Credit Acceptance(US:CACC)2021-10-31 16:00Financial Highlights Consolidated Financial Statements Net income surged to $740.7 million due to lower credit loss provisions; assets decreased, and operations generated $938.3 million cash | Financial Metric | As of Sep 30, 2021 | As of Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $7,199.0 million | $7,489.0 million | | Loans receivable, net | $6,582.6 million | $6,787.9 million | | Total Liabilities | $5,245.2 million | $5,186.5 million | | Total Shareholders' Equity | $1,953.8 million | $2,302.5 million | | Income Statement (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $470.1 | $426.5 | $1,392.8 | $1,221.9 | | Finance charges | $442.1 | $404.4 | $1,312.4 | $1,144.5 | | Provision for credit losses | ($8.3) | ($29.8) | ($17.5) | $464.3 | | Net Income | $250.0 | $242.1 | $740.7 | $254.7 | | Diluted EPS | $15.79 | $13.56 | $44.73 | $14.17 | | Cash Flow (in millions) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $938.3 | $783.0 | | Net cash provided by (used in) investing activities | $214.2 | ($658.0) | | Net cash used in financing activities | ($1,106.4) | ($241.9) | | Repurchase of common stock | ($1,093.9) | ($307.1) | Business Overview Business Model and Programs The company provides auto financing to subprime consumers via Portfolio and Purchase programs, with the Portfolio Program dominating Q3 2021 volume - The company's financing programs enable auto dealers to sell vehicles to consumers regardless of their credit history. A significant majority of consumer loans are assigned for individuals with FICO scores below 650 or no FICO score2730 | Program Mix (Unit Volume) | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Portfolio Program (Dealer Loans) | 69.9% | 64.1% | | Purchase Program (Purchased Loans) | 30.1% | 35.9% | - Under the Portfolio Program, the company advances cash to dealers and receives future collections, net of a 20% servicing fee. Dealers retain an interest in the back-end collections (Dealer Holdback) after the advance is repaid3436 - The Purchase Program involves a one-time payment to the dealer to acquire the consumer loan, with the company keeping all subsequent collections43 Loans Receivable and Credit Quality Net loans receivable decreased to $6.58 billion, with a Q3 2021 net reversal of credit loss provision due to improved collection forecasts | Loans Receivable (in millions) | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Dealer Loans, net | $4,030.6 | $4,167.5 | | Purchased Loans, net | $2,552.0 | $2,620.4 | | Total Loans receivable, net | $6,582.6 | $6,787.9 | | Provision for Credit Losses (in millions) | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 | | :--- | :--- | :--- | :--- | :--- | | New Consumer Loan assignments | $75.5 | $114.1 | $298.9 | $426.2 | | Forecast changes | ($83.8) | ($143.9) | ($316.4) | $38.1 | | Total | ($8.3) | ($29.8) | ($17.5) | $464.3 | - Forecasted collection rates for the 2020 vintage loans improved to 67.7% as of Q3 2021, a 4.3 percentage point positive variance from the initial forecast of 63.4%. The 2021 vintage is also performing slightly ahead of initial forecasts128243 - The company's estimate of future net cash flows continues to include an adjustment for the potential impact of the COVID-19 pandemic, which was initially established in Q1 2020137 Management's Discussion and Analysis (MD&A) Overview Q3 2021 net income increased to $250.0 million, driven by finance charges despite lower loan volumes and significant stock repurchases - Q3 2021 net income rose to $250.0 million, compared to $242.1 million in Q3 2020238 - For the nine months ended Sep 30, 2021, net income surged to $740.7 million from $254.7 million in the prior-year period, mainly due to a significant decrease in the provision for credit losses239 - Key quarterly highlights: * Consumer Loan assignment unit and dollar volumes declined 29.4% and 17.9% YoY, respectively * The company repurchased 1.3 million shares, representing 8.0% of shares outstanding at the start of the quarter238 Business Performance and Key Metrics Consumer loan volume significantly declined in Q3 2021 due to market conditions, yet collection rate forecasts for recent vintages improved | Consumer Loan Volume Change (YoY) | Q3 2021 | Q2 2021 | Q1 2021 | | :--- | :--- | :--- | :--- | | Unit Volume | -29.4% | -28.7% | -7.5% | | Dollar Volume | -17.9% | -20.5% | -2.2% | - Management believes the significant decline in loan volume since May 2021 is primarily due to low dealer inventories and elevated used vehicle prices stemming from automotive industry supply chain disruptions265 - The spread between forecasted collection rates and advance rates for the 2021 vintage was 20.8%, lower than the 23.8% for the 2020 vintage, primarily due to the exceptionally strong performance of 2020 loans250251 Results of Operations The company's financial performance improved significantly in the first nine months of 2021 compared to 2020 Comparison for the Three Months Ended September 30, 2021 and 2020 Q3 2021 revenue grew 