Credit Acceptance Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company provides financing programs through automobile dealers, primarily for consumers with impaired or limited credit histories. About 96% of assigned loan volume involved consumers with FICO scores below 650 or no score.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $210.2 million | $181.7 million | $607.5 million | $538.4 million |
| Net income | $74.0 million | $74.0 million | $219.7 million | $193.2 million |
| Diluted EPS | $3.53 | $3.38 | $10.49 | $8.48 |
| Pretax income | $117.9 million | $115.3 million | $348.6 million | $304.5 million |
| Operating cash flow | Not separately stated | Not separately stated | $300.3 million | $270.4 million |
- Q3 revenue rose 15.7%, led by finance charges, up 17.8% to $186.2 million. The average net loan balance increased to $2.89 billion from $2.38 billion, while portfolio yield declined to 25.8% from 26.6%.
- Q3 net income was unchanged: higher finance charges were offset by higher operating costs, credit-loss provision, interest expense and taxes. Net margin was approximately 35.2%, compared with 40.7% in Q3 2014.
- Nine-month net income rose 13.7%; the comparison also benefited from the absence of the prior-year $21.8 million debt-extinguishment loss. Nine-month net margin was approximately 36.2%, versus 35.9%.
- Credit-loss provision increased to $13.2 million in Q3 from $4.1 million, and to $27.8 million for nine months from $13.4 million. Management said overall loan performance was generally consistent with expectations, but certain pools underperformed.
- Interest expense increased 51.1% in Q3 to $20.4 million; average debt outstanding rose to $2.00 billion from $1.63 billion and average borrowing cost to 4.1% from 3.3%.
- At September 30, loans receivable were $3.19 billion gross and $2.96 billion net, versus $2.72 billion gross and $2.51 billion net at year-end 2014. Allowance for credit losses was $230.2 million, up from $206.9 million.
- Operating cash flow was $300.3 million for nine months. Investing used $493.4 million, including $1.64 billion of new loan assignments against $1.32 billion of principal collections; financing provided $321.4 million. Cash and cash equivalents ended at $134.7 million, versus $6.4 million at year-end.
- Total balance-sheet debt was $2.08 billion, up $328.7 million from year-end; shareholders’ equity was $931.3 million. Funded debt to equity was 2.2:1. The company reported $948.0 million of unused and available lines of credit and was compliant with debt covenants.
Material changes and management commentary
- Consumer Loan unit volume increased 41.3% in Q3 and 33.1% for nine months year over year. Active dealers increased 27.5% in Q3. Dollar assignment volume rose 32.9% in Q3, slower than unit growth, partly because the average advance per unit declined.
- The Purchase Program grew to 12.7% of Q3 assignments by unit volume, from 9.5% a year earlier; the Portfolio Program remained the majority.
- 2015 assignment forecasts were weaker than 2014: the first-nine-month 2015 cohort had an initial forecast collection rate of 68.6%, versus 71.8% for 2014. Q3 2015 assignments were forecast at 66.5%. Management attributed the change to assignment mix, including longer average loan terms; the nine-month average initial term was 49.7 months versus 46.9 months in 2014.
- Management stated that operating cash flows and financing alternatives should be sufficient for debt maturities and future operations, based on anticipated cash flows. No specific earnings or volume guidance was provided. Management cautioned that reduced access to financing could materially affect liquidity and operations.
- Funding actions included issuance of $250 million of 7.375% senior notes due 2023, two 2015 asset-backed financings totaling about $601 million, increases to several revolving facility limits, and a new $75 million warehouse facility. Scheduled principal maturities were $490.5 million in 2016 and $745.0 million in 2017.
Risks, contingencies and unusual items
- Consumer collections and profitability depend on estimates of future loan performance. Recent cohorts have limited realized payment history; management noted that forecasts for newer loans are less certain. 2006–2007 cohorts remained below initial collection forecasts, while 2009–2014 cohorts had outperformed initial estimates.
- The company received a New York Attorney General subpoena in September 2015 concerning loan origination and collection. It was also cooperating with Department of Justice and Massachusetts Attorney General inquiries. The company could not estimate potential losses or their range for these investigations.
- The CFPB’s larger-participant rule became effective August 31, 2015, and the company expects to be subject to CFPB supervision. The FTC notified the company in March 2015 that its investigation was closed with no further action warranted.
- Five dealer arbitrations remained pending; management believed their eventual outcome would not materially affect the consolidated financial statements. The filing also describes broader consumer litigation and regulatory risks, including potential adverse effects on financial position, liquidity and results.
- Key stated risks include forecasting errors, funding-market access, substantial debt and interest-rate exposure, competition, economic or auto-market deterioration, regulation, and litigation.
Important facts for investors to verify
- Whether collection performance for 2015 and subsequent loan cohorts tracks initial forecasts, particularly the weaker Q3 2015 forecast.
- How credit-loss provisions and the allowance evolve as newer loans season, and whether cohort performance alters expected yields.
- Whether rapid assignment growth continues to support earnings after lower yields, higher expenses and rising debt costs.
- Available borrowing capacity, refinancing access, debt maturities and compliance with facility covenants.
- Developments and potential financial effects of the New York, DOJ and Massachusetts inquiries and remaining dealer arbitrations.