Credit Acceptance Corporation (Nasdaq: CACC)
(referred to as the “Company”, “Credit Acceptance”, “we”, “our”, or
“us”) today announced a consolidated net loss of $83.8 million, or
$4.61 per diluted share, for the three months ended March 31,
2020 compared to consolidated net income of $164.4 million, or
$8.65 per diluted share, for the same period in 2019.
Adjusted net income, a non-GAAP financial
measure, for the three months ended March 31, 2020 was $175.7
million, or $9.66 per diluted share, compared to $153.6 million, or
$8.08 per diluted share, for the same period in 2019.
COVID-19 Pandemic
In March 2020, COVID-19 began to spread rapidly
across the United States. In an effort to slow the spread of
the virus, authorities implemented various measures, including
travel bans, stay-at-home orders and shutdowns of non-essential
businesses. These measures have caused a significant decline
in economic activity and a dramatic increase in the number of
individuals who are no longer employed. As detailed below, starting
in mid-March, we experienced a substantial reduction in demand for
our product and a significant decline in cash flows from our loan
portfolio that lasted through mid-April, after which collections
and new loan volumes improved significantly. As the virus is
not yet contained, the ultimate impact of the pandemic on our
business is not yet known. The impact will depend on future
developments, including, but not limited to, the duration and
spread of the pandemic, its severity, the actions to contain the
disease or mitigate its impact, and the duration, timing and
severity of the impact on consumer behavior and economic
activity.
GAAP Results
GAAP results for the quarter ended March 31,
2020 include a provision for credit losses of $354.7 million
reflecting the adoption of CECL on January 1, 2020 and the impact
of a reduction in forecasted future cash flows from our loan
portfolio. Under CECL, we are required to record a provision for
credit losses for every new loan at the time that loan is
originated equal to the difference between the amount we paid to
acquire the loan and present value of forecasted net cash flows
using an effective interest rate prescribed under CECL. The
effective interest rate under CECL is calculated assuming 100% of
the contractually scheduled payments of each loan are
received. Since we do not expect to receive this amount, the
effective rate under CECL is higher than the rate we expect to
earn. Using the higher effective rate prescribed by CECL to
record the loan results in a value for each loan that is less than
amount we paid to acquire the loan. This difference is
recorded as an allowance for credit losses along with a
corresponding provision for credit losses. During the most recent
quarter, we recorded a provision for credit losses of $157.9
million related to new Consumer Loan assignments. Over the life of
the loan, assuming actual cash flows are equal to our forecast, an
amount equivalent to this provision for credit losses will be
recorded as finance charge revenue, which is recognized using the
same effective interest rate used to record the loan.
The remaining provision for credit losses of
$196.8 million reflects a reduction in our estimate of future net
cash flows from our loan portfolio discussed below. Under
CECL, the net present value of the change in our net cash flow
forecast is recorded as a provision for credit losses.
Adjusted Results
While we use the same net cash flow forecast for
GAAP and adjusted results, the reduction in our forecast had only a
modest impact on adjusted results during the quarter. Under our
adjusted methodology, changes in forecasted net cash flows are
recorded over time as an adjustment to the yield used to recognize
finance charge revenue. Since most of the reduction in our forecast
occurred in March 2020, the reduction in the adjusted yield that
occurred will not impact the amount of revenue recognized until
April 2020. At the end of the first quarter the adjusted yield was
17.8%, down from 20.4% at the start of the quarter. Finance charges
recorded for adjusted results will reflect this lower yield
starting in the second quarter.
Consumer Loan Metrics
Dealers assign retail installment contracts
(referred to as “Consumer Loans”) to Credit Acceptance. At the
time a Consumer Loan is submitted to us for assignment, we forecast
future expected cash flows from the Consumer Loan. Based on
the amount and timing of these forecasts and expected expense
levels, an advance or one-time purchase payment is made to the
related dealer at a price designed to maximize economic profit, a
non-GAAP financial measure that considers our return on capital,
our cost of capital and the amount of capital invested.
We use a statistical model to estimate the
expected collection rate for each Consumer Loan at the time of
assignment. We continue to evaluate the expected collection
rate of each Consumer Loan subsequent to assignment. Our
evaluation becomes more accurate as the Consumer Loans age, as we
use actual performance data in our forecast. By comparing our
current expected collection rate for each Consumer Loan with the
rate we projected at the time of assignment, we are able to assess
the accuracy of our initial forecast. The following table
compares our forecast of Consumer Loan collection rates as of
March 31, 2020 with the forecasts as of December 31, 2019
and at the time of assignment, segmented by year of assignment:
|
|
Forecasted Collection Percentage as of (1) |
|
Current Forecast Variance from |
Consumer Loan Assignment Year |
|
March 31, 2020 |
|
December 31, 2019 |
|
InitialForecast |
|
December 31, 2019 |
|
InitialForecast |
2011 |
|
74.8 |
% |
|
74.8 |
% |
|
72.5 |
% |
|
0.0 |
% |
|
2.3 |
% |
2012 |
|
73.8 |
% |
|
73.9 |
% |
|
71.4 |
% |
|
-0.1 |
% |
|
2.4 |
% |
2013 |
|
73.4 |
% |
|
73.5 |
% |
|
72.0 |
% |
|
-0.1 |
% |
|
1.4 |
% |
2014 |
|
71.7 |
% |
|
71.7 |
% |
|
71.8 |
% |
|
0.0 |
% |
|
-0.1 |
% |
2015 |
|
65.3 |
% |
|
65.4 |
% |
|
67.7 |
% |
|
-0.1 |
% |
|
-2.4 |
% |
2016 |
|
63.6 |
% |
|
64.1 |
% |
|
65.4 |
% |
|
-0.5 |
% |
|
-1.8 |
% |
2017 |
|
63.8 |
% |
|
64.8 |
% |
|
64.0 |
% |
|
-1.0 |
% |
|
-0.2 |
% |
2018 |
|
63.6 |
% |
|
65.1 |
% |
|
63.6 |
% |
|
-1.5 |
% |
|
0.0 |
% |
2019 |
|
63.0 |
% |
|
64.6 |
% |
|
64.0 |
% |
|
-1.6 |
% |
|
-1.0 |
% |
2020 |
|
61.3 |
% |
|
— |
|
|
62.5 |
% |
|
— |
|
|
-1.2 |
% |
(1) Represents the total forecasted
collections we expect to collect on the Consumer Loans as a
percentage of the repayments that we were contractually owed on the
Consumer Loans at the time of assignment. Contractual
repayments include both principal and interest. Forecasted
collection rates are negatively impacted by canceled Consumer Loans
as the contractual amount owed is not removed from the denominator
for purposes of computing forecasted collection rates in the
table.
Consumer Loans assigned in 2011 through 2013
have yielded forecasted collection results materially better than
our initial estimates, while Consumer Loans assigned in 2015, 2016,
2019 and 2020 have yielded forecasted collection results materially
worse than our initial estimates. For Consumer Loans assigned
in 2014, 2017 and 2018, actual results have been close to our
initial estimates. For the three months ended March 31,
2020, forecasted collection rates declined for Consumer Loans
assigned in 2016 through 2020 and were generally consistent with
expectations at the start of the period for all other assignment
years presented.
Forecasted collection rates in the table above
reflect a reduction in collection rates calculated by our
forecasting model and an additional subjective adjustment which
considers the future impact of COVID-19. The COVID-19
adjustment is detailed by year of assignment as follows:
|
|
Forecasted Collection Percentage as of March 31,
2020 |
Consumer Loan Assignment Year |
|
Prior to COVID-19 Adjustment |
|
COVID-19 Adjustment |
|
After COVID-19 Adjustment |
2011 |
|
74.8 |
% |
|
0.0 |
% |
|
74.8 |
% |
2012 |
|
73.9 |
% |
|
-0.1 |
% |
|
73.8 |
% |
2013 |
|
73.5 |
% |
|
-0.1 |
% |
|
73.4 |
% |
2014 |
|
71.8 |
% |
|
-0.1 |
% |
|
71.7 |
% |
2015 |
|
65.4 |
% |
|
-0.1 |
% |
|
65.3 |
% |
2016 |
|
64.0 |
% |
|
-0.4 |
% |
|
63.6 |
% |
2017 |
|
64.4 |
% |
|
-0.6 |
% |
|
63.8 |
% |
2018 |
|
64.5 |
% |
|
-0.9 |
% |
|
63.6 |
% |
2019 |
|
64.5 |
% |
|
-1.5 |
% |
|
63.0 |
% |
2020 |
|
63.2 |
% |
|
-1.9 |
% |
|
61.3 |
% |
The changes in forecasted collection rates for
the three months ended March 31, 2020 and 2019 impacted
forecasted net cash flows (forecasted collections less forecasted
dealer holdback payments) as follows:
(In millions) |
|
For the Three Months Ended March 31, |
Increase (Decrease) in Forecasted Net Cash
Flows |
|
2020 |
|
2019 |
Dealer loans |
|
$ |
(75.9 |
) |
|
$ |
0.5 |
|
Purchased loans |
|
(130.6 |
) |
|
16.2 |
|
Total |
|
$ |
(206.5 |
) |
|
$ |
16.7 |
|
During the first quarter, we reduced our
estimate of future net cash flows from our loan portfolio by $206.5
million, or 2.3% of the forecasted net cash flows at the start of
the period, primarily due to the impact of the COVID-19 pandemic.
