Business context and reporting period
Credit Acceptance Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2012. The company provides automobile financing through dealers, primarily to consumers with impaired or limited credit histories. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $151.8 | $130.0 | $294.2 | $253.5 |
| Net income | $56.5 | $44.8 | $106.9 | $88.0 |
| Diluted EPS | $2.18 | $1.72 | $4.10 | $3.29 |
| Net income / revenue | 37.2% | 34.5% | 36.3% | 34.7% |
| Provision for credit losses | $2.7 | $8.9 | $8.0 | $17.8 |
| Interest expense | $15.6 | $15.0 | $30.9 | $27.6 |
- For the first six months, operating cash flow was $151.6; investing activities used $255.0 and financing activities provided $104.0. Cash and cash equivalents increased $0.5 to $5.2. Restricted cash was $128.4 and is not equivalent to unrestricted liquidity.
- At June 30, loans receivable were $1,977.8 gross and $1,815.9 net of a $161.9 allowance. Total assets were $2,002.9 and shareholders’ equity was $540.4.
- Balance-sheet debt was approximately $1,132.0, up $134.2 from year-end 2011; funded debt to equity was 2.1:1. The company reported $221.9 available on its revolving line, subject to borrowing-base limits, and compliance with debt covenants.
- Average loan portfolio yield declined to 30.1% in Q2 from 32.6%, and to 30.3% for the half-year from 33.2%. Average cost of debt declined to 5.6% in Q2 and 5.7% for the half-year.
Material changes versus comparable periods
- Q2 revenue rose 16.8% and net income 26.0% year over year; first-half revenue rose 16.1% and net income 21.4%. Management attributed earnings growth principally to a larger loan portfolio.
- Finance charges increased 17.7% in Q2 and 18.0% for the half-year, as portfolio growth more than offset lower yields. Lower credit-loss provisions also supported earnings.
- Consumer loan assignment dollar volume grew 7.9% in Q2 year over year, slowing from 41.3% in Q2 2011. For the half-year, unit volume increased 9.1%, active dealers increased 32.1%, and average volume per active dealer fell 17.4%.
- Operating expenses rose 27.4% in Q2 and 25.1% for the half-year, including higher staffing, sales and marketing, and stock-based compensation. First-half other income fell 21.3%, primarily reflecting lower GAP profit-sharing income following a revenue-recognition change.
Outlook, risks, contingencies and unusual items
- No formal earnings or financial forecast is provided. Management said anticipated operating cash flows and financing alternatives should be sufficient for debt maturities and future operations, while warning that restricted or unavailable funding could materially harm liquidity and operations.
- Management said Q2 forecasted collection rates improved for 2008 and 2010–2012 vintages and were generally stable for other vintages. Lifetime forecasts remain uncertain for newer loans; 2006 and 2007 vintages were materially below initial collection expectations. Management stated that Q2 and first-half forecast methodology changes did not materially affect results.
- Management reported Q2 unit volume for July 2012 was 15.9% above July 2011. It also said the April 2012 increase in dealer advance rates supported volume but lowered expected returns on new assignments.
- In Q2, the company repurchased 1.0 million shares through a tender offer for $84.5 million; the amount was payable at quarter-end and was settled in Q3 with revolver borrowings. It also repurchased 285,402 shares in the open market during the first half for $27.0 million.
- The revolving credit facility was increased from $205 million to $235 million, extended to June 2025? The filing states June 22, 2015, and its borrowing spread was reduced. Warehouse Facility III’s revolving period and final maturity were extended. A $201.3 million Term ABS financing closed in March 2012.
- Stock-based compensation rose substantially, including a CEO award of 310,000 restricted stock units and 190,000 restricted shares; some vesting is tied to adjusted economic profit, a non-GAAP measure.
- Contingencies include a Missouri Attorney General inquiry concerning collections involving consumers who allegedly did not receive vehicle titles, and dealer disputes. A putative class arbitration was dismissed on August 1, 2012; the company also reported a demand from five dealers. The filing does not provide a clear estimate of potential exposure.
- Key risks include forecasting collections, competition, funding access and substantial debt, interest-rate exposure, regulation and litigation, and technology and cybersecurity incidents. The company disclosed prior cybersecurity incidents but said they had not materially affected results to date.
Important facts for investors to verify
- Whether loan growth and forecasted collections remain strong enough to offset lower portfolio yields and the recent slowdown in assignment-volume growth.
- How vintages performing below initial estimates, particularly 2006–2007, affect the allowance, provisions and future cash collections.
- Funding availability, borrowing-base capacity, debt maturities and covenant headroom; distinguish restricted cash from cash available for general use.
- The effects of the $84.5 million tender-offer settlement and other repurchases on leverage, liquidity and diluted share count.
- Updates on the Missouri inquiry and dealer claims, including any material change in potential exposure.