Credit Acceptance Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the same periods in 2017 unless noted. The company provides auto financing through dealers, primarily to consumers with impaired or limited credit histories; 95.2% of Q3 loan assignments were to consumers with FICO scores below 650 or no score.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $332.0 million | $283.9 million | $943.0 million | $822.7 million |
| Income before taxes | $198.4 million | $160.1 million | $554.1 million | $461.4 million |
| Net income | $151.0 million | $100.7 million | $422.1 million | $293.1 million |
| Diluted EPS | $7.75 | $5.19 | $21.68 | $14.99 |
| Provision for credit losses | $14.0 million | $25.7 million | $39.2 million | $68.0 million |
| Interest expense | $41.1 million | $30.5 million | $114.3 million | $88.0 million |
Revenue increased 16.9% in Q3 and 14.6% year to date; net income increased 50.0% and 44.0%, respectively. Approximate net margin rose to 45.5% from 35.5% in Q3 and to 44.8% from 35.6% year to date. Management attributed earnings growth mainly to a larger loan portfolio, improved loan performance and the lower tax rate under the 2017 Tax Act. The effective tax rate fell to 23.9% in Q3 and 23.8% year to date, from 37.1% and 36.5%.
Finance charges grew 16.8% in Q3 and 15.2% year to date, driven by higher average net loan balances; lower yields on newer assignments partly offset the growth. Average portfolio yield declined to 22.2% from 23.8% in Q3 and to 22.4% from 23.9% year to date. Operating expenses increased 15.1% in Q3 and 15.0% year to date, largely from compensation, staffing and sales-force costs. The lower credit-loss provision reflected improved aggregate performance versus the prior-year periods, although certain loan pools still required provisions.
Consumer Loan assignments totaled $831.0 million in Q3, up 20.3% in dollar volume year over year; unit volume rose 9.4% to 86,005. For the first nine months, unit volume rose 16.1% to 290,976. The average advance per unit and average loan size increased. Purchased Loans were 30.5% of Q3 unit volume, versus 28.1% a year earlier.
At September 30, 2018, total assets were $6.244 billion, including net loans receivable of $5.558 billion and an allowance for credit losses of $447.6 million. Total liabilities were $4.281 billion and shareholders’ equity was $1.963 billion. Debt carrying value was $3.877 billion, up from $3.071 billion at year-end 2017; funded debt to equity was 2.0 to 1. Cash and cash equivalents were $195.7 million, with an additional $347.6 million restricted. Unused and available credit lines totaled $1.325 billion; availability may be constrained by collateral and borrowing-base requirements.
For the first nine months, operating cash flow was $501.0 million, investing cash flow was negative $1.010 billion, and financing cash flow was positive $788.9 million. Cash, cash equivalents and restricted cash together increased $279.5 million to $543.3 million. These totals include restricted amounts and should not be read as unrestricted liquidity.
Material changes, outlook and risks
- Management said forecasted collection rates improved for 2018 assignments and were generally stable for most other assignment years during Q3. Forecasts for 2015 and 2016 assignments remain below initial estimates; 2016 forecasts also declined during the first nine months. More recent-loan forecasts remain less certain because less of the expected collections have been realized.
- The spread between forecast collections and advances for 2018 assignments was 21.4%, compared with 22.4% for 2017. Management cited assignment mix, more Purchased Loans, and stronger-than-initially-forecast performance of 2017 loans as factors. Q3 2018 assignments had a 20.3% spread, below the first-half 2018 cohort’s 21.9%.
- The company completed three Term ABS financings in 2018 totaling approximately $1.348 billion, extended its revolving credit facility maturity to June 2021, amended and extended Warehouse Facility V, and added a $12 million mortgage note. Management stated that operating cash flows and financing alternatives should be sufficient for debt maturities and operations, while warning that reduced access to funding could materially harm liquidity and results.
- Scheduled principal debt maturities were $223.3 million for the remainder of 2018, $1.006 billion in 2019, $1.335 billion in 2020 and $1.077 billion in 2021. Management reported compliance with applicable debt covenants at quarter-end.
- The company expects adoption of the new CECL credit-loss standard to materially affect its accounting for loans. It was evaluating the fair-value option as an alternative for future loans; the accounting approach had not been finalized. The filing notes potential volatility from fair-value accounting when rates change rapidly.
- Regulatory and legal matters include inquiries or investigations by New York DFS, Massachusetts and Mississippi authorities, the CFPB, FTC, Maryland, New York and the Department of Justice. The company said it cannot predict several outcomes or estimate reasonably possible losses. Westlake Services’ antitrust case had been dismissed in the company’s favor, but the plaintiff appealed. An adverse outcome in litigation or investigations could materially affect financial position, liquidity or results.
- Key business risks include forecasting collections on high-risk consumer loans, competition, access to capital, debt and interest-rate exposure, regulation, and adverse economic or auto-finance conditions. No specific earnings or operating guidance was provided.
Key facts for investors to verify
- Track realized collections and forecast revisions for the 2015–2018 loan cohorts, especially the weaker 2015 and 2016 cohorts and the early performance of recent assignments.
- Assess whether portfolio growth can sustain earnings as average yields decline and debt balances and interest costs rise; distinguish restricted cash from cash available for general use.
- Review future funding availability, securitization costs, borrowing-base capacity, covenant compliance and the substantial 2019–2021 scheduled maturities.
- Monitor CECL implementation and the company’s decision on the fair-value option, including impacts on earnings timing, reported credit provisions and volatility.
- Follow regulatory inquiries and litigation developments, potential consumer-protection or fair-lending exposure, and any resulting financial or operational consequences.