The reduction is comprised of: (1) $44.3 million calculated by our
forecasting model, which reflects lower realized collections during
the quarter and (2) an additional $162.2 million, which represents
our best estimate of the future impact of the COVID-19 pandemic on
future net cash flows. Under CECL, changes in forecasted net cash
flows are recorded as a provision for credit losses in the current
period. While the adjustment to our forecast represents our best
estimate at this time, the COVID-19 pandemic has created conditions
that do not allow us to forecast future cash flows from our loan
portfolio with confidence.
The following table summarizes changes in
realized collections in each of the last five months as compared to
the same period in the previous year:
|
|
Year over Year Percent Change |
Month Ended |
|
Front End Collections (1) |
|
Total Collections |
January 31, 2020 |
|
15.9 |
% |
|
20.0 |
% |
February 29, 2020 |
|
13.4 |
% |
|
13.2 |
% |
March 31, 2020 |
|
-1.3 |
% |
|
-3.1 |
% |
April 30, 2020 |
|
7.7 |
% |
|
-1.1 |
% |
May 26, 2020 Month-to-Date
(2) |
|
8.5 |
% |
|
4.9 |
% |
(1) Represents collections realized on Consumer
Loans that are either current or in the early stages of
delinquency.
(2) The 2020 period had one less
business day than the comparable 2019 period.
Starting in mid-March, we experienced a
reduction in realized collections at the same time government
authorities began to implement restrictions that limited economic
activity. The reduction in Front End Collections reflects a
lower volume of payments from customers while the reduction in
Total Collections also includes lower realized collections from
repossessions, which were suspended as the crisis began to
unfold. Starting in mid-April, Front End Collections improved
at the same time federal stimulus payments began to be distributed
and such improvement has continued into May.
When comparing year over year changes in
collections on a monthly basis, variations in the calendar can have
a meaningful impact on the results as collections fluctuate
according to the day of the week. In addition, February of
2020 had 29 days as compared to 28 in the prior year. The
following table presents year over year collection results after
adjusting for these differences:
|
|
Year over Year Percent Change |
Month Ended |
|
Front End Collections (1) |
|
Total Collections |
January 31, 2020 |
|
9.7 |
% |
|
13.3 |
% |
February 29, 2020 |
|
8.4 |
% |
|
9.0 |
% |
March 31, 2020 |
|
2.2 |
% |
|
-0.6 |
% |
April 30, 2020 |
|
7.8 |
% |
|
-0.4 |
% |
May 26, 2020
Month-to-Date |
|
12.2 |
% |
|
7.3 |
% |
(1) Represents collections realized
on Consumer Loans that are either current or in the early stages of
delinquency.
The following table presents information on the
average Consumer Loan assignment for each of the last 10 years:
|
|
Average |
Consumer Loan Assignment Year |
|
Consumer Loan (1) |
|
Advance (2) |
|
Initial Loan Term (in months) |
2011 |
|
15,686 |
|
7,137 |
|
46 |
2012 |
|
15,468 |
|
7,165 |
|
47 |
2013 |
|
15,445 |
|
7,344 |
|
47 |
2014 |
|
15,692 |
|
7,492 |
|
47 |
2015 |
|
16,354 |
|
7,272 |
|
50 |
2016 |
|
18,218 |
|
7,976 |
|
53 |
2017 |
|
20,230 |
|
8,746 |
|
55 |
2018 |
|
22,158 |
|
9,635 |
|
57 |
2019 |
|
23,139 |
|
10,174 |
|
57 |
2020 |
|
23,717 |
|
10,405 |
|
58 |
(1) Represents the repayments that we
were contractually owed on Consumer Loans at the time of
assignment, which include both principal and interest.
(2) Represents advances
paid to dealers on Consumer Loans assigned under our portfolio
program and one-time payments made to dealers to purchase Consumer
Loans assigned under our purchase program. Payments of
dealer holdback and accelerated dealer holdback are not
included.
Forecasting collection rates accurately at loan
inception is difficult. With this in mind, we establish
advance rates that are intended to allow us to achieve acceptable
levels of profitability, even if collection rates are less than we
initially forecast.
The following table presents forecasted Consumer
Loan collection rates, advance rates, the spread (the forecasted
collection rate less the advance rate), and the percentage of the
forecasted collections that had been realized as of March 31,
2020. All amounts, unless otherwise noted, are presented
as a percentage of the initial balance of the Consumer Loan
(principal + interest). The table includes both dealer
loans and purchased loans.
|
|
As of March 31, 2020 |
Consumer Loan Assignment Year |
|
ForecastedCollection % |
|
Advance % (1) |
|
Spread % |
|
% of ForecastRealized (2) |
2011 |
|
74.8 |
% |
|
45.5 |
% |
|
29.3 |
% |
|
99.7 |
% |
2012 |
|
73.8 |
% |
|
46.3 |
% |
|
27.5 |
% |
|
99.4 |
% |
2013 |
|
73.4 |
% |
|
47.6 |
% |
|
25.8 |
% |
|
99.0 |
% |
2014 |
|
71.7 |
% |
|
47.7 |
% |
|
24.0 |
% |
|
98.4 |
% |
2015 |
|
65.3 |
% |
|
44.5 |
% |
|
20.8 |
% |
|
95.8 |
% |
2016 |
|
63.6 |
% |
|
43.8 |
% |
|
19.8 |
% |
|
88.1 |
% |
2017 |
|
63.8 |
% |
|
43.2 |
% |
|
20.6 |
% |
|
74.2 |
% |
2018 |
|
63.6 |
% |
|
43.5 |
% |
|
20.1 |
% |
|
52.6 |
% |
2019 |
|
63.0 |
% |
|
44.0 |
% |
|
19.0 |
% |
|
24.1 |
% |
2020 |
|
61.3 |
% |
|
43.9 |
% |
|
17.4 |
% |
|
2.6 |
% |
(1) Represents advances paid to
dealers on Consumer Loans assigned under our portfolio program and
one-time payments made to dealers to purchase Consumer Loans
assigned under our purchase program as a percentage of the initial
balance of the Consumer Loans. Payments of dealer
holdback and accelerated dealer holdback are not included.
(2) Presented as a percentage of
total forecasted collections.
The risk of a material change in our forecasted
collection rate declines as the Consumer Loans age. For 2015
and prior Consumer Loan assignments, the risk of a material
forecast variance is modest, as we have currently realized in
excess of 90% of the expected collections. Conversely, the
forecasted collection rates for more recent Consumer Loan
assignments are less certain as a significant portion of our
forecast has not been realized.
The spread between the forecasted collection
rate and the advance rate has ranged from 17.4% to 29.3%, on an
annual basis, over the last 10 years. The spread was at the high
end of this range in 2011, when the competitive environment was
unusually favorable, and much lower during other years (2015
through 2020) when competition was more intense. The decrease in
the spread from 2019 to 2020 was primarily the result of a lower
initial forecast on Consumer Loans assigned to us in 2020 and the
performance of 2020 Consumer Loans in our purchased loan portfolio,
which has deteriorated from our initial estimates by a greater
margin than those assigned to us in 2019.
