Business Context and Reporting Period
Company: Credit Acceptance Corporation (Credit Acceptance)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Credit Acceptance provides auto loans to consumers regardless of credit history through a network of "Dealer-Partners." The company operates two primary programs: the Portfolio Program (advancing funds to dealers) and the Purchase Program (buying consumer loans). The company is an indirect lender, with Dealer-Partners originating loans that are assigned to Credit Acceptance.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenue | $111,661 | $326,702 |
| Net Income | $42,047 | $123,097 |
| Diluted EPS | $1.48 | $4.03 |
| Loans Receivable, Net | $1,176,118 | $1,176,118 (Balance Sheet) |
| Total Debt Outstanding | $679,561 | $679,561 (Balance Sheet) |
| Cash and Cash Equivalents | $1,537 | $1,537 (Balance Sheet) |
| Operating Cash Flow (9mo) | N/A | $150,656 |
Note: Total Debt includes Line of Credit ($102.7M), Secured Financing ($328.1M), Mortgage Note ($4.6M), and Senior Notes ($244.2M).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 11.4% for the quarter and 16.5% for the nine-month period compared to 2009. This was driven primarily by a 17.5% increase in finance charges due to higher average loan yields and increased loan balances.
- Profitability: Net income rose 3.2% for the quarter and 16.2% for the nine-month period. Income from continuing operations increased 3.0% (quarter) and 16.2% (nine months).
- Provision for Credit Losses: The provision shifted from a benefit (reversal) of $3.6 million in Q3 2009 to a nominal expense of $2,000 in Q3 2010. For the nine months, the provision increased from a benefit of $7.2 million in 2009 to an expense of $8.2 million in 2010, reflecting net declines in forecasted cash flows for specific impaired loan pools.
- Interest Expense: Interest expense increased 47.8% for the quarter and 54.2% for the nine months, primarily due to the issuance of $250 million in Senior Notes in Q1 2010, which raised the pre-tax average cost of debt.
- Loan Volume: Consumer loan assignment volume increased significantly, with dollar volume up 51.5% year-over-year for the quarter ended September 30, 2010.
Guidance, Outlook, and Risks
- Capital Transactions: The company completed a tender offer in Q3 2010, repurchasing 4.0 million shares at $50.00 per share ($200 million total). This was financed through borrowings under existing credit facilities.
- Debt Structure: The company issued $250 million in 9.125% Senior Notes due 2017. It also extended maturities and reduced interest rates on its revolving secured warehouse facilities and line of credit during the year.
- Tax Settlement: The company settled an IRS audit covering tax years 2004–2008. This resulted in a $6.2 million after-tax favorable impact on net income for the nine-month period due to the reversal of uncertain tax position reserves.
- Key Risks:
- Forecast Accuracy: Reliance on statistical models to forecast collection rates; material variances could impact profitability.
- Liquidity: Dependence on access to capital markets and renewal of financing facilities (Line of Credit, Warehouse Facilities, ABS).
- Debt Covenants: Compliance with restrictive covenants regarding asset-to-debt ratios and earnings coverage is required.
- Economic Conditions: Adverse changes in the auto industry or non-prime consumer market could affect loan performance.
Investor Verification Checklist
- Loan Performance: Verify the accuracy of forecasted collection rates for 2009 and 2010 loan assignments, as these are less certain than older vintages.
- Debt Covenants: Confirm continued compliance with financial covenants, specifically the funded debt to tangible net worth ratio and minimum collateral coverage.
- Interest Rate Exposure: Review the impact of the new Senior Notes (fixed at 9.125%) and floating rate facilities on future interest expense given potential rate hikes.
- Stock Repurchase Impact: Assess the effect of the $200 million share repurchase on liquidity and future capital availability for loan growth.
- Reinsurance Portfolio: Monitor the size and claims experience of the vehicle service contract reinsurance portfolio, which saw a decline in premiums earned.