Credit Acceptance Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The interim financial statements are unaudited. Credit Acceptance provides financing programs through a nationwide dealer network for consumers who may not qualify for traditional auto financing.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $179.8 million | $169.4 million | $356.7 million | $334.1 million |
| Income before taxes | $109.2 million | $97.4 million | $189.2 million | $192.5 million |
| Net income | $69.4 million | $61.5 million | $119.2 million | $122.1 million |
| Diluted EPS | $3.06 | $2.56 | $5.15 | $5.04 |
| Finance charges | $157.9 million | $147.5 million | $310.7 million | $290.4 million |
| Interest expense | $13.3 million | $16.2 million | $29.3 million | $32.2 million |
| Provision for credit losses | $4.6 million | $5.4 million | $9.3 million | $11.2 million |
Q2 net income increased 12.8%, primarily as the average net loan balance grew; six-month net income declined 2.4%, mainly because of a $21.8 million pretax debt-extinguishment loss in Q1. Diluted EPS rose for the six-month period as weighted average shares fell 4.4%. Calculated net margin was approximately 38.6% in Q2 2014 versus 36.3% a year earlier; for the six months it was approximately 33.4% versus 36.5%.
- Q2 revenue rose 6.1%. Finance charges increased 7.1%, as a 13.5% increase in average net loans more than offset a lower portfolio yield: 26.9% versus 28.5%.
- For the first six months, revenue rose 6.8%; average net loans increased to $2,296.7 million from $2,015.8 million, while average yield fell to 27.1% from 28.8%.
- Q2 operating expenses increased 4.5%; the six-month increase was 8.1%, including higher compensation and stock-based compensation. Claims provision rose 12.8% in the six-month comparison.
- Net cash provided by operating activities was $174.3 million versus $140.7 million in the first half of 2013. Investing activities used $204.0 million; financing activities provided $32.2 million. Cash and cash equivalents increased to $6.7 million from $4.2 million at year-end.
Balance sheet, debt and liquidity
At June 30, 2014, total assets were $2,627.6 million, including net loans receivable of $2,358.0 million and an allowance for credit losses of $204.8 million. Total liabilities were $1,954.8 million and shareholders’ equity was $672.8 million. Total balance-sheet debt was $1,654.7 million, up $262.3 million from December 31, 2013. The funded-debt-to-equity ratio was 2.5:1.
Unrestricted cash was $6.7 million; restricted cash and cash equivalents were $156.6 million and are not freely available. The revolving credit line had $128.8 million of stated borrowing availability, subject to borrowing-base limits. Management said operating cash flows and financing alternatives should be sufficient for maturities and operations, but warned that constrained funding access could materially harm liquidity. The company reported compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- Q2 Consumer Loan unit volume grew 4.5% year over year and dollar volume grew 5.7%. Active dealers increased 10.6%, but average volume per active dealer declined 5.5%; management attributed the decline to increased competition. First-half unit volume rose 9.8%.
- The portfolio grew, while the Purchase Program’s share of assignments increased: it represented 8.6% of Q2 unit volume versus 6.1% a year earlier. Management noted that weaker collections affect Purchased Loans more directly than Dealer Loans.
- In January, the company issued $300 million of 6.125% senior notes due 2021 and used the proceeds, together with revolver borrowings, to redeem $350 million of 9.125% notes due 2017. The redemption generated the $21.8 million loss. Q2 also included a $299 million Term ABS financing at an expected annualized cost of approximately 2.0%. The revolving credit line maturity was extended to June 2017; Warehouse Facility II’s revolving period was extended after quarter-end to July 2017.
- The company repurchased $218.7 million of shares in the first half, including 1,553,170 shares through a tender offer. Remaining authorization under its separate repurchase program was 324,456 shares at June 30.
- Management reported that overall loan performance exceeded expectations in the first half, but certain pools underperformed and generated provisions. Forecast collection rates for 2006 and 2007 assignment cohorts remained below initial estimates; 2009–2013 cohorts were above initial estimates. Only 8.3% of forecast collections on 2014 assignments had been realized by June 30, leaving new-cohort estimates relatively uncertain.
- No specific earnings or volume guidance is provided. Management identified accurate collection forecasting, access to capital, competition, interest rates, regulation, litigation, and the ability to sustain dealer and loan volume as key uncertainties.
- On June 6, 2014, the company received a Federal Trade Commission civil investigative demand concerning consumer practices and said it was cooperating. It also disclosed six dealer arbitrations seeking unspecified damages. The filing states adverse outcomes in litigation could materially affect financial position, liquidity or results.
Most important facts for investors to verify
- Whether actual collections on newer loan cohorts track the company’s forecasts, and how forecast revisions affect earnings and the credit-loss allowance.
- Whether dealer growth can offset falling volume per dealer and competitive pressure without further yield or spread deterioration.
- Available borrowing capacity under collateral-based facilities, refinancing needs and compliance with debt covenants; scheduled principal maturities include $204.7 million for the remainder of 2014 and $584.1 million in 2016.
- Developments and potential financial exposure related to the FTC inquiry and dealer arbitrations; the filing does not quantify a likely loss.
- The effect of continued share repurchases and higher debt on leverage, liquidity and per-share results.