Credit Acceptance Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Credit Acceptance provides financing programs through automobile dealers, primarily for consumers with impaired or limited credit histories. 96.6% of Q1 assigned loan units had a FICO score below 650 or no score.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 / prior balance date |
|---|---|---|
| Total revenue | $227.9 million | $194.2 million; up 17.4% |
| Finance charges | $202.8 million | $169.9 million; up 19.4% |
| Income before taxes | $118.4 million | $113.3 million; up 4.5% |
| Net income | $74.4 million | $71.5 million; up 4.1% |
| Diluted EPS | $3.63 | $3.41; up 6.5% |
| Operating cash flow | $91.7 million | $117.4 million |
| Loans receivable, net | $3,363.4 million | $3,101.5 million |
| Debt carrying amount | $2,328.3 million | $2,067.8 million, as presented after reclassification |
| Cash and cash equivalents | $9.1 million | $6.3 million |
Net income as a share of revenue was approximately 32.6%, compared with 36.8% a year earlier. Finance-charge growth reflected a $604.2 million increase in average net loans receivable, partly offset by a lower average portfolio yield (25.3% versus 26.1%). Total costs and expenses rose 35.4%, including a sharp increase in credit-loss provision to $22.1 million from $6.2 million and interest expense to $22.1 million from $14.9 million.
Net cash used in investing activities was $344.3 million, compared with $268.7 million used in Q1 2015, reflecting loan funding and restricted-cash needs. Financing activities provided $255.4 million. Restricted cash and cash equivalents were $225.7 million at quarter-end and are not equivalent to unrestricted liquidity. The company reported $911.7 million of unused and available lines of credit.
Changes versus the prior comparable period
- Consumer Loan assignment unit volume increased 21.1% and dollar volume increased 18.8%; active Dealers rose 24.9%, while average volume per active Dealer fell 2.9%.
- The Purchase Program’s share of assigned units increased to 17.6% from 11.4%; the Portfolio Program share declined to 82.4% from 88.6%.
- Management attributed higher net income mainly to growth in the average loan portfolio, partly offset by weaker Consumer Loan performance. Forecast changes in net future expected cash flows were unfavorable by $6.7 million, versus favorable changes of $9.4 million in Q1 2015.
- Average debt principal rose to $2,210.8 million from $1,845.9 million; average cost of debt increased to 4.0% from 3.2%. The company completed a $385.0 million Term ABS financing in February 2016.
- Debt issuance-cost accounting adopted in 2016 reclassified $16.8 million from other assets to debt balances at December 31, 2015. This affects comparisons of reported debt carrying amounts.
Outlook, risks, and unusual items
- Outlook: No numerical earnings or operating guidance is provided. Management said anticipated operating cash flows and financing alternatives should be sufficient for debt maturities and future operations, while cautioning that access to borrowing depends on economic and financial-market conditions.
- Credit and estimates: Results depend materially on forecasting collections on subprime consumer loans. Management reported weaker Q1 performance overall and declining forecasted collection rates for 2013, 2014, and 2015 assignment vintages. Recent-vintage forecasts remain less certain because much of the expected cash flow has not yet been realized.
- Leverage and funding: Funded debt to equity was 2.3:1. Debt covenants and borrowing-base requirements constrain financing; management reported compliance with applicable covenants. Funding disruption, higher rates, or deteriorating collateral performance could affect liquidity and results.
- Legal and regulatory matters: The company received a Maryland Attorney General subpoena concerning repossession and vehicle-sale practices. It also disclosed investigations by New York, Massachusetts, and the U.S. Department of Justice, and a lawsuit alleging attempted monopolization; the court dismissed one plaintiff’s claims in April 2016. The company could not estimate reasonably possible losses for these matters.
- Other items: Q1 stock repurchases totaled $40.8 million, including open-market purchases and shares withheld for employee tax obligations. The company reported no material off-balance-sheet arrangements and no material change in market-risk disclosures.
Key facts for investors to verify
- Whether collection performance and allowance estimates for newer loan vintages continue to weaken, especially given the increase in credit-loss provision.
- How loan growth, the rising Purchase Program mix, and lower portfolio yields affect returns and the risk borne directly by the company.
- Debt maturities and refinancing capacity, including the scheduled $400.0 million of principal maturities for the remainder of 2016 and reported available credit lines.
- Developments and potential financial exposure from the state and federal investigations, repossession inquiry, and antitrust litigation.
- Debt comparisons across periods, taking account of the debt issuance-cost reclassification and restricted funds that are not freely available.