Credit Acceptance Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Credit Acceptance provides auto financing through dealers, primarily to consumers with impaired or limited credit histories; 92.7% of Q2 2021 assigned-loan units had borrower FICO scores below 650 or no score.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $471.7 million | $406.3 million | $922.7 million | $795.4 million |
| Net income | $288.6 million | $96.4 million | $490.7 million | $12.6 million |
| Diluted EPS | $17.18 | $5.40 | $28.96 | $0.70 |
| Provision for credit losses | $(30.5) million | $139.4 million | $(9.2) million | $494.1 million |
- Revenue increased 16.1% in Q2 and 16.0% for the half year. Finance charges rose 17.8% and 17.6%, respectively; management attributed most of the increase to higher portfolio yields, with average yields of 26.0% in Q2 and 25.5% for the half year. Management cautions that CECL accounting causes reported finance charges on newer loans to exceed expected yields.
- Net income margin, calculated as net income divided by revenue, was approximately 61.2% in Q2 2021 versus 23.7% in Q2 2020, and 53.2% for the first half versus 1.6%. Results benefited substantially from changes in credit-loss forecasts and the prior-year comparison.
- Credit-loss provision was a reversal in both 2021 periods. Q2 included a $122.1 million favorable impact from forecast changes, partly offset by $91.6 million of provision on new assignments. For the half year, favorable forecast changes of $232.6 million exceeded $223.4 million of new-assignment provision.
- Six-month operating cash flow was $668.5 million; investing cash flow was $21.6 million and financing cash flow was $(225.4) million. Cash and restricted cash together increased $464.7 million to $860.9 million. Of that, unrestricted cash and cash equivalents were $383.5 million.
- At June 30, total debt carrying amount was $4.780 billion, up from $4.609 billion at year-end. Secured financing was $3.979 billion and senior notes were $791.5 million; the revolving line had no balance. Unused and available credit lines were $1.590 billion, subject to collateral and other terms. Funded debt to equity was 2.0 to 1; the company reported compliance with debt covenants.
- Total assets were $7.801 billion, shareholders’ equity $2.393 billion, and net loans receivable $6.768 billion. The allowance for credit losses was $3.198 billion.
Material changes versus the prior comparable periods
- Net income rose sharply as credit-loss expense fell: Q2 swung from $139.4 million expense to a $30.5 million reversal; first-half expense fell from $494.1 million to a $9.2 million reversal. Management cited improved portfolio performance and a 2020 COVID-related reduction in collection forecasts.
- Q2 finance charges increased $67.2 million; management attributed $56.5 million to yield and $10.7 million to a higher average net loan balance. For the half year, the $130.2 million increase reflected $114.0 million from yield and $16.2 million from balance.
- Consumer Loan unit assignments fell 28.7% in Q2 and 17.9% in the first half year over year; dollar volume fell 20.5% in Q2. Active dealers and average volume per active dealer also declined.
- Interest expense declined 12.9% in Q2 and 14.3% for the half year, primarily as average borrowing costs fell. First-half general and administrative expense increased $33.4 million, including a $27.2 million Massachusetts litigation contingency accrual.
- The company repurchased 991,571 shares for $389.7 million during the first half. June 30 shares issued and outstanding were 16.0 million, versus 17.1 million at year-end.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said operating cash flows and financing alternatives were expected to be sufficient for debt maturities and future operations, while warning that constrained funding access could materially harm liquidity and operations.
- Management reported that assignment demand weakened again from May through July 2021, which it attributed mainly to low dealer inventories and rising used-car prices associated with automotive supply-chain disruptions. Unit volume for the 28-day period ended July 28 was down 37.6% year over year and 33.2% versus 2019. Collections remained above the prior year in that period, but growth had eased from Q2.
- Credit performance estimates remain judgment-sensitive. The company continued to apply its COVID-19 forecast adjustment; it said the pandemic increased uncertainty in estimating future collections. Recent loan vintages have less realized performance data, making their collection forecasts less certain.
- Significant legal matters include a putative securities class action, investigations by the Consumer Financial Protection Bureau and multiple state attorneys general, and litigation in Mississippi and Massachusetts. The company could not estimate reasonably possible losses for several matters. It recorded a probable $27.2 million loss in Q1 2021 after reaching an agreement in principle to settle the Massachusetts case.
- The former CEO’s May 2021 retirement triggered an $11.5 million reversal of stock-based compensation expense. Shareholder approval on July 21, 2021 made 770,500 previously conditional stock options grant-date eligible; the filing reports $145.3 million of grant-date fair value to be expensed over the requisite service period.
- Key risks include forecasting collections on high-risk consumer loans, reduced assignment volume, dealer and vehicle-supply conditions, dependence on securitization and other funding sources, substantial debt and interest-rate exposure, and litigation and regulatory outcomes.
Important facts for investors to verify
- Whether subsequent collection performance supports the improved forecasts that drove the credit-loss reversals, especially for recent vintages.
- How dealer inventory constraints, used-car prices, and lower assignment volumes affect loan growth and pricing.
- Availability and cost of warehouse and asset-backed funding, collateral headroom, covenant compliance, and upcoming principal maturities, particularly in 2022 and 2023.
- Developments and potential financial effects of the Massachusetts settlement, CFPB and state investigations, and securities litigation.
- The future effect of CECL-driven yield recognition, the new stock-option compensation expense, and continued share repurchases on reported earnings and per-share results.