The following table compares our forecast of Consumer Loan
collection rates as of March 31, 2020 with the forecasts at
the time of assignment, for dealer loans and purchased loans
separately:
|
|
Dealer Loans |
|
Purchased Loans |
|
|
Forecasted Collection Percentage as of
(1) |
|
|
|
Forecasted Collection Percentage as of
(1) |
|
|
Consumer Loan Assignment Year |
|
March 31, 2020 |
|
Initial Forecast |
|
Variance |
|
March 31, 2020 |
|
Initial Forecast |
|
Variance |
2011 |
|
74.6 |
% |
|
72.4 |
% |
|
2.2 |
% |
|
76.3 |
% |
|
72.7 |
% |
|
3.6 |
% |
2012 |
|
73.6 |
% |
|
71.3 |
% |
|
2.3 |
% |
|
75.9 |
% |
|
71.4 |
% |
|
4.5 |
% |
2013 |
|
73.4 |
% |
|
72.1 |
% |
|
1.3 |
% |
|
74.3 |
% |
|
71.6 |
% |
|
2.7 |
% |
2014 |
|
71.6 |
% |
|
71.9 |
% |
|
-0.3 |
% |
|
72.5 |
% |
|
70.9 |
% |
|
1.6 |
% |
2015 |
|
64.6 |
% |
|
67.5 |
% |
|
-2.9 |
% |
|
69.0 |
% |
|
68.5 |
% |
|
0.5 |
% |
2016 |
|
62.8 |
% |
|
65.1 |
% |
|
-2.3 |
% |
|
66.0 |
% |
|
66.5 |
% |
|
-0.5 |
% |
2017 |
|
63.2 |
% |
|
63.8 |
% |
|
-0.6 |
% |
|
65.4 |
% |
|
64.6 |
% |
|
0.8 |
% |
2018 |
|
63.1 |
% |
|
63.6 |
% |
|
-0.5 |
% |
|
64.6 |
% |
|
63.5 |
% |
|
1.1 |
% |
2019 |
|
62.6 |
% |
|
63.9 |
% |
|
-1.3 |
% |
|
63.6 |
% |
|
64.2 |
% |
|
-0.6 |
% |
2020 |
|
61.2 |
% |
|
62.4 |
% |
|
-1.2 |
% |
|
61.6 |
% |
|
62.8 |
% |
|
-1.2 |
% |
(1) The forecasted collection rates
presented for dealer loans and purchased loans reflect the Consumer
Loan classification at the time of assignment.
The following table presents forecasted Consumer
Loan collection rates, advance rates, and the spread (the
forecasted collection rate less the advance rate) as of
March 31, 2020 for dealer loans and purchased loans
separately. All amounts are presented as a percentage of
the initial balance of the Consumer Loan (principal +
interest).
|
|
Dealer Loans |
|
Purchased Loans |
Consumer Loan Assignment Year |
|
Forecasted Collection % (1) |
|
Advance % (1)(2) |
|
Spread % |
|
Forecasted Collection % (1) |
|
Advance % (1)(2) |
|
Spread % |
2011 |
|
74.6 |
% |
|
45.1 |
% |
|
29.5 |
% |
|
76.3 |
% |
|
49.3 |
% |
|
27.0 |
% |
2012 |
|
73.6 |
% |
|
46.0 |
% |
|
27.6 |
% |
|
75.9 |
% |
|
50.0 |
% |
|
25.9 |
% |
2013 |
|
73.4 |
% |
|
47.2 |
% |
|
26.2 |
% |
|
74.3 |
% |
|
51.5 |
% |
|
22.8 |
% |
2014 |
|
71.6 |
% |
|
47.2 |
% |
|
24.4 |
% |
|
72.5 |
% |
|
51.8 |
% |
|
20.7 |
% |
2015 |
|
64.6 |
% |
|
43.4 |
% |
|
21.2 |
% |
|
69.0 |
% |
|
50.2 |
% |
|
18.8 |
% |
2016 |
|
62.8 |
% |
|
42.1 |
% |
|
20.7 |
% |
|
66.0 |
% |
|
48.6 |
% |
|
17.4 |
% |
2017 |
|
63.2 |
% |
|
42.1 |
% |
|
21.1 |
% |
|
65.4 |
% |
|
45.8 |
% |
|
19.6 |
% |
2018 |
|
63.1 |
% |
|
42.7 |
% |
|
20.4 |
% |
|
64.6 |
% |
|
45.2 |
% |
|
19.4 |
% |
2019 |
|
62.6 |
% |
|
43.1 |
% |
|
19.5 |
% |
|
63.6 |
% |
|
45.6 |
% |
|
18.0 |
% |
2020 |
|
61.2 |
% |
|
42.7 |
% |
|
18.5 |
% |
|
61.6 |
% |
|
45.8 |
% |
|
15.8 |
% |
(1) The forecasted collection rates
and advance rates presented for dealer loans and purchased loans
reflect the Consumer Loan classification at the time of
assignment.
(2) Represents advances paid to
dealers on Consumer Loans assigned under our portfolio program and
one-time payments made to dealers to purchase Consumer Loans
assigned under our purchase program as a percentage of the initial
balance of the Consumer Loans. Payments of dealer
holdback and accelerated dealer holdback are not included.
Although the advance rate on purchased loans is
higher as compared to the advance rate on dealer loans, purchased
loans do not require us to pay dealer holdback.
The spread on dealer loans decreased from 19.5%
in 2019 to 18.5% in 2020, primarily as a result of a lower initial
forecast on dealer loans assigned to us in 2020. The spread on
purchased loans decreased from 18.0% in 2019 to 15.8% in 2020,
primarily as a result of a lower initial forecast on purchased
loans assigned to us in 2020 and the performance of 2020 Consumer
Loans in our purchased loan portfolio, which has deteriorated from
our initial estimates by a greater margin than those assigned to us
in 2019.
Consumer Loan Volume
The following table summarizes changes in
Consumer Loan assignment volume in each of the last five quarters
as compared to the same period in the previous year:
|
|
Year over Year Percent Change |
Three Months Ended |
|
Unit Volume |
|
Dollar Volume (1) |
March 31, 2019 |
|
0.4 |
% |
|
5.1 |
% |
June 30, 2019 |
|
0.0 |
% |
|
5.6 |
% |
September 30, 2019 |
|
0.4 |
% |
|
7.6 |
% |
December 31, 2019 |
|
-5.3 |
% |
|
1.1 |
% |
March 31, 2020 |
|
-10.1 |
% |
|
-4.5 |
% |
(1) Represents advances paid to
dealers on Consumer Loans assigned under our portfolio program and
one-time payments made to dealers to purchase Consumer Loans
assigned under our purchase program. Payments of dealer
holdback and accelerated dealer holdback are not included.
Consumer Loan assignment volumes depend on a
number of factors including (1) the overall demand for our
financing programs, (2) the amount of capital available to fund new
loans, and (3) our assessment of the volume that our infrastructure
can support. Our pricing strategy is intended to maximize the
amount of economic profit we generate, within the confines of
capital and infrastructure constraints.
Unit and dollar volumes declined 10.1% and 4.5%,
respectively, during the first quarter of 2020 as the number of
active dealers grew 2.2% while average unit volume per active
dealer declined 12.0%. Dollar volume declined less than unit volume
declined during the first quarter of 2020 due to an increase in the
average advance paid per unit. This increase was the result of an
increase in the average size of the Consumer Loans assigned,
primarily due to increases in the average vehicle selling price and
average initial loan term and an increase in purchased loans as a
percentage of total unit volume.
The following table summarizes changes in
Consumer Loan assignment unit volume in each of the last five
months as compared to the same period in the previous year:
|
|
Year over Year Percent Change |
Month Ended |
|
Unit Volume |
January 31, 2020 |
|
-0.7 |
% |
February 29, 2020 |
|
0.9 |
% |
March 31, 2020 |
|
-22.3 |
% |
April 30, 2020 |
|
-22.3 |
% |
May 26, 2020 Month-to-Date
(1) |
|
21.8 |
% |
(1) The 2020 period had one less
business day than the comparable 2019 period.
We believe the declines in unit volume for the
months ended March 31, 2020 and April 30, 2020 were primarily due
to the impact of COVID-19, which resulted in many dealers
temporarily closing or restricting their operations and a
deterioration in consumer demand for dealers that have remained
open. During the latter part of April and continuing into May, unit
volumes improved. We believe the improvement resulted from a
combination of dealers gradually reopening their operations and the
release of federal stimulus payments.
The following table summarizes the changes in Consumer Loan unit
volume and active dealers:
|
For the Three Months Ended March 31, |
|
2020 |
|
2019 |
|
% Change |
Consumer Loan unit volume |
101,477 |
|
|
112,844 |
|
|
-10.1 |
% |
Active dealers (1) |
9,843 |
|
|
9,633 |
|
|
2.2 |
% |
Average volume per active
dealer |
10.3 |
|
|
11.7 |
|
|
-12.0 |
% |
|
|
|
|
|
|
Consumer Loan unit volume from
dealers active both periods |
81,029 |
|
|
96,732 |
|
|
-16.2 |
% |
Dealers active both
periods |
6,681 |
|
|
6,681 |
|
|
— |
|
Average volume per dealer
active both periods |
12.1 |
|
|
14.5 |
|
|
-16.2 |
% |
|
|
|
|
|
|
Consumer loan unit volume from
dealers not active both periods |
20,448 |
|
|
16,112 |
|
|
26.9 |
% |
Dealers not active both
periods |
3,162 |
|
|
2,952 |
|
|
7.1 |
% |
Average volume per dealer not
active both periods |
6.5 |
|
|
5.5 |
|
|
18.2 |
% |
(1) Active dealers are dealers who
have received funding for at least one Consumer Loan during the
period.The following table provides additional information on the
changes in Consumer Loan unit volume and active dealers:
|
For the Three Months Ended March 31, |
|
2020 |
|
2019 |
|
% Change |
Consumer Loan unit volume from
new active dealers |
4,644 |
|
|
6,082 |
|
|
-23.6 |
% |
New active dealers (1) |
902 |
|
|
1,224 |
|
|
-26.3 |
% |
Average volume per new active
dealer |
5.1 |
|
|
5.0 |
|
|
2.0 |
% |
|
|
|
|
|
|
Attrition (2) |
-14.3 |
% |
|
-14.2 |
% |
|
|
(1) New active dealers are dealers
who enrolled in our program and have received funding for their
first dealer loan or purchased loan from us during the period.
