Credit Acceptance Corporation — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017; balance-sheet figures are compared with December 31, 2017. Credit Acceptance provides financing programs through auto dealers, primarily for consumers with impaired or limited credit histories. 96.3% of assigned loan units in both periods were for consumers with FICO scores below 650 or no score.
Financial and operating metrics
| Metric | Q1 2018 | Q1 2017 / prior date | Change |
|---|---|---|---|
| Revenue | $295.6 million | $262.8 million | +12.5% |
| Income before taxes | $157.7 million | $144.2 million | +9.4% |
| Net income | $120.1 million | $93.3 million | +28.7% |
| Diluted EPS | $6.17 | $4.72 | +30.7% |
| Net income margin | 40.6% | 35.5% | +5.1 percentage points |
| Operating cash flow | $207.4 million | $161.9 million | +$45.5 million |
| Net loans receivable | $5,049.7 million | $4,619.6 million at Dec. 31, 2017 | +$430.1 million |
| Total debt, carrying amount | $3,446.4 million | $3,070.8 million at Dec. 31, 2017 | +$375.6 million |
| Cash and cash equivalents | $11.5 million | $8.2 million at Dec. 31, 2017 | +$3.3 million |
- Finance charges rose 13.6% to $270.3 million, mainly as the average net loan balance increased by $800.7 million to $4,781.0 million. Average portfolio yield declined to 22.6% from 23.9%.
- Total costs and expenses increased 16.3% to $137.9 million. Interest expense rose 25.0% to $34.5 million, reflecting higher average debt and a 4.2% average debt cost versus 4.0%. Credit-loss provision increased to $23.4 million from $20.5 million.
- The effective tax rate fell to 23.8% from 35.3%, primarily following the 2017 Tax Act’s reduction in the federal statutory rate. Management expects a long-term effective rate of approximately 23% under currently enacted rates.
- Cash flow from investing was negative $460.3 million and financing provided $369.1 million. Cash, cash equivalents and restricted cash together increased $116.2 million to $380.0 million; much of this total is restricted and should not be treated as freely available liquidity.
- Unused and available lines of credit were $1,152.0 million. Funded debt to equity was 2.1 to 1. Principal debt outstanding was $3,469.9 million. The company reported compliance with its financing covenants.
Material changes versus the prior comparable period
- Consumer Loan assignments grew 18.5% by units and 32.9% by dollar volume. Active dealers increased 11.6%; average volume per active dealer increased 5.8%. Purchased Loans reached 29.9% of unit volume, up from 26.7%.
- Average Consumer Loan size and term increased; the average initial term for 2018 assignments was 57 months. Management attributed faster dollar than unit growth partly to larger loans and a higher Purchased Loan mix.
- Net income growth reflected the larger average loan portfolio and lower taxes. Revenue growth was partly offset by lower portfolio yield and higher operating and interest costs.
- Forecasted collections weakened during Q1 for 2015 and 2016 assignment cohorts; their current forecasts were respectively 2.4 and 1.0 percentage points below initial forecasts. Overall forecasted net cash flows decreased $10.8 million during the quarter.
- On February 22, 2018, the company completed a $500 million Term ABS financing, with an expected annualized cost of approximately 3.6%; proceeds were used to repay outstanding indebtedness. Cash-flow presentation also changed retrospectively upon adoption of restricted-cash accounting guidance, so prior-period cash-flow figures reflect the revised presentation.
Outlook, commentary, risks and unusual items
- No specific earnings or volume guidance was provided. Management said anticipated operating cash flows and financing alternatives should be sufficient for debt maturities and future operations, while warning that reduced access to funding could materially harm liquidity and operations.
- Management identifies accurate loan-collection forecasts, access to capital, and maintaining or growing loan volume on expected terms as key success factors. Recent cohorts have less realized payment history, making their forecasts more uncertain; management says forecast risk declines as loans age.
- The allowance for credit losses was $448.4 million, up from $429.4 million at year-end. The company said adoption of the expected-credit-loss standard (CECL), effective for it after December 15, 2019, is expected to have a material impact; the amount was not yet determined.
- Regulatory and legal matters include a New York DFS inquiry communicated April 10, 2018 concerning possible fair-lending, GPS device disclosure, and examination-information issues; investigations or inquiries by Massachusetts and Mississippi authorities, the CFPB, FTC, Maryland, New York and the U.S. Department of Justice; and an appeal by Westlake of a judgment in the company’s favor. The company could not estimate reasonably possible losses for the identified matters. An adverse outcome could materially affect financial position, liquidity or results.
- The company reported a $5.8 million valuation allowance related to executive-compensation tax rules and noted uncertainty about the tax treatment of its loan valuation income-recognition method. It stated that estimates may change as guidance develops.
Important facts for investors to verify
- Track collection performance and allowance changes, especially for 2015–2016 cohorts and newer, less seasoned assignments.
- Assess whether rapid loan growth and the increased Purchased Loan mix sustain returns as portfolio yields decline and funding costs rise.
- Review debt maturities, borrowing-base and covenant capacity, restricted collateral, and continued access to warehouse and securitization funding.
- Monitor the outcome and potential financial effects of the regulatory investigations and litigation; loss exposure was not estimable in the filing.
- Confirm the eventual effects of CECL adoption and remaining tax-accounting uncertainties. The filing does not provide a clear quantified estimate for either impact.