Credit Acceptance Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Credit Acceptance provides indirect automobile financing through a nationwide dealer network, primarily to consumers with impaired or limited credit histories; 95.6% of 2018 assigned loan units had FICO scores below 650 or no score.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $1,285.8 million | $1,110.0 million |
| Income before taxes | $755.1 million | $583.8 million |
| Net income | $574.0 million | $470.2 million |
| Diluted EPS | $29.39 | $24.04 |
| Net margin | 44.6% | 42.4% |
| Net cash from operating activities | $703.9 million | $566.0 million |
| Net cash used in investing activities | $1,238.3 million | $871.8 million |
| Net cash from financing activities | $599.9 million | $330.3 million |
| Loans receivable, net (year-end) | $5,763.3 million | $4,619.6 million |
| Total debt (year-end carrying amount) | $3,820.9 million | $3,070.8 million |
| Cash and cash equivalents (year-end) | $25.7 million | $8.2 million |
2018 revenue rose 15.8% and net income rose 22.1%. Finance charges, 91.5% of revenue, increased 16.3%, mainly as the average net loan balance grew to $5,279.7 million from $4,276.4 million. Average portfolio yield declined to 22.3% from 23.7%. Credit-loss provision fell to $56.9 million from $129.3 million; interest expense rose 30.3% to $156.6 million. Operating expenses increased 14.6% to $291.2 million.
Fourth-quarter 2018 revenue was $342.8 million and net income was $151.9 million, compared with $287.3 million and $177.1 million in fourth-quarter 2017. The prior-year quarter included a substantial tax benefit from the 2017 Tax Act.
Material changes and liquidity
- Consumer Loan assignments increased 13.6% by unit volume and 25.2% by dollar volume; active dealers rose 8.5% to 12,528. Purchased Loans increased to 30.3% of unit volume from 27.5%.
- Management attributed 2018 earnings growth mainly to a larger average loan portfolio and improved loan performance. 2018 collection forecasts improved for the 2018 cohort; the 2016 cohort weakened, while the 2015 and 2016 cohorts remained below initial collection estimates.
- Year-end loans receivable, net, increased 24.7%; total debt increased 24.4%. Funded debt to equity was 1.9 to 1. Cash and available unused lines of credit were $25.7 million and $1,153.1 million, respectively. The company reported compliance with debt covenants.
- Operating cash flow was $703.9 million; investing outflows primarily reflected dealer advances and loan purchases. The company repurchased $129.1 million of stock in 2018 and paid no dividends.
- 2018 financing included three Term ABS transactions totaling approximately $1.35 billion. The revolving credit facility maturity was extended to June 2021; the company also added a $12.0 million mortgage note. Management said operating cash flows and financing alternatives were expected to provide sufficient funding, while warning that reduced financing access could materially affect liquidity and operations.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management estimated a long-term effective tax rate of approximately 23% under then-enacted federal and state rates.
- The 2017 Tax Act reduced the federal statutory rate to 21% beginning in 2018. Its one-time deferred-tax revaluation benefit increased 2017 net income by $99.8 million; 2018 included a $5.5 million reversal of a provisional tax valuation allowance.
- Management’s loan cash-flow forecasts are a critical accounting estimate. A 1% decline in forecast future loan cash flows at year-end 2018 would have reduced 2018 net income by approximately $25.0 million. A 2017 cash-flow timing model revision had reduced that year’s net income by $30.8 million and portfolio yield by 90 basis points.
- The company identified significant regulatory inquiries, including matters involving the New York Department of Financial Services, the Consumer Financial Protection Bureau, the Federal Trade Commission, and state attorneys general. It could not estimate reasonably possible losses or their ranges. An adverse outcome could materially affect financial results and liquidity.
- Other key risks include non-prime borrower defaults and repossessions, used-vehicle values, competition, funding availability and borrowing costs, debt covenants, consumer-protection regulation, litigation, cybersecurity, and forecast uncertainty. The company expects adoption of the CECL credit-loss standard to materially affect its financial statements and was evaluating the fair-value option for future loans.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Track performance of the 2015–2016 loan cohorts and whether realized collections continue to support management’s forecasts and allowance estimates.
- Review the composition, cost, maturities, collateral requirements, and covenant headroom of debt, including the company’s dependence on asset-backed and warehouse financing.
- Monitor outcomes and potential financial consequences of the pending regulatory inquiries and related litigation; the filing provides no clear loss estimate.
- Assess the effect and implementation choices for CECL, including possible changes to the timing and volatility of reported earnings.
- Separate recurring operating performance from the significant 2017 tax benefit when comparing periods.