(2) Attrition is measured according
to the following formula: decrease in Consumer Loan unit
volume from dealers who have received funding for at least one
dealer loan or purchased loan during the comparable period of the
prior year but did not receive funding for any dealer loans or
purchased loans during the current period divided by prior year
comparable period Consumer Loan unit volume.
The following table shows the percentage of
Consumer Loans assigned to us as dealer loans and purchased loans
for each of the last five quarters:
|
|
Unit Volume |
|
Dollar Volume (1) |
Three Months Ended |
|
Dealer Loans |
|
Purchased Loans |
|
Dealer Loans |
|
Purchased Loans |
March 31, 2019 |
|
67.4 |
% |
|
32.6 |
% |
|
65.0 |
% |
|
35.0 |
% |
June 30, 2019 |
|
66.7 |
% |
|
33.3 |
% |
|
63.7 |
% |
|
36.3 |
% |
September 30, 2019 |
|
67.2 |
% |
|
32.8 |
% |
|
64.1 |
% |
|
35.9 |
% |
December 31, 2019 |
|
67.4 |
% |
|
32.6 |
% |
|
64.0 |
% |
|
36.0 |
% |
March 31, 2020 |
|
64.9 |
% |
|
35.1 |
% |
|
60.5 |
% |
|
39.5 |
% |
(1) Represents advances paid to dealers
on Consumer Loans assigned under our portfolio program and one-time
payments made to dealers to purchase Consumer Loans assigned under
our purchase program. Payments of dealer holdback and
accelerated dealer holdback are not included.
As of March 31, 2020 and December 31,
2019, the net dealer loans receivable balance was 62.6% and 62.8%,
respectively, of the total net loans receivable balance.
Financial Results
(Dollars in millions, except
per share data) |
For the Three Months Ended March 31, |
|
2020 |
|
2019 |
|
% Change |
GAAP average debt |
$ |
4,597.2 |
|
|
$ |
3,996.2 |
|
|
15.0 |
% |
GAAP average shareholders'
equity |
2,229.8 |
|
|
1,982.6 |
|
|
12.5 |
% |
Average capital |
$ |
6,827.0 |
|
|
$ |
5,978.8 |
|
|
14.2 |
% |
GAAP net income (loss) |
$ |
(83.8 |
) |
|
$ |
164.4 |
|
|
-151.0 |
% |
Diluted weighted average
shares outstanding |
18,185,465 |
|
19,004,498 |
|
-4.3 |
% |
GAAP net income (loss) per
diluted share |
$ |
(4.61 |
) |
|
$ |
8.65 |
|
|
-153.3 |
% |
The Financial Accounting Standards Board issued
a new accounting standard (known as CECL) that changed how we
account for our loans under GAAP effective January 1, 2020. The net
loan income (finance charge revenue less provision for credit
losses expense) that we recognize over the life of a loan equals
the cash we collect from the underlying Consumer Loan less the cash
we pay to the dealer. While the total amount of net loan income we
will recognize over the life of the loan is not impacted by CECL,
the timing of when we will recognize this income has changed
significantly from our prior accounting method. We believe that
recognizing net loan income on a level-yield basis over the life of
the loan based on expected future net cash flows matches the
economics of our business. We believe CECL diverges from economic
reality by requiring us to recognize a significant provision for
credit losses expense at the time of assignment for amounts we
never expected to realize and finance charge revenue in subsequent
periods that is significantly in excess of our expected yields.
Given the significant change in timing of net loan income
recognition, we believe net income for the year ending December 31,
2020 will be significantly lower under CECL than what would be
reported under our prior accounting method, with the greatest
impact occurring in the quarter of adoption. The ultimate financial
statement impact of CECL will depend on Consumer Loan assignment
volume and the percentage of Consumer Loans assigned to us as
purchased loans, the size and composition of our loan portfolio,
the loan portfolio’s credit quality and economic conditions.
The decrease in GAAP net income for the three
months ended March 31, 2020, as compared to the same period in
2019, was primarily the result of the following:
- An increase in provision for credit losses of 2,346.2% ($340.2
million), primarily due to:
- An increase in provision for credit losses on forecast changes
of $182.3 million primarily related to a reduction in forecasted
collection rates to reflect the estimated long-term impact of
COVID-19 on Consumer Loan performance; and
- A $157.9 million provision for credit losses on new Consumer
Loan assignments related to our adoption of CECL on January 1,
2020.
- A decrease in provision for income taxes of 169.2% ($70.9
million), primarily due to a decrease in pre-tax income.
- An increase in finance charges of 12.4% ($40.0 million),
primarily due to growth in our loan portfolio.
- An increase in interest expense of 15.3% ($6.9 million) due to
increases in the average outstanding debt principal balance due to
borrowings used to fund the growth in our loan portfolio and stock
repurchases.
- A decrease in other income of 27.4% ($5.4 million), primarily
due to a decrease in ancillary product profit sharing income due to
an increase in average vehicle service contract claim rates and a
decrease in GPS-SID fee income due to the discontinuation of the
program in the prior year.
- A decrease in salaries and wages expense of 7.6% ($3.7
million), primarily due to a decrease in cash-based incentive
compensation expense due to a decline in Company performance
measures, partially offset by an increase in fringe benefits
primarily due to higher medical claims.
Adjusted financial results are provided to help
shareholders understand our financial performance. The
financial data below is non-GAAP, unless labeled
otherwise. We use adjusted financial information
internally to measure financial performance and to determine
incentive compensation. In addition, effective January 1,
2020, certain debt facilities utilize adjusted financial
information for the determination of loan collateral values. The
table below shows our results following adjustments to reflect
non-GAAP accounting methods. Material adjustments are
explained in the table footnotes and the subsequent “Floating Yield
Adjustment” and “Senior Notes Adjustment”
sections. Measures such as adjusted average capital,
adjusted net income, adjusted net income per diluted share,
adjusted interest expense (after-tax), adjusted net income plus
interest expense (after-tax), adjusted return on capital, adjusted
revenue, operating expenses, and economic profit are all non-GAAP
financial measures. These non-GAAP financial measures
should be viewed in addition to, and not as an alternative for, our
reported results prepared in accordance with GAAP.
Adjusted financial results for the three months
ended March 31, 2020, compared to the same period in 2019,
include the following:
(Dollars in millions, except
per share data) |
For the Three Months Ended March 31, |
|
2020 |
|
2019 |
|
% Change |
Adjusted average capital |
$ |
6,865.6 |
|
|
$ |
5,964.3 |
|
|
15.1 |
% |
Adjusted net income |
$ |
175.7 |
|
|
$ |
153.6 |
|
|
14.4 |
% |
Adjusted interest expense
(after-tax) |
$ |
40.1 |
|
|
$ |
35.3 |
|
|
13.6 |
% |
Adjusted net income plus
interest expense (after-tax) |
$ |
215.8 |
|
|
$ |
188.9 |
|
|
14.2 |
% |
Adjusted return on
capital |
12.6 |
% |
|
12.7 |
% |
|
-0.8 |
% |
Cost of capital |
5.4 |
% |
|
6.2 |
% |
|
-12.9 |
% |
Economic profit |
$ |
123.1 |
|
|
$ |
96.8 |
|
|
27.2 |
% |
Diluted weighted average
shares outstanding |
18,185,465 |
|
19,004,498 |
|
-4.3 |
% |
Adjusted net income per
diluted share |
$ |
9.66 |
|
|
$ |
8.08 |
|
|
19.6 |
% |
Economic profit increased 27.2% for the three
months ended March 31, 2020, as compared to the same period in
2019. Economic profit is a function of the return on
capital in excess of the cost of capital and the amount of capital
invested in the business. The following table summarizes
the impact each of these components had on the changes in economic
profit for the three months ended March 31, 2020, as compared
to the same period in 2019:
(In millions) |
Year over Year Change in Economic Profit |
|
For the Three Months Ended March 31, 2020 |
Increase in adjusted average
capital |
$ |
14.6 |
|
Decrease in cost of
capital |
13.2 |
|
Decrease in adjusted return on
capital |
(1.5 |
) |
Increase in economic profit |
$ |
26.3 |
|
The increase in economic profit for the three
months ended March 31, 2020, as compared to the same period in
2019, was primarily the result of the following:
- An increase in our adjusted average capital of 15.1%, primarily
due to growth in our loan portfolio.
