Credit Acceptance Corporation — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. Credit Acceptance provides vehicle financing through a nationwide dealer network, primarily to consumers with impaired or limited credit histories. It operates one reportable segment and uses Portfolio and Purchase programs.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $262.8 million | $227.9 million | +15.3% |
| Finance charges | $238.0 million | $202.8 million | +17.4% |
| Income before taxes | $144.2 million | $118.4 million | +21.8% |
| Net income | $93.3 million | $74.4 million | +25.4% |
| Diluted EPS | $4.72 | $3.63 | +30.0% |
| Net income margin | 35.5% | 32.6% | +2.9 percentage points |
| Operating cash flow | $161.9 million | $91.7 million | +$70.2 million |
Revenue growth primarily reflected a larger average net loan balance: $3.98 billion, up from $3.21 billion. The portfolio’s average yield declined to 23.9% from 25.3%, partly offsetting the volume benefit. Interest expense rose 24.9% to $27.6 million as average debt increased; average borrowing cost was 4.0% in both periods. Provision for credit losses declined to $20.5 million from $22.1 million.
Cash used in investing activities was $366.4 million, compared with $344.3 million, including $791.5 million of new loan assignments and $567.0 million of principal collections. Financing activities provided $201.0 million, including $105.8 million of share repurchases. Cash and cash equivalents were $11.1 million at quarter-end; restricted cash was $316.7 million.
Balance sheet, debt and liquidity
Loans receivable, net, increased to $4.14 billion from $3.89 billion; the allowance for credit losses was $338.0 million, versus $320.4 million at year-end. Total debt carrying value rose to $2.91 billion from $2.60 billion. Funded debt to equity was 2.5 to 1. Available and unused lines of credit were $813.9 million, down from $948.0 million at December 31, 2016. The company reported compliance with financing covenants.
Management stated that operating cash flows and financing alternatives were expected to fund debt maturities and operations, while noting that reduced or unavailable funding could materially harm liquidity and operations. Scheduled principal maturities total $562.9 million for the remainder of 2017 and $821.4 million in 2018.
Material changes and management commentary
- Net income increased mainly because of portfolio growth, partly offset by weaker performance in certain consumer loan vintages. Lower operating expenses were not the main driver: operating expenses increased 10.3% to $64.5 million.
- Consumer Loan unit volume fell 6.6% year over year to 94,809, while dollar volume increased 6.4%. Active dealers grew 4.8%, but average volume per active dealer declined 11.0%; dealer attrition increased to 18.5% from 12.9%.
- Purchased Loans rose to 26.7% of assigned units from 17.6% a year earlier. Management cited larger average loan size and longer initial terms as factors behind higher dollar volume despite lower unit volume.
- Forecasted collections on 2015 assignments remained below initial estimates (65.8% versus 67.7%); 2009–2013 cohorts had performed materially better than initial forecasts. Q1 forecast changes increased expected net cash flows by $8.1 million overall, including $11.5 million for Purchased Loans and a $3.4 million decrease for Dealer Loans.
- The company repurchased 528,523 shares for $105.8 million and had authorization for 857,945 additional shares at quarter-end.
Outlook, risks and unusual items
No specific earnings or revenue guidance was provided. Management identified accurate collection forecasting, access to capital, and maintaining or growing loan volume on acceptable terms as critical success factors. It warned that recent loan forecasts remain less certain because much of the expected collections on newer vintages has not yet been realized.
Key risks include competition, consumer credit performance, substantial debt and refinancing needs, interest-rate changes, capital-market access, regulation, and consumer litigation. Regulatory matters include inquiries by the FTC concerning dealer use of GPS starter interrupters and by state attorneys general concerning repossession, origination and collection practices; the company could not estimate potential losses. It is also defending an antitrust lawsuit brought by Westlake Services and Nowcom; the filing states that potential loss is not estimable.
Accounting updates had notable effects: adoption of share-based payment guidance reduced Q1 2017 income tax provision by $2.5 million and shifted the benefit to operating cash flow. The company preliminarily expects the future CECL credit-loss standard to have a material impact. Subsequent to quarter-end, Warehouse Facility IV capacity increased from $75 million to $100 million, its revolving period was extended to April 2020, and its spread increased from LIBOR plus 200 to LIBOR plus 225 basis points.
Most important facts for investors to verify
- Whether recent vintage collection performance, particularly the 2015 cohort, stabilizes or worsens and how that affects credit-loss provisions.
- Whether unit-volume declines, dealer attrition, and lower average dealer volume continue despite higher dollar assignments.
- How the larger Purchased Loan mix and lower portfolio yield affect returns and risk-adjusted profitability.
- Debt maturities, unused borrowing capacity, covenant compliance, and continued access to securitization and warehouse funding.
- Developments and potential financial effects of the FTC, state investigations, and antitrust litigation; the filing provides no clear loss estimate.