Credit Acceptance Corporation (Nasdaq: CACC)
(referred to as the “Company”, “Credit Acceptance”, “we”, “our”, or
“us”) today announced consolidated net income of $96.4 million, or
$5.40 per diluted share, for the three months ended June 30,
2020 compared to consolidated net income of $164.4 million, or
$8.68 per diluted share, for the same period in 2019. For the six
months ended June 30, 2020, consolidated net income was $12.6
million, or $0.70 per diluted share, compared to consolidated net
income of $328.8 million, or $17.33 per diluted share, for the same
period in 2019.
Adjusted net income, a non-GAAP financial
measure, for the three months ended June 30, 2020 was $154.1
million, or $8.63 per diluted share, compared to $162.9 million, or
$8.60 per diluted share, for the same period in 2019. For the six
months ended June 30, 2020, adjusted net income was $329.8
million, or $18.29 per diluted share, compared to adjusted net
income of $316.5 million, or $16.68 per diluted share, for the same
period in 2019.
COVID-19 Pandemic
COVID-19 continues to spread rapidly across the
United States. In an effort to slow the spread of the virus,
authorities continue to implement 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, the continuation of federal stimulus measures
and unemployment benefits, and the duration, timing and severity of
the impact on consumer behavior and economic activity.
GAAP Results
GAAP results for the three and six months ended
June 30, 2020 include provisions for credit losses of $139.4
million and $494.1 million, respectively, reflecting the adoption
of the current expected credit loss (“CECL”) accounting standard on
January 1, 2020 and the impact of changes 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 the 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 is 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 the 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. For the three and six months ended June 30, 2020, we
recorded provision for credit losses of $154.2 million and $312.1
million, respectively, related to new Consumer Loan assignments.
Over the life of the loan, we expect to record an amount equivalent
to this provision for credit losses as finance charge revenue,
which will be recognized using the same effective interest rate
used to record the loan.
The remaining reversal of provision for credit
losses of $14.8 million and provision for credit losses of $182.0
million for the three and six months ended June 30, 2020,
respectively, reflect changes 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 or reversal of provision
for credit losses.
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
June 30, 2020 with the forecasts as of March 31, 2020, 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 |
|
June 30, 2020 |
|
March 31, 2020 |
|
December 31, 2019 |
|
InitialForecast |
|
March 31, 2020 |
|
December 31, 2019 |
|
InitialForecast |
2011 |
|
74.8 |
% |
|
74.8 |
% |
|
74.8 |
% |
|
72.5 |
% |
|
0.0 |
% |
|
0.0 |
% |
|
2.3 |
% |
2012 |
|
73.8 |
% |
|
73.8 |
% |
|
73.9 |
% |
|
71.4 |
% |
|
0.0 |
% |
|
-0.1 |
% |
|
2.4 |
% |
2013 |
|
73.5 |
% |
|
73.4 |
% |
|
73.5 |
% |
|
72.0 |
% |
|
0.1 |
% |
|
0.0 |
% |
|
1.5 |
% |
2014 |
|
71.7 |
% |
|
71.7 |
% |
|
71.7 |
% |
|
71.8 |
% |
|
0.0 |
% |
|
0.0 |
% |
|
-0.1 |
% |
2015 |
|
65.2 |
% |
|
65.3 |
% |
|
65.4 |
% |
|
67.7 |
% |
|
-0.1 |
% |
|
-0.2 |
% |
|
-2.5 |
% |
2016 |
|
63.6 |
% |
|
63.6 |
% |
|
64.1 |
% |
|
65.4 |
% |
|
0.0 |
% |
|
-0.5 |
% |
|
-1.8 |
% |
2017 |
|
63.8 |
% |
|
63.8 |
% |
|
64.8 |
% |
|
64.0 |
% |
|
0.0 |
% |
|
-1.0 |
% |
|
-0.2 |
% |
2018 |
|
63.5 |
% |
|
63.6 |
% |
|
65.1 |
% |
|
63.6 |
% |
|
-0.1 |
% |
|
-1.6 |
% |
|
-0.1 |
% |
2019 |
|
63.4 |
% |
|
63.0 |
% |
|
64.6 |
% |
|
64.0 |
% |
|
0.4 |
% |
|
-1.2 |
% |
|
-0.6 |
% |
2020 (2) |
|
62.2 |
% |
|
61.3 |
% |
|
— |
|
|
62.4 |
% |
|
0.9 |
% |
|
— |
|
|
-0.2 |
% |
(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.(2) The forecasted collection rate for 2020
Consumer Loans as of June 30, 2020 includes both Consumer Loans
that were in our portfolio as of March 31, 2020 and Consumer Loans
assigned during the most recent quarter. The following table
provides forecasted collection rates for each of these
segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forecasted Collection Percentage as of |
|
Current Forecast Variance from |
2020 Consumer Loan Assignment Period |
|
June 30, 2020 |
|
March 31, 2020 |
|
Initial Forecast |
|
March 31, 2020 |
|
Initial Forecast |
January 1, 2020 through March 31, 2020 |
|
62.1 |
% |
|
61.3 |
% |
|
62.5 |
% |
|
0.8 |
% |
|
-0.4 |
% |
April 1, 2020 through June 30,
2020 |
|
62.3 |
% |
|
— |
|
|
62.3 |
% |
|
— |
|
|
— |
% |
Consumer Loans assigned in 2011 through 2013
have yielded forecasted collection results materially better than
our initial estimates, while Consumer Loans assigned in 2015 and
2016 have yielded forecasted collection results materially worse
than our initial estimates. For all other assignment years
presented, actual results have been close to our initial
estimates. For the three months ended June 30, 2020,
forecasted collection rates improved for Consumer Loans assigned in
2019 and 2020 and were generally consistent with expectations at
the start of the period for all other assignment years presented.
For the six months ended June 30, 2020, forecasted collection
rates declined for Consumer Loans assigned in 2015 through 2020 and
were generally consistent with expectations at the start of the
period for all other assignment years presented.
The changes in forecasted collection rates for
the three and six months ended June 30, 2020 and 2019 impacted
forecasted net cash flows (forecasted collections less forecasted
dealer holdback payments) as follows:
(In millions) |
|
For the Three Months Ended June 30, |
|
For the Six Months Ended June 30, |
Increase (Decrease) in Forecasted Net Cash
Flows |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
Dealer loans |
|
$ |
(0.1 |
) |
|
|
$ |
3.4 |
|
|
$ |
(76.0 |
) |
|
|
$ |
3.9 |
|
Purchased loans |
|
24.5 |
|
|
|
9.6 |
|
|
(106.1 |
) |
|
|
25.8 |
|
Total |
|
$ |
24.4 |
|
|
|
$ |
13.0 |
|
|
$ |
(182.1 |
) |
|
|
$ |
29.7 |
|
During the first quarter of 2020, 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 was comprised of: (1) $44.3 million calculated by our
forecasting model, which reflected lower realized collections
during the first quarter of 2020 and (2) an additional $162.2
million, which represented 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, which we continued to apply throughout the second
quarter of 2020, 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 seven 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 31, 2020 |
|
9.1 |
% |
|
5.4 |
% |
June 30, 2020 |
|
17.5 |
% |
|
15.7 |
% |
July 28, 2020
Month-to-Date |
|
18.9 |
% |
|
15.5 |
% |
(1) Represents collections realized
on Consumer Loans that are either current or in the early stages of
delinquency.