- A decrease in our cost of capital of 80 basis points, primarily
due to a decrease in the 30-year Treasury rate, which is used in
the average cost of equity calculation.
The following table shows adjusted revenue and
operating expenses as a percentage of adjusted average capital, the
adjusted return on capital, and the percentage change in adjusted
average capital for each of the last eight quarters, compared to
the same period in the prior year:
|
|
For the Three Months Ended |
|
|
Mar. 31, 2020 |
|
Dec. 31, 2019 |
|
Sept. 30, 2019 |
|
Jun. 30, 2019 |
|
Mar. 31, 2019 |
|
Dec. 31, 2018 |
|
Sept. 30, 2018 |
|
Jun. 30, 2018 |
|
Adjusted revenue as a
percentage of adjusted average capital (1) |
|
20.9 |
% |
|
21.6 |
% |
|
21.6 |
% |
|
21.6 |
% |
|
21.9 |
% |
|
21.9 |
% |
|
21.5 |
% |
|
21.3 |
% |
|
Operating expenses as a
percentage of adjusted average capital (1) |
|
4.6 |
% |
|
5.0 |
% |
|
5.0 |
% |
|
5.1 |
% |
|
5.5 |
% |
|
5.2 |
% |
|
5.1 |
% |
|
5.2 |
% |
|
Adjusted return on capital
(1) |
|
12.6 |
% |
|
12.8 |
% |
|
12.8 |
% |
|
12.7 |
% |
|
12.7 |
% |
|
12.9 |
% |
|
12.7 |
% |
|
12.4 |
% |
|
Percentage change in adjusted
average capital compared to the same period in the prior year |
|
15.1 |
% |
|
14.9 |
% |
|
15.0 |
% |
|
19.0 |
% |
|
22.1 |
% |
|
26.7 |
% |
|
29.8 |
% |
|
27.5 |
% |
|
(1) Annualized.
The decrease in operating expenses as a
percentage of adjusted average capital for the three months ended
March 31, 2020, as compared to the three months ended December 31,
2019, was primarily due to a decrease in operating expenses of
5.5%, while adjusted average capital grew by 3.0%. The decrease in
operating expenses was primarily due to a decrease in salaries and
wages expense of 8.9% ($4.4 million), primarily due to a decrease
in cash-based incentive compensation expense due to a decline in
Company performance measures.
The following tables provide a reconciliation of
non-GAAP measures to GAAP measures. Certain amounts do
not recalculate due to rounding.
(Dollars in millions, except
per share data) |
|
For the Three Months Ended |
|
|
Mar. 31, 2020 |
|
Dec. 31, 2019 |
|
Sept. 30, 2019 |
|
Jun. 30, 2019 |
|
Mar. 31, 2019 |
|
Dec. 31, 2018 |
|
Sept. 30, 2018 |
|
Jun. 30, 2018 |
Adjusted net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss) |
|
$ |
(83.8 |
) |
|
$ |
161.9 |
|
|
$ |
165.4 |
|
|
$ |
164.4 |
|
|
$ |
164.4 |
|
|
$ |
151.9 |
|
|
$ |
151.0 |
|
|
$ |
151.0 |
|
Floating yield adjustment
(after-tax) |
|
(16.0 |
) |
|
(14.3 |
) |
|
(14.5 |
) |
|
(14.1 |
) |
|
(15.8 |
) |
|
(14.7 |
) |
|
(15.8 |
) |
|
(17.8 |
) |
GAAP provision for credit
losses (after-tax) |
|
273.0 |
|
|
21.0 |
|
|
14.9 |
|
|
11.8 |
|
|
11.2 |
|
|
13.6 |
|
|
10.8 |
|
|
1.4 |
|
Senior notes adjustment
(after-tax) |
|
5.6 |
|
|
1.1 |
|
|
(0.6 |
) |
|
(0.7 |
) |
|
(0.6 |
) |
|
(0.6 |
) |
|
(0.6 |
) |
|
(0.7 |
) |
Income tax adjustment (1) |
|
(3.1 |
) |
|
3.8 |
|
|
3.2 |
|
|
1.5 |
|
|
(5.6 |
) |
|
2.8 |
|
|
1.8 |
|
|
1.5 |
|
Adjusted net income |
|
$ |
175.7 |
|
|
$ |
173.5 |
|
|
$ |
168.4 |
|
|
$ |
162.9 |
|
|
$ |
153.6 |
|
|
$ |
153.0 |
|
|
$ |
147.2 |
|
|
$ |
135.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income per
diluted share (2) |
|
$ |
9.66 |
|
|
$ |
9.22 |
|
|
$ |
8.89 |
|
|
$ |
8.60 |
|
|
$ |
8.08 |
|
|
$ |
7.85 |
|
|
$ |
7.56 |
|
|
$ |
6.95 |
|
Diluted weighted average
shares outstanding |
|
18,185,465 |
|
18,827,222 |
|
18,950,866 |
|
18,949,962 |
|
19,004,498 |
|
19,500,601 |
|
19,473,978 |
|
19,472,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP total revenue |
|
$ |
389.1 |
|
|
$ |
385.9 |
|
|
$ |
378.7 |
|
|
$ |
370.6 |
|
|
$ |
353.8 |
|
|
$ |
342.8 |
|
|
$ |
332.0 |
|
|
$ |
315.4 |
|
Floating yield adjustment |
|
(20.8 |
) |
|
(18.5 |
) |
|
(18.8 |
) |
|
(18.4 |
) |
|
(20.5 |
) |
|
(19.0 |
) |
|
(20.6 |
) |
|
(23.0 |
) |
GAAP provision for claims |
|
(8.8 |
) |
|
(7.0 |
) |
|
(8.2 |
) |
|
(8.3 |
) |
|
(6.6 |
) |
|
(6.5 |
) |
|
(7.0 |
) |
|
(7.3 |
) |
Adjusted revenue |
|
$ |
359.5 |
|
|
$ |
360.4 |
|
|
$ |
351.7 |
|
|
$ |
343.9 |
|
|
$ |
326.7 |
|
|
$ |
317.3 |
|
|
$ |
304.4 |
|
|
$ |
285.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted average capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP average debt |
|
$ |
4,597.2 |
|
|
$ |
4,320.2 |
|
|
$ |
4,230.2 |
|
|
$ |
4,245.5 |
|
|
$ |
3,996.2 |
|
|
$ |
3,794.4 |
|
|
$ |
3,784.2 |
|
|
$ |
3,609.6 |
|
GAAP average shareholders'
equity |
|
2,229.8 |
|
|
2,392.7 |
|
|
2,297.8 |
|
|
2,131.8 |
|
|
1,982.6 |
|
|
2,023.5 |
|
|
1,885.6 |
|
|
1,732.6 |
|
Deferred debt issuance
adjustment |
|
28.5 |
|
|
25.3 |
|
|
25.3 |
|
|
24.5 |
|
|
23.3 |
|
|
22.1 |
|
|
23.4 |
|
|
22.7 |
|
Senior notes adjustment |
|
(15.9 |
) |
|
(20.1 |
) |
|
6.9 |
|
|
7.5 |
|
|
8.2 |
|
|
8.7 |
|
|
9.4 |
|
|
10.1 |
|
Income tax adjustment (3) |
|
(118.5 |
) |
|
(118.5 |
) |
|
(118.5 |
) |
|
(118.5 |
) |
|
(118.5 |
) |
|
(118.5 |
) |
|
(118.5 |
) |
|
(118.5 |
) |
Floating yield adjustment |
|
144.5 |
|
|
64.3 |
|
|
64.9 |
|
|
63.1 |
|
|
72.5 |
|
|
67.1 |
|
|
74.7 |
|
|
85.0 |
|
Adjusted average capital |
|
$ |
6,865.6 |
|
|
$ |
6,663.9 |
|
|
$ |
6,506.6 |
|
|
$ |
6,353.9 |
|
|
$ |
5,964.3 |
|
|
$ |
5,797.3 |
|
|
$ |
5,658.8 |
|
|
$ |
5,341.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted revenue as a
percentage of adjusted average capital (4) |
|
20.9 |
% |
|
21.6 |
% |
|
21.6 |
% |
|
21.6 |
% |
|
21.9 |
% |
|
21.9 |
% |
|
21.5 |
% |
|
21.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted interest expense (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP interest expense |
|
$ |
51.9 |
|
|
$ |
51.0 |
|
|
$ |
50.4 |
|
|
$ |
49.8 |
|
|
$ |
45.0 |
|
|
$ |
42.3 |
|
|
$ |
41.1 |
|
|
$ |
38.7 |
|
Senior notes adjustment |
|
0.2 |
|
|
0.4 |
|
|
0.8 |
|
|
0.8 |
|
|
0.8 |
|
|
0.9 |
|
|
0.8 |
|
|
0.8 |
|
Adjusted interest expense (pre-tax) |
|
52.1 |
|
|
51.4 |
|
|
51.2 |
|
|
50.6 |
|
|
45.8 |
|
|
43.2 |
|
|
41.9 |
|
|
39.5 |
|
Adjustment to record tax
effect (1) |
|
(12.0 |
) |
|
(11.9 |
) |
|
(11.7 |
) |
|
(11.7 |
) |
|
(10.5 |
) |
|
(10.0 |
) |
|
(9.6 |
) |
|
(9.1 |
) |
Adjusted interest expense (after-tax) |
|
$ |
40.1 |
|
|
$ |
39.5 |
|
|
$ |
39.5 |
|
|
$ |
38.9 |
|
|
$ |
35.3 |
|
|
$ |
33.2 |
|
|
$ |
32.3 |
|
|
$ |
30.4 |
|
(1) Adjustment to record taxes at
our estimated long-term effective income tax rate of 23%.
