin | 35.4% | 35.0% |
| Operating cash flow | $89.3 million | $86.1 million |
Finance-charge growth reflected a larger average net loan balance ($1.650 billion, up $391.0 million year over year), partly offset by a lower average portfolio yield (30.6% versus 33.8%). Provision for credit losses declined to $5.2 million from $8.9 million. At March 31, net loans receivable were $1.738 billion, up from $1.599 billion at year-end; the allowance was $159.4 million.
Total assets were $1.955 billion and shareholders’ equity was $572.6 million. Total balance-sheet debt was approximately $1.133 billion, up $134.9 million from year-end; management reported funded debt to equity of 2.0:1. Cash and cash equivalents were $4.7 million, while restricted cash was $160.1 million and is not equivalent to unrestricted liquidity. Reported borrowing availability included $31.4 million on the revolving line and $372.7 million across the three warehouse facilities, subject to borrowing-base and collateral limits.
Material changes and operating trends
- Consumer Loan assignments rose 10.6% by units and 10.7% by dollar volume year over year, slower than the 25.3%–36.7% unit growth reported in the preceding four comparable quarters. Active Dealer-Partners increased 29.5%, but average volume per active partner fell 14.6%; management attributed the decline to increased competition.
- Operating expenses (salaries, general and administrative, and sales and marketing) increased 23.0%, reflecting staffing and growth, higher legal and technology costs, and a 57% expansion of the field sales force.
- Premiums earned increased 26.1% to $10.8 million as the reinsurance portfolio grew. Provision for claims rose 29.6% to $8.6 million.
- Other income fell 34.2% to $5.6 million, mainly because GAP profit-sharing revenue began being recognized over contract lives rather than annually in the first quarter; Q1 2012 also included a $0.5 million reversal related to a change in the arrangement.
- Finance-charge growth and income also benefited from portfolio expansion; lower credit-loss provision contributed to the year-over-year earnings increase. Weighted average diluted shares declined to 26.3 million from 27.5 million.
Liquidity, outlook, risks and unusual items
- The company completed a $201.3 million Term ABS financing in March, with an expected annualized cost of approximately 2.8%; proceeds were used to repay outstanding debt. Management said operating cash flows and financing alternatives should be sufficient for maturities and operations, while warning that restricted or unavailable funding could materially harm liquidity and operations.
- Scheduled principal maturities totaled $1.132 billion: $24.0 million for the remainder of 2012, $172.8 million in 2013, $565.3 million in 2014, and $350.0 million thereafter. Some maturities are estimates based on forecast collections. All reported debt covenants were satisfied at quarter-end.
- No earnings or loan-volume guidance was provided. Management identified accurate collection forecasting, access to capital, and maintaining or growing loan volume on expected terms as key success factors. Collection forecasts for 2011 assignments weakened slightly during the quarter; forecasts for newer vintages remain less certain because comparatively little of expected collections has been realized. Older vintages generally have lower forecast uncertainty.
- Principal risks include borrower collection and credit performance, competition, funding access and cost, substantial debt and covenant restrictions, interest-rate changes, regulation, economic conditions, and litigation. The company described a Missouri Attorney General inquiry into consumer title-related collection practices and a Dealer-Partner arbitration seeking unspecified damages and class treatment; class status and other procedural matters remained unresolved. The filing states an adverse outcome could materially affect financial position, liquidity, or results.
- The company repurchased 190,843 shares for $18.7 million during Q1. The board authorized an additional one million shares on March 26; $6.2 million remained under prior dollar authorization at quarter-end. The proposed increase in incentive-plan capacity and CEO equity awards were subject to shareholder approval as applicable.
Important facts for investors to verify
- Whether recent assignment growth, partner activity, and per-partner volume trends persist amid increased competition.
- Subsequent performance of newer loan vintages, especially 2011 and 2012, against initial collection forecasts and the resulting allowance or yield adjustments.
- Availability and cost of borrowing under secured facilities, collateral requirements, debt maturities, and compliance with covenants.
- Development and potential financial exposure from the Missouri inquiry and Dealer-Partner arbitration, including any class-action determination.
- Effect of GAP revenue-recognition changes, claims experience, share repurchases, and equity awards on recurring earnings and per-share results.