Credit Acceptance Corporation (NASDAQ: CACC) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Credit Acceptance provides indirect auto financing through a nationwide dealer network, primarily for consumers with impaired or limited credit histories. It operates the Portfolio Program, advancing funds to dealers and sharing certain collections, and the Purchase Program, buying consumer loans. A single reportable segment accounts for the business.
Key financial metrics
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Total revenue | $1,489.0 | $1,285.8 | +15.8% |
| Income before taxes | $855.9 | $755.1 | +13.3% |
| Net income | $656.1 | $574.0 | +14.3% |
| Diluted EPS | $34.57 | $29.39 | +17.6% |
| Net income margin | 44.1% | 44.6% | Down 0.5 percentage points |
| Operating cash flow | $812.3 | $703.9 | +15.4% |
| Loans receivable, net (year-end) | $6,685.2 | $5,763.3 | +16.0% |
| Total debt (year-end carrying amount) | $4,538.8 | $3,820.9 | +18.8% |
| Cash and cash equivalents (year-end) | $187.4 | $25.7 | +$161.7 |
- Finance charges were $1,369.4, or 92.0% of revenue, up 16.4%. The average net loan balance rose to $6,321.2 from $5,279.7; portfolio yield declined to 21.7% from 22.3%.
- Provision for credit losses increased 34.3% to $76.4. The year-end allowance was $536.0, compared with $461.9.
- Interest expense rose 25.3% to $196.2, reflecting higher average debt and a higher average cost of debt (4.6% versus 4.3%).
- Operating cash flow was $812.3; investing cash use was $1,024.2, principally reflecting loan assignments and dealer payments. Financing provided $400.3.
- Net income margin is calculated as net income divided by total revenue; the filing does not present this margin as a reported metric.
Material changes and quarterly performance
- Loan assignment dollar volume increased 4.9% to $3,772.2, while unit volume decreased 0.9% to 369,805. Active dealers rose 7.0% to 13,399, but average volume per active dealer fell 7.4%.
- Purchased Loans increased to 32.8% of unit volume from 30.3% in 2018. Average contract size and average advance also increased.
- FY 2019 fourth-quarter revenue was $385.9, versus $342.8 in Q4 2018; net income was $161.9 versus $151.9, and diluted EPS was $8.60 versus $7.79.
- The company repurchased 712,448 shares for $300.4 during 2019. No dividends were paid in the periods presented.
Liquidity, debt and financing
Year-end total debt principal was $4,568.7 (carrying amount $4,538.8); funded debt to equity was 1.9 to 1. Cash and cash equivalents were $187.4, while restricted cash and securities are separately reported and are not generally available for unrestricted use. The company reported $1,565.0 of unused and available lines of credit and compliance with debt covenants at year-end. Management said operating cash flows and financing alternatives should be sufficient for maturities and operations, while warning that reduced financing access could harm liquidity.
During 2019, the company issued $400.0 of 6.625% senior notes due 2026 and $400.0 of 5.125% notes due 2024, completed three Term ABS financings totaling approximately $1,254.2, and expanded or extended several warehouse facilities. It repurchased or redeemed the 6.125% notes due 2021; the remaining $151.8 was redeemed in January 2020. Management intended to redeem $250.0 of 7.375% notes due 2023 around March 2020. A $1.8 pre-tax debt extinguishment loss was recorded in Q4 2019.
Outlook, risks and unusual items
- CECL accounting change: Adopted January 1, 2020. The company estimated that the transition would increase loans receivable and the allowance by approximately $2.5 billion each, with no initial change to net loan carrying value or net income. For new loans, it estimated an initial credit-loss provision of approximately 12%–15% of the loan amount.
- Management estimated 2020 net income under CECL could be 30%–60% lower than under prior GAAP, with the largest impact in the adoption quarter, estimated at 50%–80% lower. These estimates depend on loan volume, portfolio mix and credit performance and may vary materially.
- Credit performance and the estimated timing and amount of collections are central risks. A 1% decline in forecast future net cash flows at year-end was estimated to reduce 2019 net income by approximately $26.8.
- Regulatory and legal matters include a Mississippi state lawsuit alleging unfair or deceptive practices, ongoing inquiries by the New York Attorney General, the CFPB, Maryland, the U.S. Department of Justice and Massachusetts authorities, among others. The company said it could not estimate reasonably possible losses for several matters. The CFPB completed an ECOA examination and identified two matters for action through its supervisory process in February 2020. The Ninth Circuit affirmed a judgment for the company in the Westlake case in February 2020.
- Other key risks include recession-related delinquencies and vehicle-value declines, competition, financing availability and interest rates, regulatory change, litigation, and cybersecurity or technology disruption. The company discontinued its GPS-SID offering during 2019.
Investor verification priorities
- Track CECL’s actual effect on reported earnings, loan balances, allowances and comparability with prior periods.
- Review loan collection forecasts and cohort performance, particularly the 2015–2016 cohorts, whose current collection estimates remain below initial forecasts.
- Assess whether loan growth, declining portfolio yield, higher credit-loss provisions and rising funding costs remain economically attractive together.
- Verify liquidity and refinancing capacity, including secured-facility availability, debt maturities and planned note redemptions.
- Monitor outcomes and potential financial or operating effects of the Mississippi litigation and regulatory investigations; disclosed loss exposure is not estimable for several matters.
The independent auditor issued an unqualified opinion on the financial statements and internal controls over financial reporting.