(2) Net income per share is computed
independently for each of the quarters presented. Therefore, the
sum of quarterly net income per share information may not equal
year-to-date net income per share.
(3) The enactment of the Tax Cuts
and Jobs Act in December 2017 resulted in the reversal of $118.5
million of provision for income taxes to reflect the new federal
statutory income tax rate. This adjustment removes the impact of
this reversal from adjusted average capital. We believe the income
tax adjustment provides a more accurate reflection of the
performance of our business as we are recognizing provision for
income taxes at the applicable long-term effective tax rate for the
period.
(4) Annualized.
(Dollars in millions) |
|
For the Three Months Ended |
|
|
Mar. 31, 2020 |
|
Dec. 31, 2019 |
|
Sept. 30, 2019 |
|
Jun. 30, 2019 |
|
Mar. 31, 2019 |
|
Dec. 31, 2018 |
|
Sept. 30, 2018 |
|
Jun. 30, 2018 |
Adjusted return on capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income |
|
$ |
175.7 |
|
|
$ |
173.5 |
|
|
$ |
168.4 |
|
|
$ |
162.9 |
|
|
$ |
153.6 |
|
|
$ |
153.0 |
|
|
$ |
147.2 |
|
|
$ |
135.4 |
|
Adjusted interest expense
(after-tax) |
|
40.1 |
|
|
39.5 |
|
|
39.5 |
|
|
38.9 |
|
|
35.3 |
|
|
33.2 |
|
|
32.3 |
|
|
30.4 |
|
Adjusted net income plus
interest expense (after-tax) |
|
$ |
215.8 |
|
|
$ |
213.0 |
|
|
$ |
207.9 |
|
|
$ |
201.8 |
|
|
$ |
188.9 |
|
|
$ |
186.2 |
|
|
$ |
179.5 |
|
|
$ |
165.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP return on equity to adjusted return
on capital (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP return on equity (1) |
|
-3.8 |
% |
|
27.1 |
% |
|
28.8 |
% |
|
30.8 |
% |
|
33.2 |
% |
|
30.0 |
% |
|
32.0 |
% |
|
34.9 |
% |
Non-GAAP adjustments |
|
16.4 |
% |
|
-14.3 |
% |
|
-16.0 |
% |
|
-18.1 |
% |
|
-20.5 |
% |
|
-17.1 |
% |
|
-19.3 |
% |
|
-22.5 |
% |
Adjusted return on capital (2) |
|
12.6 |
% |
|
12.8 |
% |
|
12.8 |
% |
|
12.7 |
% |
|
12.7 |
% |
|
12.9 |
% |
|
12.7 |
% |
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted return on
capital |
|
12.6 |
% |
|
12.8 |
% |
|
12.8 |
% |
|
12.7 |
% |
|
12.7 |
% |
|
12.9 |
% |
|
12.7 |
% |
|
12.4 |
% |
Cost of capital (3) (4) |
|
5.4 |
% |
|
5.8 |
% |
|
5.8 |
% |
|
6.0 |
% |
|
6.2 |
% |
|
6.4 |
% |
|
6.2 |
% |
|
6.1 |
% |
Adjusted return on capital in
excess of cost of capital |
|
7.2 |
% |
|
7.0 |
% |
|
7.0 |
% |
|
6.7 |
% |
|
6.5 |
% |
|
6.5 |
% |
|
6.5 |
% |
|
6.3 |
% |
Adjusted average capital |
|
$ |
6,865.6 |
|
|
$ |
6,663.9 |
|
|
$ |
6,506.6 |
|
|
$ |
6,353.9 |
|
|
$ |
5,964.3 |
|
|
$ |
5,797.3 |
|
|
$ |
5,658.8 |
|
|
$ |
5,341.5 |
|
Economic profit |
|
$ |
123.1 |
|
|
$ |
116.9 |
|
|
$ |
113.2 |
|
|
$ |
105.8 |
|
|
$ |
96.8 |
|
|
$ |
93.4 |
|
|
$ |
91.5 |
|
|
$ |
84.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP net income (loss) to economic
profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss) |
|
$ |
(83.8 |
) |
|
$ |
161.9 |
|
|
$ |
165.4 |
|
|
$ |
164.4 |
|
|
$ |
164.4 |
|
|
$ |
151.9 |
|
|
$ |
151.0 |
|
|
$ |
151.0 |
|
Non-GAAP adjustments |
|
259.5 |
|
|
11.6 |
|
|
3.0 |
|
|
(1.5 |
) |
|
(10.8 |
) |
|
1.1 |
|
|
(3.8 |
) |
|
(15.6 |
) |
Adjusted net income |
|
175.7 |
|
|
173.5 |
|
|
168.4 |
|
|
162.9 |
|
|
153.6 |
|
|
153.0 |
|
|
147.2 |
|
|
135.4 |
|
Adjusted interest expense
(after-tax) |
|
40.1 |
|
|
39.5 |
|
|
39.5 |
|
|
38.9 |
|
|
35.3 |
|
|
33.2 |
|
|
32.3 |
|
|
30.4 |
|
Adjusted net income plus
interest expense (after-tax) |
|
215.8 |
|
|
213.0 |
|
|
207.9 |
|
|
201.8 |
|
|
188.9 |
|
|
186.2 |
|
|
179.5 |
|
|
165.8 |
|
Less: cost of capital |
|
92.7 |
|
|
96.1 |
|
|
94.7 |
|
|
96.0 |
|
|
92.1 |
|
|
92.8 |
|
|
88.0 |
|
|
81.8 |
|
Economic profit |
|
$ |
123.1 |
|
|
$ |
116.9 |
|
|
$ |
113.2 |
|
|
$ |
105.8 |
|
|
$ |
96.8 |
|
|
$ |
93.4 |
|
|
$ |
91.5 |
|
|
$ |
84.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP salaries and wages |
|
$ |
45.0 |
|
|
$ |
49.4 |
|
|
$ |
47.9 |
|
|
$ |
47.3 |
|
|
$ |
48.7 |
|
|
$ |
44.5 |
|
|
$ |
41.1 |
|
|
$ |
39.7 |
|
GAAP general and
administrative |
|
15.0 |
|
|
17.2 |
|
|
17.2 |
|
|
16.8 |
|
|
13.9 |
|
|
14.4 |
|
|
14.1 |
|
|
12.7 |
|
GAAP sales and marketing |
|
19.1 |
|
|
17.1 |
|
|
16.6 |
|
|
17.7 |
|
|
18.8 |
|
|
16.4 |
|
|
16.3 |
|
|
17.2 |
|
Operating expenses |
|
$ |
79.1 |
|
|
$ |
83.7 |
|
|
$ |
81.7 |
|
|
$ |
81.8 |
|
|
$ |
81.4 |
|
|
$ |
75.3 |
|
|
$ |
71.5 |
|
|
$ |
69.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a
percentage of adjusted average capital (4) |
|
4.6 |
% |
|
5.0 |
% |
|
5.0 |
% |
|
5.1 |
% |
|
5.5 |
% |
|
5.2 |
% |
|
5.1 |
% |
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change in adjusted
average capital compared to the same period in the prior year |
|
15.1 |
% |
|
14.9 |
% |
|
15.0 |
% |
|
19.0 |
% |
|
22.1 |
% |
|
26.7 |
% |
|
29.8 |
% |
|
27.5 |
% |
(1) Calculated by dividing GAAP net income (loss) by
GAAP average shareholders' equity.
