Credit Acceptance Corporation — Q2 2015 Form 10-Q
Period: Three and six months ended June 30, 2015; unaudited. The company provides dealer financing for vehicle buyers, predominantly consumers with impaired or limited credit histories. It reported one operating segment.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $203.1 million | $179.8 million | $397.3 million | $356.7 million |
| Net income | $74.2 million | $69.4 million | $145.7 million | $119.2 million |
| Diluted EPS | $3.54 | $3.06 | $6.95 | $5.15 |
| Income before tax | $117.4 million | $109.2 million | $230.7 million | $189.2 million |
- Q2 revenue grew 13.0% and net income 6.9%; approximate net margin was 36.5%, versus 38.6% a year earlier. For the first half, revenue grew 11.4% and net income 22.2%; approximate net margin was 36.7%, versus 33.4%.
- Finance charges rose 14.1% in Q2 and 12.7% in the first half, primarily from portfolio growth. Average net loans increased to $2,786.3 million in Q2 from $2,345.6 million; average yield declined to 25.9% from 26.9%. First-half average yield fell to 26.0% from 27.1%.
- Consumer Loan assignments grew 30.6% in units and 28.6% in dollar volume in Q2; active dealers increased 22.7%. The Purchase Program’s share of Q2 unit assignments rose to 12.3% from 8.6% a year earlier.
- Q2 provision for credit losses increased to $8.4 million from $4.6 million; first-half provision increased to $14.6 million from $9.3 million. Management said overall loan performance exceeded expectations, but certain pools underperformed their forecasts.
- Operating cash flow was $189.5 million for the first half, compared with $174.3 million. Investing cash outflow was $357.6 million, versus $204.0 million; financing cash inflow was $163.0 million, versus $32.2 million. Ending cash and cash equivalents were $1.3 million, excluding restricted cash.
- At June 30, total assets were $3,132.5 million; net loans receivable were $2,834.7 million, with a $217.9 million allowance. Total liabilities were $2,278.6 million and shareholders’ equity $853.9 million.
Debt, liquidity, and capital
- Balance-sheet debt was $1,918.0 million, up from $1,752.5 million at year-end; funded debt to equity was 2.2:1. Debt comprised $1,345.0 million secured financing, $548.2 million senior notes, and $24.8 million on the revolving line.
- Unused and available lines of credit totaled $832.3 million, compared with $471.4 million at December 31, 2014. Restricted cash was $177.5 million and should not be treated as unrestricted liquidity.
- The company issued $250 million of 7.375% senior notes due 2023 and completed a $300.6 million Term ABS financing. It also increased its revolving line limit to $310 million and expanded warehouse facility limits. Management said operating cash flows and financing alternatives should cover maturities and operations; access to borrowing remains exposed to economic and market conditions.
- Scheduled principal maturities were $162.4 million for the remainder of 2015, $492.7 million in 2016, and $650.2 million in 2017. The company reported compliance with debt covenants at June 30.
Changes, outlook, and risks
- Q2 income growth reflected higher finance charges, partly offset by lower portfolio yield, higher operating costs, credit-loss provision, and interest expense. Q2 interest expense rose 47.4% to $19.6 million as average debt and average borrowing cost increased.
- First-half net income growth also benefited from the absence of the prior-year $21.8 million debt-extinguishment loss. Lower shares outstanding contributed to stronger per-share growth.
- Management reported 2015 assignment-vintage forecasted collections of 68.9%, versus an initial 68.6%; Q2 assignments alone were forecast at 67.8%. The initial forecast was lower than 2014’s, partly reflecting a shift in loan mix and longer average initial terms (49.4 months versus 46.9 months in 2014). Newer-vintage collection forecasts remain less certain because less performance has been observed.
- No specific earnings or operating guidance was provided. Management identified accurate collection forecasting, access to capital, and maintaining anticipated loan volume as critical success factors. Key risks include subprime credit performance, competition, substantial debt and funding availability, interest-rate changes, regulation, litigation, and consumer-finance market conditions.
- The CFPB’s larger-participant rule will subject the company to CFPB supervision beginning August 31, 2015. A Department of Justice inquiry and a Massachusetts Attorney General inquiry remained open; the company said it could not estimate potential losses. The FTC closed its investigation in March 2015 with no further action warranted. Five dealer arbitrations remained; management believed their outcome would not materially affect the financial statements.
- Management reported no material changes to critical accounting estimates or market-risk disclosures, and no material off-balance-sheet arrangements. Disclosure controls were considered effective.
Key investor verification points
- Track realized collections and forecast revisions for recent loan vintages, especially 2015 assignments and the lower Q2 forecast.
- Assess whether rapid assignment growth can be sustained without further yield compression, credit-loss expense, or funding-cost increases.
- Review unrestricted liquidity, secured borrowing capacity, debt maturities, covenant headroom, and the effect of asset-backed financing structures.
- Monitor CFPB supervision and the outcomes of the DOJ and Massachusetts inquiries, along with remaining dealer arbitrations.
- Separate underlying operating growth from the prior-year debt-extinguishment charge and share-count changes when evaluating earnings comparisons.