Credit Acceptance Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Credit Acceptance finances vehicle purchases through dealers, primarily for consumers with impaired or limited credit histories. The filing is unaudited.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date | Change |
|---|---|---|---|
| Total revenue | $353.8 million | $295.6 million | +19.7% |
| Net income | $164.4 million | $120.1 million | +36.9% |
| Diluted earnings per share | $8.65 | $6.17 | +40.2% |
| Income before taxes | $206.3 million | $157.7 million | +30.8% |
| Operating cash flow | $229.7 million | $207.4 million | +$22.3 million |
| Loans receivable, net | $6,143.7 million | $5,763.3 million | +6.6% since year-end |
| Total debt, carrying amount | $4,231.3 million | $3,820.9 million | +$410.4 million since year-end |
| Cash and cash equivalents | $41.3 million | $25.7 million | +$15.6 million since year-end |
Net margin was approximately 46.5%, versus 40.6% a year earlier; pretax margin was approximately 58.3%, versus 53.3%. These percentages are calculated from reported revenue and income.
- Finance charges increased 19.1% to $321.9 million, primarily as the average net loan balance grew to $5,894.1 million from $4,781.0 million. Average portfolio yield declined to 21.8% from 22.6%.
- Provision for credit losses fell to $14.5 million from $23.4 million. Interest expense rose 30.4% to $45.0 million as average debt and average cost of debt increased to $4,019.5 million and 4.5%, respectively, from $3,303.1 million and 4.2%.
- Net cash used in investing was $402.2 million, including $719.0 million of dealer advances and $386.4 million of loan purchases, partly offset by $757.4 million of loan principal collections. Financing provided $302.4 million. Cash, including restricted cash, increased $129.9 million to $459.2 million; restricted cash is not equivalent to freely available cash.
- Reported unused and available lines of credit totaled $1,325.0 million at quarter-end. Funded debt to equity was 2.1 to 1. The company reported compliance with applicable debt covenants.
Material changes and operating trends
- Management attributed higher earnings primarily to growth in the average loan portfolio. Total new assignment dollar volume grew 5.1% year over year, but unit volume grew only 0.4%, slowing from prior quarters.
- Active dealers increased 9.9% to 9,633, while average unit volume per active dealer decreased 8.6%. Purchased Loans rose to 32.6% of unit volume from 29.9% a year earlier and to 35.0% of dollar volume from 32.6%.
- Operating expenses increased 8.8% to $81.4 million, including higher compensation. The effective tax rate declined to 20.3% from 23.8%, mainly due to stock-based compensation tax benefits.
- The company repurchased 268,611 shares for $109.2 million, compared with $2.0 million of repurchases in Q1 2018.
- On March 7, 2019, the company issued $400 million of 6.625% senior notes due 2026. It also completed a $402.5 million Term ABS financing in February, with an expected annualized cost of approximately 3.8%. The new senior-note proceeds were used for general corporate purposes, including repayment of revolving borrowings.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said it believes operating cash flows and financing alternatives will be sufficient for debt maturities and operations, while warning that reduced access to financing could materially harm liquidity and operations.
- Credit performance and the accuracy of collection forecasts are central risks. Forecasted collections for 2015 and 2016 assignment cohorts remained below initial estimates; 2010–2013, 2017 and 2018 cohorts were above initial estimates. For 2019 assignments, the forecasted collection rate was 64.1% versus 63.9% initially. Newer cohorts remain less certain because relatively little of their forecast collections has been realized.
- For Q1, overall loan performance exceeded expectations at the start of the period, but some pools underperformed and generated the $14.5 million credit-loss provision. Forecasted net cash flows increased $16.7 million overall, including a $16.2 million improvement for Purchased Loans. Management notes that collection shortfalls affect Purchased Loans more directly; Dealer Loan shortfalls are substantially offset by lower forecast Dealer Holdback.
- Management expects CECL adoption to materially affect financial statements and disclosures, with significant changes to the timing of income recognition. The company was evaluating the fair value option as an alternative; fair-value accounting could make reported results volatile when interest rates change rapidly.
- After quarter-end, the company received a Consumer Financial Protection Bureau civil investigative demand on April 22, and Mississippi filed a consumer-protection lawsuit on April 23. The company said it could not estimate potential losses for either matter and intends to defend the Mississippi case. New York DFS closed its current examinations on April 24. Other federal and state investigations and litigation remain ongoing; an adverse outcome could materially affect financial position, liquidity or results.
- Other stated risks include subprime consumer credit deterioration, competition, funding availability and cost, substantial leverage, interest-rate movements, regulation, and litigation. The filing reports no material change in market-risk disclosures and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether recent assignment-volume growth and dealer productivity stabilize, and whether the larger Purchased Loan mix continues to affect portfolio risk and returns.
- Subsequent collection performance, especially for 2015–2016 cohorts and newer cohorts with limited realized payment history; also monitor allowance and provision trends.
- Funding capacity, borrowing costs, debt maturities and covenant compliance, including the revolving facility’s scheduled capacity reduction in June 2019.
- Developments, potential financial exposure and timing in the CFPB matter, Mississippi lawsuit, and other unresolved regulatory investigations and litigation.
- The company’s eventual CECL or fair-value accounting approach, adoption effects, and implications for the comparability and volatility of reported earnings.