(2) Adjusted return on capital is defined as
adjusted net income plus adjusted interest expense (after-tax)
divided by adjusted average capital.
(3) The cost of capital includes
both a cost of equity and a cost of debt. The cost of
equity capital is determined based on a formula that considers the
risk of the business and the risk associated with our use of
debt. The formula utilized for determining the cost of
equity capital is as follows: (the average 30-year Treasury rate +
5%) + [(1 – tax rate) x (the average 30-year Treasury rate + 5% –
pre-tax average cost of debt rate) x average debt/(average equity +
average debt x tax rate)]. For the periods presented,
the average 30-year Treasury rate and the adjusted pre-tax average
cost of debt were as follows:
|
|
For the Three Months Ended |
|
|
Mar. 31, 2020 |
|
Dec. 31, 2019 |
|
Sept. 30, 2019 |
|
Jun. 30, 2019 |
|
Mar. 31, 2019 |
|
Dec. 31, 2018 |
|
Sept. 30, 2018 |
|
Jun. 30, 2018 |
Average 30-year Treasury
rate |
|
1.8 |
% |
|
2.2 |
% |
|
2.3 |
% |
|
2.7 |
% |
|
3.0 |
% |
|
3.3 |
% |
|
3.1 |
% |
|
3.0 |
% |
Adjusted pre-tax average cost
of debt (4) |
|
4.5 |
% |
|
4.8 |
% |
|
4.8 |
% |
|
4.7 |
% |
|
4.6 |
% |
|
4.5 |
% |
|
4.4 |
% |
|
4.3 |
% |
(4) Annualized.
Floating Yield Adjustment
The net loan income (finance charge revenue less
provision for credit losses expense) that we recognize over the
life of a loan equals the cash we collect from the underlying
Consumer Loan less the cash we pay to the dealer. The purpose of
this non-GAAP adjustment is to modify the calculation of our
GAAP-based net loan income so that it is recognized on a
level-yield basis over the life of the loan based on expected
future net cash flows, which we believe matches the economics of
our business.
Our current GAAP methodology, which was adopted
on January 1, 2020, diverges from economic reality by requiring us
to recognize a significant provision for credit losses expense at
the time of assignment for amounts we never expected to realize and
finance charge revenue in subsequent periods that is significantly
in excess of our expected yields. Under our prior GAAP methodology,
which was used prior to January 1, 2020, net loan income was based
on expected future net cash flows and was recognized on a
level-yield basis over the estimated life of the
loan. Favorable changes in expected future net cash
flows were treated as increases to the yield and were recognized
over time, while unfavorable changes were recorded as a current
period expense.
The non-GAAP floating yield methodology that we
use is identical to the prior GAAP methodology except that, under
the floating yield method, all changes in expected future net cash
flows (both positive and negative) are treated as yield adjustments
and therefore impact earnings over time. The current
GAAP methodology results in a lower carrying value of the loan
receivable asset, but may result in either higher or lower earnings
for any given period depending on Consumer Loan assignment volume
and the timing and amount of expected future net cash flow changes.
The prior GAAP methodology resulted in a lower carrying value of
the loan receivable asset, but may have resulted in either higher
or lower earnings for any given period depending on the timing and
amount of expected future net cash flow changes.
We believe the floating yield adjustment
provides a more accurate reflection of the performance of our
business, since net loan income is recognized on a level-yield
basis over the life of the loan based on expected future net cash
flows and both favorable and unfavorable changes in expected future
net cash flows are treated consistently.
Senior Notes Adjustment
The purpose of this non-GAAP adjustment is to
modify our GAAP financial results to treat the issuance of certain
senior notes as a refinancing of certain previously-issued senior
notes.
On December 18, 2019, we issued $400.0 million
of 5.125% senior notes due 2024 (the “2024 senior notes”). We used
a portion of the net proceeds from the 2024 senior notes to
repurchase or redeem all of the $300.0 million outstanding
principal amount of our 6.125% senior notes due 2021 (the “2021
senior notes”), of which $148.2 million was repurchased on December
18, 2019 and the remaining $151.8 million was redeemed on January
17, 2020. We used the remaining net proceeds from the 2024 senior
notes, together with borrowings under our revolving credit
facility, to redeem in full the $250.0 million outstanding
principal amount of our 7.375% senior notes due 2023 (the "2023
senior notes") on March 15, 2020. Under GAAP, the fourth quarter of
2019 included (i) a pre-tax loss on extinguishment of debt of $1.8
million related to the repurchase of 2021 senior notes in the
fourth quarter of 2019 and the redemption of the remaining 2021
senior notes in the first quarter of 2020 and (ii) additional
interest expense of $0.3 million on $160.0 million of additional
outstanding debt caused by the one month lag from the issuance of
the 2024 senior notes and repurchase of 2021 senior notes in the
fourth quarter of 2019 to the redemption of the remaining 2021
senior notes in the first quarter of 2020. Under GAAP, the first
quarter of 2020 included (i) a pre-tax loss on extinguishment of
debt of $7.4 million related to the redemption of 2023 senior notes
in the first quarter of 2020 and (ii) additional interest expense
of $0.4 million on $160.0 million of additional outstanding debt
caused by the one month lag from the issuance of the 2024 senior
notes and repurchase of 2021 senior notes in the fourth quarter of
2019 to the redemption of the remaining 2021 senior notes in the
first quarter of 2020.
On January 22, 2014, we issued the 2021 senior
notes. On February 21, 2014, we used the net proceeds from the 2021
senior notes, together with borrowings under our revolving credit
facilities, to redeem in full the $350.0 million outstanding
principal amount of our 9.125% senior notes due 2017 (the “2017
senior notes”). Under GAAP, the first quarter of 2014 included (i)
a pre-tax loss on extinguishment of debt of $21.8 million related
to the redemption of the 2017 senior notes in the first quarter of
2014 and (ii) additional interest expense of $1.4 million on $276.0
million of additional outstanding debt caused by the one month lag
from the issuance of the 2021 senior notes to the redemption of the
2017 senior notes.
Under our non-GAAP approach, the loss on
extinguishment of debt and additional interest expense that were
recognized for GAAP purposes were in each case deferred as debt
issuance costs and are being recognized ratably as interest expense
over the term of the newly issued notes. In addition, for adjusted
average capital purposes, the impact of additional outstanding debt
related to the lag from the issuance of the new notes to the
redemption of the previously issued notes was in each case deferred
and is being recognized ratably over the term of the newly issued
notes. Upon the issuance of the 2024 senior notes in the
fourth quarter of 2019, the outstanding unamortized balances of the
non-GAAP adjustments related to the 2021 senior notes were deferred
and are being recognized ratably over the term of the 2024 senior
notes.
We believe the senior notes adjustment provides
a more accurate reflection of the performance of our business,
since we are recognizing the costs incurred with these transactions
in a manner consistent with how we recognize the costs incurred
when we periodically refinance our other debt facilities.
Cautionary Statement Regarding
Forward-Looking Information
We claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 for all of our forward-looking
statements. Statements in this release that are not
historical facts, such as those using terms like “may,” “will,”
“should,” “believe,” “expect,” “anticipate,” “assume,” “forecast,”
“estimate,” “intend,” “plan,” “target” and those regarding our
future results, plans and objectives, are “forward-looking
statements” within the meaning of the federal securities
laws. These forward-looking statements represent our
outlook only as of the date of this release. Actual
results could differ materially from these forward-looking
statements since the statements are based on our current
expectations, which are subject to risks and
uncertainties. Factors that might cause such a
difference include, but are not limited to, the factors set forth
in Item 1A of our Form 10-K for the year ended December 31, 2019,
filed with the Securities and Exchange Commission on February 11,
2020, our Form 8-K filed with the Securities and Exchange
Commission on April 20, 2020, other risk factors discussed
herein or listed from time to time in our reports filed with the
Securities and Exchange Commission and the following:
- Our inability to accurately forecast and estimate the amount
and timing of future collections could have a material adverse
effect on results of operations.
- We may be unable to execute our business strategy due to
current economic conditions.
- We may be unable to continue to access or renew funding sources
and obtain capital needed to maintain and grow our business.
- The terms of our debt limit how we conduct our business.
- A violation of the terms of our asset-backed secured financing
facilities or revolving secured warehouse facilities could have a
material adverse impact on our operations.
- The conditions of the U.S. and international capital markets
may adversely affect lenders with which we have relationships,
causing us to incur additional costs and reducing our sources of
liquidity, which may adversely affect our financial position,
liquidity and results of operations.
