Credit Acceptance Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Credit Acceptance provides financing programs through auto dealers, primarily for consumers with impaired or limited credit histories; 95.3% of second-quarter loan assignments were to consumers with FICO scores below 650 or no score.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $276.0 million | $238.5 million | $538.8 million | $466.4 million |
| Net income | $99.1 million | $84.9 million | $192.4 million | $159.3 million |
| Diluted EPS | $5.09 | $4.17 | $9.81 | $7.80 |
| Net income margin | 35.9% | 35.6% | 35.7% | 34.2% |
For the first six months, operating cash flow was $261.0 million, investing cash outflow was $534.7 million, and financing cash inflow was $286.3 million. Cash and cash equivalents ended at $27.2 million; restricted cash was $313.9 million.
At June 30, loans receivable, net, were $4.284 billion, up from $3.887 billion at year-end 2016. The allowance for credit losses was $354.1 million. Total debt carrying value was $3.014 billion ($3.035 billion principal), versus $2.604 billion carrying value at December 31, 2016. Shareholders’ equity was $1.248 billion. Management reported funded debt to equity of 2.4 to 1 and $1.020 billion of unused and available credit lines; availability may depend on collateral and borrowing-base limits.
Changes and operating drivers
- Q2 revenue rose 15.7% and net income rose 16.7% year over year; first-half revenue rose 15.5% and net income 20.8%. Management attributed earnings growth primarily to a larger average loan portfolio.
- Finance charges increased 17.0% in Q2 and 17.2% for the half, principally from higher average receivables, partly offset by lower portfolio yields (23.9% versus 25.0% in Q2; 23.9% versus 25.1% for the half).
- Interest expense increased 23.0% in Q2 and 23.9% for the half, reflecting higher average debt balances and slightly higher average borrowing costs. Operating expenses rose 11.9% in Q2 and 11.1% for the half, including higher servicing, sales-force and legal costs.
- Q2 assignment volume increased 1.0% by units and 7.1% by dollars; first-half unit volume declined 3.3%. In Q2, active dealers grew 6.3%, but average volume per active dealer fell 5.6%. Management said competition, dealer attrition and lower per-dealer volume have made unit growth more difficult.
- The Purchase Program represented 27.7% of Q2 unit assignments, up from 22.2% a year earlier. Purchased Loans absorb collection shortfalls more directly than Dealer Loans, which may be partly offset by lower Dealer Holdback.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management believes operating cash flows and financing alternatives should fund maturities and future operations, but warns that constrained capital-market access could materially harm liquidity and operations.
- Loan performance forecasts improved for 2017 assignments and remained materially above initial estimates for 2009–2013 cohorts; 2015 assignments remained materially below initial estimates. Forecasts for newer loans are less certain because less expected collection activity has been realized. Management identifies accurate collection forecasting as critical.
- Credit-loss provision was $21.8 million in Q2 and $42.3 million for the half, even though aggregate performance exceeded beginning-of-period expectations; certain individual loan pools underperformed. The allowance increased to $354.1 million from $320.4 million at year-end.
- Debt increased to support loan growth and share repurchases. The company repurchased 610,260 shares for $123.5 million in the first half; $776.2 thousand? The remaining authorization was 776,208 shares as of June 30.
- Regulatory and legal matters include a newly disclosed CFPB inquiry into possible Equal Credit Opportunity Act/Regulation B issues, plus FTC, Maryland, New York, DOJ and Massachusetts inquiries and a competitor lawsuit. The company is cooperating or defending as applicable and cannot estimate reasonably possible losses for these matters.
- Management reported compliance with debt covenants. A July 2017 subsequent event extended Warehouse Facility VI’s revolving period to September 2020. Adoption of the expected-credit-loss standard (CECL) was preliminarily expected to have a material financial-statement impact; the filing gives no quantified estimate.
- Accounting adoption of share-based payment guidance reduced first-half income-tax provision by $2.5 million. The effective tax rate was 36.1%, compared with 37.1% a year earlier.
Important facts for investors to verify
- Whether recent loan cohorts—especially 2015 and newer assignments—continue to perform in line with collection forecasts, and how forecast changes affect provisions and yields.
- Whether dealer attrition and declining average volume per dealer persist, and whether assignment growth is achieved without weaker pricing or underwriting economics.
- Debt maturity, collateral and borrowing-base capacity, refinancing access, and the availability of reported unused credit lines.
- Developments and potential financial consequences of the CFPB inquiry and other regulatory matters and litigation; loss estimates are not available in the filing.
- The eventual quantified impact of CECL adoption and the sustainability of earnings growth amid falling portfolio yields and rising funding costs.
Correction: Remaining repurchase authorization was 776,208 shares, not a dollar amount.