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 temporarily suspended as the COVID-19
crisis began to unfold. Starting in mid-April and continuing into
July, Front End Collections improved as federal stimulus and
unemployment benefit payments were being distributed.
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 2020 had 29
days as compared to 28 days 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 31, 2020 |
|
11.6 |
% |
|
8.2 |
% |
June 30, 2020 |
|
15.0 |
% |
|
12.3 |
% |
July 28, 2020
Month-to-Date |
|
20.9 |
% |
|
16.2 |
% |
(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 (3) |
|
23,801 |
|
10,349 |
|
59 |
(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.(3) The averages for 2020 Consumer
Loans include both Consumer Loans that were in our portfolio as of
March 31, 2020 and Consumer Loans assigned during the most recent
quarter. The following table provides averages for each of these
segments:
|
|
|
|
|
|
|
|
|
Average |
2020 Consumer Loan Assignment Period |
|
Consumer Loan |
|
Advance |
|
Initial Loan Term (in months) |
January 1, 2020 through March 31, 2020 |
|
$ |
23,717 |
|
|
$ |
10,405 |
|
|
58 |
|
April 1, 2020 through June 30,
2020 |
|
23,888 |
|
|
10,290 |
|
|
59 |
|
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 June 30,
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 June 30, 2020 |
Consumer Loan Assignment Year |
|
Forecasted Collection % |
|
Advance % (1) |
|
Spread % |
|
% of Forecast Realized (2) |
2011 |
|
74.8 |
% |
|
45.5 |
% |
|
29.3 |
% |
|
99.7 |
% |
2012 |
|
73.8 |
% |
|
46.3 |
% |
|
27.5 |
% |
|
99.5 |
% |
2013 |
|
73.5 |
% |
|
47.6 |
% |
|
25.9 |
% |
|
99.1 |
% |
2014 |
|
71.7 |
% |
|
47.7 |
% |
|
24.0 |
% |
|
98.6 |
% |
2015 |
|
65.2 |
% |
|
44.5 |
% |
|
20.7 |
% |
|
96.6 |
% |
2016 |
|
63.6 |
% |
|
43.8 |
% |
|
19.8 |
% |
|
90.4 |
% |
2017 |
|
63.8 |
% |
|
43.2 |
% |
|
20.6 |
% |
|
78.2 |
% |
2018 |
|
63.5 |
% |
|
43.5 |
% |
|
20.0 |
% |
|
58.3 |
% |
2019 |
|
63.4 |
% |
|
44.0 |
% |
|
19.4 |
% |
|
31.4 |
% |
2020 (3) |
|
62.2 |
% |
|
43.5 |
% |
|
18.7 |
% |
|
6.6 |
% |
(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.(3) The forecasted collection
rate, advance rate and spread for 2020 Consumer Loans as of
June 30, 2020 include both Consumer Loans that were in our
portfolio as of March 31, 2020 and Consumer Loans assigned
during the most recent quarter. The following table provides
forecasted collection rates, advance rates and spreads for each of
these segments:
|
|
|
|
|
|
|
|
|
As of June 30, 2020 |
2020 Consumer Loan Assignment Period |
|
Forecasted Collection % |
|
Advance % |
|
Spread % |
January 1, 2020 through March 31, 2020 |
|
62.1 |
% |
|
43.9 |
% |
|
18.2 |
% |
April 1, 2020 through June 30,
2020 |
|
62.3 |
% |
|
43.1 |
% |
|
19.2 |
% |
The risk of a material change in our forecasted
collection rate declines as the Consumer Loans age. For 2016
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 18.7% 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,
partially offset by a reduction in the advance rate of 2020
Consumer Loans and the performance of 2019 Consumer Loans which has
deteriorated from our initial estimates by a greater margin than
those assigned to us in 2020.
The following table compares our forecast of Consumer Loan
collection rates as of June 30, 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 |
|
June 30, 2020 |
|
Initial Forecast |
|
Variance |
|
June 30, 2020 |
|
Initial Forecast |
|
Variance |
2011 |
|
74.7 |
% |
|
72.4 |
% |
|
2.3 |
% |
|
76.4 |
% |
|
72.7 |
% |
|
3.7 |
% |
2012 |
|
73.7 |
% |
|
71.3 |
% |
|
2.4 |
% |
|
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 |
% |
|
68.9 |
% |
|
68.5 |
% |
|
0.4 |
% |
2016 |
|
62.8 |
% |
|
65.1 |
% |
|
-2.3 |
% |
|
65.9 |
% |
|
66.5 |
% |
|
-0.6 |
% |
2017 |
|
63.2 |
% |
|
63.8 |
% |
|
-0.6 |
% |
|
65.3 |
% |
|
64.6 |
% |
|
0.7 |
% |
2018 |
|
63.0 |
% |
|
63.6 |
% |
|
-0.6 |
% |
|
64.6 |
% |
|
63.5 |
% |
|
1.1 |
% |
2019 |
|
63.0 |
% |
|
63.9 |
% |
|
-0.9 |
% |
|
64.1 |
% |
|
64.2 |
% |
|
-0.1 |
% |
2020 |
|
61.9 |
% |
|
62.3 |
% |
|
-0.4 |
% |
|
62.6 |
% |
|
62.6 |
% |
|
0.0 |
% |
(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
June 30, 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 |
|
74.7 |
% |
|
45.1 |
% |
|
29.6 |
% |
|
76.4 |
% |
|
49.3 |
% |
|
27.1 |
% |
2012 |
|
73.7 |
% |
|
46.0 |
% |
|
27.7 |
% |
|
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 |
% |
|
68.9 |
% |
|
50.2 |
% |
|
18.7 |
% |
2016 |
|
62.8 |
% |
|
42.1 |
% |
|
20.7 |
% |
|
65.9 |
% |
|
48.6 |
% |
|
17.3 |
% |
2017 |
|
63.2 |
% |
|
42.1 |
% |
|
21.1 |
% |
|
65.3 |
% |
|
45.8 |
% |
|
19.5 |
% |
2018 |
|
63.0 |
% |
|
42.7 |
% |
|
20.3 |
% |
|
64.6 |
% |
|
45.2 |
% |
|
19.4 |
% |
2019 |
|
63.0 |
% |
|
43.1 |
% |
|
19.9 |
% |
|
64.1 |
% |
|
45.6 |
% |
|
18.5 |
% |
2020 |
|
61.9 |
% |
|
42.4 |
% |
|
19.5 |
% |
|
62.6 |
% |
|
45.1 |
% |
|
17.5 |
% |
(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 19.9%
in 2019 to 19.5% in 2020, primarily as a result of a lower initial
forecast on dealer loans assigned to us in 2020, partially offset
by the performance of 2019 Consumer Loans in our dealer loan
portfolio, which has deteriorated from our initial estimates by a
greater margin than those assigned to us in 2020. The spread on
purchased loans decreased from 18.5% in 2019 to 17.5% in 2020,
primarily as a result of a lower initial forecast on purchased
loans assigned to us in 2020.
