Credit Acceptance Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. The company provides auto financing through a nationwide network of dealers, primarily to consumers with impaired or limited credit histories. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $130.0 (+16.3%) | $111.8 | $253.5 (+17.9%) | $215.0 |
| Income before tax | $70.6 (+6.0%) | $66.6 | $137.9 (+15.8%) | $119.1 |
| Net income | $44.8 (-8.6%) | $49.0 | $88.0 (+8.6%) | $81.1 |
| Diluted EPS | $1.72 | $1.55 | $3.29 | $2.56 |
| Net margin | 34.5% | 43.9% | 34.7% | 37.7% |
- Finance charges increased 19.1% in Q2 and 19.0% year to date, mainly on a larger average net loan balance; portfolio yield declined to 32.6% in Q2 from 34.3%, and to 33.2% for the half from 34.2%.
- Credit-loss provision rose to $8.9 million in Q2 from $1.8 million, and to $17.8 million for the half from $8.2 million. Management said overall loan performance exceeded its period-start expectations, but certain impaired pools had weaker-than-expected forecast cash flows.
- Interest expense increased 21.9% in Q2 and 15.0% for the half as average debt grew; average pretax borrowing cost fell to 6.5% in Q2 and 6.7% for the half, from 9.6% in both 2010 comparison periods.
Balance sheet, cash flow and funding
- At June 30, total assets were $1,581.7 million, including net loans receivable of $1,438.1 million; the loan-loss allowance was $144.8 million. Total liabilities were $1,139.7 million and shareholders’ equity $441.9 million.
- Cash and cash equivalents were $5.7 million; restricted cash was $86.1 million. Cash alone is limited, while restricted funds are pledged or held for specified purposes.
- Six-month operating cash flow was $140.0 million; investing cash outflow was $260.0 million, including $610.2 million of dealer advances and $63.5 million of purchased loans; financing cash flow was $121.9 million. Cash increased $1.9 million.
- Balance-sheet debt was approximately $934.7 million, up from $685.7 million at year-end; funded debt to equity was 2.1:1. Reported facility availability included $77.3 million on the revolving line and $145.0 million across warehouse facilities, subject to borrowing-base limits.
- Management reported compliance with debt covenants and expected operating cash flows and financing alternatives to cover maturities and operations, while warning that restricted or unavailable funding could materially impair liquidity. Scheduled principal maturities totaled $934.3 million, including $258.8 million in 2014 and $350.0 million thereafter.
Material changes and management commentary
- Consumer Loan unit volume grew 33.1% in the first half, to 95,050; active Dealer-Partners increased 20.1% to 3,190. Q2 dollar assignment volume grew 41.3% year over year. Dealer Loans accounted for 92.1% of Q2 assigned units.
- Q2 net income declined despite higher revenue and pretax income, primarily because the 2010 quarter benefited from reversals of uncertain-tax-position reserves following an IRS resolution. The effective tax rate was 36.5% versus 26.4%; first-half rates were 36.2% versus 31.9%.
- The company repurchased 1.9 million shares for $125.0 million in a first-quarter tender offer, partly funded by $100.0 million of additional senior notes and revolving borrowings. Weighted-average diluted shares fell to 26.1 million in Q2 from 31.6 million.
- In Q2, the $205 million revolving line was extended to 2014 and enlarged from $170 million; its asset-to-debt covenant and LIBOR floor were removed. The $325 million warehouse facility received an extended revolving period and lower spread; the $75 million facility’s spread was also reduced.
- Management increased the advance rates on new loans during Q2, supporting volume but reducing expected return on capital per loan; it believed the increases likely benefited economic profit. Collection forecasts improved for 2009–2011 vintages, while 2006–2007 vintages remained below initial forecasts. Newer vintages remain less certain because less of their expected collections has been realized.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management’s outlook depends on access to capital, loan volume, accurate collection forecasts and the company’s ability to support growth.
- Key risks include nonprime borrower defaults and repossessions, errors in collection forecasts, refinancing and liquidity constraints, substantial debt and interest-rate exposure, competition, regulation, and customer or dealer litigation.
- The company disclosed a Missouri Attorney General civil investigative demand concerning collections from consumers who say they did not receive vehicle titles from dealers; it had responded and was cooperating. The filing also describes routine customer and dealer litigation, including purported class actions, whose adverse outcomes could materially affect results or liquidity.
- Q2 other income was affected by $4.4 million of prior-year income from discontinued third-party arrangements that did not recur, partly offset by $1.9 million of increased GAP profit-sharing income following a change to recognize that income over contract lives. The filing reports no material changes to collection-forecast methodology and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the elevated credit-loss provisions and performance of impaired loan pools persist, particularly against the weaker 2006–2007 vintage forecasts.
- How advance-rate increases affect loan growth, portfolio yield, expected returns and economic profit.
- Available borrowing capacity after collateral and covenant limits, upcoming maturities, and the company’s ability to refinance or maintain multiple funding sources.
- Whether the Missouri inquiry or other litigation results in material costs, and whether the higher effective tax rate continues.
- The sustainability of earnings growth after separating portfolio expansion from tax effects and the nonrecurrence or timing of unusual income items.