10.2% to $470.1 million, driven by finance charges, while operating expenses rose and credit loss reversal was smaller - Finance charges increased by $37.7 million (9.3%) YoY, primarily due to a higher average portfolio yield (26.5% vs 23.7%) resulting from CECL accounting rules277 - Salaries and wages expense increased 35.6% YoY, primarily driven by a $14.7 million increase in stock-based compensation expense related to newly-approved stock option grants279 - The reversal of provision for credit losses was smaller in Q3 2021 ($8.3M) than in Q3 2020 ($29.8M). This was because the positive change in collection forecasts was less pronounced ($82.3M in 2021 vs. $138.5M in 2020)281282283 - Interest expense decreased by 15.0% to $39.8 million due to a lower average cost of debt (3.4% vs 3.9%) on recently completed financings284285 Comparison for the Nine Months Ended September 30, 2021 and 2020 Nine-month net income surged 190.8% to $740.7 million, primarily due to a $481.8 million decrease in credit loss provision - The provision for credit losses decreased by $481.8 million YoY, moving from a $464.3 million expense to a $17.5 million reversal. This was due to improved loan performance forecasts in 2021 versus large provisions made for the expected impact of COVID-19 in 2020292293294 - General and administrative expenses increased by $33.1 million (70.7%), primarily due to a $27.2 million settlement with the Commonwealth of Massachusetts291 - Interest expense decreased by $21.3 million (14.5%) due to a lower average cost of debt (3.5% vs 4.1%) from more favorable recent financing transactions296297 - A loss on extinguishment of debt of $7.4 million was recognized in the first nine months of 2020 related to the redemption of senior notes, with no similar loss in 2021297 Liquidity and Capital Resources The company maintains strong liquidity with $1.52 billion in available credit and $4.6 billion total debt, completing significant financings - As of September 30, 2021, the company had $1.52 billion in unused and available lines of credit and total debt of $4.6 billion309 - Key 2021 financing activities include: * Completed three Term ABS financings totaling $1.05 billion * Extended maturities on Warehouse Facilities II, IV, VI, VIII and the main revolving secured line of credit301302303304305306307 | Scheduled Principal Debt Maturities (in millions) | Amount | | :--- | :--- | | Remainder of 2021 | $163.8 | | 2022 | $1,430.4 | | 2023 | $1,725.0 | | 2024 | $915.6 | | Over five years | $400.0 | | Total | $4,634.8 | Risk Factors and Controls Risk Factors The company faces diverse risks including industry, operational, capital, liquidity, IT, cybersecurity, legal, and regulatory challenges - Key identified risks include: * Industry/Operational: Inability to accurately forecast collections, competition, reliance on senior management, and the adverse impact of COVID-19 * Capital/Liquidity: Inability to access funding, restrictive debt covenants, and interest rate fluctuations, including the phaseout of LIBOR * Legal/Regulatory: Ongoing litigation and investigations, and changes in consumer protection regulations318319323 Market Risk No material changes to the company's market risk profile have occurred since the 2020 Annual Report on Form 10-K - There have been no material changes to the company's market risk profile since the 2020 Annual Report on Form 10-K326 Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal controls during Q3 2021 - The principal executive and financial officers concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period327 - No material changes to internal control over financial reporting occurred during the third quarter of 2021328 Other Information Legal Proceedings The company settled a $27.2 million legal case with Massachusetts and faces ongoing investigations from multiple regulatory bodies - On September 1, 2021, the company finalized a settlement with the Massachusetts Attorney General, agreeing to a payment of $27.2 million to resolve claims of unfair and deceptive trade practices228 - The company is cooperating with ongoing investigations from the New York State Attorney General, the CFPB, and the Maryland Attorney General regarding its origination, collection, and securitization practices221222226 - A lawsuit filed by the Mississippi Attorney General alleging unfair and deceptive trade practices is ongoing, and the company intends to defend itself vigorously223 Stock Repurchases The company repurchased 1.29 million shares for $704.2 million in Q3 2021 and authorized an additional 2 million shares for repurchase | Period | Total Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | July 2021 | 364,963 | $454.67 | | August 2021 | 406,680 | $566.33 | | September 2021 | 514,603 | $598.20 | | Q3 2021 Total | 1,286,246 | $547.40 | - On September 28, 2021, the board authorized the repurchase of an additional 2 million shares of common stock335 - As of September 30, 2021, a total of 2,231,859 shares remained available for repurchase under board authorizations333