Consumer Loan Volume
The following table summarizes changes in
Consumer Loan assignment volume in each of the last six 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 |
% |
June 30, 2020 |
|
5.7 |
% |
|
5.2 |
% |
(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 grew 5.7% and 5.2%,
respectively, during the second quarter of 2020 as the number of
active dealers declined 2.3% while average unit volume per active
dealer grew 8.2%.
The following table summarizes changes in
Consumer Loan assignment unit volume in each of the last seven
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 31, 2020 |
|
20.2 |
% |
June 30, 2020 |
|
22.4 |
% |
July 28, 2020
Month-to-Date |
|
7.1 |
% |
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 remained open.
During the latter part of April and continuing into July, unit
volumes improved. We believe the improvement resulted from a
combination of dealers gradually reopening their operations and the
release of federal stimulus and unemployment benefit payments.
The following table summarizes the changes in Consumer Loan unit
volume and active dealers:
|
For the Three Months Ended June 30, |
|
For the Six Months Ended June 30, |
|
2020 |
|
2019 |
|
% Change |
|
2020 |
|
2019 |
|
% Change |
Consumer Loan unit volume |
97,854 |
|
|
92,613 |
|
|
5.7 |
% |
|
199,331 |
|
|
205,457 |
|
|
-3.0 |
% |
Active dealers (1) |
9,342 |
|
|
9,562 |
|
|
-2.3 |
% |
|
11,149 |
|
|
11,303 |
|
|
-1.4 |
% |
Average volume per active
dealer |
10.5 |
|
|
9.7 |
|
|
8.2 |
% |
|
17.9 |
|
|
18.2 |
|
|
-1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loan unit volume from
dealers active both periods |
79,506 |
|
|
76,734 |
|
|
3.6 |
% |
|
168,437 |
|
|
181,647 |
|
|
-7.3 |
% |
Dealers active both
periods |
6,490 |
|
|
6,490 |
|
|
— |
|
|
8,113 |
|
|
8,113 |
|
|
— |
|
Average volume per dealer
active both periods |
12.3 |
|
|
11.8 |
|
|
3.6 |
% |
|
20.8 |
|
|
22.4 |
|
|
-7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loan unit volume from
dealers not active both periods |
18,348 |
|
|
15,879 |
|
|
15.5 |
% |
|
30,894 |
|
|
23,810 |
|
|
29.8 |
% |
Dealers not active both
periods |
2,852 |
|
|
3,072 |
|
|
-7.2 |
% |
|
3,036 |
|
|
3,190 |
|
|
-4.8 |
% |
Average volume per dealer not
active both periods |
6.4 |
|
|
5.2 |
|
|
23.1 |
% |
|
10.2 |
|
|
7.5 |
|
|
36.0 |
% |
(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 June 30, |
|
For the Six Months Ended June 30, |
|
2020 |
|
2019 |
|
% Change |
|
2020 |
|
2019 |
|
% Change |
Consumer Loan unit volume from
new active dealers |
2,452 |
|
|
4,295 |
|
|
-42.9 |
% |
|
12,771 |
|
|
16,665 |
|
|
-23.4 |
% |
New active dealers (1) |
590 |
|
|
1,008 |
|
|
-41.5 |
% |
|
1,492 |
|
|
2,232 |
|
|
-33.2 |
% |
Average volume per new active
dealer |
4.2 |
|
|
4.3 |
|
|
-2.3 |
% |
|
8.6 |
|
|
7.5 |
|
|
14.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Attrition (2) |
-17.1 |
% |
|
-16.0 |
% |
|
|
|
-11.6 |
% |
|
-11.7 |
% |
|
|
(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 six 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 |
% |
June 30, 2020 |
|
62.5 |
% |
|
37.5 |
% |
|
59.1 |
% |
|
40.9 |
% |
(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 June 30, 2020 and December 31,
2019, the net dealer loans receivable balance was 62.0% 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 June 30, |
|
For the Six Months Ended June 30, |
|
2020 |
|
2019 |
|
% Change |
|
2020 |
|
2019 |
|
% Change |
GAAP average debt |
$ |
4,786.9 |
|
|
$ |
4,245.5 |
|
|
12.8 |
% |
|
$ |
4,692.0 |
|
|
$ |
4,120.8 |
|
|
13.9 |
% |
GAAP average shareholders'
equity |
2,015.6 |
|
|
2,131.8 |
|
|
-5.5 |
% |
|
2,122.7 |
|
|
2,057.2 |
|
|
3.2 |
% |
Average capital |
$ |
6,802.5 |
|
|
$ |
6,377.3 |
|
|
6.7 |
% |
|
$ |
6,814.7 |
|
|
$ |
6,178.0 |
|
|
10.3 |
% |
GAAP net income |
$ |
96.4 |
|
|
$ |
164.4 |
|
|
-41.4 |
% |
|
$ |
12.6 |
|
|
$ |
328.8 |
|
|
-96.2 |
% |
Diluted weighted average
shares outstanding |
17,847,050 |
|
18,949,962 |
|
-5.8 |
% |
|
18,035,167 |
|
18,976,289 |
|
-5.0 |
% |
GAAP net income per diluted
share |
$ |
5.40 |
|
|
$ |
8.68 |
|
|
-37.8 |
% |
|
$ |
0.70 |
|
|
$ |
17.33 |
|
|
-96.0 |
% |
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 financial
statement impact of CECL in any period 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 June 30, 2020, as compared to the same period in
2019, was primarily the result of the following:
- An increase in provision for credit losses of 805.2% ($124.0
million), primarily due to a $154.2 million provision for credit
losses on new Consumer Loan assignments related to our adoption of
CECL on January 1, 2020.
- An increase in finance charges of 10.7% ($36.7 million) due to
growth in our loan portfolio and an increase in the yields on new
Consumer Loan assignments following the adoption of CECL.
- A decrease in provision for income taxes of 38.3% ($19.5
million), primarily due to a decrease in pre-tax income.
The decrease in GAAP net income for the six
months ended June 30, 2020, as compared to the same period in
2019, was primarily the result of the following:
- An increase in provision for credit losses of 1,552.5% ($464.2
million), primarily due to:
- A $312.1 million provision for credit losses on new Consumer
Loan assignments related to our adoption of CECL on January 1,
2020; and
- An increase in provision for credit losses on forecast changes
of $182.3 million recognized during the first quarter, primarily
related to a reduction in forecasted collection rates to reflect
the estimated long-term impact of COVID-19 on Consumer Loan
performance.
- A decrease in other income of 21.0% ($7.5 million), primarily
due to a decrease in interest income earned on restricted cash and
cash equivalents due to a decline in benchmark interest rates, a
decrease in remarketing fees due to our temporary suspension of
involuntary repossessions due to COVID-19 and a decrease in GPS-SID
income due to the discontinuation of our GPS-SID program in
2019.
