Credit Acceptance Corporation — Q2 2022 Form 10-Q
Business context and reporting period. The company provides financing through a nationwide dealer network, primarily for consumers with impaired or limited credit histories. This unaudited report covers the quarter and six months ended June 30, 2022; financial amounts below are in millions unless noted.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Total revenue | $457.4 | $471.7 | $913.1 | $922.7 |
| Provision for credit losses | $147.5 | $(30.5) reversal | $170.8 | $(9.2) reversal |
| Income before taxes | $142.1 | $379.7 | $426.6 | $644.0 |
| Net income | $107.4 | $288.6 | $321.7 | $490.7 |
| Diluted EPS | $7.94 | $17.18 | $23.10 | $28.96 |
| Operating expenses, excluding credit-loss provision, interest and claims | $116.7 | $70.2 | $219.2 | $182.8 |
- Revenue and earnings: Q2 revenue declined 3.0% and net income declined 62.8% year over year. First-half revenue declined 1.0% and net income declined 34.4%. Finance charges fell 4.4% in Q2 and 2.4% in the first half, mainly as average net loans declined; higher portfolio yields partly offset that effect. Other income rose, largely from ancillary-product profit sharing.
- Credit performance: Q2 forecast changes reduced expected future net cash flows by $43.4, versus a $104.5 increase in Q2 2021. For the first half, forecasted net cash flows increased $66.8, but less than the $211.9 increase in the prior-year period. The company recorded a $97.5 provision on new Q2 assignments and $50.0 from forecast changes.
- Cash flow: First-half operating cash flow was $625.6, compared with $668.5 in 2021. Investing activities used $166.4, versus providing $21.6; financing activities used $462.6, including $652.7 of share repurchases. Cash and restricted cash totaled $430.8 at June 30, 2022.
- Loans and allowance: Gross loans receivable were $9,190.6 and the allowance for credit losses was $2,866.9; net loans were $6,323.7. Net loans were broadly unchanged from year-end 2021.
- Debt and liquidity: Total debt carrying amount was $4,792.2, up from $4,616.3 at year-end. Unrestricted cash was $4.1; restricted cash was $426.7. Unused and available lines of credit were $1,239.3. Funded debt to equity was 3.2:1; the company reported compliance with financing covenants.
Material changes and management commentary
- Q2 Consumer Loan assignment volume increased 5.1% by units and 22.0% by dollars year over year; first-half unit volume declined 10.5%, while dollar volume rose 3.7%. Larger average loans and higher advances contributed to dollar growth. The company attributed weak 2021 comparisons and continuing pressure on unit volume partly to low dealer inventories and elevated used-car prices.
- Management removed its COVID-related forecast adjustment in Q1 2022 and enhanced its cash-flow forecasting methodology using more recent data and new variables. These changes increased forecasted net cash flows by $95.7 and reduced provision expense by $70.6 in Q1. In Q2, however, forecasted collections weakened for 2020–2022 assignment vintages.
- Q2 operating expense growth included higher stock-based compensation and staffing costs, as well as a $12.0 legal contingency expense. The prior-year quarter included a reversal of stock compensation expense following the former CEO’s retirement.
- The company repurchased approximately 1.2 million shares for $652.7 in the first half, or about 8.5% of beginning-of-year shares. At June 30, 419,607 shares remained authorized for repurchase.
- In June, the company completed a $350.0 Term ABS financing, extended Warehouse Facility IV’s revolving period, and extended its revolving credit facility maturity to June 2025. The revolving facility’s capacity was reduced to $410.0, and a net-income covenant was removed.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management said anticipated operating cash flows and financing alternatives should fund debt maturities and future operations, while cautioning that reduced access to financing could materially affect liquidity and operations.
- Key risks include forecasting collections on recent loan vintages, consumer credit deterioration, used-car market and broader economic conditions, funding availability and cost, interest rates, substantial debt, and regulatory, litigation and cybersecurity exposures. Most recently assigned loans have less realized performance history, increasing forecast uncertainty.
- Regulatory investigations include matters involving the California Attorney General, New York Attorney General, CFPB, and multistate authorities, among others. The company said it could not estimate reasonably possible losses for these investigations. It also warned that adverse outcomes could materially affect financial position, liquidity or results.
- The company reached an agreement in principle to settle a putative securities class action for $12.0, recorded as a Q2 contingent loss, subject to definitive documentation and court approval. The agreement denies liability and does not assure final resolution.
- The company believes the carrying value of its owned office properties and related assets may exceed market value; a future held-for-sale classification could require impairment. Its Henderson lease expires in December 2022 and will not be renewed.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How collections and forecast assumptions develop for the 2020–2022 loan vintages, and whether the Q2 weakening persists.
- Whether dealer assignment growth, average advance size and used-car prices sustain loan volume and portfolio economics.
- Available borrowing capacity, refinancing needs and funding costs, particularly amid rising rates and scheduled debt maturities.
- Status and potential financial consequences of CFPB, state attorney general and other legal or regulatory matters, including court approval of the $12.0 settlement.
- Potential office-property impairment and the effects of continued share repurchases on leverage and liquidity.