Credit Acceptance Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Credit Acceptance provides indirect auto financing through dealers, primarily to consumers with impaired or limited credit histories. All dollar amounts below are in millions unless otherwise stated.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $283.9 | $246.6 | $822.7 | $713.0 |
| Income before taxes | $160.1 | $136.5 | $461.4 | $389.6 |
| Net income | $100.7 | $85.9 | $293.1 | $245.2 |
| Diluted EPS | $5.19 | $4.21 | $14.99 | $12.01 |
| Net income as a percentage of revenue | 35.5% | 34.9% | 35.6% | 34.4% |
- Q3 revenue increased 15.1% and net income increased 17.2% year over year. For the first nine months, revenue rose 15.4% and net income rose 19.5%. Management attributed higher earnings primarily to growth in the average loan portfolio.
- Finance charges were $259.4 in Q3, up 15.9%, and $749.2 for the nine months, up 16.7%. Portfolio growth drove the increase, partly offset by lower average yields: 23.8% versus 24.5% in Q3 and 23.9% versus 24.9% year to date.
- Credit-loss provision was $25.7 in Q3 and $68.0 year to date, compared with $22.8 and $62.8, respectively, in 2016. Interest expense increased 21.5% in Q3 and 23.1% year to date, reflecting higher average debt balances; average debt cost was 4.1%, versus 4.0%.
- At September 30, loans receivable were $4,827.6 gross and $4,451.4 net, up from $4,207.0 gross and $3,886.6 net at year-end 2016. The credit-loss allowance was $376.2, versus $320.4.
- Nine-month cash from operations was $414.6, compared with $363.5 in 2016. Investing used $689.3 and financing provided $265.0; unrestricted cash declined to $4.9 from $14.6 at year-end. Q3-only cash flow figures are not separately presented in the filing text provided.
- Debt carrying value rose to $3,000.8 from $2,603.7 at year-end; principal outstanding was $3,020.2. The company reported $889.5 of unused and available lines of credit and $273.6 of restricted cash. Shareholders’ equity was $1,351.8. Funded debt to equity was 2.2 to 1.
Changes, outlook, and risks
- Consumer Loan unit volume fell 4.7% in Q3 and 3.8% year to date; dollar assignment volume fell 0.5% in Q3. Active dealers increased, but average volume per active dealer declined 9.7% in Q3. Purchased Loans increased to 28.1% of Q3 unit volume from 23.8% a year earlier.
- Recent loan yields were lower, and assignment growth faced competitive pressure. Collection forecasts for 2015 and 2016 cohorts were below initial estimates; 2015 was 2.2 percentage points below its initial forecast. 2017 forecasts were above initial estimates, but management cautioned that newer cohorts remain less certain because limited collections have been realized.
- Management provided no specific earnings or volume guidance. It said operating cash flows and available financing alternatives were expected to fund debt maturities and future operations, while warning that reduced access to funding could materially affect liquidity and operations.
- Subsequent to quarter-end, the company completed a $350 million Term ABS financing on October 26, with an expected annualized cost of approximately 3.2%, to repay outstanding debt. It also reported an October increase to its revolving credit facility.
- Regulatory and legal matters include a Mississippi Attorney General inquiry, a CFPB fair-lending investigation, FTC and state inquiries, and litigation alleging attempted monopolization. The company is cooperating with inquiries and said it could not estimate potential losses. It warned that adverse outcomes could materially affect financial results or liquidity.
- Key business risks include forecasting collections on non-prime loans, funding access and substantial debt, interest-rate exposure, competition, regulatory changes, and litigation. The company reported compliance with its debt covenants at quarter-end.
- Adoption of new share-based payment accounting reduced nine-month income-tax provision by $2.5. The company expects the CECL credit-loss standard, when adopted, to have a material impact; it did not believe the upcoming revenue-recognition standard would have a material impact.
Most important facts for investors to verify
- Whether collections and credit performance—particularly for 2015 and 2016 assignments—continue to track or diverge from forecasts, and how this affects provisions and yields.
- Whether declining unit volume and average dealer production persist despite growth in active dealers, and whether purchased-loan mix changes affect risk and returns.
- Debt, borrowing-base availability, refinancing costs, and liquidity, including the effect of restricted cash and upcoming scheduled maturities.
- Developments and potential financial consequences of the CFPB, Mississippi, FTC, other state inquiries, and pending litigation; loss estimates were not available in this filing.
- Management’s forthcoming assessment of CECL implementation and its expected material financial-statement impact.