- A loss on extinguishment of debt of $7.4 million related to the
redemption of senior notes in March 2020.
- An increase in finance charges of 11.6% ($76.7 million) due to
growth in our loan portfolio and an increase in the yields on new
Consumer Loan assignments following the adoption of CECL.
- A decrease in provision for income taxes of 97.4% ($90.4
million), primarily due to a decrease in pre-tax income.
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, adjusted loans receivable 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 and six
months ended June 30, 2020, compared to the same periods in
2019, include the following:
(Dollars in millions, except
per share data) |
For the Three Months Ended June 30, |
|
For the Six Months Ended June 30, |
|
2020 |
|
2019 |
|
% Change |
|
2020 |
|
2019 |
|
% Change |
Adjusted average capital |
$ |
7,079.4 |
|
|
$ |
6,353.9 |
|
|
11.4 |
% |
|
$ |
6,972.5 |
|
|
$ |
6,159.1 |
|
|
13.2 |
% |
Adjusted net income |
$ |
154.1 |
|
|
$ |
162.9 |
|
|
-5.4 |
% |
|
$ |
329.8 |
|
|
$ |
316.5 |
|
|
4.2 |
% |
Adjusted interest expense
(after-tax) |
$ |
37.7 |
|
|
$ |
38.9 |
|
|
-3.1 |
% |
|
$ |
77.8 |
|
|
$ |
74.2 |
|
|
4.9 |
% |
Adjusted net income plus
interest expense (after-tax) |
$ |
191.8 |
|
|
$ |
201.8 |
|
|
-5.0 |
% |
|
$ |
407.6 |
|
|
$ |
390.7 |
|
|
4.3 |
% |
Adjusted return on
capital |
10.8 |
% |
|
12.7 |
% |
|
-15.0 |
% |
|
11.7 |
% |
|
12.7 |
% |
|
-7.9 |
% |
Cost of capital |
5.0 |
% |
|
6.0 |
% |
|
-16.7 |
% |
|
5.2 |
% |
|
6.1 |
% |
|
-14.8 |
% |
Economic profit |
$ |
103.5 |
|
|
$ |
105.8 |
|
|
-2.2 |
% |
|
$ |
226.6 |
|
|
$ |
202.6 |
|
|
11.8 |
% |
Diluted weighted average
shares outstanding |
17,847,050 |
|
18,949,962 |
|
-5.8 |
% |
|
18,035,167 |
|
18,976,289 |
|
-5.0 |
% |
Adjusted net income per
diluted share |
$ |
8.63 |
|
|
$ |
8.60 |
|
|
0.3 |
% |
|
$ |
18.29 |
|
|
$ |
16.68 |
|
|
9.7 |
% |
Economic profit decreased 2.2% for the three
months ended June 30, 2020 and increased 11.8% for the six months
ended June 30, 2020, as compared to the same periods 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 and six months ended June 30, 2020, as
compared to the same periods in 2019:
(In millions) |
Year over Year Change in Economic Profit |
|
For the Three Months Ended June 30, 2020 |
|
For the Six Months Ended June 30, 2020 |
Increase in adjusted average
capital |
$ |
12.2 |
|
|
|
$ |
26.8 |
|
|
Decrease in cost of
capital |
18.8 |
|
|
|
32.0 |
|
|
Decrease in adjusted return on
capital |
(33.3 |
) |
|
|
(34.8 |
) |
|
Increase (decrease) in economic profit |
$ |
(2.3 |
) |
|
|
$ |
24.0 |
|
|
The decrease in economic profit for the three
months ended June 30, 2020, as compared to the same period in
2019, was primarily the result of the following:
- A decrease in our adjusted return on capital of 190 basis
points, primarily due to a reduction in forecasted collection rates
during the first quarter of 2020 to reflect the estimated long-term
impact of COVID-19 on Consumer Loan performance, which is being
recorded over time as an adjustment to the yield used to recognize
adjusted finance charges.
- An increase in our adjusted average capital of 11.4%, primarily
due to growth in our loan portfolio.
- A decrease in our cost of capital of 100 basis points,
primarily due to a decrease in the 30-year Treasury rate, which is
used in the average cost of equity calculation.
The increase in economic profit for the six
months ended June 30, 2020, as compared to the same period in
2019, was primarily the result of the following:
- A decrease in our cost of capital of 90 basis points, primarily
due to a decrease in the 30-year Treasury rate, which is used in
the average cost of equity calculation.
- An increase in our adjusted average capital of 13.2%, primarily
due to growth in our loan portfolio.
- A decrease in our adjusted return on capital of 100 basis
points, primarily due to a reduction in forecasted collection rates
during the first quarter of 2020 to reflect the estimated long-term
impact of COVID-19 on Consumer Loan performance, which is being
recorded over time as an adjustment to the yield used to recognize
adjusted finance charges.
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 |
|
|
Jun. 30, 2020 |
|
Mar. 31, 2020 |
|
Dec. 31, 2019 |
|
Sept. 30, 2019 |
|
Jun. 30, 2019 |
|
Mar. 31, 2019 |
|
Dec. 31, 2018 |
|
Sept. 30, 2018 |
|
Adjusted revenue as a
percentage of adjusted average capital (1) |
|
18.7 |
% |
|
20.9 |
% |
|
21.6 |
% |
|
21.6 |
% |
|
21.6 |
% |
|
21.9 |
% |
|
21.9 |
% |
|
21.5 |
% |
|
Operating expenses as a
percentage of adjusted average capital (1) |
|
4.6 |
% |
|
4.6 |
% |
|
5.0 |
% |
|
5.0 |
% |
|
5.1 |
% |
|
5.5 |
% |
|
5.2 |
% |
|
5.1 |
% |
|
Adjusted return on capital
(1) |
|
10.8 |
% |
|
12.6 |
% |
|
12.8 |
% |
|
12.8 |
% |
|
12.7 |
% |
|
12.7 |
% |
|
12.9 |
% |
|
12.7 |
% |
|
Percentage change in adjusted
average capital compared to the same period in the prior year |
|
11.4 |
% |
|
15.1 |
% |
|
14.9 |
% |
|
15.0 |
% |
|
19.0 |
% |
|
22.1 |
% |
|
26.7 |
% |
|
29.8 |
% |
|
(1) Annualized.
The decreases in adjusted revenue as a
percentage of adjusted average capital and adjusted return on
capital were primarily due to a reduction in forecasted collection
rates during the first quarter of 2020 to reflect the estimated
long-term impact of COVID-19 on Consumer Loan performance. Under
our adjusted methodology, changes in forecasted net cash flows are
recorded over time as an adjustment to the yield used to recognize
adjusted finance charge revenue. Since most of the reduction in our
forecast due to COVID-19 occurred in March 2020, adjusted results
did not reflect this lower yield until the second quarter of
2020.
