Credit Acceptance Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context
Credit Acceptance provides automobile financing through a nationwide dealer network, primarily for consumers with impaired or limited credit histories. Its Portfolio Program advances funds to dealers and generally receives collections before dealer holdback; its Purchase Program buys consumer loans. The Portfolio Program represented 94.4% of Q1 assigned-loan units, versus 93.3% a year earlier.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior date | Change |
|---|---|---|---|
| Total revenue | $164.7 | $142.4 | +15.7% |
| Finance charges | $142.9 | $126.1 | +13.3% |
| Net income | $60.6 | $50.3 | +20.5% |
| Diluted EPS | $2.48 | $1.92 | +29.2% |
| Net margin | 36.8% | 35.3% | +1.5 percentage points |
| Operating cash flow | $80.9 | $89.1 | Down $8.2 |
| Net loans receivable | $2,028.6 | $1,933.5 | +4.9% since year-end |
| Total debt | $1,356.0 | $1,250.8 | + $105.2 since year-end |
Revenue and earnings growth primarily reflected a larger average loan portfolio. Average net loans receivable rose to $1,964.3 from $1,649.7 year over year, while average portfolio yield declined to 29.1% from 30.6%, largely due to higher advance rates on newer assignments. Net income grew faster than revenue; expenses rose 9.4% overall. Interest expense was $16.0, and the effective tax rate was 36.3%.
Cash and cash equivalents were $7.8 at quarter-end, versus $9.0 at year-end; restricted cash was $116.3, up from $92.4, and is largely tied to secured financings and claims trusts. Investing cash use was $127.4, including $378.6 of dealer advances, partly offset by $345.5 of loan principal collections. Financing cash provided was $45.3, including $59.7 of stock repurchases. The allowance for credit losses was $181.7, compared with $176.4 at year-end.
Quarter-end debt comprised $115.9 revolving line borrowings, $885.8 secured financing, a $4.0 mortgage note, and $350.3 senior notes. Funded debt to equity was 2.2:1. The company reported $119.1 available under its revolving line and $182.9 under Warehouse Facility II, subject to borrowing-base and collateral limitations. It was in compliance with its debt covenants.
Material changes and management commentary
- Net income increased primarily because of growth in average loans. Finance charges gained $16.8 from portfolio growth, partly offset by a $7.2 impact from lower yield.
- Consumer Loan unit assignments fell 2.9% year over year and dollar volume fell 0.4%. Active dealers increased 21.2%, but average volume per active dealer declined 20.1%; management attributed the decline to increased competition.
- Other income rose 78.2% to $9.8, primarily due to higher GPS/starter-interrupt-device fees per unit and increased dealer-support product income.
- Credit-loss provision increased to $5.8 from $5.2. Management said overall loan performance exceeded expectations during the quarter, although certain pools underperformed; the provision included $6.0 for Dealer Loans, partly offset by a $0.2 reversal for Purchased Loans.
- Forecasted collection rates for 2009–2012 assignment cohorts remained above initial estimates, while 2006–2007 cohorts remained below. More recent cohorts are less certain because less of their expected collections has been realized.
- The company repurchased 537,054 shares for $59.7 during Q1. The board authorized repurchases of an additional 1 million shares in March; 1,003,417 shares remained authorized at quarter-end.
Outlook, risks, contingencies, and subsequent events
No specific earnings or revenue guidance was provided. Management said operating cash flows and available financing alternatives were expected to cover debt maturities and future operations, but cautioned that restricted or unavailable funding could materially harm liquidity and operations. Scheduled principal maturities totaled $1,355.7, including $102.7 for the remainder of 2013 and $399.4 in 2014.
Key risks include inaccurate forecasts of subprime-loan collections, competition, access to capital, substantial debt and covenant restrictions, interest-rate changes, economic and regulatory developments, and customer or dealer litigation. The filing describes six individual dealer arbitrations filed in February 2013 seeking unspecified damages; the company intends to defend them. It warns that an adverse outcome in litigation could materially affect financial position, liquidity, or results.
Subsequent to quarter-end, Warehouse Facility IV’s revolving period was extended to April 5, 2016 and its spread reduced from LIBOR plus 275 to LIBOR plus 225 basis points. The company also completed a $140.3 million Term ABS financing, with an expected annualized cost of approximately 1.8%, to repay debt. An underwritten offering of 1.5 million shares by existing holders generated no proceeds for the company.
Important facts for investors to verify
- Whether collections and credit-loss forecasts for newer loan cohorts remain sound, given the portfolio’s high-risk consumer profile and the sensitivity of results to forecast revisions.
- Whether dealer assignment volumes and average volume per dealer recover, and how competition affects advance rates, yields, and returns.
- Current borrowing-base availability, restricted cash requirements, upcoming maturities, covenant compliance, and the cost and availability of refinancing.
- The status and potential financial exposure of dealer arbitrations and other customer or regulatory matters.
- The company’s use of cash for repurchases relative to loan growth and debt levels; repurchases were $59.7 million while total debt rose $105.2 million from year-end.