- Our substantial debt could negatively impact our business,
prevent us from satisfying our debt obligations and adversely
affect our financial condition.
- Due to competition from traditional financing sources and
non-traditional lenders, we may not be able to compete
successfully.
- We may not be able to generate sufficient cash flows to service
our outstanding debt and fund operations and may be forced to take
other actions to satisfy our obligations under such debt.
- Interest rate fluctuations may adversely affect our borrowing
costs, profitability and liquidity.
- The phaseout of the London Interbank Offered Rate (“LIBOR”), or
the replacement of LIBOR with a different reference rate, could
result in a material adverse effect on our business.
- Reduction in our credit rating could increase the cost of our
funding from, and restrict our access to, the capital markets and
adversely affect our liquidity, financial condition and results of
operations.
- We may incur substantially more debt and other
liabilities. This could exacerbate further the risks
associated with our current debt levels.
- The regulation to which we are or may become subject could
result in a material adverse effect on our business.
- Adverse changes in economic conditions, the automobile or
finance industries, or the non-prime consumer market could
adversely affect our financial position, liquidity and results of
operations, the ability of key vendors that we depend on to supply
us with services, and our ability to enter into future financing
transactions.
- Litigation we are involved in from time to time may adversely
affect our financial condition, results of operations and cash
flows.
- Changes in tax laws and the resolution of uncertain income tax
matters could have a material adverse effect on our results of
operations and cash flows from operations.
- Our dependence on technology could have a material adverse
effect on our business.
- Our use of electronic contracts could impact our ability to
perfect our ownership or security interest in Consumer Loans.
- Reliance on third parties to administer our ancillary product
offerings could adversely affect our business and financial
results.
- We are dependent on our senior management and the loss of any
of these individuals or an inability to hire additional team
members could adversely affect our ability to operate
profitably.
- Our reputation is a key asset to our business, and our business
may be affected by how we are perceived in the marketplace.
- The concentration of our dealers in several states could
adversely affect us.
- Failure to properly safeguard confidential consumer and team
member information could subject us to liability, decrease our
profitability and damage our reputation.
- A small number of our shareholders have the ability to
significantly influence matters requiring shareholder approval and
such shareholders have interests which may conflict with the
interests of our other security holders.
- Reliance on our outsourced business functions could adversely
affect our business.
- Our ability to hire and retain foreign information technology
personnel could be hindered by immigration restrictions.
- Natural disasters, acts of war, terrorist attacks and threats
or the escalation of military activity in response to these attacks
or otherwise may negatively affect our business, financial
condition and results of operations.
- The current outbreak of COVID-19 has adversely impacted our
business, and the continuance of this pandemic, or any future
outbreak of any contagious diseases or other public health
emergency, could materially and adversely affect our business,
financial condition, liquidity and results of operations.
Other factors not currently anticipated by
management may also materially and adversely affect our business,
financial condition and results of operations. We do not
undertake, and expressly disclaim any obligation, to update or
alter our statements whether as a result of new information, future
events or otherwise, except as required by applicable law.
Webcast Details
We will host a webcast on May 27, 2020 at
5:00 p.m. Eastern Time to answer questions related to our first
quarter results. The webcast can be accessed live by
visiting the “Investor Relations” section of our website at
ir.creditacceptance.com or by dialing
877-303-2904. Additionally, a replay and transcript of the
webcast will be archived in the “Investor Relations” section of our
website.
Description of Credit Acceptance
Corporation
Since 1972, Credit Acceptance has offered
financing programs that enable automobile dealers to sell vehicles
to consumers, regardless of their credit history. Our
financing programs are offered through a nationwide network of
automobile dealers who benefit from sales of vehicles to consumers
who otherwise could not obtain financing; from repeat and referral
sales generated by these same customers; and from sales to
customers responding to advertisements for our financing programs,
but who actually end up qualifying for traditional financing.
Without our financing programs, consumers are
often unable to purchase vehicles or they purchase unreliable
ones. Further, as we report to the three national credit
reporting agencies, an important ancillary benefit of our programs
is that we provide consumers with an opportunity to improve their
lives by improving their credit score and move on to more
traditional sources of financing. Credit Acceptance is publicly
traded on the Nasdaq Stock Market under the symbol
CACC. For more information, visit
creditacceptance.com.
CREDIT ACCEPTANCE
CORPORATIONCONSOLIDATED STATEMENTS OF
OPERATIONS(UNAUDITED)
(Dollars in millions, except
per share data) |
For the Three Months Ended March 31, |
|
2020 |
|
2019 |
Revenue: |
|
|
|
Finance charges |
$ |
361.9 |
|
|
$ |
321.9 |
|
Premiums earned |
12.9 |
|
|
12.2 |
|
Other income |
14.3 |
|
|
19.7 |
|
Total revenue |
389.1 |
|
|
353.8 |
|
Costs and
expenses: |
|
|
|
Salaries and wages |
45.0 |
|
|
48.7 |
|
General and administrative |
15.0 |
|
|
13.9 |
|
Sales and marketing |
19.1 |
|
|
18.8 |
|
Provision for credit losses |
354.7 |
|
|
14.5 |
|
Interest |
51.9 |
|
|
45.0 |
|
Provision for claims |
8.8 |
|
|
6.6 |
|
Loss on extinguishment of debt |
7.4 |
|
|
— |
|
Total costs and expenses |
501.9 |
|
|
147.5 |
|
Income (loss) before provision
(benefit) for income taxes |
(112.8 |
) |
|
206.3 |
|
Provision (benefit) for income taxes |
(29.0 |
) |
|
41.9 |
|
Net income (loss) |
$ |
(83.8 |
) |
|
$ |
164.4 |
|
|
|
|
|
Net income (loss) per
share: |
|
|
|
Basic |
$ |
(4.61 |
) |
|
$ |
8.67 |
|
Diluted |
$ |
(4.61 |
) |
|
$ |
8.65 |
|
|
|
|
|
Weighted average shares
outstanding: |
|
|
|
Basic |
18,185,465 |
|
|
18,955,191 |
|
Diluted |
18,185,465 |
|
|
19,004,498 |
|
CREDIT ACCEPTANCE
CORPORATIONCONSOLIDATED BALANCE
SHEETS(UNAUDITED)
(Dollars in millions, except per share data) |
As of |
|
March 31, 2020 |
|
December 31, 2019 |
ASSETS: |
|
|
|
Cash and cash equivalents |
$ |
25.7 |
|
|
$ |
187.4 |
|
Restricted cash and cash equivalents |
408.1 |
|
|
330.3 |
|
Restricted securities available for sale |
63.2 |
|
|
59.3 |
|
|
|
|
|
Loans receivable |
9,859.0 |
|
|
7,221.2 |
|
Allowance for credit losses |
(3,240.5 |
) |
|
(536.0 |
) |
Loans receivable, net |
6,618.5 |
|
|
6,685.2 |
|
|
|
|
|
Property and equipment, net |
62.3 |
|
|
59.7 |
|
Income taxes receivable |
59.6 |
|
|
66.2 |
|
Other assets |
22.2 |
|
|
35.1 |
|
Total Assets |
$ |
7,259.6 |
|
|
$ |
7,423.2 |
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY: |
|
|
|
Liabilities: |
|
|
|
Accounts payable and accrued liabilities |
$ |
170.6 |
|
|
$ |
206.4 |
|
Revolving secured line of credit |
79.9 |
|
|
— |
|
Secured financing |
3,957.6 |
|
|
3,339.7 |
|
Senior notes |
789.2 |
|
|
1,187.8 |
|
Mortgage note |
11.1 |
|
|
11.3 |
|
Deferred income taxes, net |
284.9 |
|
|
322.5 |
|
Income taxes payable |
0.2 |
|
|
0.2 |
|
Total Liabilities |
5,293.5 |
|
|
5,067.9 |
|
|
|
|
|
Shareholders'
Equity: |
|
|
|
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none
issued |
— |
|
|
— |
|
Common stock, $0.01 par value, 80,000,000 shares authorized,
17,649,478 and 18,352,779 shares issued and outstanding as of March
31, 2020 and December 31, 2019, respectively |
0.2 |
|
|
0.2 |
|
Paid-in capital |
157.5 |
|
|
157.7 |
|
Retained earnings |
1,807.7 |
|
|
2,196.6 |
|
Accumulated other comprehensive income |
0.7 |
|
|
0.8 |
|
Total Shareholders' Equity |
1,966.1 |
|
|
2,355.3 |
|
Total Liabilities and Shareholders' Equity |
$ |
7,259.6 |
|
|
$ |
7,423.2 |
|
Investor Relations: Douglas W. Busk
Senior Vice President and Treasurer
(248) 353-2700 Ext. 4432
IR@creditacceptance.com
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