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 |
|
|
Jun. 30, 2020 |
|
Mar. 31, 2020 |
|
Dec. 31, 2019 |
|
Sept. 30, 2019 |
|
Jun. 30, 2019 |
|
Mar. 31, 2019 |
|
Dec. 31, 2018 |
|
Sept. 30, 2018 |
Adjusted net
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss) |
|
$ |
96.4 |
|
|
|
$ |
(83.8 |
) |
|
|
$ |
161.9 |
|
|
|
$ |
165.4 |
|
|
|
$ |
164.4 |
|
|
|
$ |
164.4 |
|
|
|
$ |
151.9 |
|
|
|
$ |
151.0 |
|
|
Floating yield adjustment
(after-tax) |
|
(51.3 |
) |
|
|
(16.0 |
) |
|
|
(14.3 |
) |
|
|
(14.5 |
) |
|
|
(14.1 |
) |
|
|
(15.8 |
) |
|
|
(14.7 |
) |
|
|
(15.8 |
) |
|
GAAP provision for credit
losses (after-tax) |
|
107.5 |
|
|
|
273.0 |
|
|
|
21.0 |
|
|
|
14.9 |
|
|
|
11.8 |
|
|
|
11.2 |
|
|
|
13.6 |
|
|
|
10.8 |
|
|
Senior notes adjustment
(after-tax) |
|
(0.6 |
) |
|
|
5.6 |
|
|
|
1.1 |
|
|
|
(0.6 |
) |
|
|
(0.7 |
) |
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
|
(0.6 |
) |
|
Income tax adjustment (1) |
|
2.1 |
|
|
|
(3.1 |
) |
|
|
3.8 |
|
|
|
3.2 |
|
|
|
1.5 |
|
|
|
(5.6 |
) |
|
|
2.8 |
|
|
|
1.8 |
|
|
Adjusted net income |
|
$ |
154.1 |
|
|
|
$ |
175.7 |
|
|
|
$ |
173.5 |
|
|
|
$ |
168.4 |
|
|
|
$ |
162.9 |
|
|
|
$ |
153.6 |
|
|
|
$ |
153.0 |
|
|
|
$ |
147.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income per
diluted share (2) |
|
$ |
8.63 |
|
|
|
$ |
9.66 |
|
|
|
$ |
9.22 |
|
|
|
$ |
8.89 |
|
|
|
$ |
8.60 |
|
|
|
$ |
8.08 |
|
|
|
$ |
7.85 |
|
|
|
$ |
7.56 |
|
|
Diluted weighted average
shares outstanding |
|
17,847,050 |
|
18,185,465 |
|
18,827,222 |
|
18,950,866 |
|
18,949,962 |
|
19,004,498 |
|
19,500,601 |
|
19,473,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP total revenue |
|
$ |
406.3 |
|
|
|
$ |
389.1 |
|
|
|
$ |
385.9 |
|
|
|
$ |
378.7 |
|
|
|
$ |
370.6 |
|
|
|
$ |
353.8 |
|
|
|
$ |
342.8 |
|
|
|
$ |
332.0 |
|
|
Floating yield adjustment |
|
(66.5 |
) |
|
|
(20.8 |
) |
|
|
(18.5 |
) |
|
|
(18.8 |
) |
|
|
(18.4 |
) |
|
|
(20.5 |
) |
|
|
(19.0 |
) |
|
|
(20.6 |
) |
|
GAAP provision for claims |
|
(9.3 |
) |
|
|
(8.8 |
) |
|
|
(7.0 |
) |
|
|
(8.2 |
) |
|
|
(8.3 |
) |
|
|
(6.6 |
) |
|
|
(6.5 |
) |
|
|
(7.0 |
) |
|
Adjusted revenue |
|
$ |
330.5 |
|
|
|
$ |
359.5 |
|
|
|
$ |
360.4 |
|
|
|
$ |
351.7 |
|
|
|
$ |
343.9 |
|
|
|
$ |
326.7 |
|
|
|
$ |
317.3 |
|
|
|
$ |
304.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted average
capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP average debt |
|
$ |
4,786.9 |
|
|
|
$ |
4,597.2 |
|
|
|
$ |
4,320.2 |
|
|
|
$ |
4,230.2 |
|
|
|
$ |
4,245.5 |
|
|
|
$ |
3,996.2 |
|
|
|
$ |
3,794.4 |
|
|
|
$ |
3,784.2 |
|
|
GAAP average shareholders'
equity |
|
2,015.6 |
|
|
|
2,229.8 |
|
|
|
2,392.7 |
|
|
|
2,297.8 |
|
|
|
2,131.8 |
|
|
|
1,982.6 |
|
|
|
2,023.5 |
|
|
|
1,885.6 |
|
|
Deferred debt issuance
adjustment |
|
25.9 |
|
|
|
28.5 |
|
|
|
25.3 |
|
|
|
25.3 |
|
|
|
24.5 |
|
|
|
23.3 |
|
|
|
22.1 |
|
|
|
23.4 |
|
|
Senior notes adjustment |
|
13.1 |
|
|
|
(15.9 |
) |
|
|
(20.1 |
) |
|
|
6.9 |
|
|
|
7.5 |
|
|
|
8.2 |
|
|
|
8.7 |
|
|
|
9.4 |
|
|
Income tax adjustment (3) |
|
(118.5 |
) |
|
|
(118.5 |
) |
|
|
(118.5 |
) |
|
|
(118.5 |
) |
|
|
(118.5 |
) |
|
|
(118.5 |
) |
|
|
(118.5 |
) |
|
|
(118.5 |
) |
|
Floating yield adjustment |
|
356.4 |
|
|
|
144.5 |
|
|
|
64.3 |
|
|
|
64.9 |
|
|
|
63.1 |
|
|
|
72.5 |
|
|
|
67.1 |
|
|
|
74.7 |
|
|
Adjusted average capital |
|
$ |
7,079.4 |
|
|
|
$ |
6,865.6 |
|
|
|
$ |
6,663.9 |
|
|
|
$ |
6,506.6 |
|
|
|
$ |
6,353.9 |
|
|
|
$ |
5,964.3 |
|
|
|
$ |
5,797.3 |
|
|
|
$ |
5,658.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted revenue as a
percentage of adjusted average capital (4) |
|
18.7 |
|
% |
|
20.9 |
|
% |
|
21.6 |
|
% |
|
21.6 |
|
% |
|
21.6 |
|
% |
|
21.9 |
|
% |
|
21.9 |
|
% |
|
21.5 |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted loans
receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP loans receivable, net |
|
$ |
6,749.8 |
|
|
|
$ |
6,618.5 |
|
|
|
$ |
6,685.2 |
|
|
|
$ |
6,563.7 |
|
|
|
$ |
6,384.0 |
|
|
|
$ |
6,143.7 |
|
|
|
$ |
5,763.3 |
|
|
|
$ |
5,557.6 |
|
|
Floating yield adjustment |
|
498.8 |
|
|
|
425.8 |
|
|
|
92.0 |
|
|
|
83.3 |
|
|
|
82.8 |
|
|
|
85.8 |
|
|
|
91.8 |
|
|
|
93.1 |
|
|
Adjusted loans receivable |
|
$ |
7,248.6 |
|
|
|
$ |
7,044.3 |
|
|
|
$ |
6,777.2 |
|
|
|
$ |
6,647.0 |
|
|
|
$ |
6,466.8 |
|
|
|
$ |
6,229.5 |
|
|
|
$ |
5,855.1 |
|
|
|
$ |
5,650.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted interest
expense (after-tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP interest expense |
|
$ |
48.2 |
|
|
|
$ |
51.9 |
|
|
|
$ |
51.0 |
|
|
|
$ |
50.4 |
|
|
|
$ |
49.8 |
|
|
|
$ |
45.0 |
|
|
|
$ |
42.3 |
|
|
|
$ |
41.1 |
|
|
