Credit Acceptance Corporation — Q3 2011 Form 10-Q
Business context and reporting period
Credit Acceptance provides auto financing through a nationwide dealer network, primarily to consumers with impaired or limited credit histories. This unaudited filing covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Most assigned loans were under the Portfolio Program (92.3% of Q3 unit volume); the company also purchases loans and reinsures vehicle service contracts.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $133.7m | $111.7m | $387.2m | $326.7m |
| Income before tax | $78.7m | $65.2m | $216.6m | $184.3m |
| Net income | $50.0m | $42.0m | $138.0m | $123.1m |
| Diluted EPS | $1.91 | $1.48 | $5.19 | $4.03 |
| Operating cash flow | — | $202.4m | $150.7m |
Q3 revenue rose 19.8% and net income rose 18.8%; nine-month revenue rose 18.5% and net income rose 12.1%. Management attributed profit growth mainly to expansion of the loan portfolio. Q3 net margin was approximately 37.4% (2010: 37.7%); nine-month net margin was approximately 35.6% (2010: 37.7%). Finance charges increased 18.8% in Q3 and 18.9% year to date, primarily from higher average receivables, partly offset by lower portfolio yields. Average yield declined to 31.9% from 34.4% in Q3 and to 32.7% from 34.3% year to date.
Credit-loss provision was $4.6m in Q3 versus $2,000 in Q3 2010, and $22.4m year to date versus $8.2m. Management said overall loan performance exceeded expectations, but certain impaired pools had weaker forecast cash flows. Claims provision increased 36.8% in Q3 and 29.1% year to date, reflecting a larger reinsurance portfolio and higher claims per contract. Interest expense rose as average debt increased, although average borrowing costs declined.
Balance sheet, liquidity and funding
At September 30, 2011, total assets were $1.671bn, including net loans receivable of $1.525bn, against $1.344bn and $1.218bn, respectively, at December 31, 2010. Gross loans were $1.674bn and the allowance for credit losses was $149.0m. Cash and cash equivalents were $3.6m; restricted cash was $91.2m, up from $66.5m at year-end. The filing does not present a conventional current-liquidity ratio.
Total balance-sheet debt was approximately $969.0m, versus $685.7m at year-end; shareholders’ equity was $493.3m. Funded debt to equity was 2.0:1. Debt comprised a $99.4m revolving credit balance, $514.8m secured financing, a $4.3m mortgage note and $350.4m senior notes. Nine-month investing cash outflow was $358.0m, mainly reflecting $888.6m of dealer advances and $94.2m of loan purchases, partly offset by $748.2m of principal collections. Financing provided $155.5m; cash decreased $0.2m. The company repurchased $125.0m of shares in a Q1 tender offer and reported $126.7m total repurchases in financing cash flows.
Funding actions included a new $75m warehouse facility, increased and extended revolving-credit capacity, and improved pricing or maturity terms on certain facilities. In October 2011, after quarter-end, the company completed a $200.5m term ABS financing, with an expected annualized cost of approximately 3.5%, to repay debt. Management believed operating cash flows and financing alternatives would fund maturities and operations, but cautioned that restricted or unavailable funding could materially affect liquidity. All reported debt covenants were met at quarter-end.
Changes, outlook, risks and unusual items
- Consumer-loan unit volume increased 28.6% year over year in Q3; dollar volume increased 40.5%. For the first nine months, unit volume rose 31.6%, active dealer-partners rose 23.8%, and average volume per active dealer-partner rose 6.4%. Management cited dealer growth and higher advance rates; it noted the higher advances reduced expected returns on new loans but likely increased economic profit.
- Loan portfolio expansion drove revenue, while lower yields, sharply higher credit-loss provisions, rising interest expense and claims costs constrained earnings growth. Year-to-date effective tax rate rose to 36.3% from 33.2%, largely because 2010 included releases of uncertain-tax-position reserves.
- Management provided no specific earnings or operating guidance. It said forecasts for older loan vintages were more seasoned, while forecasts for recent vintages remained less certain because fewer expected collections had been realized. Certain 2006–2007 vintages remained below initial collection forecasts; 2009–2010 vintages were above initial forecasts.
- Other income included higher GAP profit-sharing income following a change beginning in Q2 2011 to recognize it over contract lives. The company also reported no material forecast-methodology changes affecting results.
- Risks include forecasting collections on higher-risk consumer loans, access to funding and capital markets, substantial debt and interest-rate exposure, competition, regulation, and consumer claims and litigation. The filing describes customer lawsuits, including purported class actions, and an ongoing Missouri Attorney General inquiry into collection practices involving consumers who say they did not receive vehicle titles.
Important facts for investors to verify
- Whether recent loan-vintage collections support current forecasts, and how impaired pools affect future credit-loss provisions and yields.
- Loan growth, advance rates and dealer-partner trends, including the effect of higher advances on returns and economic profit.
- Debt maturities, borrowing-base availability, covenant headroom and continued access to warehouse and securitization funding.
- The scope and potential financial impact of consumer litigation and the Missouri Attorney General inquiry; the filing does not quantify a clear potential loss.
- How GAP revenue recognition and reinsurance claims affect comparability and future reported results.