Credit Acceptance Corporation — Q2 2019 Form 10-Q
Business context and reporting period. The company provides indirect auto financing through a nationwide dealer network, primarily to consumers with impaired or limited credit histories. This unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Dollar figures are in millions except per-share data.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $370.6 (+17.5%) | $315.4 | $724.4 (+18.6%) | $611.0 |
| Net income | $164.4 (+8.9%) | $151.0 | $328.8 (+21.3%) | $271.1 |
| Diluted EPS | $8.68 | $7.75 | $17.33 | $13.92 |
| Net margin | 44.4% | 47.9% | 45.4% | 44.4% |
| Operating cash flow | Not separately reported for the quarter | $400.6 | $310.0 |
- Q2 finance charges rose 17.9% to $341.5, primarily from a higher average net loan balance; the average portfolio yield declined to 21.8% from 22.3%. For the six months, finance charges increased 18.5% to $663.4 while average yield fell to 21.8% from 22.4%.
- Q2 credit-loss provision increased to $15.4 from $1.8; six-month provision was $29.9 versus $25.2. Management said overall loan performance exceeded period-start expectations, but certain pools performed below expectations and required provisions.
- Interest expense rose 28.7% in Q2 to $49.8 and 29.5% for the six months to $94.8, reflecting higher average debt balances and a higher average cost of debt. The six-month average cost was 4.6%, versus 4.2%.
- At June 30, total assets were $6,908.5; loans receivable, net, $6,384.0; and shareholders’ equity, $2,215.3. Total debt carrying value was $4,222.6, up from $3,820.9 at year-end 2018; funded debt to equity was 1.9:1.
- Cash and cash equivalents were $19.7, with restricted cash of $328.8. The company reported $1,050.6 of unused and available credit lines. Six-month investing cash outflow was $668.4 and financing cash inflow was $287.0.
Material changes and operating developments
- Loan portfolio growth drove higher finance charges: average net loans were $6,273.9 in Q2, up from $5,202.8. Net loans at period-end increased to $6,384.0 from $5,763.3 at December 31, 2018.
- Q2 Consumer Loan unit volume was essentially flat year over year at 92,613, while dollar volume grew 5.6%. Active dealers increased 10.9%, but average volume per active dealer declined 9.3%. Purchased Loans rose to 33.3% of Q2 unit assignments from 30.3% a year earlier.
- Operating expenses rose 17.5% in Q2, including higher incentive compensation, staffing-related costs, legal expenses and building expenses. The company repurchased 268,611 shares for $109.2 during the first half; no repurchases occurred in Q2.
- In March, the company issued $400 million of 6.625% senior notes due 2026. It also completed a $402.5 million Term ABS financing in February. Subsequent to quarter-end, it extended or expanded several warehouse facilities and entered a new $200 million facility.
Outlook, risks and unusual items
- No specific earnings or operating guidance was provided. Management said operating cash flows and financing alternatives were expected to fund debt maturities and operations, while warning that reduced access to financing could materially harm liquidity and operations.
- Collection forecasting is central to results. Forecasts for 2015 and 2016 loan assignments remained below original estimates; 2010–2013, 2017 and 2018 vintages were above initial estimates. Forecasts for newer loans are less certain because much of their expected collections have not yet been realized.
- The company expects adoption of the CECL credit-loss standard to have a material impact on financial statements and disclosures. It intends to use CECL rather than the fair-value option, citing potential earnings volatility under fair value. Management also cautioned that CECL may substantially change the timing of reported loan income and credit-loss expense.
- Regulatory and legal exposures include a new New York Attorney General subpoena and a Consumer Financial Protection Bureau investigative demand in 2019, as well as a Mississippi consumer-protection lawsuit. The company could not estimate reasonably possible losses for these matters. New York DFS examinations and an FTC matter were closed during the period; other investigations and litigation remain ongoing.
- The company discontinued its GPS-SID dealer program during Q2, though dealers could install previously purchased devices through September 1, 2019. Management cited risks including loan-collection forecasting, consumer-credit conditions, competition, substantial debt, interest rates, funding availability and regulation.
- Management reported compliance with debt covenants at June 30, 2019 and effective disclosure controls. The filing states there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether collection performance—particularly for recent assignment vintages and the weaker 2015–2016 cohorts—continues to track forecasts, and how provisions evolve.
- Whether portfolio growth, lower yields on newer assignments and rising funding costs affect future earnings and margins.
- The scale and outcome of the regulatory inquiries and litigation, especially the CFPB and New York inquiries and Mississippi lawsuit, for which losses were not estimable.
- The expected transition effects of CECL on reported earnings, allowances, financing capacity and covenant compliance.
- Debt maturities, borrowing-base availability and continued access to warehouse, securitization and capital-market funding.