Senior notes adjustment |
|
0.7 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
0.8 |
|
|
Adjusted interest expense (pre-tax) |
|
48.9 |
|
|
|
52.1 |
|
|
|
51.4 |
|
|
|
51.2 |
|
|
|
50.6 |
|
|
|
45.8 |
|
|
|
43.2 |
|
|
|
41.9 |
|
|
Adjustment to record tax
effect (1) |
|
(11.2 |
) |
|
|
(12.0 |
) |
|
|
(11.9 |
) |
|
|
(11.7 |
) |
|
|
(11.7 |
) |
|
|
(10.5 |
) |
|
|
(10.0 |
) |
|
|
(9.6 |
) |
|
Adjusted interest expense (after-tax) |
|
$ |
37.7 |
|
|
|
$ |
40.1 |
|
|
|
$ |
39.5 |
|
|
|
$ |
39.5 |
|
|
|
$ |
38.9 |
|
|
|
$ |
35.3 |
|
|
|
$ |
33.2 |
|
|
|
$ |
32.3 |
|
|
(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 |
|
|
Jun. 30, 2020 |
|
Mar. 31, 2020 |
|
Dec. 31, 2019 |
|
Sept. 30, 2019 |
|
Jun. 30, 2019 |
|
Mar. 31, 2019 |
|
Dec. 31, 2018 |
|
Sept. 30, 2018 |
Adjusted return on
capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income |
|
$ |
154.1 |
|
|
$ |
175.7 |
|
|
|
$ |
173.5 |
|
|
$ |
168.4 |
|
|
$ |
162.9 |
|
|
|
$ |
153.6 |
|
|
|
$ |
153.0 |
|
|
$ |
147.2 |
|
|
Adjusted interest expense
(after-tax) |
|
37.7 |
|
|
40.1 |
|
|
|
39.5 |
|
|
39.5 |
|
|
38.9 |
|
|
|
35.3 |
|
|
|
33.2 |
|
|
32.3 |
|
|
Adjusted net income plus
interest expense (after-tax) |
|
$ |
191.8 |
|
|
$ |
215.8 |
|
|
|
$ |
213.0 |
|
|
$ |
207.9 |
|
|
$ |
201.8 |
|
|
|
$ |
188.9 |
|
|
|
$ |
186.2 |
|
|
$ |
179.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP
return on equity to adjusted return on capital (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP return on equity (1) |
|
19.1 |
% |
|
-15.0 |
|
% |
|
27.1 |
% |
|
28.8 |
% |
|
30.8 |
|
% |
|
33.2 |
|
% |
|
30.0 |
% |
|
32.0 |
|
% |
Non-GAAP adjustments |
|
-8.3 |
% |
|
27.6 |
|
% |
|
-14.3 |
% |
|
-16.0 |
% |
|
-18.1 |
|
% |
|
-20.5 |
|
% |
|
-17.1 |
% |
|
-19.3 |
|
% |
Adjusted return on capital (2) |
|
10.8 |
% |
|
12.6 |
|
% |
|
12.8 |
% |
|
12.8 |
% |
|
12.7 |
|
% |
|
12.7 |
|
% |
|
12.9 |
% |
|
12.7 |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted return on capital |
|
10.8 |
% |
|
12.6 |
|
% |
|
12.8 |
% |
|
12.8 |
% |
|
12.7 |
|
% |
|
12.7 |
|
% |
|
12.9 |
% |
|
12.7 |
|
% |
Cost of capital (3) (4) |
|
5.0 |
% |
|
5.4 |
|
% |
|
5.8 |
% |
|
5.8 |
% |
|
6.0 |
|
% |
|
6.2 |
|
% |
|
6.4 |
% |
|
6.2 |
|
% |
Adjusted return on capital in
excess of cost of capital |
|
5.8 |
% |
|
7.2 |
|
% |
|
7.0 |
% |
|
7.0 |
% |
|
6.7 |
|
% |
|
6.5 |
|
% |
|
6.5 |
% |
|
6.5 |
|
% |
Adjusted average capital |
|
$ |
7,079.4 |
|
|
$ |
6,865.6 |
|
|
|
$ |
6,663.9 |
|
|
$ |
6,506.6 |
|
|
$ |
6,353.9 |
|
|
|
$ |
5,964.3 |
|
|
|
$ |
5,797.3 |
|
|
$ |
5,658.8 |
|
|
Economic profit |
|
$ |
103.5 |
|
|
$ |
123.1 |
|
|
|
$ |
116.9 |
|
|
$ |
113.2 |
|
|
$ |
105.8 |
|
|
|
$ |
96.8 |
|
|
|
$ |
93.4 |
|
|
$ |
91.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of GAAP
net income (loss) to economic profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP net income (loss) |
|
$ |
96.4 |
|
|
$ |
(83.8 |
) |
|
|
$ |
161.9 |
|
|
$ |
165.4 |
|
|
$ |
164.4 |
|
|
|
$ |
164.4 |
|
|
|
$ |
151.9 |
|
|
$ |
151.0 |
|
|
Non-GAAP adjustments |
|
57.7 |
|
|
259.5 |
|
|
|
11.6 |
|
|
3.0 |
|
|
(1.5 |
) |
|
|
(10.8 |
) |
|
|
1.1 |
|
|
(3.8 |
) |
|
Adjusted net income |
|
154.1 |
|
|
175.7 |
|
|
|
173.5 |
|
|
168.4 |
|
|
162.9 |
|
|
|
153.6 |
|
|
|
153.0 |
|
|
147.2 |
|
|
Adjusted interest expense
(after-tax) |
|
37.7 |
|
|
40.1 |
|
|
|
39.5 |
|
|
39.5 |
|
|
38.9 |
|
|
|
35.3 |
|
|
|
33.2 |
|
|
32.3 |
|
|
Adjusted net income plus
interest expense (after-tax) |
|
191.8 |
|
|
215.8 |
|
|
|
213.0 |
|
|
207.9 |
|
|
201.8 |
|
|
|
188.9 |
|
|
|
186.2 |
|
|
179.5 |
|
|
Less: cost of capital |
|
88.3 |
|
|
92.7 |
|
|
|
96.1 |
|
|
94.7 |
|
|
96.0 |
|
|
|
92.1 |
|
|
|
92.8 |
|
|
88.0 |
|
|
Economic profit |
|
$ |
103.5 |
|
|
$ |
123.1 |
|
|
|
$ |
116.9 |
|
|
$ |
113.2 |
|
|
$ |
105.8 |
|
|
|
$ |
96.8 |
|
|
|
$ |
93.4 |
|
|
$ |
91.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP salaries and wages |
|
$ |
48.8 |
|
|
$ |
45.0 |
|
|
|
$ |
49.4 |
|
|
$ |
47.9 |
|
|
$ |
47.3 |
|
|
|
$ |
48.7 |
|
|
|
$ |
44.5 |
|
|
$ |
41.1 |
|
|
GAAP general and
administrative |
|
14.6 |
|
|
15.0 |
|
|
|
17.2 |
|
|
17.2 |
|
|
16.8 |
|
|
|
13.9 |
|
|
|
14.4 |
|
|
14.1 |
|
|
GAAP sales and marketing |
|
18.2 |
|
|
19.1 |
|
|
|
17.1 |
|
|
16.6 |
|
|
17.7 |
|
|
|
18.8 |
|
|
|
16.4 |
|
|
16.3 |
|
|
Operating expenses |
|
$ |
81.6 |
|
|
$ |
79.1 |
|
|
|
$ |
83.7 |
|
|
$ |
81.7 |
|
|
$ |
81.8 |
|
|
|
$ |
81.4 |
|
|
|
$ |
75.3 |
|
|
$ |
71.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses as a
percentage of adjusted average capital (4) |
|
4.6 |
% |
|
4.6 |
|
% |
|
5.0 |
% |
|
5.0 |
% |
|
5.1 |
|
% |
|
5.5 |
|
% |
|
5.2 |
