Credit Acceptance Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Dollar amounts are in millions unless otherwise stated. The company provides financing programs through automobile dealers, primarily to consumers with impaired or limited credit histories.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $378.7 | $332.0 | $1,103.1 | $943.0 |
| Income before taxes | $219.1 | $198.4 | $640.7 | $554.1 |
| Net income | $165.4 | $151.0 | $494.2 | $422.1 |
| Diluted EPS | $8.73 | $7.75 | $26.06 | $21.68 |
| Net income margin | 43.7% | 45.5% | 44.8% | 44.8% |
- Q3 revenue increased 14.1% and net income increased 9.5% year over year; nine-month revenue rose 17.0% and net income rose 17.1%. Management attributed higher earnings primarily to growth in the average loan portfolio.
- Finance charges were $349.9 in Q3 (+15.5%) and $1,013.3 for nine months (+17.4%). Growth from larger average net loan balances was partly offset by lower portfolio yields: 21.6% versus 22.2% in Q3 and 21.7% versus 22.4% year to date.
- Q3 provision for credit losses was $19.3, up from $14.0; nine-month provision was $49.2, up from $39.2. Interest expense rose 22.6% in Q3 and 27.0% year to date, reflecting higher average debt and cost of debt.
- Operating cash flow was $608.0 for nine months, versus $501.0. Investing activities used $873.0, while financing activities provided $290.2. Cash and restricted cash totaled $354.5 at period-end; unrestricted cash was $24.7.
Balance sheet, debt and liquidity
- Total assets were $7,071.0, compared with $6,237.4 at December 31, 2018. Loans receivable, net, were $6,563.7; the allowance for credit losses was $509.1.
- Total debt carrying amount was $4,232.2, up from $3,820.9 at year-end. Shareholders’ equity was $2,382.8. Management reported funded debt to equity of 1.8 to 1.
- Unused and available lines of credit totaled $1,512.8. The company reported compliance with its debt covenants. Management believes operating cash flows and financing alternatives will fund maturities and operations, but cautioned that restricted or unavailable funding could materially harm liquidity.
- During 2019, the company issued $400.0 of 6.625% senior notes due 2026 and completed $402.5 and $500.0 term ABS financings. It also extended or expanded warehouse facilities and established a new $200.0 warehouse facility.
Material changes and business trends
- Q3 Consumer Loan assignment unit volume increased 0.4% year over year and dollar volume increased 7.6%. Active dealers increased 10.0%, while average unit volume per active dealer declined 9.1%. Unit volume for October 2019 was down 6.2% year over year.
- The loan portfolio grew: gross loans receivable increased to $7,072.8 from $6,225.2 at year-end. Purchased Loans represented 32.8% of Q3 unit volume, compared with 30.5% a year earlier.
- Collections forecasts were broadly stable during Q3. Forecasts for 2015 and 2016 assignments remained below initial estimates; 2010–2013, 2017 and 2018 assignments were above initial estimates. Recent loan cohorts remain less seasoned and more uncertain.
- Effective August 5, 2019, dealers could enroll in the Portfolio Program without an enrollment fee, and could close eligible loan pools at 50 assignments rather than generally requiring 100.
Outlook, risks and unusual items
- CECL: Adoption is expected January 1, 2020. The company estimates reported 2020 net income may be 30%–60% lower than under current GAAP, with the greatest effect in the adoption quarter, because of changed timing of income and credit-loss recognition. The estimate is subject to portfolio mix, volume, credit performance, economic conditions and model revisions. Management estimates the new-loan initial provision could be 12%–15% of loan amount. Existing loans are expected to receive an equal gross-up to loans receivable and allowance, without changing net carrying value or adoption-date net income.
- Management identifies accurate collection forecasting, access to capital, and maintaining or growing loan volume on expected terms as key success factors. The business is exposed to borrower credit deterioration, competition, funding-market conditions, debt and interest-rate risk, and regulatory or economic changes.
- Regulatory and legal matters include New York Attorney General and Consumer Financial Protection Bureau inquiries, an ongoing Mississippi lawsuit, a federal fair-lending inquiry, and investigations in Maryland, Massachusetts and by the Department of Justice. The company said it could not estimate reasonably possible losses for the noted matters; an adverse outcome could materially affect financial position, liquidity or results.
- The company repurchased 268,611 shares for $109.2 during the first nine months of 2019; no repurchases occurred in Q3. It reported no material change in market-risk information or internal financial controls.
Important facts for investors to verify
- How CECL implementation and actual 2020 portfolio characteristics compare with the estimated 30%–60% reduction in reported net income.
- Whether collection performance, particularly for newer assignment vintages and 2015–2016 cohorts, remains consistent with forecasts and supports the allowance.
- Whether lower average portfolio yields, higher funding costs and elevated credit-loss provisions affect earnings as the loan portfolio grows.
- Dealer activity and assignment trends, including the October 2019 unit-volume decline and lower volume per active dealer.
- Developments in regulatory investigations and litigation, and any resulting financial exposure or operational changes.
- Ongoing access to financing, debt maturities, covenant compliance and the availability of reported credit capacity.