Credit Acceptance Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Dollar amounts are in millions unless stated otherwise. The company provides auto financing through dealers, primarily to consumers with impaired or limited credit histories.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $406.3 | $370.6 | $795.4 | $724.4 |
| Income before taxes | $127.8 | $215.3 | $15.0 | $421.6 |
| Net income | $96.4 | $164.4 | $12.6 | $328.8 |
| Diluted earnings per share | $5.40 | $8.68 | $0.70 | $17.33 |
| Provision for credit losses | $139.4 | $15.4 | $494.1 | $29.9 |
- Q2 revenue grew 9.6%, while net income fell 41.4%. Six-month revenue grew 9.8%, while net income fell 96.2%.
- Finance charges increased 10.7% in Q2 and 11.6% for the six months, reflecting a larger average net loan balance and higher reported yields. CECL accounting contributed to the higher yields.
- Six-month operating cash flow was $506.3, versus $400.6 a year earlier; investing cash outflow was $572.0 and financing cash outflow was $60.8. Cash and restricted cash combined declined $126.5 to $391.2.
- At June 30, total debt carrying value was $4,799.1, up from $4,538.8 at year-end. Unrestricted cash was $8.5; restricted cash was $382.7. The company reported $804.5 of unused and available lines of credit and funded debt to equity of 2.3:1.
- Net loans receivable were $6,749.8, compared with $6,685.2 at December 31, 2019. The $3,346.1 allowance for credit losses is affected by CECL adoption and should not be read as a comparable increase in expected losses alone.
Material changes and accounting
- The company adopted CECL on January 1, 2020. Adoption grossed up loans receivable and the allowance by $2,463.6, with no initial effect on net loan carrying value or net income. For new assignments, CECL requires an upfront credit-loss provision, with corresponding finance revenue recognized over time; management said lifetime net loan income is not changed, but its timing is.
- CECL-related provisions on new assignments were $154.2 in Q2 and $312.1 for the six months. Management estimated these reduced six-month net income by $240.3, or $13.32 per diluted share.
- Six-month provision for credit losses also included $182.0 from forecast changes. The company reduced its forecast of future net cash flows by $206.5 in Q1, primarily due to COVID-19. In Q2, forecasted future net cash flows increased by $24.4, and the company recorded a $14.8 net reversal of provision for credit losses.
- The company repaid its remaining $151.8 of 2021 senior notes and redeemed $250.0 of 2023 senior notes; the latter resulted in a $7.4 debt-extinguishment loss. It completed a $500.0 Term ABS financing in February and a further $481.8 financing after quarter-end in July, both used to repay outstanding debt.
- Six-month share repurchases totaled $307.1 for 725,220 shares. No repurchases occurred in Q2.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided. Management expected 2020 net income to be significantly lower under CECL than under the prior accounting method, with the largest impact in the adoption quarter.
- COVID-19 caused a sharp decline in loan demand and collections from mid-March through mid-April; both improved afterward. Management said the pandemic’s ultimate impact remained uncertain and depended in part on consumer conditions and the continuation of federal stimulus and unemployment benefits.
- Management cited forecast uncertainty for its predominantly non-prime loan portfolio. Collection forecasts, consumer payment performance, loan assignment volume, funding access, debt levels, interest rates, and capital-market conditions are key risks.
- The company reported compliance with debt covenants at June 30. Amendments to certain warehouse and revolving credit agreements changed the basis for testing specified covenants through year-end 2020 to the pre-CECL accounting basis.
- Regulatory inquiries and legal matters include investigations by the New York, Maryland, Massachusetts, and federal consumer authorities, and a Mississippi lawsuit alleging unfair or deceptive practices. The company said it could not estimate reasonably possible losses for the described matters; an adverse outcome could materially affect financial results, liquidity, or position.
Investor verification priorities
- Track collection performance, delinquencies, and updated cash-flow forecasts, particularly for recent loan vintages, and assess the assumptions behind the COVID-19 forecast adjustment.
- Separate CECL timing effects from changes in underlying loan economics when evaluating provisions, finance charges, and earnings.
- Verify available borrowing capacity, debt maturities, covenant headroom, and the terms and collateral requirements of warehouse and securitization funding.
- Monitor the status and potential financial impact of the regulatory investigations and Mississippi litigation.
- Assess whether loan assignment volumes and collections remain resilient as stimulus support and broader economic conditions change.