% |
|
5.1 |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage change in adjusted
average capital compared to the same period in the prior year |
|
11.4 |
% |
|
15.1 |
|
% |
|
14.9 |
% |
|
15.0 |
% |
|
19.0 |
|
% |
|
22.1 |
|
% |
|
26.7 |
% |
|
29.8 |
|
% |
(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 |
|
|
Jun. 30, 2020 |
|
Mar. 31, 2020 |
|
Dec. 31, 2019 |
|
Sept. 30, 2019 |
|
Jun. 30, 2019 |
|
Mar. 31, 2019 |
|
Dec. 31, 2018 |
|
Sept. 30, 2018 |
Average 30-year Treasury
rate |
|
1.4 |
% |
|
1.8 |
% |
|
2.2 |
% |
|
2.3 |
% |
|
2.7 |
% |
|
3.0 |
% |
|
3.3 |
% |
|
3.1 |
% |
Adjusted pre-tax average cost
of debt (4) |
|
4.1 |
% |
|
4.5 |
% |
|
4.8 |
% |
|
4.8 |
% |
|
4.7 |
% |
|
4.6 |
% |
|
4.5 |
% |
|
4.4 |
% |
(4) Annualized.
(In millions, except share and
per share data) |
|
For the Six Months Ended June 30, |
|
|
2020 |
|
2019 |
Adjusted net
income |
|
|
|
|
GAAP net income |
|
$ |
12.6 |
|
|
|
$ |
328.8 |
|
|
Floating yield adjustment
(after-tax) |
|
(67.3 |
) |
|
|
(29.9 |
) |
|
GAAP provision for credit
losses (after-tax) |
|
380.5 |
|
|
|
23.0 |
|
|
Senior notes adjustment
(after-tax) |
|
5.0 |
|
|
|
(1.3 |
) |
|
Income tax adjustment (1) |
|
(1.0 |
) |
|
|
(4.1 |
) |
|
Adjusted net income |
|
$ |
329.8 |
|
|
|
$ |
316.5 |
|
|
|
|
|
|
|
Adjusted net income per
diluted share |
|
$ |
18.29 |
|
|
|
$ |
16.68 |
|
|
Diluted weighted average
shares outstanding |
|
18,035,167 |
|
18,976,289 |
|
|
|
|
|
Adjusted average
capital |
|
|
|
|
GAAP average debt |
|
$ |
4,692.0 |
|
|
|
$ |
4,120.8 |
|
|
GAAP average shareholders'
equity |
|
2,122.7 |
|
|
|
2,057.2 |
|
|
Deferred debt issuance
adjustment |
|
27.3 |
|
|
|
23.9 |
|
|
Senior notes adjustment |
|
(1.4 |
) |
|
|
7.9 |
|
|
Income tax adjustment (2) |
|
(118.5 |
) |
|
|
(118.5 |
) |
|
Floating yield adjustment |
|
250.4 |
|
|
|
67.8 |
|
|
Adjusted average
capital |
|
$ |
6,972.5 |
|
|
|
$ |
6,159.1 |
|
|
|
|
|
|
|
Adjusted interest
expense (after-tax) |
|
|
|
|
GAAP interest expense |
|
$ |
100.1 |
|
|
|
$ |
94.8 |
|
|
Senior notes adjustment |
|
0.9 |
|
|
|
1.6 |
|
|
Adjusted interest expense
(pre-tax) |
|
101.0 |
|
|
|
96.4 |
|
|
Adjustment to record tax
effect (1) |
|
(23.2 |
) |
|
|
(22.2 |
) |
|
Adjusted interest expense (after-tax) |
|
$ |
77.8 |
|
|
|
$ |
74.2 |
|
|
|
|
|
|
|
Adjusted return on
capital |
|
|
|
|
Adjusted net income |
|
$ |
329.8 |
|
|
|
$ |
316.5 |
|
|
Adjusted interest expense
(after-tax) |
|
77.8 |
|
|
|
74.2 |
|
|
Adjusted net income plus
interest expense (after-tax) |
|
$ |
407.6 |
|
|
|
$ |
390.7 |
|
|
|
|
|
|
|
Reconciliation of GAAP
return on equity to adjusted return on capital (6) |
|
|
|
|
GAAP return on equity (3) |
|
1.2 |
|
% |
|
32.0 |
|
% |
Non-GAAP adjustments |
|
10.5 |
|
% |
|
-19.3 |
|
% |
Adjusted return on capital (4) |
|
11.7 |
|
% |
|
12.7 |
|
% |
|
|
|
|
|
Economic
profit |
|
|
|
|
Adjusted return on capital |
|
11.7 |
|
% |
|
12.7 |
|
% |
Cost of capital (5) (6) |
|
5.2 |
|
% |
|
6.1 |
|
% |
Adjusted return on capital in
excess of cost of capital |
|
6.5 |
|
% |
|
6.6 |
|
% |
Adjusted average capital |
|
$ |
6,972.5 |
|
|
|
$ |
6,159.1 |
|
|
Economic profit |
|
$ |
226.6 |
|
|
|
$ |
202.6 |
|
|
|
|
|
|
|
Reconciliation of GAAP
net income to economic profit |
|
|
|
|
GAAP net income |
|
$ |
12.6 |
|
|
|
$ |
328.8 |
|
|
Non-GAAP adjustments |
|
317.2 |
|
|
|
(12.3 |
) |
|
Adjusted net income |
|
329.8 |
|
|
|
316.5 |
|
|
Adjusted interest expense
(after-tax) |
|
77.8 |
|
|
|
74.2 |
|
|
Adjusted net income plus
interest expense (after-tax) |
|
407.6 |
|
|
|
390.7 |
|
|
Less: cost of capital |
|
181.0 |
|
|
|
188.1 |
|
|
Economic profit |
|
$ |
226.6 |
|
|
|
$ |
202.6 |
|
|
|
|
|
|
|
Operating
expenses |
|
|
|
|
GAAP salaries and wages |
|
$ |
93.8 |
|
|
|
$ |
96.0 |
|
|
GAAP general and
administrative |
|
29.6 |
|
|
|
30.7 |
|
|
GAAP sales and marketing |
|
37.3 |
|
|
|
36.5 |
|
|
Operating expenses |
|
$ |
160.7 |
|
|
|
$ |
163.2 |
|
|
(1) Adjustment to record taxes at our
estimated long-term effective income tax rate of
23%.(2) The enactment of the 2017 Tax 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.(3)
Calculated by dividing GAAP net income by GAAP average
shareholders' equity.(4) Adjusted return on capital is
defined as adjusted net income plus adjusted interest expense
after-tax divided by adjusted average capital.(5) 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 Six Months Ended June 30, |
|
|
2020 |
|
2019 |
Average 30-year Treasury
rate |
|
1.6 |
% |
|
2.9 |
% |
Adjusted pre-tax average cost
of debt (6) |
|
4.3 |
% |
|
4.6 |
% |
(6) 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.
