Business context and reporting period
Credit Acceptance Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company provides automobile dealers with financing programs for consumers who may not qualify for traditional credit. Its portfolio consists primarily of Dealer Loans, with a smaller Purchase Program.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $181.7 million | $172.7 million | $538.4 million | $506.8 million |
| Net income | $74.0 million | $65.1 million | $193.2 million | $187.2 million |
| Diluted EPS | $3.38 | $2.75 | $8.48 | $7.78 |
| Finance charges | $158.0 million | $148.7 million | $468.7 million | $439.1 million |
| Interest expense | $13.5 million | $16.1 million | $42.8 million | $48.3 million |
| Credit-loss provision | $4.1 million | $6.1 million | $13.4 million | $17.3 million |
- Revenue grew 5.2% in Q3 and 6.2% year to date; net income rose 13.7% in Q3 and 3.2% year to date. Approximate net margin was 40.7% in Q3 2014 versus 37.7% in Q3 2013, and 35.9% year to date versus 36.9%; the year-to-date comparison includes a $21.8 million debt-extinguishment loss.
- Operating cash flow was $270.4 million for the first nine months, compared with $221.4 million a year earlier. Investing used $303.8 million; financing provided $33.5 million. Cash and cash equivalents were $4.3 million at September 30. Restricted cash was $205.4 million and is not freely available for general use.
- Net loans receivable increased to $2.407 billion from $2.213 billion at year-end 2013. The allowance for credit losses was $208.2 million, versus $195.4 million.
- Total balance-sheet debt was $1.660 billion, up from $1.392 billion at year-end; shareholders’ equity was $748.5 million. Funded debt to equity was 2.2:1. The company reported $226.2 million available under its revolving line, subject to borrowing-base limits, and reported compliance with debt covenants.
Material changes versus prior comparable periods
- Q3 finance charges increased 6.3%, primarily as the average net loan balance grew by $250.0 million; average portfolio yield declined to 26.6% from 27.9%. For the first nine months, the average yield declined to 26.9% from 28.5%.
- Q3 volume increased 4.7% by units and 6.1% by dollar amount. Active dealers rose 9.8%, while average volume per active dealer fell 4.6%; management attributed the decline to increased competition.
- The Purchase Program’s share of assigned units increased to 9.5% in Q3 from 7.1% a year earlier. Dealer Loans remained the majority of assignments.
- Lower average funding cost reduced interest expense despite higher average debt. The company issued $300 million of 6.125% senior notes due 2021 and redeemed $350 million of 9.125% notes due 2017, recording a $21.8 million loss on extinguishment. It also completed $299 million and $349 million Term ABS financings during 2014.
- The company repurchased $218.7 million of shares in the first nine months. A separate tender offer completed October 20, 2014 repurchased 995,698 shares for approximately $125 million, funded with cash and borrowings.
Outlook, commentary, risks and unusual items
- No specific earnings or volume guidance was provided. Management said operating cash flows and financing alternatives were expected to fund debt maturities and future operations, while cautioning that reduced access to financing could materially harm liquidity and operations.
- Management identified accurate forecasting of consumer-loan collections, access to capital, and maintaining or growing loan volume on expected terms as critical success factors. Forecasted collection rates improved for several recent assignment vintages, but performance for 2006 and 2007 vintages remained below initial forecasts. Newer vintages are less certain because much of their expected collections have not yet been realized.
- Management said overall loan performance exceeded expectations during Q3 and the first nine months, although certain individual pools underperformed and required credit-loss provisions. The allowance and revenue depend on estimates of future collections; actual results may differ.
- Risks include competition, consumer-credit performance, substantial debt and funding availability, interest-rate changes, regulation, and litigation. 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 dealer arbitrations and warned that adverse outcomes in litigation could materially affect results, liquidity, or financial position.
- Other notable items: the company extended certain revolving credit and warehouse facility terms; it reported no material off-balance-sheet arrangements and no material change in market-risk disclosures. It had not determined the effect of the new revenue-recognition standard.
Important facts for investors to verify
- Whether realized collections and future forecasts support the carrying value of the loan portfolio and the $208.2 million credit-loss allowance, especially for newer loan vintages.
- How competition and declining volume per active dealer affect loan growth, advance rates, and portfolio yields.
- Debt capacity, borrowing-base availability, refinancing terms, and the effect of the post-quarter $125 million share repurchase on liquidity and leverage.
- Developments in the FTC inquiry and dealer or consumer litigation, including any potential financial exposure.
- The sustainability of earnings growth after considering the lower portfolio yield, higher operating expenses, and the prior-period comparison affected by the debt-extinguishment charge.