We believe 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 10-Q filed with the Securities and Exchange
Commission on May 27, 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 July 30, 2020 at
5:00 p.m. Eastern Time to answer questions related to our second
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
INCOME(UNAUDITED)
(Dollars in millions, except
per share data) |
For the Three Months Ended June 30, |
|
For the Six Months Ended June 30, |
|
2020 |
|
2019 |
|
2020 |
|
2019 |
Revenue: |
|
|
|
|
|
|
|
Finance charges |
$ |
378.2 |
|
|
$ |
341.5 |
|
|
$ |
740.1 |
|
|
$ |
663.4 |
|
Premiums earned |
14.2 |
|
|
13.1 |
|
|
27.1 |
|
|
25.3 |
|
Other income |
13.9 |
|
|
16.0 |
|
|
28.2 |
|
|
35.7 |
|
Total revenue |
406.3 |
|
|
370.6 |
|
|
795.4 |
|
|
724.4 |
|
Costs and
expenses: |
|
|
|
|
|
|
|
Salaries and wages |
48.8 |
|
|
47.3 |
|
|
93.8 |
|
|
96.0 |
|
General and administrative |
14.6 |
|
|
16.8 |
|
|
29.6 |
|
|
30.7 |
|
Sales and marketing |
18.2 |
|
|
17.7 |
|
|
37.3 |
|
|
36.5 |
|
Provision for credit losses |
139.4 |
|
|
15.4 |
|
|
494.1 |
|
|
29.9 |
|
Interest |
48.2 |
|
|
49.8 |
|
|
100.1 |
|
|
94.8 |
|
Provision for claims |
9.3 |
|
|
8.3 |
|
|
18.1 |
|
|
14.9 |
|
Loss on extinguishment of debt |
0.0 |
|
|
0.0 |
|
|
7.4 |
|
|
0.0 |
|
Total costs and expenses |
278.5 |
|
|
155.3 |
|
|
780.4 |
|
|
302.8 |
|
Income before provision for
income taxes |
127.8 |
|
|
215.3 |
|
|
15.0 |
|
|
421.6 |
|
Provision for income taxes |
31.4 |
|
|
50.9 |
|
|
2.4 |
|
|
92.8 |
|
Net income |
$ |
96.4 |
|
|
$ |
164.4 |
|
|
$ |
12.6 |
|
|
$ |
328.8 |
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
Basic |
$ |
5.40 |
|
|
$ |
8.68 |
|
|
$ |
0.70 |
|
|
$ |
17.35 |
|
Diluted |
$ |
5.40 |
|
|
$ |
8.68 |
|
|
$ |
0.70 |
|
|
$ |
17.33 |
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding: |
|
|
|
|
|
|
|
Basic |
17,844,785 |
|
|
18,944,672 |
|
|
18,015,125 |
|
|
18,949,902 |
|
Diluted |
17,847,050 |
|
|
18,949,962 |
|
|
18,035,167 |
|
|
18,976,289 |
|
CREDIT ACCEPTANCE
CORPORATIONCONSOLIDATED BALANCE
SHEETS(UNAUDITED)
(Dollars in millions, except
per share data) |
As of |
|
June 30, 2020 |
|
December 31, 2019 |
ASSETS: |
|
|
|
Cash and cash equivalents |
$ |
8.5 |
|
|
|
$ |
187.4 |
|
|
Restricted cash and cash equivalents |
382.7 |
|
|
|
330.3 |
|
|
Restricted securities available for sale |
67.9 |
|
|
|
59.3 |
|
|
|
|
|
|
Loans receivable |
10,095.9 |
|
|
|
7,221.2 |
|
|
Allowance for credit losses |
(3,346.1 |
) |
|
|
(536.0 |
) |
|
Loans receivable, net |
6,749.8 |
|
|
|
6,685.2 |
|
|
|
|
|
|
Property and equipment, net |
62.0 |
|
|
|
59.7 |
|
|
Income taxes receivable |
36.3 |
|
|
|
66.2 |
|
|
Other assets |
30.4 |
|
|
|
35.1 |
|
|
Total Assets |
$ |
7,337.6 |
|
|
|
$ |
7,423.2 |
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY: |
|
|
|
Liabilities: |
|
|
|
Accounts payable and accrued liabilities |
$ |
181.1 |
|
|
|
$ |
206.4 |
|
|
Revolving secured line of credit |
160.5 |
|
|
|
0.0 |
|
|
Secured financing |
3,838.0 |
|
|
|
3,339.7 |
|
|
Senior notes |
789.7 |
|
|
|
1,187.8 |
|
|
Mortgage note |
10.9 |
|
|
|
11.3 |
|
|
Deferred income taxes, net |
292.1 |
|
|
|
322.5 |
|
|
Income taxes payable |
0.2 |
|
|
|
0.2 |
|
|
Total Liabilities |
5,272.5 |
|
|
|
5,067.9 |
|
|
|
|
|
|
Shareholders'
Equity: |
|
|
|
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none
issued |
0.0 |
|
|
|
0.0 |
|
|
Common stock, $0.01 par value, 80,000,000 shares authorized,
17,649,470 and 18,352,779 shares issued and outstanding as of June
30, 2020 and December 31, 2019, respectively |
0.2 |
|
|
|
0.2 |
|
|
Paid-in capital |
158.9 |
|
|
|
157.7 |
|
|
Retained earnings |
1,904.1 |
|
|
|
2,196.6 |
|
|
Accumulated other comprehensive income |
1.9 |
|
|
|
0.8 |
|
|
Total Shareholders' Equity |
2,065.1 |
|
|
|
2,355.3 |
|
|
Total Liabilities and Shareholders' Equity |
$ |
7,337.6 |
|
|
|
$ |
7,423.2 |
|
|
Investor Relations: Douglas W. Busk
Chief Treasury Officer
(248) 353-2700 Ext. 4432
IR@creditacceptance.com
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